普拉格能源 (PLUG) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2006 Plug Power 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)

Now I would like to turn the presentation over to your initial 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 first-quarter review.

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

Dave Neumann, Chief Financial Officer;

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

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

This conference call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding the proposed investment transaction with Smart Hydrogen and our 2006 milestone for system orders.

These statements are based on current expectations that are subject to certain assumptions, risks, and uncertainties, many of which are difficult to predict or beyond our control, and that may cause our actual results to differ materially from the expectations in our forward-looking statements.

These risks include, without limitation, the ability to satisfy the conditions to the completion of the Smart Hydrogen investment; the timing and consent of the approvals necessary to complete the investment; the risks that possible strategic benefits of the transaction do not materialize; our ability to develop commercially viable on-site energy products; the cost and timing of developing our on-site energy products; market acceptance of our on-site energy products; our ability to lower the costs of our on-site energy products and demonstrate their reliability; and other risks and uncertainties discussed in the reports we file from time to time with the Securities and Exchange Commission.

Plug Power does not intend to and undertakes no duty to update any forward-looking statements as a result of new information or future events.

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 us today.

This morning we will be covering three major topics.

First, Mark Sperry will review our progress against three of the five milestones that we established for 2006.

Second, Dave Neumann will review our first-quarter financials.

And finally, I will update you on the Interros, Norilsk Nickel, Smart Hydrogen investment transaction and the next steps.

After our prepared remarks, we will open the line for a question-and-answer session.

Although we placed a high priority on negotiating the definitive agreement with our new strategic partner, we were attentive to our other duties.

The definitive investment agreement, when approved by our shareholders, is expected to infuse approximately $217 million in cash into Plug Power.

In addition, I am happy to report that we also made good progress against our established 2006 milestones during the quarter.

In fact, by the end of the first quarter, we had actually completed two of the five milestones for 2006.

Mark Sperry will elaborate for us.

Mark?

Thanks, Roger, and good morning, everyone.

First, in regard to our milestone to book orders for 500 to 750 systems this year, we accepted orders for 52 systems during the first quarter.

Last year at this time, we had received orders for 16 systems versus an annual goal of 300, and we exceeded that goal by year-end.

We expect 2006 orders to be similarly back-end loaded, and we remain comfortable with our ability to achieve our order milestone for 2006 as well.

As in the past, reaching the order milestone is directly related to our success with a handful of large opportunity accounts, and this success has already begun for 2006.

As noted in our press release this morning, one of the recent orders for 17 GenCore systems came from our largest telecom customer via Tyco.

Four customers accounted for 80% of the systems ordered during the quarter.

We continue to target the large market for backup power within the telecommunication and utility sectors, which are currently served by a combination of battery and generator technology.

While targeting these large strategic accounts with near-term sales potential, we continue to conduct the market development necessary to develop longer-term opportunities.

In terms of shipping, we shipped 17 systems during the first quarter and our backlog grew to 229 systems as of March 31, 2006.

We continue to manufacture and deliver systems in accordance with our customers' schedules.

As to our milestone to expand and adjust our global network of strategic partners, Roger will provide an update of the Interros, Norilsk Nickel, Smart Hydrogen transaction in a few moments.

I would like to make a few comments about the recent restructuring of our relationship with General Electric.

As we previously reported, GE sold all of its shares in Plug Power in two separate transactions during the fourth quarter of 2005, one of which was a sale of 2.7 million shares to Smart Hydrogen.

During the first quarter, we took steps to better align the agreements between GE and Plug Power.

We have terminated our GE Fuel Cell Systems distribution joint venture and the associated distribution agreements and replaced those with a new development collaboration agreement.

The exclusive distribution rights that GE had have reverted back to Plug Power, and the commissions that we were required to pay GE on sales of certain products to third parties have been eliminated.

As a result of this restructuring, we are free to build a distribution network reflective of our current product portfolio in target markets while maintaining a research and development collaboration with GE's Global Research Center.

In addition, this past January, we announced a new collaboration with Ballard Power Systems to jointly develop a next-generation prototype proton exchange membrane fuel cell to be used in backup power applications.

Plug Power is acting as a system integrator, using a Ballard fuel cell stack for evaluation of potential use in continuity of operations programs for the Department of Defense and the Department of Homeland Security.

Congress appropriated $2 million in the 2006 Department of Defense appropriations for this program.

Finally, one of our 2006 milestones called for us to execute contracts with Honda R&D for two initiatives -- first, ongoing research, and second, the joint design and development of the fourth-generation Home Energy Station.

I am happy to report that those agreements were signed during the first quarter.

As in the past, Honda will fund Plug Power's work under the two new agreements, and we are currently executing against the agreed-to statements of work included in the contracts.

We greatly value our deepening relationship with Honda and we look forward to the joint development work we are undertaking with them again this year.

We remain committed to our additional 2006 milestones of expanding the GenCore feature set and beginning in-application field testing of our next-generation GenSys products.

We will be providing progress updates as we move through the remainder of 2006.

Now I'll turn the call over to Dave for an update on the first-quarter financials.

Dave?

Thanks, Mark.

I will be providing a brief summary of our financial results for the first quarter ended March 31, 2006.

Starting with our statement of operations, total revenue for the first quarter was $2.3 million compared to $3.2 million during the first quarter of 2005.

Product and service revenue, a component of total revenue, was $857,000 during the first quarter of 2006 compared to $1.1 million last year.

As Mark mentioned, we shipped 17 fuel cell systems during the quarter, and our backlog grew to 229 systems at March 31.

Under our accounting policy for revenue recognition, we continue to defer product and service revenue at the time of sale, and at March 31 we had total deferred revenue of $3.3 million.

Contract revenue, under research and development contracts and tested development projects, was $1.4 million for the first quarter ended March 31, 2006 compared to $2.2 million in the first quarter of 2005.

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

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

In addition to the 17 fuel cell systems shipped during the quarter, we supported close to 200 systems during the quarter, and our cost of product and service revenue was $1.2 million, compared to $708,000 during the first quarter of 2005, when we shipped 16 systems and supported approximately 125 systems in the field.

Our cost of research and development contract revenue, which represents the fully-burdened cost of contract activity, was $2.5 million during the first quarter of 2006 compared to $2.9 million last year.

Research and development expenses were $9 million for the first quarter of 2006, which compares to $9.8 million during the same quarter a year ago.

Our net loss for the quarter ended March 31 was $12.1 million, or $0.14 per share, compared to $12.5 million, or $0.17 per share, in the first quarter of 2005.

Weighted average shares outstanding were 85.9 million compared to 73.4 million shares during the same period last year.

Our net cash used in operating activities for the first quarter ended March 31, '06 was $11.1 million compared to $10.2 million in 2005.

At March 31, '06, the Company had $86.3 million in cash and marketable securities and $85.5 million in working capital.

I would now like to turn the call back to Roger to provide an update regarding our investment transaction with Interros, Norilsk Nickel, and Smart Hydrogen.

Roger?

Thank you, Dave.

As we go forward, we are determined to continue exercising the prudent stewardship of resources that has characterized this management team.

While looking for ways to accelerate and expand our business, we are always mindful of our commitment to find the shortest path to profitability.

Our determination to find this pathway to profitability will be aided significantly by our new strategic partners, Interros, Norilsk Nickel, and Smart Hydrogen, and their investment in Plug Power.

As we announced two weeks ago, the principal investors of Interros, the well-known Russian private investment firm, and Norilsk Nickel, the world's largest producer of nickel and palladium, have agreed to make an investment that will infuse approximately $217 million of cash into Plug Power.

The investment is being made through Smart Hydrogen, a partnership between Norilsk and the principal Interros investors that was formed to accelerate the transformation of our present fossil fuel energy economy to a global hydrogen economy.

As we have discussed, the parties have entered into a definitive investment agreement.

The transaction is expected to close this summer, subject to approval by Plug Power's shareholders, regulatory approvals, and customary closing conditions.

Further details of the transaction are available on our website, including a playback of the transaction conference call that we conducted on April 11, the day of the announcement.

The response to the transaction has been overwhelmingly positive from every corner, the financial community, government entities, our strategic partners, suppliers, customers, and employees.

Since the announcement, the parties have made the necessary application for Hart-Scott-Rodino antitrust clearance and submitted filings with both NASDAQ and the Committee for Foreign Investment in the U.S.

We do not currently foresee any issues in obtaining the necessary regulatory approvals for the transaction.

The investment has received support from Senators Schumer and Clinton, Congressmen Sweeney and McNulty, the governor's office, and the leadership in the New York State Legislature, among others.

Additionally, we are preparing the necessary proxy materials and have tentatively set the date for our annual shareholder meeting, where we will seek shareholder approval, for June 28, 2006.

As I mentioned last time, our strengthened balance sheet will allow us to lengthen our stride and quicken our pace as we enhance product performance, reduce costs, strengthen our supply base, access new customers and markets, and improve our manufacturing and integration processes.

To that end, members of the Plug Power, Smart Hydrogen, Norilsk Nickel, and Interros management teams met this past weekend to explore areas of potential collaboration beyond the initial investment.

While these discussions are in the very preliminary stages, we do expect additional agreements in areas of technology and market development.

We are working to expand and deepen our understanding of potential new markets and new technology resources available through our new partnership and we intend to provide regular updates on our progress.

I believe the investment to be truly transformational for both Plug Power and the alternative energy industry.

We have received numerous phone calls and e-mails from industry leaders hailing the transaction and affirming their commitment to the industry with a renewed sense of purpose and conviction.

I'm also heartened by the excellent meetings we had with our new partners this past weekend.

Our teams are establishing strong bonds and are clearly committed to leveraging maximum value for our shareholders from this relationship.

In conclusion, I think it is helpful to take a step back and look at the bigger picture.

We are hearing not only about global warming, but the sudden acceleration of global warming.

The evidence of that trend is accumulating as we suffer one natural disaster after another.

At the same time, the price of gasoline is causing millions to rethink, finally, our dependence on oil.

The first target for ending our dependence on oil is transportation.

As you know, we in the stationary PEM fuel cell technology position ourselves well ahead of automotive fuel cells because of cost.

PEM technology will pass through the price point for stationary and order of magnitude before the automotive price point is reached.

In addition, President Bush has announced to the world that we are addicted to oil.

As we all know, the first step to cure an addiction is awareness.

For certain, we are now becoming aware.

The trend impacts Plug Power in two ways.

First, it enhances our position in the marketplace.

As people become aware of the pressing need for alternative energy, the demand for it grows and so does the opportunity for fuel cells.

Second, these developments allow us to fulfill our purpose of the Company, to provide clean, reliable, on-site energy to a world that is running out of options.

Thank you, everyone.

That concludes our prepared remarks.

We will now open the call to questions.

(OPERATOR INSTRUCTIONS) Steve Sanders, Stephens Incorporated.

I wanted to ask a couple of follow-up questions on the public energy side of the customer base.

How would you characterize the interest level, the orderbook?

I'm talking about the various states.

What applications seem to be the most interesting near-term and how are things going in Florida?

Sure, Steve.

Florida has been an early customer of ours, the state itself.

That particular application is in providing backup services to some of the critical facilities inside -- actually inside office buildings.

So I would characterize it as a small-scale UPS type application.

More generally, I would characterize the interest as in line with the infrastructure that we are targeting, i.e. the telecommunications and the grid type infrastructures that the states themselves own and operate.

So we have been targeting the most populated states, New York, Florida, Texas, California.

We continue to see good interest and are exploring in most of those states the state-run emergency 911 communications systems, be they 911 systems, emergency type systems in general. .

We also see interest from what I would characterize as the First Responder Network, so think about police forces, fire departments, the application again being their internal communication infrastructure that needs to stay up and operating whenever there might be a power outage.

So I would say it continues to lag behind the private sector, but the interest that we thought was there continues to be there and we are happy with our progress thus far.

Okay.

On the GenSys side, can you give us an update on, Mark, the level of interest?

You've got some units in the field now.

It seems like you're pretty excited about the potential there.

And how close you think the product is in terms of cost performance, configuration, to meet some of the early market opportunities.

Steve, the interest there is very high, is the way I would characterize it.

There is a good amount of demand for that particular product, the applications that we are looking at.

I think we are in very good shape with respect to the value proposition that we need to put forward.

So again, we are not, with this initial market, targeting competing with the grid; we are targeting competing with the potential of extending the grid or places where the grid does not necessarily exist.

So where your choices are -- photovoltaics, generator sets, or having to extend the grid at $15,000 or $25,000 a mile, depending on where you might be.

So we are very happy, I think, with where we are on the cost front, the value proposition we're going to be able to put forward, and the early customer interest that we have seen.

And we continue to work internally to get that product into the market as soon as we can.

And as I've said, we are very committed to our milestone of actually beginning in-application testing with targeted end-users this year.

Okay, thank you.

David Smith, Citigroup.

Can you give (technical difficulty) a sense of where your conviction is coming on the order of visibility for the full year, the 500 to 750?

It sounded like, in the comments, Mark, you sounded like you definitely had a lot of conviction around it.

But you talk about four customers, for instance, specifically making up about 80%.

What kind of markets are looking at that those people coming from?

Really, just where does the degree of conviction come from?

Sure, Dave.

It really comes from the level of interaction and engagement we have had with what I would characterize as very large customers, that each one of them could potentially fulfill the entire orderbook that we put out there.

So as I have characterized, we're not trying to get 500 to 750 orders.

We're trying to get probably 5 to 7 customers to place single orders that would equate to 500 to 750 systems.

And we have the right engagements going on.

We continue to make the right amount of progress in getting through the various gates that we've talked about before, in terms of being able to sell.

In many cases we have come through that and we are out actively engaging now at the operational level.

So typically those decisions tend to be distributed once you get past the ability to actually deploy the product in the infrastructure network.

You then have to go out and establish those relationships with the operationals guys, typically at a regional level.

And that is where we are, so we are comfortable with the engagements we have.

Again, it is going to be highly driven by success with a very limited number of accounts.

We are very encouraged by what's going on with our activities on the ground in South Africa in the communication and utility companies there, as well as some of the other international fronts, which are beginning to emerge as we look into this year.

So I would say that is where the confidence is coming from.

So, it doesn't sound like -- it sort of sounds like you're past the first step of just [seeing] onesies and twosies.

Would I be correct in saying that?

Yes, I would characterize it as with a handful of accounts, we are at the point where we've done the onesies and twosies, and we are expecting deployment type decisions as opposed to evaluation type decisions.

There is clearly accounts where we are still in what I would characterize as the evaluation decisions.

But we are at the point with enough accounts that I'm still quite comfortable with the 500 to 750.

The ones that are still in the evaluation stage, what is giving them their primary hesitancy in going forward at this point?

I would say it is just a matter of - in many cases in the telecommunications industry, they are a little distracted by the amount of merger activity that is going on.

So many of these companies are actually integrating with recent acquisitions, and a lot of time and energy is being spent there.

The technology evaluation process is just what it is in this industry, so it takes awhile.

We have not run into anything that would say it is anything other than the process you need to go through.

So it is just finding the right people, getting them to go into the testing cycles, actually mapping out what that test looks like, writing the reports, getting that issued, getting the procurement organization through the processes they need to get through to be able to actually order the system.

It's those types of things, as opposed to there's some philosophical issue or technical issue with the product.

Which end markets are those four customers that are 85% of the sales in the quarter?

They would be telecommunications.

Okay.

So any progress so far on the utility market?

I would say limited progress at this point.

Most all of our utility customers would still be in the evaluation stage.

Okay.

Lastly on the World Bank, how is that progressing?

Have they started shipping?

And what is the general feeling around the (indiscernible) on deliveries there?

The feeling is very positive.

I spent some time down on the ground with the primary end-users earlier this year.

What I can tell you is the World Bank subsidy absolutely has made a difference and has sort of taken the price conversation off the table.

So the pace at which we can move through the procurement organizations has really been accelerated pretty much across the board in South Africa.

We did earlier this month make our first shipment against the 80-unit order that was placed late last year, and we expect within the next couple of weeks, actually the next shipment to go against that.

So we have begun to make shipments into the country, into the targeted accounts -- that would be the telecommunication and utility customers down in South Africa.

Last question.

On the energy policy, any impact from the tax credit that you are seeing in North America?

Is that helping things out?

And then there seems to be a little bit more discussion about more tax credits coming on.

Are you hearing anything on that?

They definitely have helped.

And again, back to the comment I made about South Africa in terms of helping with the first cost conversation, that has definitely helped.

As you would imagine with any large companies, the telecommunications in particular, you need to help them do the total cost of ownership type activities that are required to in order to get the procurement done.

So it is not always the guy that has the purchasing budget that is actually going to see the tax credit; that may be scooped at corporate.

So working through that logic and helping them do the math, essentially, is what we have been up to.

And at this point, it is looking very good for an extension of the policy and the credits that are involved -- that are out there today.

So we are feeling very comfortable that the tax credit will be extended another three to five years.

Is there any -- I'm hearing kind of talk around more work on the energy policy, on more energy credits, just recently, with a lot of what Bush has been saying.

Is there any more talk around that?

Yes, there is a lot more talk, and obviously with some of the comments and speeches that President Bush has made of late, there seems to be a renewed interest in that.

What we need to understand, with Congress coming back from vacation and beginning to really get their minds around north of $3 gasoline pricing, what is the right approach?

So the environment is definitely right.

It is a little early to be putting a read on what's going to come of that, but I think in general it will be positive.

Okay, great.

Thank you.

[Stewart Bush], RBC Capital Markets.

To follow up on David's question, as I try to understand it a little better, especially since these large orders are, as I see it, really a binary catalyst, since you're primarily targeting the big seven telecom customers, can you give us some color on what, if any, shift you have seen over the past quarter in the thinking from the purchase decision-makers at these target accounts, and what sticking points did they have before that they're more comfortable with now?

Sure, Stewart.

I would say back to the comments around price, clearly the tax credit stuff has helped in that conversation.

The real inertia has been around just getting the test completed and running through that process.

So it really has depended on how long ago did we engage and how stringent are they, how long do those tests need to run?

Is it a 90-day test?

Is a 12-month test?

Those types of things have been the gates.

And we have consistently continued to work through that.

It is very typical that there may be one or two unique requirements by the major telcos that we then need to go back and incorporate in the product, so we have worked through that in many cases.

So while I always would like it to go faster, I am heartened by the fact that we have gotten to a point now where that is not the issue.

The issue is we need to deploy the systems and we need to get with the operational folks, which by and large tend to be -- again, tend to be distributed out in the operations and you're really looking at understanding who owns what geographies and making the sale at that point.

So the good news is that is the level that we have reached with several of these accounts.

The bad news is it's multiple touch points inside the accounts to make the sale.

So we have a lot of relationships that we are currently building and we are beginning to see the benefit of those.

Great.

Secondly, I know this may be a different perspective from what is usually an issue in the energy tech space, but given this huge investment by the Russians, you are capitalized for seven or so years if we stick with your current strategy.

Should we be looking for some sort of major strategic shift to put that money to work in a major way, or do you think you will mainly pursue your current strategy with some incremental additions to productline and markets?

This is Roger.

That is part of why we had the discussions this past weekend.

Let's do one thing about your anticipation horizon in terms of when we are likely to make statements.

We will probably not issue anything of significance for the next six to eight weeks, until we get past the shareholder approval, because we don't want to go back and restart anything in the proxy process.

In the meantime, we are looking at all options.

Probably the least desirable is business as usual, but we certainly have that under consideration.

And we are looking -- we think with this type of capital that the menu of options to accelerate our path to profitability has been greatly enhanced.

And it is a centerpiece part of our conversations with our new partners to look at a variety of options.

And at this point, I'm just simply going to say that leave that to your imagination, but we are very active at looking at greater than five different ways that we could use these monies to improve our time to profitability.

And our new partners are keenly interested in the same objectives as any of our shareholders are and our employee base as far as achieving profitability.

Okay, that's great.

That's pretty helpful.

Lastly, can you give us some more color on the history of the Smart Hydrogen group and their initiatives before they invested in you?

Did they make any previous investments?

And how long before your announcement was that initiative formed?

I think it has been very clear that the Russian investors have been looking at this space internally and globally for at least three years.

And Smart Hydrogen has been specifically looking outside of Russia to understand what would marry up best with their capabilities inside the country.

And I think at a high level, we have mentioned already that there is a portfolio of technologies that are present because of the inherent talents inside the Russian technical community that are looking for the best way to become commercialized.

So one of the criteria in their search globally to see what they could do to enhance commercialization for them was to look for a company that was independent and had demonstrated the ability to go from concept to technology to commercialization.

One of the rigorous kind of tests that they put us through in terms of evaluating us was to understand how quantified our process was from technology all the way through to customer service capability.

And when they came back, their assessment basically said that we were the best prepared to complement what they were already positioned to be able to do, up to the point of late product development and commercialization.

So when I said leave it to your imagination for the time being, you need to understand that we have a lot of potential options that we very systematically have to go through.

And we are going to be very thorough and exacting in selecting the technology, selecting the market, and selecting the processes or the order of the processes to commercialize their technology and explore the possibilities of markets around the world.

And a big opportunity, obviously, to us is Russia.

Okay, so just to confirm, besides the technology they have at their disposal based on their relationships in Russia, you are the only formal investment that they have done so far.

Is that right?

I'm sorry that I didn't mention that.

We are the first and only formal investment they have made in this space outside of Russia through Smart Hydrogen.

Right.

Thanks so much.

[John Keeley], Canaccord Adams.

Just a question on the competitive front in specifically the smaller fuel cell space.

What have you seen lately, anybody coming up really challenging you on some of these RFPs?

Can you just use a little flavor for how that's progressing for you folks?

Sure, John.

I wouldn't characterize the competitive landscape as really having changed much in the past 12 to 18 months -- the same players we were bumping into we continue to bump into.

I haven't really seen anyone new.

And I would also characterize it that the main competition really is around the existing technology sets, that being generators and batteries.

And that really is where we spend the bulk of our time in terms of the selling initiatives against competition; it's against existing technologies that have been out there for years and that are well understood and characterized, both the good and the bad.

So the competitive front, fuel cell to fuel cell company is about the same, and I would say it is absolutely necessary.

So we continue, as we deal with these very large telecom customers, to hear that they will not enter into a technology where there is only a sole source.

So it is actually helpful that there is competition and we think it also validates that there is a market space here that is compelling.

Okay, then my last question.

Obviously, you have got a lot going on the strategic side of things.

But can you comment and give us a refresher on where you stand on product costing and getting the costs out of the product, notwithstanding volumes?

John, this is Greg.

The work that we're doing on taking the cost out of the system never ends.

So I think that has been something we have talked about as an organization.

And when people come and visit us, they see the detailed work that we go through to take costs out of the systems.

We are in a state right now where we are in the middle of the development of the GenSys product, and so we are continuing to work on cost designs -- or designs that continue to take costs down in that system.

But we are also focused -- a lot of our current energy is focused on making sure that we meet the product feature set and the performance expectations of those systems.

And in the last few weeks since the announcement of this new investment, there has been a lot of work with our suppliers.

Because we have been looking at the situation with the supply base and recognizing what opportunities such a large investment from such a strong hand of partners will bring to our business, that we have started immediately, since the day of that announcement, working with a number of our critical suppliers in exploring where we are going, both short-term cost reductions activities, as well as what advanced technology concepts can we work with these suppliers that allow us to really break -- what I call break the back of the cost equation to bring the system costs down to the levels that are in our long-range plans that we believe are most attractive to the Company.

Great, thanks.

[Brian Gamble], Simmons & Company.

A couple quick questions.

First, a follow-up on the GenCore orders from earlier.

The 5 to 7 new total customers you are targeting for the 500 to 700 orders for the year, are those all new customers or are any of those follow-ons from additional customers that you already have established?

It’s a combination, Brian.

I would say all of them -- when you say new customer -- I mean, they have all purchased evaluation systems.

They all would not be what I would characterize in -- have made deployment purchases.

So at this point, I would say we have a lead telecom customer that has made a deployment decision, a couple others that we're in that process with, and then some that I would say are still sort of in the evaluation purchase mode.

So it is a combination across the waterfront there.

Have there been any large telecom companies that you have targeted that have been completely unresponsive to any type of communication and just flat out said, hey no, we are not going to do this?

Yes, they do exist.

I would say there has been one or two customers where I have recommended to my sales team that they not bother continuing to bang on that door.

Fair enough.

On the discussions with Interros, I know you said that nothing is going to be announced for the next six to eight weeks and we should use our imagination, but a couple points on that.

One, should we be expecting something sooner rather than later from recent discussions that you have been having with Interros?

And whether or not that is the case, should we still be targeting $40 million for a cash burn for the year?

It sounds like from the "use your imagination" type things that there are specific things you guys are targeting that could drastically or not drastically increase that number for the year.

What is your view on that?

Touche.

I certainly set myself up for that follow-on question.

I should have been more careful, because I'd like to keep it down to just one question at a time.

But the linkage is good.

First of all, we really are sending you a very clear message that we are not going to become profligate in the way we manage our cash.

There is no way that this management team is going to do that.

So I would expect that we are going to be working with a very temperate attitude relative to cash, cash usage.

So I would expect whatever we do is just done with the confidence to know that we have a very, very strong partner, and that opens up a lot of other possibilities.

Second, in terms of using your imagination, I just simply mean that we have given enough indications that you can extrapolate to understand that we move very methodically, we are very thoughtful about what we do.

And when you tie that with the idea of sooner rather than later, we are not going to be thinking that long that you won't be hearing stuff from us probably within the third and fourth quarter this year.

So from our public announcement posture, we are going to be very careful about what we do, because we will also give out milestones over time that we have to live up to.

So there is a certain amount of cautiousness that goes into what I am saying.

So when you let your imagination go, don't expect us to come back with an announcement that is inconsistent with our history.

Okay, that's fair enough.

Thank you very much.

[Andrew Morrow], Otto Capital.

I had a quick question about the milestones for the year.

If you could maybe reiterate those for us, I would appreciate it.

At the beginning, you stated that two out of the five had been completed, and maybe you could also say what those were again, more specifically.

Sure, Andrew.

The two that I would reference as completed was the milestone to essentially expand and adjust our global network with strategic partners.

Clearly, with our restructuring of what we have done with GE and the introduction here of Interros and some others, I think we would consider that to be -- to check the box that we have done that.

In terms of our milestone to execute contracts with Honda, we have, as I said in the prepared remarks, we have executed against that.

Our milestone around the 500 to the 750 orders, I think we have talked a lot about that in today's call.

The two that I did not give a lot of color to was the milestone to begin in-application field testing of our next-generation -- continuous run GenSys product, our next-generation continuous run product.

And the fifth milestone was to add incremental features to the GenCore productline.

And at this point, we're not ready to make an announcement on that, but as I said in the remarks, we are committed to both the in-application testing of our next-generation continuous run product and to expanding and adding features into the GenCore productline.

Great, thanks.

Then did you have any ability to bring down the costs on the GenCore system over the quarter?

Andrew, it's Greg.

We are not talking in public about specific moves on our cost structure.

Okay, thank you.

(OPERATOR INSTRUCTIONS) David Smith, Citigroup.

Roger, can you just follow up and give us a bit more detail?

You said five opportunities to accelerate the path to profits.

Can you just elaborate a little bit more on what you meant there?

Actually in terms of accelerating our path to profitability, which I always carry in my mind, is how we can enhance product performance?

How can we reduce cost?

How can we strengthen our supply base?

How can we access new markets and customers?

And how can we improve our manufacturing and integration processes?

Okay.

So everything would come under those headings, David.

Right.

The last thing I wanted to ask you about was you didn't touch on customer approvals.

You've talked about this a bit in the past.

Was there any growth in that in terms of -- specifically maybe on the utility side?

Dave, this is Mark.

I would not say that any of the utilities we have gotten to the point where we are okay for deployment.

We are out under evaluation in applications that I would characterize as communication applications inside the utilities.

So many utilities have their own communications infrastructure, repeater towers, those types of things.

And then inside the substation itself, there are communication applications for the control systems that are operating and there are breaker management backup systems.

So inside the utilities, I would think about it as three applications, and we are under test in all of those.

But I would not say that we are okay for deployment, if you will, in any utility right now.

One of the big things that they've talked about is increased reliability of the electric grid.

Has there been any discussion around that with fuel cells?

I would say tangential, in that in terms of where we are targeting the particular applications I've talked about are more in the lines of how to get the grid back online sooner.

So if there is a failure, how to get communication of that failure upstream to the management office, how to get communication from the office back down to the substation, saying it's okay to reset those breakers, because whatever caused the problem has been cleared.

It has been more in that space.

The other thing I would say is that in some of our applications, the actual end-user is saying okay, I'm going to manage the unreliability of the infrastructure myself by putting in a bridging technology set.

And that is where I think we are looking at bolstering -- maybe not directly bolstering the reliability of the grid, but improving the continuity of service of the electrons that they're looking for ultimately.

Okay.

Final thing on Tyco.

This order came through Tyco, I think you said.

And is Tyco pretty much active with all the U.S. telecom companies now in trying to get this product out?

Are they seeing more of a push program or are they seeing more pull from the customer in terms of interest?

I would say it is a little of both.

Tyco, as with any company, they have customers where they have very large market share and they have some where they don't have much market share at all.

So I think their ability to sell and influence really goes with where they have privilege with particular accounts.

So I don't see -- my observation is that fuel cell technology is no different from the other technologies that Tyco is moving into those accounts.

It really goes to the relationship that they have established over a period of time.

Is there any incentive for a sales guy to really push the fuel cell option, when he could be selling batteries every three to five years to these guys?

I would say that the incentives are the same in terms of the technology sets.

There are programs that come and go inside of any selling activities where there might be incentives put to move particular product lines.

But by and large, Tyco is pretty evenhanded about the technology set.

So they work hard to make sure that the right technology is represented to the customer and they try and keep their sales commission programs in line to make that happen.

Certainly, as it relates to my direct sales team, they are not allowed to sell batteries or generators, so they are highly incented to move fuel cells.

Got you.

Great, thanks.

Ladies and gentlemen, this does conclude our time for the question-and-answer session.

I would now 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 and 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.

Have a wonderful day.