普拉格能源 (PLUG) 2005 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to Plug Power's third-quarter 2005 earnings conference call.

My name is Angela and I will be 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, Ms. Cynthia Mahoney White, Manager of Public Relations and Marketing.

Please proceed, ma'am.

Good morning and welcome Plug Power's third-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 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 Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

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

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

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

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

Thank you, Cynthia.

Good morning everyone and thank you for joining our call.

This morning I will be making a few comments followed by remarks by Mark Sperry and Dave Neumann relative to our sales and financial activities respectively.

We will then open the line for a question-and-answer session.

As outlined in our press release issued this morning, it was a busy and productive quarter for Plug Power as we continued on track to achieve the 2005 milestones that we established for the Company earlier this year.

While there is work yet to be done, we remain confident that we will achieve our stated objectives for the fifth consecutive year.

We have processed 136 orders for GenCore systems during the third quarter and as of today have 108 orders to go against our full-year milestone of 300.

We and others in the fuel cell industry worked hard to have a tax credit included in the energy bill which was passed in August.

The tax credit is 30% or up to $1000 per kilowatt on the purchase of fuel cells used in residential or commercial applications.

The tax credit will go into effect in January of 2006 and specifically includes telecommunications carriers, a target market for our GenCore product among the eligible end-users for this credit.

We currently had 10 prototypes of our Next Generation prime power product installed and operating at Robbins Air Force Base in Georgia.

It is important to note that these systems were installed and are being maintained by one of our third-party service providers, LOGANEnergy.

Sam Logan of LOGANEnergy and his people have observed significant improvements in ease of understanding and installation and of operation of the new GenSys prototypes compared to our earlier continuous run SU-1 product.

Year-to-date, we have reduced our GenCore material cost by approximately 16% versus 2004 levels.

We are working a defined set of near-term initiatives in support of our full-year milestone target of a 25% year-over-year cost reduction.

We continue to execute against the latest agreement with Honda R&D for Phase III of the Home Energy Station program and the program remains on schedule.

I was in Japan last week meeting with the Honda team and had the opportunity to visit the Tokyo Auto Sow.

Honda showcased its new fuel cell concept vehicle along with the Home Energy Station.

Honda Motors President, Mr. Fukui, discussed both the fuel cell vehicle and the Home Energy Station at length during his press conference at the show.

It was gratifying to see the prominence assigned to our work with Honda and overall I have to say that our meeting in Japan was very positive and promising for the future of our partnership.

Last but certainly not least, during the quarter we completed a very successful stock offering that resulted in the Company securing over $70 million in net cash to the balance sheet.

We remain on track to use less than 40 million in cash for operations during 2005.

In summary, our progress this quarter has put us in a position to deliver our key 2005 milestones.

These results are reflective of the passion and dedication that the employees of Plug Power bring to work every day.

I am pleased with our progress to date and now will turn the call over to Mark Sperry to elaborate on our sales and marketing activities.

Mark?

Thank you Roger and good morning everyone.

As Roger indicated we received 136 GenCore orders during the quarter and are now about two-thirds of the way to our full-year milestone with 192 orders on the books year to date.

As I noted during our last call, the majority of the orders during the quarter came from a single large domestic telecommunications company via our channel partner, Tyco Electronics Power Systems.

So far this year we have shipped 21 systems to that one telecom conference and 80 GenCore systems in total.

Our current GenCore backlog stands at 116 systems and we are prepared to manufacture and deliver them in accordance with our customer's schedules.

We expect to ship an additional 30 GenCore systems against the Tyco order later this week.

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

During the quarter, our GenCore system was approved for deployment with two additional international cellular service providers that we have been working with since early in 2005.

The GenCore product is now approved for deployment with a total of 10 customers split evenly across the private and public sectors.

We continued to see good interest in the product outside the United States.

Last month we participated in the international telecommunications energy conference in Berlin Germany where we were able to demonstrate our GenCore product in operation to a number of potential international customers.

And we are actively following up on those promising leads.

Our ongoing 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 market conditioning work necessary to develop longer-term opportunities.

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

The achievement of this milestone is directly linked to our success in getting orders from a handful of large opportunity accounts which we had been working all year.

During the quarter, we continued to strengthen both our direct and indirect sales and support channels.

We hired Jos van der Hyden as the General Manager of our European, Middle Eastern and African operations.

Jos has extensive experience in the telecommunications industry and is chartered with developing our commercial business in these important geographies and the associated key accounts operating within them.

Additionally, we added three new GenCore distributors during the third quarter including Connect Telecommunications Solutions Inc. which is operated in Canada;

Zebotec GmbH to represent us in Germany, Austria and Switzerland; and SmartLink Ltd. to distribute GenCore in Kuwait.

We now have a network of 14 distribution partners operating across five continents for our GenCore product family.

To date this network of distributors has been responsible for over 75% of our GenCore order flow.

During the past 90 days, external macro events continued to drive interest in our GenCore product as well.

Recent natural disasters including the hurricanes in the Gulf States and the earthquake in Pakistan again highlighted the current vulnerability of our utility and communications infrastructure and the need for more dependable and longer run backup systems.

The recent spike in the price of oil and gasoline clearly has people thinking about their ongoing energy consumption and needs.

As Roger noted, the long-awaited energy bill was finally signed into law and includes a provision that will allow customers purchasing a GenCore system at our list price to receive a $5000 tax credit beginning in January of next year.

These events have heightened the interest in GenCore which we now must convert into sales.

At this point I'd like to turn the call over to Dave to discuss our financials.

Dave?

Thank you, Mark.

I will be providing a summary of our financial results for the third-quarter and nine-month period ended September 30, 2005.

Starting with our statement of operations, total revenue for the third-quarter of 2005 was 3.9 million and compares to 4.6 million during the same three-month period last year.

For the nine months ended September 30, 2005, total revenue was 10.8 million and compares to 11.6 million during the same nine-month period in 2004.

Product and service revenue, a component of total revenue, was 1.3 million for the third quarter which equals the 1.3 million in the third quarter of 2004.

We delivered a total of 39 fuel cell systems during the quarter including 28 GenCore systems and 11 GenSys systems.

Year-to-date products and service revenue was 3.8 million compared to 4.2 million in 2004.

Under our accounting policy for revenue recognition, we continued to defer product and service revenue at the time of sale and at September 30, we had total deferred revenue of 3.4 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 2.6 million for the quarter ending September 30, 2005 compared to 3.3 million in the third quarter of 2004.

Year-to-date contract revenue was 6.9 million for the nine months ended September 30 compared to 7.4 million during the same period last year.

Our cost of products and service revenues continues to represent the direct material cost for fuel cell systems delivered during the period combined with labor and materials associated with servicing all of the fuel cell systems under warranty.

These costs do not include any tax related or overhead expenses.

In addition to the 39 fuel cell systems delivered during the quarter, we supported approximately 200 systems during the third quarter of 2005 and our cost of product and service revenue was $796,000, compared to 1.2 million during the third quarter of 2004.

Year-to-date these costs were 2.5 million for the period ended September 30 compared to 3.9 million for the period ended September 30, 2004.

Our cost of research and development contract revenues representing the fully burdened cost of R&D contract activity was 3.4 million during the third quarter compared to 4.3 million in the third quarter of last year.

Year-to-date these costs were 9.5 million compared to 9.9 million a year ago.

Research and development expenses were 9.5 million during the third quarter of '05 compared to 8.6 million during the same quarter a year ago.

Year-to-date these costs were 27.1 million for the nine-month period ended September 30 and 26.2 million for the nine-month period ended September 30, 2004.

During the third quarter, we expensed $720,000 for inventory associated with the materials purchased for our GenSite demonstration product.

We will continue to operate the hydrogen generation system installed in our Latham, New York and Apeldoorn facilities where they will supplement the hydrogen use in our daily operations.

We are also participating in an NYSERDA program with Honda and our products, utilize our GenSite in a fuel cell vehicle for fueling demonstrations.

We continue to be interested in on site hydrogen generation and we are currently evaluating how the Company can profitably participate in this market.

Including this inventory write-off, our net loss for the third quarter ended September 30, was 11.9 million or $0.15 per share compared to 11.7 million or $0.16 per share in the third quarter of 2004.

Year-to-date the net loss was 35.3 million or $0.47 per share compared to 34.9 million or $0.48 per share for the same period last year.

Net cash used in operating activities for the third quarter ended September 30, 2005, was 10.7 million compared to 7.3 in 2004.

Year-to-date net cash used in operating activities (indiscernible) 30.1 million which compares to 25.8 million during the same period last year.

The increase is the result of expanding the size of our direct sales organization, as Mark mentioned, combined with the increased activity associated with advancing the development of our next generation continuous run product.

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 September 30, '05, the Company had 110.9 million in cash, cash equivalents and marketable securities and 105.7 million in working capital.

This concludes our prepared remarks.

We would now like to open the meeting for questions.

Angela, can you please proceed?

(OPERATOR INSTRUCTIONS) David Smith with Citigroup.

Good morning, guys.

You talked about the additional customers being approved, Mark, from the perspective of maybe can you provide a little more color?

I know you can't give the exact names or anything like that but can you just maybe give us a sense of -- I think you said Telecom -- you went through it pretty quick.

And then beyond that, maybe give us a mix of if I take those 10 customers, what the end markets that they are involved in?

Sure.

The recent addition -- they are both wireless carriers, David, so they are cellular operators and they operate outside of the United States.

In terms of the break out of the 10, as I said, five of them would be in the public sector so think about the State of New York, we're on the Federal GSA schedule, Homeland Security schedule, those kind of things.

And then on the private side, the five are all in the telecommunications business that we have been targeting where we have received approval for deployment.

Okay.

Can you may be elaborate a bit as well, Mark, maybe around the interest that you are getting if you look at the things that went wrong in the telecom network say around the hurricane activity down south?

Is there anything that in terms of customer interest or surrounding that type of thing around what you can do that batteries didn't do and why the systems went down?

Yes, I would say what it is containing to highlight is the current infrastructure really isn't designed for extended outage periods.

So we absolutely in our conversations with the domestic carriers have had keen interest in those geographies that are subject to weather problems, so whether it is hurricanes or ice storms, tornadoes, they tend to be the regions that are being explored most diligently.

It is kind of a double edged sword.

I think the interest clearly has been heightened and exposed but those same companies are very actively trying to rebuild the infrastructure and get the communications back up and operating.

The same thing on the utility side of the business.

So I think we will see, we have seen definite increased interest as they are looking to rebuild that.

But right now there is a lot of energy obviously in fixing the immediate term problem.

Coming back to utilities.

Is there any interest around this type of -- related to disasters or just in terms of general replacement of batteries for utilities right now?

Yes, there is definite interest in the utilities sector.

We are continuing to see good interest and again we are probably about a year behind our marketing into that particular application.

But the interest that we are primarily centered on is in and around the infrastructure so the poles and wires and the substations that they run through.

And providing backup services there to the communication systems that operate there as well as the breaker reset activities is where the primary focus has been for us in the utility market.

How about on the state, you mentioned that 10 customers -- I assume that is a federal government and a few state programs.

What do you see as opportunities there?

I know Tyco announced a big opportunity or program with the State of New York.

Is that the type of thing for what you see telecom systems may be going after?

Right.

If you think about the state as an operator of communication facilities, that is really the area where we are most interested.

And so much most states operate their own 911 type services and many operate their own data and communications services.

And in fact some of the local cities and municipalities do the same dispatch services for like fire trucks and ambulance services, emergency services in general.

So that communication infrastructure in many cases is actually owned and operated by the state.

And so it is the same application, if you will, in the communications.

It is just a different customer set.

And that is specifically where we are targeted.

What states have given you approval so far?

The states that we've got approval for that we've talked about publicly are California, Florida, Texas and New York.

Okay.

Last thing on Honda.

Roger, you talked about that relationship.

Maybe you can talk a little bit more about what went on behind closed doors in Tokyo.

Well, since it was behind closed doors, David, my gosh.

All I would do is to say that we are looking at continuing to strengthen the relationship.

We are looking to see how the fuel cell vehicle ties with the home energy system.

And we are watching various initiatives in states and countries that can force zero emission vehicles all of which are supporting an accelerated introduction of fuel cell vehicles.

Are there any, does it seem to be mainly like an Asian industry or is it something in Europe that you are still looking at?

I think it is very clear that in the United States right now that California and the Northeast states are working very hard at looking at ZLEV emission standards.

How about on stationary systems?

Is Honda expressing interest in getting more involved in that?

I think that that is something that we are not prepared to discuss right now.

We've been working with Honda Research directly and our relationship is with them and there is an awful strong feeling about proprietary insights.

Okay.

I think, David, it is safe to say that our relationship goes beyond just the HES, Home Energy Station, but we don't really want to comment much beyond that.

Okay, great.

Thanks, guys.

Steven Sanders.

Good morning.

Mark I think on the last call you indicated that you had a few hundred plus unit type of orders out there in the pipeline.

I just wanted to see if you could bring us up-to-date on that?

Any slipping, any added, whatever color you can provide there?

Yes, Steve.

I mean we continue to work that set of accounts in the -- the language in my prepared comments would infer that one of those needs to really come home.

And we expect that one of those will come home in the context of getting us to the 300.

So it is not going to be a 100 different accounts delivering those units.

And all of those are still alive.

Some of them clearly won't happen this year but our expectation is that we will get benefit out of that set that we have been working this year.

Okay.

And then on the Tyco side, were there any additional Tyco sales I guess since you brought us up to date in July?

Where are you in terms of training the sales and service people there?

And just comment on your sense of the momentum in that channel.

We've had a few additional orders come in via Tyco other -- since the large order that came in the very early part of this quarter.

I would characterize it as the sales and marketing efforts continue to bear fruit.

We are training on an ongoing basis both our marketing and salespeople so the activity in the field right now with the accounts that Tyco has privilege with is very good in terms of joint calls and their ability to represent the product.

Tyco was actually also at the show with their own booth in Berlin that I referenced and had a GenCore system in their booth space.

We continue to see good progress on that front.

On the service side the training is actually complete and that will I think be more and more exercised as we install more in more systems out in the field.

And there is actually a hands-on sort of experience with that technician force.

I'd say it continues to move in the right direction.

Okay.

And then a couple of questions for Dave.

First, could you just review the inventory write-off again?

I didn't catch all of your comments there.

And second, just bring us up-to-date on your current thinking with regard to flipping the revenue model?

I assume you are gaining a lot of warranty experience and that there's reasonable -- it's reasonable to assume that we might see that for the GenCore in early '06?

Yes.

The first question was related to GenSite inventory write-off.

Included in our R&D expenses for the quarter was a $720,000 write-off related to the GenSite inventory that we have to do demonstration products.

We're going to continue to run the products that are currently installed in our facilities and continue with the (indiscernible) programs but we are not likely to put additional customer units out there.

And then your second question related to the accounting model.

Yes, we continue to gather that warranty information, continue to get that live field experience so that we can estimate the warranty expense.

We haven't made a definitive decision about when we are going to flip the model but I think we're getting close to having the right kind of data to be able to get closer to making that estimate.

Okay, thank you very much.

Pearce Hammond, with Simmons & Co.

Good morning.

Just a few sort of refresh type questions.

But on the (technical difficulty) size at the GenCore backup power market for telecom apps, sort of the number that had been thrown out there before sort of 100,000 opportunities annually, is that still kind of the number?

I would, Pearce, I would put it at larger than that.

Something closer to 300 than 100 if you look at the totality of wealthy Wireline and wireless opportunities.

Okay, so about 300,000?

Yes.

And then kind of on a refresh on cost, especially with the tax credit in place which is going to provide $5000.

If the capital cost on the fuel cell was more expensive than about regulated lead acid battery but as you switched out the batteries, the cost started to move in favor of the fuel cell.

With the tax credit in place is there any sort of refresh you can provide on the cost side of things?

Yes, Pearce, where we have been without the tax credit is depending on where you are in the world.

Our first cost was roughly at parity to a little bit more expensive than the traditional valve regulated technology set for equivalent output sizing and run times.

And then you are absolutely right, essentially the real economic driver was the life of the batteries versus the life of the GenCore.

So GenCore having a ten-year design life and the batteries experiencing something considerably less than that depending on where you are.

As the tax credit begins to be implemented, that should bring our first cost actually certainly in line with if not sufficiently or significantly lower than the first cost of the incumbent technology sets and we think that will absolutely help because as you know, some organizations in their purchasing decisions are highly focused on first cost.

And the fact that the pay back over ten years is very compelling may not be of interest to the guy that doesn't have the budget in that particular year.

And adds just one more thing that you need to sell through and we've been successful in selling through that.

But we view the tax credit as something that will absolutely help with that first cost discussion.

Have you had a lot of interest since the passage of the energy bill as it relates to the cash credit?

Are people very interested in doing something in '06 that may not have been there before?

I would say, yes.

There has been more what I would characterize as generic interest.

We have obviously been engaged with the four key large players on the wireless side and a similar number on the Wireline side for years now.

I think their awareness has been there.

Their willingness to do a transaction I think will be influenced here by the tax credit.

At the end of they day, we haven't seen any slow down because the implementation details are still being worked.

But it is highly likely that you'll get the credit based on when the systems are actually installed.

So any orders that we'd receive right now through the end of the year would likely be eligible given what the install timeframe of those is going to look like.

But you think sort of the phone is ringing a little bit more as it relates to '06 and beyond because of the tax credit?

Yes.

As I said, we've been pretty centered on the critical accounts and they've been engaged or how we characterize as there is much better understanding and people have revised their models to say what does the cost model really look like in the break even and all of those.

So that level of activity is spiked.

It is a fairly tight market that we're going after.

We have had some increase in activity from folks that would not be really in the bull's eye of our targeted markets of Telecom and utility.

There has definitely been an increase in that kind of activity.

The biggest challenge that you see right now in acceptance -- is it on the technology side or just customer concern as you mentioned that the buyer with the limited budget and may not pay attention to the pay back period -- I mean what -- is it just a combination of things?

At this point where do you see sort of the biggest challenge to acceptance?

The biggest challenge has really been around understanding the technology and getting you to move off of the incumbent solutions.

So it is really an understanding each of these customers has a process that is very defined and arduous that you need to go through to get approval to deploy technology.

We have been working that case and as I indicated, we've met with pretty good success this year in getting to the point where we can actually now go sell it.

We continue to work through that with a number of accounts as well where we are not yet approved for deployment.

And that has really been the where the hard work has been going on is get people familiar with the technology, understand it, get it into their labs, go through their field test programs and get the technology officers comfortable.

Once that is done, then it has been the selling to the actual operations people to make them comfortable and understand where the benefits of this technology are.

But the real selling points that we've come up against or the objections really are around just I have a solution I've been doing what I've been doing for quite a while and why should I do something different?

One final question, maybe this is for Dave or Roger.

But on GenSite, so basically kind of it was something that was fairly exciting and you don't think now it is a good potential market longer term?

We think there is a good potential market.

But one of the things we are really trying to do right now is to focus on launching our next generation stationery product.

And engaging the market and improving our GenCore product so it becomes a solution for our telecommunications customers and our utility customers.

So it is really a challenge for us to keep carrying multiple products and going through the adoption of those products into the market.

And therefore we are really just focusing down.

Thank you.

John Quealy with Adams Harkness.

Good morning.

Just returning to the energy bill question.

Can you just go into a little bit more detail?

What I understand is demand still seems strong with the energy bill tailwind; however, it sounds like we're doing a bit of a logistical dance in terms of finding out when customers can get the tax credit, when the installs go.

So can you just sort of summarize?

Is it changing the order flow at all or the install flow or what is exactly going on as it relates to this timing issue?

I wouldn't say that the order flow in the immediate term has been impacted by what has happened is I think a relook by folks that were maybe considering it at one level to cause them to consider it at a higher level at this point in time.

So the economic models that people are running, they are going back, updating those.

But by and large it has not really influenced the orders out.

It may, as you look out into next year, encourage orders that might have been on the margin, might not have been placed to be placed.

So it is helping us in terms of the economics that are being examined inside of the accounts from an awareness perspective.

Because we've been engaged with these customers for well over a year in most cases over two years and some, they are highly aware of our product and the capabilities.

This just adds as I said some icing to the economic model.

John, I just want to add to that that they are still working through the procedures and the process in the tax law itself so the exact implementation of this will become understood and that will be part of what we expect to be the documentation early in January.

So it is not altogether clear exactly how to operate using this tax credit yet to all the potential buyers.

Okay, no, that clears it up.

Roger or Mark, at this point would you be willing to at least characterize what sort of growth and order flow or shipments would you expect off this 300 base for '06?

OR is this something that we can look for on the year-end call?

We will be doing that on the year-end call.

We are not prepared to do that today.

Okay.

And my last two questions.

First, Mark, in terms of the current order book or expected order book for the 300, can you give us the split roughly international, domestic?

The current split is I would say highly leveraged against the single order from Tyco.

That was -- those are all domestic.

My crystal ball as I looked out through the end of the year I would say that balance would shift from a majority to something more like parity from a domestic versus international.

Okay.

And then my last question going to the direct material cost reductions, right around 16%.

Can you just comment on the progress made in the quarter?

And then secondly, what needs to happen in Q4 to get to that 25% run rate type of number?

This is Greg.

The progress in Q3 came out to be about a wash.

So if you looked at our second-quarter release, we have a number in there of 16.5 and we said approximately 16% in this release.

And so that is not an unexpected outcome for the quarter that we just finished.

So when we entered the year, we had a number of projects, some of which we expected to yield early in the year and some of the projects are anticipated to yield later in the year.

So that is why in our release and in the comments you heard earlier we still have confidence in hitting the public milestone.

And it is more a matter of the timing of when we do cut ins and certain projects with our supply chain partners yield into the product line.

Great, thanks guys.

Jarett Carson with RBC.

Good morning.

I was trying to do some calculus here.

At the -- I know a number of the orders came in very early in the quarter and so we talked a lot about them on the call.

But I believe you mentioned 174 units on the Q2 call.

And so over the last three months I think the incremental versus today is only about 8 is roughly around 18.

Is that a fair -- is that math fair verses where you are today?

Is that fair?

That is fair, yes.

The second question I think, Roger or Greg or Mark, on the GenSite to the write-off of the systems that were there in inventory -- I mean it seems to me it makes sense because trying to -- because you kind of put the effort to the units or I believe are going down into Robbins (ph) and kind of trying to correctly match your resource spend with the kind of the ramp of that stationery market maybe it is three or so years out.

Is that reasonable to try to just where you are going today on it?

Jarett, this is Greg.

I think as Roger pointed out, it is really about setting the priorities for the development and the support organizations.

We achieved a lot of what we wanted to achieve in terms of validating the system designed for GenSite.

We had some good receptions.

We've had good results in terms of the operations of the unit.

When we look at the full voice of customer, what we would need to do with that product line, so that that product line became meaningful to our financial progress over the next two years.

It just can't compete for resources the way that the GenSys and the GenCore programs can.

So we recognize that internally.

We've had some very good and clean discussions with the people that we've been working with on GenSite in terms of end users and channel partners.

And I think we've got lots of support for the path forward.

Right and so it seems appropriate because you wouldn't be gaining a lot of new, in my view, incremental information on the older units and you would expend a certain amount of resource to try to support the additional ones, try to get them out in the field -- is that --?

Right.

And we're using, as Dave's comments pointed out, we're using several of these systems both here and in our development labs in Apeldoorn to produce the hydrogen that we need.

And we also have a development program with Honda and their products under an NYSERDA grant to use GenSites for the vehicle we are fueling which is an end market that has a lot of attraction for people that are doing on-site hydrogen generation.

So we are going to have significant learning coming into our development organization.

But without the resource cost of deploying them in a broad set of geographies.

Great, thanks.

And final question, maybe if you guys could speak to this kind of qualitatively on the home energy station with Honda -- it seemed to be -- the body language over the phone at least that it continued ticking up.

There appears to be I think some measure of consensus between the automakers forming that you might see commercial larger scale introduction of fuel cell vehicles kind of 2012 to 2015 is my view.

But that your talks with Honda are perhaps something nearer term than that.

And maybe it's smaller scale -- I say commercial and I'm talking about tens of thousands plus units.

Is there something going qualitatively where you see the markets in California where the infrastructure may not be built out between now and then substantially, but with this you can be able to put more fuel cell vehicles in the field because you can actually have the infrastructure on-site and there's some collected synergy there?

And just kind of qualitatively you feel like they want to do some of those things quicker than maybe that timeframe?

It's very clear that all the auto industry is focused on what happens in California internationally.

It's a key market.

The California market is believed to lead the world based on regulations by maybe as many as five to seven years.

So people pay a lot of attention to what's going on in California.

The second thing is -- and I'm going to keep it qualitative because I think that's the best way to do it.

Honda is very clear about establishing itself in the leadership position of delivering fuel cell vehicles and it was very clear in Mr. Fikui's remarks in the Tokyo Auto Show, that not only do they want to make those statements, but they're going to back those statements up with actions.

The third part about that is that the cycle of introduction for fuel cell vehicles will in some case not -- in some cases not be infrastructure dependent because as with most innovations in the auto industry when you really have a breakthrough you want to start with fleets.

And the idea of fleets means that you're going to end up with central -- in this case central fueling.

So from a qualitative high level, I don't want to create the impression in people's minds that there's a one to one for every fuel cell vehicle that there will be a home energy system.

By the same token, there is some linkage because not everything will be deployed by fleets.

I think your timeframe is appropriate but again, I would look at what happens in the regulation market -- in the regulation environment in California in 2006 especially around ZLEV.

Okay, just to once again qualitatively -- I mean it seems to me the way I'm trying to interpret the tone is that is it fair to say that Honda feels like this perhaps could be A, not B but A, a potential pathway to maybe get some measure of jump on the competition of getting more vehicles out there potentially in the marketplace a little sooner by enabling or an infrastructure relative to what might normally develop over the regular course?

Is that fair to say?

I think that is a fair qualitative statement.

Okay.

Thank you.

(OPERATOR INSTRUCTIONS) Jesse Pichel with Piper Jaffray.

Good morning.

Would you please review your manufacturing capacity in terms of number of GenCore units?

And what are your capacity expansion plans there for '06 and '07?

And as a follow-up to that, would you use any electronic manufacturing outsourcers to help you manufacture these machines?

Jesse, this is Greg.

I think you have about two or three questions in there.

I will try to answer and if I don't, please ask a follow on.

In terms of manufacturing capacity what we've stated publicly is that our current site will support several thousand units a year of production.

So we've put numbers out there that are approaching 10,000 units a year and that is the only level of detail that we've put out in the public domain.

So in terms of handling our near term needs -- let's say near term is inside of two years -- we are confident in this site's ability to do that.

At the same time, we do have efforts underway to look at what comes next in terms of where would we produce and how would we produce for the next phase of our development as an organization.

So we work with internal and external resources on that subject matter.

In terms of -- I think you asked about electronics or power electronics.

We are in addition to pulling out direct material costs, which is our public milestone, we are pulling down our direct labor content on the GenCore product as well over the course of this year.

Some portion of that drawdown is to continue to work toward more modular subsystems rather than components.

And to also outsource or have certain subsystems assembled outside of Plug Power and brought to us as assembled content.

Let's just leave it that way because since our inception, Plug Power is really an assembly operation and not a manufacturing operation.

We don't do primary metal fabrication or painting or compilation of boards or plastic injection molding or things like that.

We do continue to have more integrated parts come in as our bill of material item which is assembled in our plant that the component you mentioned is an obvious candidate for that.

There are some others that we are working on as well.

Great.

Next question is what can we expect from Plug on November 14 at the Fuel Cell Conference?

You are one of the big sponsors there.

What can we see from Plug if we attend the conference?

At the conference you can expect to see basically manifestations of the things we've been talking about here during the call.

So our product line clearly where our focus is is the GenCore product.

And we also will be very active in terms of the panel and presentations.

I think you will see four different people from Plug Power doing presentations and we will also have an exhibit there at the show where we will be answering people's questions and providing guidance around our product.

Thank you very much.

Kenneth Bole (ph) with Plug Power (ph).

Yes, I have a question in regards to history.

I believe at one time when you were doing tests on Long Island you were associated with the electric company down there and you also had some association with GE.

Is that still in effect?

We do.

GE is both an IPO investor and continues to be a very large investor in our Company and is also on our Board of Directors.

And we did have units placed with the Long Island Power Authority on Long Island that was our first product, SU-1, and we continue to work with Long Island Power Authority to find possible applications of our GenCore product.

Is GE doing any selling for you?

GE has been very active in introducing us to distribution partners around the world.

In that sense they have been a big enabler for us.

Thank you.

David Smith with Citigroup.

Hi guys.

Can you give us a sense -- I see how many units were booked in the quarter.

Were those booked in the quarter or were they booked prior to June the 30?

In other words, I guess if I look at the -- what is the apples-to-apples number if I look at -- I think you said 192 this quarter at the end of the quarter?

What was the actual number at the end of last quarter?

The number, Dave, booked in the quarter was 136 if you are talking GenCore.

Right, so like 50 were booked at the end of last quarter?

That order from Tyco that we've been talking about was actually booked in this quarter.

We talked about it in the last call but it actually happened in between the end of the quarter and the call date.

So it happened very early in this quarter.

All right.

So the apples-to-apples number is like more like 50 to 60 were booked as of June 30?

You would back out -- yes -- so if you just looked at the end of the third quarter, the numbers that were booked, GenCore orders was 189.

Right, so back up to 136.

Right.

And then as of today, it's 182, so we've actually had a few that got processed since the end of last month.

Great.

You mentioned to me a minute ago the states that are involved.

Are there any additional state level incentives that are out there?

There are.

Actually there is a tax credit here in the State of New York for the purchase of the GenCore as well.

They do exist and in the case of New York it is a $1500 credit and essentially the other states are looking at it.

There are also things like renewable portfolio standards out there that require the states to have a certain amount of their energy derived from renewable technologies and fuel cells.

By and large are considered renewable, not in all states but in most states they are considered renewable technology sets.

So there absolutely are incentives at the state level as well as at the federal level.

Okay.

Last thing, you talked a bit in the past about mobility markets.

Is there any further progress there in terms of mobility applications?

No, we are -- I think as was indicated before, we're really focused quite keenly on GenCore as it exists today and on our next generation continuous run product.

That is where our energies are focused.

Okay, thanks.

John Quealy, a follow up, from Adams Harkness.

Just two quick questions.

First of all in the GenCore outlook for the 300, can you comment on how many of those whether it is a range is fine -- that will generate hydrogen on site?

Or what your expectations are for that type of fueling structure?

And number two, what amount of R&D efforts are going for toward the Honda on-site refueler program?

Sure.

In terms of the number of GenCores that would have on-site hydrogenate generation really that is not the model.

In fact, there is a couple that where that is happening but I would put those more in terms of demonstration programs as opposed to commercial application.

So that the commercial targets it is all bottled hydrogen that is delivered as the fuel source.

We have the technology enabled into GenCore to put out the alarms when that stock fuel is running low so that the hydrogen delivery provider can actually deliver it in plenty of time to keep the system up and running.

So the model there is not on-site hydrogen generation, it is merchant delivered hydrogen for the GenCore.

With respect to the Honda development activities, what I would characterize there is that those activities are fully funded by Honda and our resources are applied essentially flexed off of the amount of funding that Honda is providing for that.

I really wouldn't want to characterize now many bodies that is.

But I would want you to understand that that is a Honda funded program.

Great.

Thanks Mark.

Pearce Hammond.

Just one quick question, final question.

Is the higher cost of hydrogen right now affecting any customer decisions?

No, it is not, Pearce.

When you look at the total cost of ownership for a GenCore solution, the cost of hydrogen really isn't meaningful.

It is really the up front capital cost and then the ongoing maintenance cost.

But when you look at the hours of operation for these systems, the cost of hydrogen really is the element that has the least impact into the economic model.

Thank you.

Ladies and gentlemen, at this time this concludes the allotted time for the question-and-answer session.

I would like to turn the call back over to Ms. Cynthia Mahoney White for the 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 concludes your presentation and you may now disconnect.

Everyone, have a wonderful day.