普拉格能源 (PLUG) 2009 Q3 法說會逐字稿

Greetings and welcome to Plug Power's 2009 third-quarter earnings call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Cathy Yudzevich, Manager of Investor Relations for Plug Power. Thank you, Ms. Yudzevich, you may begin.

Good morning. Thank you for joining Plug Power to discuss our 2009 third-quarter operational and financial results. Andy Marsh, CEO and Gerry Anderson, CFO, will be on this call today. This call will be archived on our website at PlugPower.com.

This conference call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including, but not limited to, our expectations regarding the remainder of 2009, the number of GenDrive and GenSys units we expect to ship in 2010 through 2012 and our expectations for achieving profitability and positive cash flow in 2012.

These statements are based on current expectations that are subject to certain assumptions, risks and uncertainties, any 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, our ability to reduce product and manufacturing costs, our ability to improve the reliability of our products, our ability to successfully expand our productlines, the risk that unit orders will not ship, be installed and/or convert to revenue, the cost and timing of developing our products and our ability to raise the necessary capital to fund such development costs, market acceptance of our products, our ability to manufacture products on a large-scale commercial basis, the cost and availability of components and parts for our products, our ability to establish and maintain relationships with third parties with respect to product development, manufacturing, distribution and servicing and the supply of key product components, the cost and availability of fuel and fueling infrastructures for our products, other risks and uncertainties discussed under Item 1A Risk Factors in our annual report on Form 10-K for the fiscal year ended on December 31, 2008 as filed with the SEC and in the other reports we file from time to time with the SEC.

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. At this time, it is my pleasure to turn this call over to Andy Marsh.

Thank you, Cathy. Good morning, everyone and thank you for joining our call. Four years, Plug Power has been a leader in the research and development of fuel cell products and technology. We are now focused on becoming the leader in the commercialization of fuel cell products, focusing on material handling and prime power applications.

Achieving our 2009 milestone is a critical step improving to the investment community that the Company has made the transformation from the laboratory to commercial acceptance. Many of you observed the fuel cell industry has struggled with identifying markets where products offer the customers unique value. We believe Plug Power is held part from our competitors by identifying the appropriate applications that are the start of building a significant business.

The Company has a core understanding of our customer needs and has strategically developed reliable products with the right value proposition to allow them to be successful. This core understanding provides competence in setting and exceeding our guidance.

Before addressing the progress against each of our 2009 milestones individually, I would like to take a moment to emphasize our core competencies within the material handling and prime power markets. Plug Power's GenDrive marketing sales and service team consists of industry veterans with over 170 years combined experience with North America leading OEMs and material handling customers. We understand the material handling application. We understand what is needed from our products to meet operational costs and productivity standards. And most importantly, we understand how to deliver the necessary solutions to our customers.

At the same time, Plug Power's GenDrive sales team has learned a great deal about the buying behavior of our top accounts such as Wal-Mart, Sysco, Wegmans, Central Grocers and Whole Foods. This learning has allowed our team to move customers systematically through the sales process and product awareness, trials and demonstrations, to single fleet conversions and now to multiple fleet conversions. This is why Plug Power's management team is confident in our projections of shipping 1100 GenDrive units next year.

The importance of understanding our customers' needs hold true in our prime power business as well. Plug Power identified the importance of fuel availability when determining system requirements. As a result, our flexible GenSys solution is designed to operate from liquefied petroleum gas, natural gas or methanol.

In India, our engineering marketing teams determined that LPG was the most commonly available and cost-effective fuel solution. Accordingly, we partner with HPCL to support LPG fueling of our GenSys systems for our Indian telecommunication customers. WTTIL, our first significant customer in India, purchased 200 GenSys units to reduce the total operating costs. The fuel savings allow the operating costs to be lower. Without a readily available fuel, the savings would not be achievable. Our Plug Power team married the two together to make an attractive offer.

At this time, I would like to address our progress against each of our 2009 targets. Plug Power reaffirms our commitment to each of our 2009 milestones announced in our first-quarter earnings call. First, the Company will secure 1000 orders in 2009 consisting of both GenDrive and GenSys fuel units, fuel cell units. To date, Plug Power has secured 582 orders against this target and in the third quarter, Plug Power received 325 orders, including 324 GenDrive units.

Plug Power saw increased traction in orders in the material handling industry during the quarter. Significant orders were received for major customers such as Wegmans, Whole Foods and Sysco. Success with multiple food distribution companies has provided sales momentum, not only with end customers about in engaging the leading truck OEMs. Simply stated, success breeds success and generates greater confidence in our product solution.

I believe it is fair to say that even the most conservative voices in the industry accept that Plug Power offers a viable product solution for material handling applications. Harnessing the benefits offered by GenDrive, these customers can achieve productivity improvements by 15% to 30%. Operators are able to move more power during a shift. Trucks run longer at maximum speed and operators refuel the unit as little as 60 seconds at compact fueling stations, eliminating the need to change and charge batteries.

More than ever, we are seeing customers make buying decisions with the environmental impact of their actions in mind. Our customers' corporate social responsibility strategies strongly align with the environmental value proposition provided by Plug Power solutions. For example, Whole Foods learned that by converting their 61 battery powered forklift trucks to GenDrive fuel cells, powered by green hydrogen, its greenhouse gas emission can be reduced by up to 80% on-site. This is roughly the equivalent of removing two passenger vehicles from the road per year for each forklift truck powered by a fuel cell.

At Wegmans' Pottsville, Pennsylvania facility, 136 GenDrive units will be put into operation throughout its produce and grocery buildings. The conversion of just the produce building alone allows Wegmans to reduce its carbon emission in an amount equivalent to removing 134 cars off the road each year.

Then as our second milestone, Plug Power will contain net cash used for operating expenses to the range of $38 million to $42 million for the full year. We have been vigilant about our stewardship of the Company's cash resources and we are on track in regards to this milestone. Gerry Anderson will provide a more in-depth view of our financials shortly.

Addressing our third milestone, Plug Power will release the GenDrive class 2 stand-up reach product in the fourth quarter of 2009, broadening the GenDrive product portfolio. During the third quarter, initial design and engineering of this product were finalized and we are currently conducting field trials with a large OEM and food distributor. I am happy to report that trials are progressing with great success. To date, this unit has performed in applications, running three shifts each day. Operators have successfully and safely performed multiple refuelings, allowing for increased productivity during their shift.

I have been involved in the introduction of new products for over 30 years now. Some of these products earned best-in-class status. Early performance of the new class 2 GenDrive product surpasses all of my previous experiences. Plug Power is experiencing tremendous results because appropriate focus was put on the needs of customers in food and distribution application where this product will be used.

Plug Power allocated experienced resources in architecting the product, had outstanding management oversight and dedicated the appropriate level of talented individuals to make this program a success. The launch of this new product is highly anticipated. With the introduction of the class 2 GenDrive unit, Plug Power can offer customers the convenience of full fleet conversions.

Customers such as Sysco believe so strongly in our solution that they are building their most recent distribution center in Houston without any battery infrastructure whatsoever. This is comparable to the $90 million grocery facility opened by Central Grocers in the second quarter. The testing of the class 2 stand-up reach product to date has only enhanced Plug Power's reputation with our customers and partners, further separating us as the clear leader in the industry. The reliability of this product is a critical ingredient in meeting our future sales, revenue and profit target.

Our last milestone, to announce a path and timeline for Plug Power's profitability during the fourth quarter of 2009, has been achieved. On October 8, 2009, Plug Power held an analyst and investor day where our strategy for profitability was outlined in detail. By executing this strategy, Plug Power plans to be profitable by 2012, generating a positive cash flow for the first time in the Company's history.

We expect to achieve this by continuing to dedicate focus and resources on two markets -- material handling and providing power. Our strategy includes plans for double shipments of our products each year from 2010 to 2012, reaching approximately 7200 to 9400 shipments in 2012. In turn, we expect revenue would double annually over the same period.

The Company also plans to continue to drive down product costs by leveraging the supply chain, lowering manufacturing costs and improving our product designs for both product (inaudible). I would like to now turn this call over to Gerry Anderson to discuss our third-quarter financial results. Gerry?

Thank you, Andy and good morning, everyone. I would like to open my comments by highlighting our backlog at the end of the third quarter, which stood at 845 units with an estimated invoice value of $20.5 million. This is by far the strongest backlog we have ever had and we expect it to continue to expand as we build toward our shipment guidance for 2010 of 1100 GenDrive units and 1000 GenSys units. Of the 535 GenDrive units in our backlog, 282, or 53%, are expected to ship by June 30, 2010 and all 200 of the GenSys units in the backlog are targeted to ship by March 31, 2010. This equates to approximately $10.5 million of invoice value being shipped out over the next 7.5 months just from the current backlog.

Also of significance, our material handling class 2 stand-up reach product that Andy mentioned earlier makes up about 34% of our GenDrive backlog. We are actively taking orders for these units and we will begin shipping to our commercial customers early next year. This is important in that our high throughput distribution center customers like Wal-Mart and Sysco can now convert full facilities rather than run both fuel cell and lead acid battery powered equipment.

For the quarter, as Andy has noted, we booked 325 unit orders, 324 GenDrive units and one GenCore unit, bringing our full-year order total to 582 units versus a full-year milestone of 1000. Again, we remain committed to our order milestone for the full year and we are confident our present sales funnel will yield positive results during the final quarter of the year to achieve this objective.

Shipments under product and service and sales activity for the third quarter were once again light at six units, all of which were GenCore backup power systems. As noted in our backlog discussion, we will begin to see several large orders shipping over the next several weeks and months and we expect to ramp both orders and shipments throughout the upcoming year.

And now turning to our operating results for the quarter, total revenue for the third quarter was $2.5 million, $1 million from product and service sales and $1.5 million from research and development contracts. Product and service revenue dropped $226,000, or 18%, from the prior year comparable quarter, but the $3.6 million year-to-date total remains $360,000, or 11%, ahead of the comparable prior year total.

Because we remain in development stage accounting, our reported product and service revenue is largely driven by the amount of deferred revenue that gets realized each quarter. As we have noted in prior calls, we spread product and service revenue over the service period of each sold system on a straight-line basis. Since our shipments have been very light over the last two quarters, we have added very little to our deferred revenue balances. In combination, many of the GenCore units, which typically had a two-year service period, are now reaching the end of their service commitments and accordingly, have reached full revenue recognition.

Lastly, we typically have longer contract terms with GenDrive customers, which in effect stretches out our revenue recognition over longer periods. All of these factors have contributed to the quarterly decline in revenue versus the comparable prior year quarter.

Consistent with these comments, our deferred product revenue was $3.2 million at the end of the quarter, a decline of $2.2 million from our 2008 year-end total. Also of note, longer duration GenDrive contracts now account for 58% of the remaining deferred revenue balances. We do expect to recognize the remaining deferred balances over future periods as the service contracts on the associated shipments are fulfilled.

Our third-quarter 10-Q will be released within the next few days and will provide further explanation of our revenue recognition policies. We encourage you to review that document once it is filed with the SEC.

R&D contract revenue at $1.5 million is a decline of $1.3 million from the prior year third quarter. As we have noted in our earlier calls, we had a slower than expected start on two new awards from the US Department of Energy that were delayed in their announcement. While work has begun on these programs, we have now consciously decided to reallocate some of our engineering resources to the GenSys initiative in India to support delivering 200 units to our anchor customer by March 31 of next year.

Accordingly, we are lowering our expectations for R&D contract revenue for the full year from the previously stated range of $8 million to $9 million to approximately $7 million. It is important to point out that this lowered expectation is not the result of lost opportunities, but rather a shift in resource prioritization, which will delay the bulk of our program work on the two mentioned DOE programs into 2010. We will still complete the work on these programs and earn more than $6 million, but will only bill out about $2 million of work in 2009.

Our total cost of revenue for the third quarter of 2009 was $4.1 million and was comprised of $1.3 million for product and service revenue and $2.8 million for R&D contract revenue. Product and service cost of revenue is down $500,000 from the prior year third quarter while our installed base has expanded with commensurate increases in cost to service the installed base. The decline in shipments of 53 units from quarter three of 2008 is the primary contributing factor to the overall cost decrease.

Our cost of revenue for R&D contracts comprised of materials, labor and overhead represents 188% of R&D contract revenue for the quarter. As previously noted, based on the 50/50 cost share nature of the new DOE programs that we began work on, we did expect costs as a percentage of revenue to track higher over the last half of our fiscal year.

In our operating expense categories, research and development expenses, cost incurred for internally funded R&D programs were $4.4 million for the third quarter of 2009, a decrease of $3.3 million, or 43% from the prior year third quarter. And our selling, general and administrative expenses at $4 million for the quarter were down $800,000, or 16% from quarter three of 2008.

Through three quarters of 2009, these two operating expense categories totaled $24.5 million versus $46.2 million over the comparable 2008 operating period. The $21.7 million, or 47% decline, results from the rationalization of our businesses, our targeted focus on our two primary markets and continuing expense containment initiatives. We will maintain this discipline over operating expense and size our resource commitments to our business opportunities accordingly.

Our net loss for the quarter ended September 30 was $10.2 million, or $0.08 per share on a basic and diluted basis. Weighted average shares outstanding were 129.4 million for the quarter. Net cash used in operating activities for the quarter was $8.5 million, another solid quarter matching our net cash consumption from last quarter, which we noted in our last call, as our best performance in 18 quarters.

On September 30, 2009, the Company had $71.1 million in cash, cash equivalents and available-for-sale securities, which equates to $0.55 for every common share outstanding and $70.4 million in working capital. At this time, we would now like to open the call to any questions.

(Operator Instructions). Steve Sanders, Stephens Inc.

Good morning. This is Trey for Steve. Andy, I think you touched on this a bit in your comments, but could you give us an update on how the class 2 certification process is going? And then kind of as a follow-on to that, maybe you could discuss the potential incremental benefit that you see from offering a class 1, 2 and 3 product, especially for those customers that you saw three in their facilities.

Sure. The class 2 product will be ready for shipment, Trey, at the end of this quarter. In the first quarter, we will actually be making delivery of that product to Wegmans, followed up with the delivery of the product to Sysco in Houston, as well as to Central Grocers, I believe, at the beginning of the second quarter of 2010.

The criticality of this product we have been talking about for the past year. The product itself allows a food distributor such as Sysco, as they have done in the Houston operation, to be able to do a full fleet conversion. And why are full fleet conversions important? And there is really two fundamental reasons. It allows our customers to eliminate the batteries and the battery infrastructure and the charging equipment and the costs associated with that.

It also allows these customers to better utilize the hydrogen infrastructure they are putting in place. So the more hydrogen they use, their cost of hydrogen actually goes down as the fixed costs of the infrastructure decrease. Our ability to sell to the large food distributors and to start moving to multiple site conversions is highly dependent upon the availability of this product.

And I think that when you look at our backlog, it also provides you a clue, Trey, in the fact that even though the product does not exist, 36% I believe Gerry said of our GenDrive backlog is class 2 products, customers who are willing to take the risk that we would have the class 2 available to couple with the class 3 so they can do a full fleet conversion. Did that answer your question, Trey?

Yes, that was very helpful. And then kind of following on what you said there at the end, how should we be thinking about, in terms of mix, the market opportunity? I think in the past you had identified 380,000 serviceable trucks, but what is kind of the breakdown between class 1, 2 and 3 there?

Sure. Class 2 and 3, Trey, is approximately 75% of the market opportunity, while class 1, which is focused more on the manufacturing sector, as well as some food and beverage distribution, is really a smaller market. And I think when you look at the 380,000 plus units that we view as servable addressable market, what you are really looking at too is the fact that, even in these difficult economic times, that portion of the industry has not seen the recession as much as the manufacturing sector. So our ability to sell into that sector during the next few years is much more -- is a much wider potential.

So I have to say that when I go through the funnel, we do have some very interesting opportunities, both with auto manufacturers, with other equipment manufacturers who recognize that the value proposition for converting their fleet of class 1 battery-powered forklift trucks to fuel cell powered forklift trucks that the value exists and we will see some conversion next year. I suspect next year's shipments will be approximately 70%, 75% class 2, 3 and 25% class 1. Long answer, but I hope it was helpful.

No, no, it definitely was. And then I know you have got kind of the target ranges for shipments for 2010, '11 and '12 out there. Do you have a target for 2009, what you are looking to ship?

Gerry, why don't you -- I think you have that information.

Yes, I think to date, Trey, we have shipped about 217 units and we expect at least another 85 units to go out before the end of the year.

Okay and is there a split there between GenDrive and GenSys?

Those would be all GenDrive units. We are underway right now building our first GenSys units in India and hope to have those ready by the end of the year.

Okay. And then, Gerry, I think the target for next year was kind of gross margin in the mid-teens. First, kind of where are margins at today and then if you could give us some color on how we should think about margins expanding from current levels to that mid-teens target? Is it a gradual ramp? Anything you can provide there would be helpful.

And I think, Trey, the best way to answer this -- I mean you are correct. What we said in our analyst day was we expect mid to high teens next year and that is basically covering our variable cost on the build of the units and labor. It is a little difficult to compare that to what you see in our financials right now because of the development stage accounting where what you see in revenue is pretty much the deferred revenue rolling into realization and period expenses for our actual costs.

What I would say right now is the orders that we have been booking over the last half of the year and going forward are gross margin positive. They are covering our variable costs to build the equipment and we expect that to increase as we continue to drive costs down. As we noted in our call, we have already been able to achieve 40% reduction in our direct material costs on these products.

Okay. That was helpful. And then lastly, Gerry, how should we think about operating expenses for 4Q? Similar levels to what we saw in 3Q and then how should we think about that trending forward?

And again, Trey, I think we are very pleased with our ability to maintain and drive down costs. Again, as we said last quarter, we do expect a modest uptick and part of the reason we raised our cash use number for the year was the investment in India. And we are in the process right now of adding additional people in India to support the delivery of our units and our customers in that market. So we do expect a small uptick, nothing dramatic and as we go forward, as we have said, we will appropriately resource our commitments for our business opportunities and we will leave it at that for now.

And Gerry, we do have targets out there for 2010, correct?

We have targets for EBITDAS for 2010, '11 and '12, which would incorporate our operating expenses.

Great, guys. Thanks for taking my question.

Burt Chao, Simmons & Co.

Hey, guys, good morning. Thanks for taking the questions. I know this has been gone over a couple of times, but can you just go over one more time the backlog and how it breaks down, when you expect to ship meaningful amounts of that? I know you -- Gerry, I think you had spoken about it in the commentary, so I apologize for asking that question twice.

Right. There is 845 units in our backlog right now; 535 of those units are GenDrive systems. There is about 65 class 1s, 183 class 2s and 287 class 3s. Obviously, those class 2s and class 3s support primarily those high throughput distribution centers. We also have 200 GenSys units in that backlog that are tied to our anchor customer, WTTIL. Those units are expected to ship by March 31.

Of the 535 GenDrive units, we are expecting about 282 of those units to be shipped out by the end of the second quarter of next year. We do have some units going out by the end of the year, about 85 units and then others that are spread the latter half of 2010 and some into 2011. And again, I'd point out, Burt, that this is just our current backlog. We are still working to close more deals and expect to flesh out more of the 2010 shipment target.

And I would just like to add to that, Burt, we're looking -- I actually wanted to mention this when Trey was talking -- was the fact that we were able to sell class 2 units without having a product I think bodes well for closing deals in the next two quarters to help fill out that backlog for GenDrive in 2010.

Great. On this path to profitability by 2012, I mean you are obviously hitting the benchmarks when it comes to volume. What else do we need to look out for to make sure that you are on schedule to make -- I mean a lot of it obviously has to do with volume, but do ASPs have to hold in there as well and costs have to come down? How can we continue to model and make sure the Company is on track to achieve that kind of benchmark by 2012?

Well, I think, Burt, one of the benchmarks we gave during our call is expecting to expand our gross margins. So I think that is a key metric for you to watch. If we are successful in continuing to take costs out of our products, you will see those margins expanding. We have also given EBITDAS numbers, which is our earnings before interest, taxes, depreciation, amortization and noncash stock comp. So that really incorporates all the other operating expenses that we need to utilize to grow this business.

And I would say and we will comment on other things, things that have been typical gating factors, making sure we have enough availability of fueling assets in the material handling industry. Those are the kinds of things that we look for that we have identified as risks and challenges and we will communicate and stay in contact with you on those issues as they continue to get greater visibility.

Okay, great. And one final quick question, can you give some more color on I guess your current relationship with Ballard. I know things are certainly changing over time, but where that stands today and where you anticipate it going.

Sure. I have a great deal of respect for Ballard. In our GenSys productline, Plug is using its own stack and that stack was developed over an eight to ten-year period and we feel quite strongly that this stack is more reliable, more efficient than any other stack on the market today.

With our GenDrive unit, we certainly have had a good positive relationship with Ballard over the years. I am certainly looking at alternatives and like any good leader, I am making sure that this Company has options. We certainly are concerned about costs down, long-term product availability, technology leadership, expect the Company will be working with Ballard for a long time.

But I think I would not be doing my job if I wasn't looking to leverage the capability we have already demonstrated that development, especially working with partners like 3M and Dana, not seeing if there is opportunities there for Plug to reduce its cost, as well as improve the reliability of the product long-term. Ballard is with us today and next year when we have this call, I am sure I will be shipping units with Ballard's stacks also.

Okay, great. Well, thanks again for taking the time and congratulations on the backlog.

Thank you.

Stuart Bush, RBC Capital Markets.

Yes, good morning, guys. Yes, I wanted to follow on to that last question. As you drive to take the costs down on the units, can you give us an example of the approximate split? Let's use class 1 for GenDrive systems as an example. What is the split between the fuel cell stack portion and the balance of systems? Where do you have the most direct cost-reduction control over?

I think that between the -- across the GenDrive products, it is approximately 25% of the cost of our products today, Stuart.

Is the stack?

Is the stack. About -- the higher power units, it is closer to 30% such as the class 1 and class 2 where the lower power units such as the class 3 is closer to 20%, but that is the cost of the stack. When we look at where there are opportunities, there are certainly improvements ongoing within the industry in improving not only the cost structure of the membranes, but also the life of the membranes. So that is where a good deal of opportunity exists.

I think, Stuart, there is also opportunities in looking at how to manage and control the stack to eliminate components in the system. I think when we looked at our GenSys product, we found that, in our GenSys product, it is approximately 25% of our cost, but by using our own stack, we probably eliminated another 5% or 6% of the cost within the system itself. We weren't using a forced cooling stack.

So I think there is continuous opportunities in reducing cell count, there is continuous opportunities in membrane improvement, there is continuous opportunities in sourcing plates in lower-cost geographies of the world and all those activities can help us reduce the costs. When we look at some of our internal models, we believe, and I don't think this is much different than Ballard, that in two to three years, the cost of the stack can decrease 25% to 50%.

Great. That is great color. I wanted to follow up with Gerry on the prospects for how the Company can move from a developmental status with the auditors to a full commercial revenue recognition model. Is there some threshold of how many units you are selling or how many hours have been in the field where the auditors would feel comfortable with you booking the full shipment revenue instead of deferring it over a period of time? My question is basically because we can track units and shipments, but how do we -- when we are modeling, how do we translate that into revenues as we look forward?

Right, Stuart, and I guess to answer the latter part of the question, that is why I tried to share the invoiceable value of our backlog and our shipments to help on that. We are actively sitting down with our external auditing firm, KPMG, to go through the timeline and the items that have to happen for us to be able to go to a traditional commercial accounting type framework. We would expect with 2100 or more shipments in 2010 that that will be a compelling factor.

But I think more importantly in terms of the accounting viewpoint on this, when we are selling a bundle of goods and services, not only the hardware but potentially service and warranty issues, as well as potentially fueling an infrastructure, we need to get certainty and comfort around the fact that we can fairly value what those components are worth. And that is probably among the biggest challenges we have had with the auditors.

But the fact that we have got a million hours of operating experience in GenDrive and we have had favorable service and warranty results to date on that, I think we are getting to the point where hopefully we will be able to substantiate the value of those other items and get over the finish line on this. So our goal is still at 2010 we will move into full commercial accounting.

Okay, that's great. And last question is, as you get certification on this class 2 unit, is there any roadblocks that we need to watch out for in that process of getting it certified or do you expect that that is a foregone conclusion?

Stuart, I consider it a foregone conclusion. And you may have heard in my remarks my statement about the class 2 product. It worked for Bell Labs for 18 years. I started my own company for eight years where every power system at the edge of the network used by AT&T today was designed by the company I came up with, which was a technology leader. I have actually been absolutely stunned by the work this team has done on this product. Not only have I been stunned, we have had it at the leading OEM in this industry and their raves and the e-mails that they have sent to me have just surprised me. We also have it at the largest food distributor in North America and the results have just been all positive. We are over the technical hurdles. That unit will be ready to go and ship January 1. I added the section myself to this presentation about how great this product was. It is really good.

Awesome. Thanks for the color.

Okay, Stuart.

Meghan Moreland, Ardour Capital Investments.

Good morning. So obviously you're doing a very good job of growing backlog and I know that you are waiting -- you have still got some products being developed in that backlog. But unit shipments this quarter were just six and I think the previous quarter it was just 11. Are some of your customers pushing forward the realization of those shipments just due to their working capital -- the investments that they want to make or delay in working capital investments going forward? What kind of delays are your customers having in the past few quarters?

Actually, Meghan, none.

None?

And if you go back and look at this business a year ago, this Company was focused on the backup power market and really was putting -- had a very small sales theme addressing GenDrive. Obviously as we talk about the class 2 product, it did not have a full offering. Last July of 2008, we started changing direction of this Company and we started selling and positioning our products. And you can see by the milestones that I put in place for 2009, working with my team, that our focus was to build orders and to build relationships. And that we went out aggressively promoting these products, lining up customers for orders, lining them up with their new forklift truck deliveries and so I have not had one customer push back on the order date.

We thought it was important on this call to start providing some insights into when these units were going to be delivered. I believe on the call, Gerry, you mentioned that between now and March 31, we will ship how many units?

We have, through June of next year, 282 GenDrives going out and 200 GenSys.

So approximately 482 units of our backlog are guaranteed to ship by June 30. And we expect, and based on our sales activity, that number between now and June 30 will grow. So this isn't a delay; it is really -- it is really impacted by the change in direction and focus we have put on the business. Does that answer your question, Meghan?

Yes, it does, thank you.

(Operator Instructions). Jeff Osborne, Thomas Weisel Partners.

Great, good morning. Three quick questions hopefully. Tremendous detail you have given us on the backlog and the unit mix between the three different classes. I was wondering now that the complexity of the mix will be shifting in 2010, can you just kind of give us a rough breakdown of what the ASPs would be or the differential between the three different classes so that we can think about that because clearly, in the past, you have kind of had a more static ASP just as the mix has been one particular class?

Sure, Jeff. If you think about in GenDrive, the three classes that we have, blended, we expect our ASPs to be somewhere in the low $20,000 range, $20,000 to $25,000. Typically, a class 3 is going to be in the low teens. A class 2 and a class 1 product you can expect to be in the high $20,000s to low $30,000 range. And again, I would like to mention -- I know we have said this in the past, Jeff -- part of the total deal is dependent upon the actual customer solution and the bundle of goods and services that we would package with the actual units themselves.

Got you. And then can you touch -- following up on Meghan's question with some of the delays in the economy, is there still an interest in the leasing model and what is your and the Board's thoughts on exploring that going forward?

Actually, I am going to just state our initial position. I will let Gerry go into detail. We will not be a leasing company. And I know we did one deal where we ended up being the leasing company because of some issues with the tax structure of Central Grocers being a -- what was the right word, Gerry?

They were a nonprofit entity and they were not able to use some of the available credits, so we had to structure it differently.

Had to structure it differently. But we are not in the leasing business. And Gerry, I'll let you -- but we are in the business of facilitating our customers with a number of local banks to help local banks and firms to allow them to structure deals. But Gerry, maybe you can go into more detail.

Sure, Jeff. And I think, again, when we had our analyst day, we did talk a little bit about this and particularly in the class 1 arena, some of the heavy manufacturers. There is a good chunk of those customers that tend to rent the equipment rather than own it. And we try to facilitate, through our financing arrangements, either banks or other leasing companies, to provide them financing options for that equipment.

They already, in some cases, have master lease arrangements with their truck OEM dealers and we try to package through them. And I can tell you two of the deals that we announced in the third quarter, we have already provided leasing quotes for them where we will actually sell the equipment as typical vendor pass-through to a leasing company who will then have a master lease with the end customer.

So we are actively working that. We are trying to get to the point where we have more programmatic solutions for our end customers, but I am sure you are aware that the credit markets are still in general a challenge to get some lending freed up here.

Great. Thanks for the detail there. And then we haven't touched on the Q&A yet on the R&D side of the house, but I think on the first-quarter call, you had articulated that that revenue would be about $8 million to $9 million for the year, for 2009, your run rate. That looks like you'll have a big step up in the fourth quarter unless something either got canceled or pushed out to next year. So I was wondering if you could just confirm that and what we think the cost number is for this year and then any color you can provide for next year would be helpful.

Okay. And actually, Jeff, I think in the call we did mention that we are lowering our guidance for this year to about the $7 million range from the $8 million to $9 million that we had previously stated. And that was primarily driven by the fact that we have reallocated some of those engineers that work on those programs to assist on the India initiative to get our products out.

So again, it is not a lost opportunity, it is just a delay. The two big programs that we have, the two DOE programs that got awarded earlier in the year, topic 6A and topic 7A, are both worth over -- they are about $6 million in general. Over $4 million of that will be rolled into 2010 and of all the programs that we have in place right now that we are still doing some work on, there is probably about $6.5 million of revenues still to be recognized, most of which will be in 2010.

So it would be the $6.5 million plus the $4 million or is it $6.5 million in --?

The $6.5 million would be all of our programs that are carrying into 2010. So again, this year, we expect to be about $7 million and we know we have another $6.5 million of work that still needs to be done on various programs with most of that probably being done in 2010.

And would the cost ratio be pretty similar?

It would be pretty similar and again, what we have commented on, most of the newer programs we have are 50/50 cost share. So in theory, if they are all 50/50 cost share, you'd have a 200% ratio of revenue to cost. This quarter we are at 188%. So we think we will be in that higher range with the mix of programs that we have carrying into next year.

Great, thanks so much for all the detail.

Thank you. Mr. Marsh, at this time, there are no further questions. I would like to turn the floor back over to you for closing comments.

Great, thank you. Thank you, everyone, for your questions today. Plug Power is on its path to achieving profitability for the first time in the Company's history. Our management team, employee base has always believed in our mission and our products. Our sales traction confirms that our customers and partners believe in us too.

You don't need to take my word for it though. Chuck Pascarelli, Executive Vice President of Sales and Marketing for the Raymond Corporation stated, "We are very excited about our partnership with Plug Power because it allows us the opportunity to offer customers a viable battery replacement in the form of fuel cell technology". I believe we are pioneering solutions that are more environmentally friendly and will enhance our customers' productivity. Of course, our goal is to be on the forefront of this revolutionary technology. Is the market ready for it? Chuck said, "Yes, it is absolutely ready for it".

Scott Kliever, CFO of Sysco Houston said, "Sysco Houston will be using the hydrogen fuel cell technology for the first time in a total fleet environment. Our hope is that through this new technology, the hydrogen fuel cell will outperform our current lead acid batteries and even enhance the usable life of our pallet jacks and forklifts. We will realize cost savings from lowering our use of kilowatt hours, no battery charging equipment is necessary, no reserve battery is needed since the hydrogen fuel cell is quickly replenished and most importantly, we do not have to dispose of the lead acid batteries after their life".

The support from industry-leading organizations is vital to the growth of our business. This, coupled with our solid sales, marketing and development activity, has put us on a clear path for success. Thank you everyone for your time today.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.