普拉格能源 (PLUG) 2006 Q2 法說會逐字稿

Welcome to the second-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 today's conference. (OPERATOR INSTRUCTIONS) Now I would like to turn the presentation over to your initial host for today's conference, Cynthia Mahoney White, Manager 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, Chief Executive Officer;

Greg Silvestri, President;

Mark Sperry, Chief Marketing Officer; and Robert Powers, Acting Chief Financial Officer.

To begin the call, I would 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 potential strategic benefits of our relationship with Smart Hydrogen and our 2006 milestone.

These statements are based on current expectations that are subject to certain assumptions, risks, and uncertainties, many of which are difficult to predict, are 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 risk that possible strategic benefits of our relationship with Smart Hydrogen 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 cost 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 or 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, Chief Executive Officer of Plug Power.

Thank you, Cynthia.

Good morning, everyone.

Thank you for joining us today.

We are entering a new, dynamic stage in the globalization and evolution of Plug Power, now that we have completed the Smart Hydrogen transaction and the associated $217 million investment.

We present to you this morning in the context of this investment and the implications of Smart Hydrogen as our new dynamic partner.

We view the Smart Hydrogen investment as providing us a launching pad, not just a runway extension.

This launching pad will serve investors well.

Our forward movement will emanate not just from the financial investment, but also from the considerable opportunities afforded us by the Russian technology and market development brought to us through our new relationships.

The Smart Hydrogen transaction has sparked a new drive and determination to proceed expediently on our pathway to profitability.

This new drive and determination is what we would like to share with you today.

First, I will offer observations about one immediate impact of the investment -- an organizational strengthening, well underway, that is designed to intensify our focus, accelerate sales and market development, and help us seize new global opportunities now at hand.

Second, Mark Sperry will elaborate on our recent activities related to technology collaboration and market development in Russia.

Third, Greg Silvestri will describe how this investment will drive the sales acceleration effort.

He also will address progress against milestones for 2006 and provide us financials for the quarter.

We will then conduct a question and answer session.

Our organizational changes began in June, and we are moving forward quickly.

At the highest level, we are augmenting our already-strong management team.

We have appointed Greg Silvestri as our new President.

Greg, who was formerly our Chief Operating Officer, is now responsible for engineering, manufacturing, supply chain, customer operations, global sales, and our operations in Apeldoorn.

I should remind you that prior to Greg's almost seven years' experience with Plug Power, he held significant positions at Saint-Gobain, Mckinsey and Company, and Hewlett-Packard.

His drive and determination will shorten decision-making cycles and bring increased focus and accountability to the engineering, manufacturing, sales, and supply activities.

Engineering, development, and product delivery have been centralized under a new Vice President of Engineering, Tom Hutchinson, who will report to Greg.

Tom worked for Ford Motor Company for 29 years in a number of engineering and leadership positions.

These included Quality Manager, Chief Engineer, Director of European Operations, and Global Director of Product Safety.

His global experience and reputation for being able to extract productivity through collaboration will help bring us to a new level, while fortifying our invaluable corporate culture.

In addition, to further support Greg we are recruiting new heads for our Sales and Supply Chain organizations.

John Elter, Gerry Conway, and Mark Sperry continue in their respective roles as Chief Technology Officer, General Counsel, and Chief Marketing Officer.

Mark Sperry, who will continue as the Chief Marketing Officer, will be leading the focus on our strategic direction in strong collaboration with our Board of Directors and me.

In this role he will be using the power of outside resources, in addition to our own, to evaluate our present strategy and select the best course to get to profitability in the shortest possible time.

Mark's financial, marketing, and planning background at Xerox Corporation as well as his six years at Plug Power make him ideal for this role.

Joe Millington, who has 23 years' experience in the human resources field, will join Plug Power on Monday as our new Vice President of Human Resources.

His background with technology and telecommunications-related companies, particularly those with global operations, strengthens our team significantly.

Joe spent 15 years with Hewlett-Packard, where he pioneered change management and organizational development initiatives.

He has also worked with Quantum Corporation, Acterna, and has been an executive recruiter and coach.

In addition, we continue our search for a new CFO.

We have evaluated and interviewed a number of candidates and expect to make a selection soon.

The people of Plug Power are important to our success, especially as we expand globally.

We are fortunate to have such a committed and accomplished staff, whose dedication has been strengthened by recent developments, and whose confidence and collaborative spirit are invaluable.

Now, Mark Sperry will discuss the progress that we have made with respect to technology collaboration and market development with our new partners.

Mark?

Thank you, Roger; good morning, everyone.

Much has happened since our last call.

Most significantly, the closing of the Smart Hydrogen transaction and the strengthening of our balance sheet.

As we have indicated, we view this transaction as truly transformational.

Beyond leveraging the financial investment, we will be able to advance our emerging leadership role in two areas with respect to Russia -- technology development and market access.

Since the transaction's approval, we have exhibited our products at the 10th Annual World Economic Forum in St. Petersburg; participated in an exclusive technology symposium in Moscow; begun to characterize the market opportunity in Russia for our products; and conducted initial meetings with potential customers.

At the 10th Annual World Economic Conference in mid-June, our GenCore and GenSys systems were exhibited.

Our collaborative presence with Interros and other related parties was quite visible in the St. Petersburg venue.

President Putin, along with the president of Finland and various Russian ministers, all visited the booth where our systems were on display.

Prior to the G8 Summit, several members of Plug Power attended an exclusive technology symposium in Moscow.

The symposium was sponsored by Russia's National Innovation Company-New Energy Projects, or NIC-NEP.

It included the representatives from the Russian Academy of Sciences, Interros, and Norilsk Nickel, among others.

The seminar identified a variety of areas for potential technical collaboration and established critical relationships among technical and business counterparts.

We are currently working to formalize strategic collaboration agreements with the appropriate entities.

Four systems have already been purchased and are in Moscow to support customer demonstration and requirement gathering activities.

Initial meetings to discuss targeted GenCore and GenSys application with potential customers, including major entities in the transportation and telecom Industries, have begun.

We are currently working to further assess the market opportunities, potential customers, applications, and their associated requirements in advancing our go-to-market strategy for Russia.

In summary, we remain enthusiastic about the potential market and technology opportunities the Smart Hydrogen transaction has afforded us.

We have made good progress in developing specific strategies to capitalize on those opportunities.

Now, I'd like to turn the call over to Greg Silvestri.

Greg?

Thank you, Mark.

Good morning everyone.

Accelerating our sales is the number one priority for my new organization and the objective which dominates my personal priority wheel and drives my entire organization.

Accelerating our sales is not a conflict or a competing priority to reducing our product's cost and increasing our product's reliability.

Accelerating sales enables and strengthens our ability to achieve those necessary objectives.

There is no doubt in my mind that we will achieve our stated sales objectives.

I am also confident that the audience for today's conference call and many of our investors will have natural questions as to how Plug Power's management team can be so confident in achieving our objectives, when the simple math of analyzing our position at the end of Q2 would assign a high degree of difficulty to meeting these sales objectives.

Our confidence emanates from two key factors.

First, what is it we have to offer?

Second, the actual progress we are making within the considerable market opportunities before us.

First, our offerings.

We believe that our GenCore product is the most viable, complete system available today for serving the extended-run back-up power needs of the telecommunications, electric utility, and industrial UPS markets.

This is why we believe we are leading the industry in sales to the telecom market.

This is why we have approximately 150 systems on active duty today, located in at least 23 countries around the world.

Our GenCore systems are sold at market clearing prices.

They are certified and tested in real-world operating conditions.

They are sold under a competitive warranty.

And they are proven in meeting specialized customer demand.

They are operating on the networks of some of the world's foremost telecommunications companies, electric utilities, and government agencies at all levels.

Our products serve the increasing worldwide need for uninterrupted power.

They are designed to compete against the incumbent technologies and excel in applications where climate conditions range from very cold to very hot; where remote locations can now be effectively maintained; and where the electrical grid is not meeting the expectations of today's wireless telecom users.

It is not just the product that we offer which makes us the leader in our industry, it is the entire infrastructure and package of services that we offer to our distributors and end-users.

Those include system certifications; product training; distribution partners for the GenCore systems and hydrogen fuel service; and installation and service infrastructure.

The second factor, our actual progress within the expansive marketplaces we serve.

Domestic and global opportunities are developing rapidly.

Our focus on serving large customers, such as the telecommunications industry, has positioned us to seize these opportunities.

We are making progress in both the domestic and global markets, and with customers in all of our targeted market segments.

Looking to the domestic wireless telecom industry, it is well known that four major carriers collectively represent about 85% of the U.S. market.

These are customers of scale and significance.

Plug Power has established relationships with each of these industry leaders.

Already, we have product deployed on the networks of three of them.

We and our distribution partners are in discussions with the fourth.

Of course, we are working with independent carriers as well.

We have multiple units operating with this group of carriers.

With who we believe to be the second largest independent carrier in the United States, we are about to have two GenCore units operating on their network within the next few weeks.

On the wireline front, we are working with BellSouth, now part of the largest wireline carrier in the U.S. due to the recent merger.

We have one system in test and one system deployed on their network.

Also, we have completed product testing for Verizon, and systems are deployed on their network.

As previously mentioned today, we are also engaging the electrical utility market.

Utilities from North America to South Africa are also deploying our product.

We are working with one of America's largest regulated utilities, intending to deploy systems at multiple substations in a major metropolitan area.

We have systems in use by the Long Island Power Authority.

We already have multiple systems deployed with Africa's largest electricity company.

Globally, the prospects are considerable.

Our recent success with large telecom players in Latin America, South Africa, and beyond underscores the prospective international opportunities.

Perhaps this is why, while we recognize that our tactical plans must accommodate considerable uncertainty, our plans are executed without accommodating doubt.

Our confidence is market-driven.

Our challenge is to seize these opportunities now.

Just recently, we announced sales to Telefonica Moviles, one of the two largest wireless providers in Latin America, which began deploying GenCore backup power systems in Venezuela.

With more than 10,000 sites across Central and South America, Telefonica Moviles offers Plug Power significant potential for future sales.

Last year we received a landmark grant from the IFC, a unit of the World Bank, to accelerate the adoption of fuel cell systems in South Africa.

Working together with IST, our premiere distributor in South Africa, we expect to build on today's current group of end-users with systems operating on their networks, to expand to other end-users in South Africa, as well as into additional geographies within Africa and the Middle East.

The need for alternative energy sources and the desirability for distributed power that doesn't rely on the grid are evident all around us.

Just consider the implications for uninterrupted power sources when you consider many of today's major news stories.

From the New York Times -- The trouble spread, and eventually up to 100,000 residents of Queens were plunged into as long as eight days of sweltering darkness.

Far more people, four to five times as many, would have lost power had the entire local network gone down, but the misery of the more limited blackout has lasted much longer than it probably would have in a controlled shutdown.

From the San Francisco Chronicle -- With the temperatures well into the 90s in San Jose and hitting triple digits in Livermore Valley, frustrations simmered among residents as well as line crews.

I'm aggravated.

I'm really aggravated, a PG&E crew foreman said.

Finally, from ABC News -- The governor sent the National Guard to evacuate people from their sweltering homes Thursday after storms knocked out power to more than half a million St. Louis-area households and businesses in the middle of the deadly heat wave.

Today's stories continue to reinforce that there are several driving forces that will create change in two major world-wide markets.

First, the market for effective and reliable telecommunications services; and second, the market for effective and reliable generation, transmission, and distribution of electric power.

When the root causes of today's problems are identified, I believe that the investigators will uncover many of the same painful lessons learned that were generated from the September 11th attacks in New York City and the Northeast Blackout of 2003.

For example, a New York State Public Service Commission report on the Blackout of 2003 noted that 20% of cell phones sites in New York lost service within 4 hours, and 30% had lost service within 12 hours.

Its conclusion pointed to back-up power, and particularly fuel cells as a new technology that could address many of the weaknesses evident in the current infrastructure.

Those weaknesses have been recounted in the past, and chief among them are VRLA batteries' degradation that comes with cold and hot temperatures, as well as starting reliability for generators.

Many of the opportunities that will come from today's news stories will be realized by effectively selling to government organizations.

This is a sector and group of customers that we have effectively sold into since our inception as a Company.

Today, we are deeply engaged with government organizations at all levels.

Most notably, the statewide wireless networks that are being developed are ideal candidates for our back-up systems.

We are pursuing opportunities in six U.S. states, as well as some potential federal and municipal projects where reliable, extended-run back-up power systems are being required.

Last quarter, we had two meaningful government announcements.

One was the installation of our first unit funded by the U.S.

Department of Homeland Security, which was in the public safety sector.

The other was the installation GenCore systems in the corporate headquarters of the New York State Energy Research and Development Authority.

Now in relation to our milestones, we remain committed to our stated objectives and are confident that we will achieve all 2006 milestones, including the GenCore unit and product line targets, GenSys field-testing, and expansion of strategic partners.

Now I would like to review our financials for the second quarter and year-to-date period ended June 30, 2006.

Starting with our statement of operations, total revenue for the second quarter was $2.8 million compared to $3.7 million during the second quarter of 2005.

The year-to-date total revenue was $5.0 million compared to $6.9 million during the same period last year.

We shipped 41 systems in the second quarter versus 27 shipments during the second quarter of 2005 and 17 shipments during the first quarter of this year.

We received orders for 31 systems in the quarter, and ended the first half of 2006 with orders for 219 systems in the backlog.

Under our accounting policy for revenue recognition, we continue to defer product and service revenue at the time of the sale, while recognizing the direct material cost for fuel cell systems delivered during the period as a component of the cost of product and service revenue.

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

Research and development expenses were $10.0 million for the second quarter of 2006 compared to $7.7 million during the same quarter a year ago.

Year-to-date these costs were $19.0 million for the six-month period ended June 30, 2006, and $17.6 million for the six months ended June 30, 2005.

Our net loss for the second quarter ended June 30, 2006, was $13.0 million or $0.15 per share compared to $10.9 million or $0.15 per share in the second quarter of 2005.

Year-to-date net loss was $25.2 million or $0.29 per share compared to $23.4 million or $0.32 per share for the same period last year.

Net cash used in operating activities for the second quarter ended June 30, 2006, was $10.5 million compared to $9.2 million in 2005.

Year-to-date, net cash used in operating activities has been $21.6 million compared to $19.4 million during the same period last year.

As discussed earlier in the call, we are making incremental investments intended to accelerate sales and product delivery, expand our reach into new markets, and facilitate corporate development activities.

We don't currently expect these investments to significantly increase our net cash used in operating activities compared to last year.

We continually evaluate the most effective use of our cash resources.

As we pursue our aggressive product development and marketing plans, we make decisions and tradeoffs every day to be cost-effective.

We will be continually mindful of our need to regulate spending, while at the same time be prepared to seize unique opportunities offered by the strength of our balance sheet.

As of June 30, 2006, the Company had $290.3 million in unrestricted cash and marketable securities, and $289.1 million in working capital.

Cynthia?

Thank you, Greg.

That concludes our prepared remarks.

We would now like to open the call for question-and-answer.

(OPERATOR INSTRUCTIONS) Steve Sanders with Stephens Inc.

A follow-up question on GenCore orders.

You've got, I guess, 83 so far.

Is there a reason that the order flow here should be seasonal?

We saw this last year.

It doesn't seem like it should be consistently back-half loaded.

So just a quick comment on that if you will.

Steve, it's Greg.

I don't think the orders are seasonal in the sense of like fashion goods are seasonal.

I think what it is, is that our pursuit of large customers that have extended adoption cycles, it comes in very lumpy in terms of when we actually receive the orders.

So last year, if you look at some of the large orders, we -- it took that long, if you will, to land those orders.

In each of the last several years, our sales have been back-end loaded.

That may be due to the rhythm that people operate their businesses in, in terms of budget cycles and the pace at which decisions are made.

But there is no seasonality effect, in terms of the weather or time of the year would affect the buying cycle.

Okay.

Would you expect to see significant progress from here in the third quarter?

Or is it still too difficult to really say with confidence that the third quarter will really show some order momentum?

We expect that the third quarter will yield some more visible signs of the progress that we're making.

I mean, clearly, one of the frustrations we share -- and we hear it from our shareholders -- is this imbalance, if you will, between the simple math and the confidence that we have as a management group.

We believe, that more tangible progress can be shared with our shareholders during the course of the third quarter.

Okay.

Then a follow-up on the Russian market opportunity.

I think you mentioned telecom and transport.

Could you just provide a little additional detail there?

Is it essentially the same telecom applications that you see in North and South America?

Is the product where it needs to be?

Are there any significant incentives in the market that would help you?

Just some additional detail on that market opportunity.

Sure, Steve.

This is Mark.

The findings we have thus far -- and I would say we are months into this, not years into it -- would indicate that the applications are very much in line in the ones that we have been chasing.

So the specific market segments that we are looking into and the application space is highly aligned with the ones that we have been targeting in the rest of the world.

In terms of specific incentives, there are none that we have uncovered thus far.

Which is not to say there aren't [any] in terms of government incentives.

But in terms of incentives to move off of incumbent technology, there absolutely are.

That being essentially the weather and the climate.

So as you look to the existing incumbent technology sets, and the impact of very cold temperatures on batteries, for example, that really does accentuate the opportunity we have with respect to GenCore and providing extended run.

So the application space is the same.

There are some requirements in terms of the product that we are looking at, in terms of very, very cold weather operation and how do we deal with that.

But by and large I would say the product is a good fit and the applications are the ones that we have been looking into for several years now.

Okay.

Then beyond the obvious cash infusion, the technical benefits, you guys have talked about incremental market opportunities.

Any notable reaction at this stage from suppliers, customers, etc., to the deal?

I would say from my perspective, then I will let Greg and Roger jump in, there certainly on the customer side and on the partner side has been notable reaction to it, primarily around the absolute strengthening and staying power that we have.

It has also, to your point, given us the opportunity now to look more seriously at some markets that we just weren't able to, due to the financial constraints that were on us.

So conversations about the BRIC bloc, if you will, Brazil, Russia, India, and China.

We by and large really weren't focusing our efforts real intently there.

We were doing some probing work.

But now we are in a position where we are able to go at that with much more focus.

So from that perspective, there has been, I think, yes, from a partnership perspective, a lot of recognition and acknowledgment of the transaction.

I will let Greg speak to the supply side.

Steve, I think we have had a very positive response from the supply base.

I think as folks look at the companies that have been investing in fuel cell technology development work for several years, there is a desire to really make sure that they are serving the customers that are poised for success.

The implications of the investment that we just received, and some materials that we were able to share with our suppliers under the restrictions of our NDA, I think has really boosted their confidence in what path we are on, and the challenges that we have.

And commensurately the challenges we are placing with them, to really make sure that they vote to stay with us, and to not just serve our immediate-term needs, but to be there for a much longer time horizon than we were probably ready to discuss a year ago.

I think one thing that I can comment, Steve -- this is Roger -- is that everyone is impatient to hear what exactly we're going to do with the money.

I want to remind everyone that we are very thoughtful about what we do.

We expect to have evidence in the marketplace of what we are doing before the end of the year.

It is complicated, particularly -- as I mentioned in my notes -- that we have got to be very careful and employ external resources to help us think through this.

Because the multiplicity of different directions we can go in is unfathomable.

So what we need to do is be very systematic, and do it -- what I like to call go slow to go fast.

Once we start making our move, it will become very evident what we're doing.

Okay, thank you.

Walter Nasdeo with Ardour Capital.

In light of the recent and pending hires and the effort that you guys are putting into the sales and marketing initiative, where do you see your SG&A going here over the next course of the next couple of quarters?

Well, I think it is going to necessarily go up a bit, but only because it's important for us to lay the framework for a leap forward in the Company.

There have been a number of things that we have held back on doing until we understood and had clarity about where we could go.

I don't expect the SG&A to get in any way unreasonable.

I think what Greg said is what I will endorse; that we are very careful about how we manage our cash, and very selective when we spend our cash.

Okay.

As we look at this universe of opportunities that you guys are investigating right now, how do you stack up as far as your current capacity?

Things like turnaround time, build, ship, and install.

How are you going to do deal with some of the warranty type issues as you go into India and Brazil and Russia, and then service and reliability things that kind of go along with that?

Can you just address those for me a little bit, please?

Sure, Walter.

It's Greg.

I want to -- this answer is going to be disaggregated between the BRIC region that Mark talked about and may want to comment on, to part of your question, and the regions that we have identified in today's script and some of the things you'll see over the coming few months.

We have spent a lot of time and money.

So one of the questions that we are always asked is, how could you spend as much money as you have as a Company?

We talk about the impact of building the Company and building our infrastructure.

We have very strong lead-time performance in terms of offering to our customers a stated lead-time and then delivering those GenCore units against that stated lead-time.

We have very strong performance from the supply base in terms of them maintaining continuity of supply and meeting the planning estimate that we use in our business systems.

So in terms of the supply base, in terms of our ability to manufacture and ship the product to customers' expectations, I don't believe that our performance will lag in those critical areas, as our sales acceleration efforts bear fruit.

In terms of service and installation and everything like that, you are asking some really good questions, which we believe are distinguishing factors of strength for Plug Power.

So if you go back and look at some of our announcements from the prior couple of years, why were we putting distribution partners in place?

Why were working on hydrogen fuel logistics supply agreements?

Why were we doing a lot of installs in very challenging areas?

It was all to gain experience and to prepare ourselves for the road ahead.

I spent several days in South Africa a couple of weeks ago to directly meet with and get to know the senior executives at our distributor IST, as well as to personally meet with key people within the very large organizations that we are placing our units and already have placed our GenCore units into those, into that country.

Their consistent remarks to us were not just around the product and its very good performance level, but it was around how quickly we have been able to operate as an entity inside of that country.

So how quickly we have dispatched people.

There is a gentleman that is a corporate officer of our Company named Paul Burton, and we have assigned him to be the country manager in South Africa.

So Paul has effectively relocated to Johannesburg and is -- you know our phrase, boots on the ground.

We have deployed people from our Apeldoorn operations in Europe.

We have deployed additional people from our organization in Latham.

We are leveraging a very well-established company in IST and taking advantage of the relationships they have, and taking advantages of the in-country capabilities they have.

So as more and more of that story is able to be shared with our shareholders, I think people will look at that story and say -- all right, now we can see the visible links between what Plug Power has done over the last several years and how we are able to translate that into an acceleration of sales in that country.

So it's right on top of Roger's point about go slow to go fast.

I think Mark ought to comment on the BRIC region.

Thanks, Greg.

Yes, Walter, I would just amplify a couple of comments.

It really is a go slow to go fast.

We are very deliberate.

To Greg's points, we very much look for the appropriate partners and we very much put our own resources in those countries.

So as Greg indicated, we have people in South Africa today on both a full-time and part-time basis.

We have people on the ground in Europe; and we now have people on the ground in Russia.

So as we go to develop those markets and to understand how to establish commercial operations, we are prepared and have the skill sets inside of our Company to deploy our own people.

We also very much recognize that you need to be local.

You need to operate locally.

You need to have the right partnerships, be that for distribution, be that for service, or ultimately be that for manufacturing.

So I think it is a very deliberate approach.

It's a sound approach where we understand what is the right local operational model, and then we are prepared when we go in to deploy against that in a significant fashion.

So I would say we are selective in when and where we go; but when we go, we are ready to deploy.

Okay.

There's no issues with capacity?

Are you going to build here and ship?

Or are you going to put any local assembly type facilities in any of these countries?

Walter, it's Greg.

In the near term, we can service all of our needs out of our existing facility here in Latham.

There is work underway to look at what the right next step would be, when eventually we outgrow this facility.

In many of the countries in which we operate in, there are discussions around longer-term sourcing and longer-term assembly that over time I think this industry and Plug Power will progress towards.

But I would say that those are more than two years out.

For the next few years, we are well prepared with the existing footprint and plans for expanding that when it is appropriate.

Okay, thanks a lot.

Brian Gamble with Simmons & Company.

I wanted to kind of I guess work backwards to your existing markets and talk a little bit about the telecom industry here in the U.S.

What are you seeing as the primary delay as far as follow-on orders are concerned?

We saw substantial orders back at the beginning of the year, late last year; and since then haven't really seen anything incrementally of any type of size.

What is the holdup on that end?

It's Greg.

I would say we are looking at a few factors which are pacing the actual order rate from the very large telecom customers.

One is inertia.

So we are competing against an incumbent technology where the services that we provide are not going to remain high-profile, need to be aware of, and tended to on a day-by-day basis.

So we are part of the infrastructure, we are part of the maintenance, part of the infrastructure.

Getting that attention inside of the corporate structure is clearly something that moves with starts and stops, and just takes longer than anybody would like.

I think that our actual test results, as those are accrued, and the technology and product champions are augmented with some very effective high-level selling within these accounts, we will start to see the progress take place.

Also, I cited in the comments earlier today that 85% of the wireless industry is concentrated in four companies' hands.

Well, those four companies a few years ago was a number of companies that was much larger.

So there is a lot of consolidation and merger and acquisition activity that is taking place.

Inside of those companies, how operational decisions are being made, there are some changes there.

Our ability to work with those new organizations has been something that we have had to address over the past few quarters.

Is there anything as far as, I guess, sales force headcount on your end that could be incrementally beneficial to say add people to go out and talk to these potential customers?

Or is it sheerly a matter of waiting for the infrastructure on the telecom part to finalize issues?

Adding personnel and strengthening the execution of our sales organization is clearly important to our future success.

So we called out today that we are in the process of bringing in at least one, what I would call a leadership position in the sales organization.

I think we are open to more than one leader coming into the Company when you think about the scale and the scope at which we are trying to move forward.

I think that as appropriate we will also be bringing in single individual bag carriers who will focus on specific market opportunities, companies, or geographies, depending on where it is we are trying to make progress.

We also have a number of agreements that we signed with key individuals who can operate and know markets very effectively in areas outside of the United States.

So as more visibility comes with some successes we expect outside the United States, I think will be able to point to having very specific knowledgeable folks working on our behalf, even if they are not full-time Plug Power employees.

Will be seen as catalysts to achieving those objectives.

I guess switching gears a little bit, obviously with all the cash that you now have and all the market opportunities that have the potential for investment, I know you are currently evaluating CFO candidates; but how much has that hindered the decision-making process?

Is there any type of time frame?

I know you stated selection soon; but is there any type of definitive time frame that you're looking to get someone on board, so you can get these decision-making processes well along the curve?

Believe me, if I can do it fast I well.

But I need to do it with a real confidence that the person fits into our team and fits into all aspects of what we see our job requirements, which include investor relations, treasury functions, international finance.

So we've got a pretty high-profile demand.

Like I say we are screening a number of individuals.

If I give you a time, believe me I want it to be before the next call.

So let's let it go in that sense.

But there is something else I want to mention.

We have a very, an exceptionally strong audit committee on our Board; and we have an exceptionally strong supporting staff.

The relationship between our audit committee and our staff financial activity inside of Plug Power is very strong.

One of the things that Dave did was he left a legacy of strength and very high integrity.

That is also supported in our relationship with KPMG.

So although it is critically important that we choose the right person, it doesn't impede us from making the necessary strategic decisions which I think are going to be very important for us, in terms of the wise use of our cash as a weapon in the marketplace.

Fair enough.

Thank you very much.

Kevin Monroe with Thomas Weisel.

I'm wondering if you could talk about the actual orders and shipments.

I think you ended the year '05 with a backlog of about 200; and you have only shipped, I don't know, 80 or so or less than that.

What is the kind of lead-time between order and shipment, and why weren't you shipping more?

It is Greg.

I think the standard lead-time that we quote is six to eight weeks.

We have shipped a lot of systems in a period of time shorter than that;

I don't believe we shipped any systems in a period of time greater than that.

So, when you look at the backlog and our progress against that backlog, I think it goes back to the factors that I mentioned in the prior question for Brian Gamble.

So when Brian asked about what is causing the delays in chewing through the backlog or chewing through the -- getting the next big order in-house, I think that those same factors are there in relation to your question.

Can you also talk about maybe the sales cycle with these -- you know, just for an example, the three wireless carriers that you are dealing with?

How long have you been talking or had relationships with these guys?

Have any of them rejected the product?

Kevin, I would say we have not had a loss or a defeat if you will.

So we have not gone down the road where ourselves and the customer have said -- you know what?

This just isn't going to work for us.

Either we are going to close the door on considering fuel cell technology or we are going to close the door on you, Plug Power; because we are going to be moving ahead with other companies.

So that has not happened.

I think that the sales cycle in certain companies, it absolutely looks at -- when we profile it, it looks like it is about a year.

I would say those are the most conservative companies, where they are going to want to go through a lab trial at their own lab site.

They are going to want to do a very limited field deployment.

Then they are going to want to move towards a broader deployment in a series of steps.

We have clear evidence with certain companies now that we are able to accelerate that, partly because they are more and more confident, looking at the technology that we offer and the product that we offer, and understanding that the operating results we have generated to date, that those results are meaningful for their own decision-making cycle, even if those results were not personally generated by those companies.

So there is a customer out there that is a well-known player in maintaining fiber-optic networks.

Instead of saying, well, we need a GenCore sent to our labs and we are going to undergo a series of tests, they provided us with a series of test protocols.

We hosted them.

They tested the product in our own labs.

Our engineering team and their technical specifiers identified four specific points that they needed clarity on, following to results of those tests.

We provided them with that clarity.

And I fully expect we will have our first group of systems deployed on their network very soon, with a realization of the order in a very accelerated time period.

So for that particular customer, we will look at an adoption cycle to get to that step of initial field deployment that will be measured in months, not calendar quarters.

Thank you.

(OPERATOR INSTRUCTIONS) Stuart Bush with RBC Capital Markets.

I guess the concerns that investors are having is that everything that we are hearing is very general, without a lot of specifics.

If we look at the way that the market is valuing you guys, barely above the book value, -- and I understand your strategy of go slow to go fast.

But in the meantime we have $290 million of idle capital sitting there.

So my question is, when you look at opportunities to deploy this significant cash infusion, what are the criteria that you're looking for?

Is there a hurdle rate for a rate of return on the capital?

Or what sort of assets do you have that you can leverage in-house?

Is it your manufacturing capacity in synergy with integrating your existing technology?

Or how should we look at the use of all of this cash beyond just sort of generalities?

Well, first of all, I don't agree with you that I'm giving you generalities.

We are giving you very hard, proper noun areas of the world, product attributes, and product capabilities that would lead to a good market.

If you call those generalities, I just want to be very, very clear -- we don't.

Part of the reason we don't is that to give you much more is to basically give you the home telephone numbers of the people that we are selling to, and the time of day when you can meet with them.

The second thing with regard to our assets and go slow to go fast, as far as we are concerned, we're going very fast.

We consider adjacencies.

We consider on-site generation of clean energy, and all the attributes that that brings.

We have to look at new technologies, many of which have been in a research phase.

For example, inside of Russia we have to understand how long it takes to bring those to market.

We have to look at markets and see which markets appear to be willing to yield.

We have to look and see which distributors are really willing to being monomaniacal zealots in the co-market development with us.

We have to, as Greg said, put boots on the ground in South Africa and really understand that market.

We have been down there a number of times;

I have been there twice;

Greg has been there once.

Our country manager Paul Burton is living there.

We have to understand our customers before we do -- before we make a major thrust that might be orthogonal to what we are doing.

Then finally, I would say, although it may appear to you that we aren't being explicit, or that we may not be doing our job as well as others might, the question is -- why did we get this investment in the first place?

It was believed by the people who were investing in is that out there, of the fuel cell companies that they could possibly have invested in or partnered with, we had demonstrated after a 9 or 12-month investigative period, that we were in fact better suited to create the market; develop product to the market; service it in the market; and continue to expand and grow than any of the other possible candidates.

To that end, has Smart Hydrogen made any other fuel cell or hydrogen investments before or after this one?

To our knowledge, they have not done that; and to our knowledge they will only do that in consultation with us.

Okay, thank you very much.

John Quealy with Canaccord Adams.

Congratulations, Greg, on the new title there.

Thank you, John.

Just one question, really, and I don't know if you brought it up already.

On the competition side, clearly you have a lot of irons in the fire on the GenCore bids and prospects.

Can you comment a little bit about the competition on the fuel cell side?

Has it improved at all, or how you feel going into pitches now with potentially a couple fuel cell vendors as well?

Okay, I think I'm going to answer.

It is Roger Saillant again.

First thing is that we believe our competition, the true competition, is the incumbent.

It is the battery; it is the spark ignited engine; the diesel generator; the diesel gen [set].

We have found a lot of agreement and unanimity when we look out there and talk to fuel cell companies like ourselves.

We are all fighting mostly shoulder to shoulder to develop the technology and to develop the market.

In fact, we have some really good collaborations going on, underway, that we publicly announced with Ballard, for example; with DESC, formerly Proton.

We have certainly been in conversation with a lot of other companies in the fuel cell industry.

So we don't quite feel it's competitive amongst ourselves as the outside folks looking in might think we should be.

We recognize that what we have to do is we have to prove ourselves in terms of reliability; we have to prove ourselves in terms of cost, which leads to a value proposition; and we will all succeed.

I realize that it's mostly incumbent focused, but if I can press you a little bit on the PEM fuel cell development.

There are a number of folks going right after the market that you folks are.

If you could comment on progress, cost, where you folks think you stack up, where the momentum has been building either on your end or on theirs; that is more along the lines of what I was trying to go for.

It's Greg.

I will try to give you some insight against your question; and if it doesn't quite match up, please ask a follow-on.

You are absolutely right in terms of there's a number of PEM fuel cell companies that are out in the same markets that we are going after.

So the positive of that is that competition validates the market opportunity.

We know that in many of the large RFPs or RFIs that are placed by large telecom companies, that they are going to see more than one sort of qualified vendor.

We have been down this road several times.

So in past conference calls, I know Mark has called out specific opportunities where we have won, where it was a competition.

There was a number of people quoted for the business, and we came through that process as the clear identified winner.

There's other opportunities in other customers that we're serving where we absolutely know that they are buying product from more than one vendor.

So the metaphor that we like to use here is we need to be in the game, and we need to win the game.

So get us into that competition, and we are going to compete.

Something I have told our organizational multiple times is our competition is not PowerPoint slides.

If you looked at PowerPoint representations, Plug Power would get their ass kicked every day by other people that are out there making representation on PowerPoint slides.

What I tell the organization and we all tell the organization is the competition is the concrete pad next to ours.

So when we go out and we are competing against another system in the field, that is the competition that we have to focus on.

Don't get spooled up when you read a press release.

Don't get spooled up when you're at an industry conference, everybody has really sharp looking booths with pretty boxes and all kinds of representations hanging there on poster boards.

Get fired up when it is time to go on actually compete against those other products.

We need in the industry -- I think it was what Mark or what Roger was saying -- we need an industry to form.

We need a lot of people to be successful.

We said that by collaboration Plug will be a stronger Company, and we think the industry will be a stronger company.

Go back to some of the earlier questions, John, on this conference call, around development of supply base.

We want the suppliers to form, to serve the industry.

We just want to be their preferred customer.

But we don't expect to be there only customer.

But we want to be top owner of share of mind and commitment to that organization.

And that is what we intend to achieve.

Great, that helps.

Thanks Greg.

Ladies and gentlemen, that concludes our time allotted for the question-and-answer session.

I would now like to turn the call back over to 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.

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

This does conclude our presentation, and you may now disconnect.

Have a wonderful day.