普拉格能源 (PLUG) 2014 Q2 法說會逐字稿

Greetings and welcome to Plug Power's 2014 second-quarter financial call. (Operator Instructions)

It is now my pleasure to introduce your host, Teal Vivacqua, Director of Marketing Communications. Please go ahead.

Thank you. Good morning and welcome to the Plug Power 2014 second-quarter earnings conference call. This call will include forward-looking statements, including but not limited to statements regarding our expectations for future business and financial performance, bookings, product shipments, revenue, margin, EBITDA, geographic and market expansion, and inorganic growth.

We intend these forward-looking statements to be covered by the Safe Harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933 and in Section 21E of the Securities Exchange Act of 1934.

We believe that it is important to communicate our future expectations to our investors. However, investors are cautioned not to unduly rely on forward-looking statements because they involve risks and uncertainties, and actual results may differ materially from those discussed as a result of various factors, including but not limited to risks and uncertainties discussed under Item 1A, risk factors, in our annual report on Form 10-K for the fiscal year ending December 31, 2013, as well as other reports we file from time to time with the SEC. These forward-looking statements speak only as of the day on which the statements are made, and we do not undertake or intend to update any forward-looking statements after this call.

At this point I would like to turn the call over to Plug Power's CEO, Andy Marsh.

Thank you, Teal. Good morning, everyone.

In the past quarter Plug Power has demonstrated how we can continue to scale this business and deliver on our promise of profitability. We have executed not only on the revenue, manufacturing, and hydrogen sides of the business, but also in the work we have been doing to impact the future of Plug Power. EBITDAS in the quarter, however, was impacted by an unanticipated $785,000 additional loss in our service business. We will discuss items that affect this issue later in this call, so let's get started.

I am pleased to report that we had a record $17.3 million in revenue in the second quarter based on shipments of more than 680 GenDrive fuel cells. This is a threefold increase versus the first quarter of 2014.

Plug Power has also recorded a positive 17% gross margin for our GenDrive units. This is a result of scale production of our business. We have also started to see a growing revenue contribution from our GenFuel and GenCare product lines.

One of the deployments in the second quarter was with Walmart. The Walmart distribution center in Pottsville, Pennsylvania, was the first of our Walmart GenKey sites to be deployed. We had 298 GenDrive units up and running in the class 2 and class 3 lift truck fleet there by May.

The outdoor GenFuel infrastructure was completed in less than 13 weeks after Walmart placed the order, and six GenFuel dispensers were installed indoors for fast refueling. To date Pottsville has already logged over 100,000 hours in GenDrive unit runtime, and it has used over 26,400 kilograms of hydrogen fuel has been dispensed.

The site has already seen productivity increases exhibited by more pallets being moved faster and operators finishing their picks early each day. The anticipated value proposition for the warehouse has been completely demonstrated. Even while the Pottsville GenKey installation was underway, we initiated deployment of Walmart's second GenKey site: its distribution center in Johnstown, New York.

Deployment at that site was completed in July, and it currently has 264 GenDrive units in place. Due to Walmart's satisfaction with the successful Pottsville sites deployments, Walmart issued a follow-on purchase order in the second quarter that added a seventh GenKey site: their warehouse in Sterling, Illinois.

Development at the Sterling site has already begun, with construction at the outdoor fueling infrastructure now proceeding. Complete deployment at this GenKey site is expected in September of this year.

Walmart is a critical customer for Plug Power's long-term success. Next year Plug Power's objective is to work alongside with Walmart to convert another 5 to 10 sites. Long-term Plug Power aims to convert all 100 Walmart distribution centers in North America.

While incredibly important to our business, Walmart is not the only customer we shipped to. In addition to deployments for Walmart in the second quarter, Plug Power also shipped GenDrive fuel cells to Mercedes-Benz, Procter & Gamble, Sysco, Golden State Foods, CVS, Central Grocers, and Volkswagen.

The Volkswagen assembly plant is an interesting site. The building in which hydrogen fuel cell solution will be implemented is a new addition to the Company's Chattanooga campus, where Volkswagen has been assembling vehicles since April 2011. The GenKey agreement leaves open the potential for Volkswagen to leverage the hydrogen fueling infrastructure to convert other lift truck fleets in adjacent buildings from battery to hydrogen fuel cell power. Having a GenFuel infrastructure in place at the campus makes such an expansion easier and extremely cost-effective for Volkswagen.

This site reminds me of the BMW Spartanburg facility, which we started in one building with 70 units. We eventually expanded to other buildings in the site, and today we have over 325 units deployed.

Customers that are in the Plug Power pipeline for shipment in the third quarter include BMW, Walmart, Procter & Gamble, Mercedes-Benz, Carter's, and Kroger. As a side note, many of our customers are currently using our complete GenKey solution. GenKey has allowed customers a reliable, seamless transition to hydrogen fuel cell power.

The customers who have chosen GenKey had opted for Plug Power's complete turnkey solutions that provides GenDrive fuel cells for their material handling vehicles, installation of on-site GenFuel infrastructure with hydrogen fuel, storage, indoor fueling dispensers, and one year-round GenCare maintenance service package. To date Plug Power has already closed 11 GenKey deals.

GenKey deployments for the third quarter are planned for Volkswagen; Kroger in Stapleton, Colorado; Federal Express in Memphis, Tennessee; and, as previously mentioned, Walmart in Johnstown, New York, and Sterling, Illinois. Kroger was actually the first customer to commit to the GenKey solution December 2013.

214 GenDrive units will be deployed in Stapleton, Colorado, in the third quarter, where the GenFuel infrastructure is nearly completed today; and 179 units will run in Louisville, Kentucky. We will break ground for the GenFuel outdoor infrastructure in Louisville in early fourth quarter 2014, and the entire site will be fully commissioned by the end of the fourth quarter of this year.

Plug Power has also seen a lot of success working with companies in the automotive industry. Plug Power's fuel cells have been successfully deployed and improving the productivity and efficiency of material handling fleets at automotive manufacturing sites. In other words, we're bringing strong value by deploying hydrogen fuel cells that power the lift trucks that load and unload containers of auto parts used in the vehicle assembly plant.

So far in 2014 we have new orders from Volkswagen; BMW; Mercedes; and a brand-new customer, Honda. Even more important, these orders open the doors for additional global accounts. Plug Power's international business team is currently working with auto companies in countries including the United Kingdom, Germany, Spain, and Mexico. In these places, not only are we developing value propositions that improve the economics for the customers lift truck fleet conversion; we are also evaluating the most appropriate hydrogen solution and how our GenFuel business can expand.

Expansion into the global automotive manufacturing market is linked to our pursuit of geographical expansion in Europe and Asia. The European market has been under development with our joint venture partner, Air Liquide, over the past two years. The JV, HyPulsion, has developed a suite of products for the European material handling market, has qualified our offering with major OEMs, and has started initial deployments. We view, as previously discussed, that the automotive manufacturers will most likely be the early adopters globally for our solution.

Plug Power is in discussion to assume majority control of the JV in 2015, ahead of our initial plan. Air Liquide will remain a valuable partner in this venture.

In anticipation of this change and the large market opportunity in Europe, Plug Power is starting to ramp up a larger sales team to accelerate growth in the coming years. Just a reminder: the European market opportunity is larger than that seen in the US, and we are focused on rapidly building our market position there.

In Asia we are continuing to partner with Hyundai Hysco. The initial focus of our activities are commercial sales in high labor cost countries like South Korea, where the Plug Power GenDrive value proposition is strong. Two, we are developing an extensive plan to study the market in China. Plug Power Hyundai will deploy individuals to develop a compelling value proposition and hydrogen strategy for China as well as understand how to leverage governmental policies.

And, three, finally, this partnership will assist in the development of cost effective stacks to support Plug Power's own stack and supplier diversification strategy. We expect this partnership to remain a working relationship. Although it will likely not become a formal JV in the forthcoming year, we believe it may develop into one in the future. Both companies remain committed to being successful in the Asian market together.

Domestically we are continuing to look at horizontal market expansion, like ground support equipment. I'd like to show you a video to make our success clear. In June, Plug Power precipitated alongside the Department of Energy to demonstrate our prototype fuel cells in an airport tugger. What you are seeing is a fuel-cell-powered tugger pulling a total of 40,000 pounds, which is the requirement for the application of pulling cargo for airplanes' sorting facility.

Application differs from material handling, starting with the large power output of 20 kilowatts. The rugged application requires the units to be stored and run exclusively outdoors. The unit must be able to handle exposure to the elements, including various temperature ranges, humidity, and precipitation. As you can see, it was raining on the day of this demo.

Outdoor dispensing is required for these units. Next step for this project are to deliver 15 fuel-cell tug units to the Memphis airport, pairing it with an indoor GenFuel hydrogen dispenser. The expected delivery of this is in October of 2014.

Ground support equipment is a market expansion opportunity for Plug Power. We view the process for selecting market expansion opportunities, both organic and inorganic, to be quite similar. Both organic and inorganic expansion must align with our strategy of providing full system solutions and must leverage our capabilities at being the premier PEM fuel cell Company in the industry.

To strengthen the management team's capability of identifying and evaluating the market expansion opportunity, Plug Power has added John Cococcia as Vice President of Market Strategy and Investor Relations. John spent 15 years working with early and growth stage companies as an investor, Board member, advisor and advocate. During his tenure he has been influential in issues such as strategy development and execution, venture and growth financing, strategic positioning, and partnerships.

John was cofounder of Arista Strategy Group, the strategic consulting firm. John also cofounded FA Technology Ventures, a $100 million venture capital fund where he was responsible for covering sectors such as cleantech. We welcome John to the team.

One area that has particular interest to the Company is hydrogen generation and distribution. We view hydrogen as an opportunity to expand margins in the future and hydrogen distribution as a vehicle to expand revenue. The Company has been reviewing opportunities to expand into hydrogen generation. Today Plug Power's products use approximately 4% of the liquid hydrogen consumed in the United States, and this number is growing. Also, 95% of the hydrogen refuelings in North America is done to fuel Plug Power products.

With some customers, as part of GenKey, we are reselling hydrogen and achieving single-digit gross margins. We are also considering several other possibilities to enhance our gross margins for hydrogen from single digits to significantly higher margins. These possibilities include the purchase of bulk hydrogen, partial ownership of a generation plant, and the reformation of natural gas to hydrogen on-site. We will continue to discuss these opportunities in the coming quarters.

Hydrogen distribution provides good potential revenue enhancements for Plug Power. Consider a Walmart or Lowe's distribution center with a GenKey fueling system. These distribution centers have fleets of hundreds of forklift trucks, and they may serve up to 60 stores each. Each of these retail stores have a smaller fleet, but combined may have more forklift trucks in the distribution center.

We have had customers express a strong desire to move GenDrive to retail stores. By developing a hydrogen delivery strategy for the retail stores, we could double the revenue opportunity provided by GenDrive and GenFuel with each retail customer.

Now I would like to take a moment to take a deeper look at our financials, starting with our GenDrive product gross margin. In the second quarter our fully loaded gross margins for GenDrive were 17%. These positive margins were heavily influenced by a few items. First, there was a significant design improvement with our newest class 2 product. This product launch drove close to a 20% reduction in material costs.

Second, the milestone Walmart deal and associated volume helped to drive supplier negotiations for lower material costs across the product line. And, third, increased volume allowed for operation overhead absorption. We expect GenDrive gross margins to continue to expand during the coming quarter, reaching mid-20% in the fourth quarter.

Let's go a bit more into the decrease in EBITDAS in the quarter versus our target. While the GenCare service business continues to show improvement, we fell short of our Q2 projections, negatively impacting EBITDAS by $785,000.

There were three primary reasons for this. First, the first was higher-than-anticipated field failures of high-power stacks. The stack is one of the largest cost components in GenDrive system and is labor-intensive to replace. This has resulted in both increased parts and labor costs.

Due to product improvements developed and implemented by our engineering and field support team, we have seen field reliability already improve by 30% in high-power units. We are isolating the root cause associated with the failures, so we expect the impact to be reduced in future quarters. The low-power units are performing as expected.

Second, we have been hiring new service employees to support the increased number of GenKey sites that have been deployed and have seen increase costs for onboarding and training these new employees. This is actually a flag of a real growing business, and I expect the margin hit of this will diminish in the third quarter.

The third contributing factor was increased expediting and freight expense, the result of our aggressive supply chain ramp to meet our growing production and service in the need. The supply chain responded well to our increased demand, and the need for expediting has been reduced.

This has been a notable quarter, thanks to record revenues of $17.3 million and record shipments of 687 units. Our revenue and booking goals for 2014 remain unchanged at $75 million in revenue, $150 million in bookings. We expect to close two major multisite deals in the remainder of the year, which will make the booking goals easily within reach.

My main interest is in investment to accelerate long-term top-line and bottom-line growth. With our strong balance sheet, we would be shortsighted not to take advantage of our unique advantage as an industry leader.

We will be making additional investments in the second half of 2014 in sales, both domestic and international; product management; and business development to grow the top line. Our financial staff will additionally grow, including a CFO to meet the needs of an expanding business. Near-term we are also allocating an additional $2.5 million to service, which includes COGS and expense to ensure that the service business becomes profitable early next year.

Finally, we may also add to the R&D team if we aggressively pursue markets like the transport refrigeration units. We are targeting EBITDAS breakeven in the fourth quarter, but it could invest some more. The Company could limit future growth by focusing only on near-term profits. We could do that. I believe this would jeopardize the huge opportunity in front of Plug Power.

Now I would like to turn the call over to Dave Waldek, Interim CFO, to provide the quarter's financial results.

Thank you, Andy, and good morning, everyone. Before I jump into the second-quarter numbers, I want to provide a few financial highlights. Our cash balance at the end of June was $168.6 million. As of June 30, our working capital was $190.4 million compared to our working capital at March 31 of $72.6 million.

During the second quarter of 2014 we shipped out 687 GenDrive units compared to 165 units during the first quarter of 2014. As of June 30, our backlog was comprised of 2,659 unit orders with a value of $36.6 million. Those backlog numbers are GenDrive units only and don't include orders for service, hydrogen infrastructure, and hydrogen molecule delivery.

Total product and service revenue for the quarter was $17.0 million with a positive gross margin of 4% compared to $7.1 million at a negative 26% gross margin for the second quarter of 2013. Breaking out the total revenue, product revenue for the second quarter was $12.6 million with a gross margin of 17%, an improvement compared to product revenue of $5.6 million at a 4% gross margin for the second quarter of 2013. Service revenue for the second quarter was $4.4 million with a gross margin of negative 34%, and an improvement compared to service revenue of $1.5 million at a negative 134% gross margin for the second quarter of 2013.

Research and development contract revenue for the quarter was $328,000 compared to $368,000 during the second quarter of 2013. In our operating expense categories, selling, general, and administrative expenses were $4.8 million for the quarter compared to $3.2 million in the second quarter of 2013. The increase in SG&A primarily relates to the acquisition and integration of ReliOn as well as the expansion of our sales force.

Research and development expense for the quarter was $1.4 million compared to $824,000 during the second quarter of 2013. Net income for the quarter was $3.9 million or $0.02 per share on a basic and diluted basis compared to a net loss of $9.3 million or a negative $0.14 per share on a basic and diluted basis for the second quarter of 2013.

Net income for the second quarter of 2014 included $9.6 million of nonoperating income related to the change in fair value of common stock warrants as well as $1 million in non-cash income related to negative goodwill from the ReliOn acquisition. Excluding these items, the adjusted net loss for the second quarter was $0.04 on a basic and diluted basis.

The $9.3 million net loss for the second quarter of 2013 included a net of $2.6 million in nonoperating charges related to the change in fair value of common stock warrants and the gain on sale of equity interest in our joint venture. EBITDAS loss for the quarter was $4.9 million compared to an EBITDAS loss of $5.1 million in the second quarter of 2013. Please reference the financial tables in the press release for a reconciliation of EBITDAS to operating loss and net income to adjusted net income.

Weighted average shares outstanding for the quarter were 159.9 million and 176.2 million on a basic and diluted basis. Net cash used in operating activities for the quarter was $11 million. As of June 30, 2014, the Company again had $168.6 million in cash and cash equivalents and $190.4 million in working capital. And this compares to $5 million of cash and $11.1 million in working capital, respectively, at December 31, 2013.

I will now turn the call back to Andy.

Thank you, Dave. I understand that during the video that we lost the audio portion. And what you were seeing during that video was our tugger unit being pulled by our partner, Charlatte -- 40,000 pounds, which is the requirement for cargo to the airports and supporting facilities.

The unit is 20 kilowatts, which is much larger than our fuel cells for material handling. And as you could tell, we were actually -- we have to work in outdoor environments in the rain. We will be deploying the first 15 of these units for the new market in Memphis alongside with the first GenFuel outdoor hydrogen dispenser. We will be delivering these units in October 2014.

At this time Dave and I are open to take any questions.

(Operator Instructions) Matt Koranda, ROTH Capital.

Congrats on the gross margins -- the positive gross margins. Things look pretty good there.

Service margins are still negative, but improving here. Could you give us a sense for what you expect in Q3 and Q4 as you deploy at additional sites? Can we expect some improvement on higher utilization of service staff? And longer-term, when do you think we reach breakeven or even positive service margins?

Matt, our internal models have -- in our service business in the fourth quarter being approximately minus 15%, and we feel that by the first or second quarter of next year, we should be able to drive it to be breakeven. I think that we know what needs to be done to reach those goals. As I mentioned, I'm spending a little bit more money this year in the third and fourth quarter to drive those improvements so that we will break even early next year in the first half in the service business.

Okay, that's helpful. Then just touching on bookings for a moment, didn't see anything in the release, but I remember last time you guys provided an update, they were kind of at $80 million part way through May. Can you give us an update on where things stand currently; and what the run rate is, maybe on a monthly basis, right now?

Matt, at the end of Q2 we were at $87 million. We do expect some lumpiness. I would expect that by the end of September, we will be in the $115 million range, $120 million range. We could do a big deal, which could accelerate it much faster.

Okay.

Just to give you a feel, a deal could move the needle $30 million instantly overnight.

Okay, that's helpful. And then just the last one for me here before I jump back in queue. Andy, you did mention a small quality issue. Can you just provide some color on the nature of the problems that the high-powered stacks were experiencing? And are they at one particular site, or is it spread across multiple customer deployments? Just give a sense for what is going on.

I would say, Matt, it is spread across sites. And I would say it's not -- they are not instantaneous failures. They are premature failures.

We have taken a number of steps to improve the products. One of them was relatively simple, where we captured the water coming out of the stacks a little bit differently to allow -- because we're seeing more water than was expected, and it was causing some premature failures. We have also been changing some filtering to keep particulates out of the stacks. And additionally, there has been a number of improvements made by Ballard that are having some benefits.

I think, Matt, that -- I think in the third and fourth quarter we will see improvements. As I mentioned, the margins will improve. But it is, quite honestly, when we look at our service business, really the biggest headache we have at the moment.

Okay, Andy, that's fair. And thanks for taking my questions.

Aditya Satghare, FBR Capital Markets.

Two questions, please, from my side. The first one is: on a really high level, can you contrast the discussions you are having with your top customers today versus what you were having at the start of the year? And what are some of the things your customers are looking for today before they progress into making some high-volume contracts here?

I think that's a real good question, Aditya, and I can tell you that -- and you may have caught some of that at the end of my portion of the talk about more resources. One of my large customers, and you may be able to guess who, came to me and said, we could do a lot more, but we're worried about the number of people you have to support us. And it is one of the reasons that in the third and fourth quarter, I think that you will see us having more product, more project managers in line; and for some of these large customers, almost having installation teams that can move site to site.

That is a key discussion point that we have been having, because we have been -- I think, you know, you take a look at how well we have executed Walmart, Pottsville; Walmart, Johnstown; about to execute Walmart, Sterling. And we have four sites we're going to be doing this quarter. But if you have one customer who comes in and wants to do four in a quarter, we are going to need more people. And we need to show them ahead of time how we will have them in place.

So that's actually -- I take that as a positive discussion. And I think with our present customers, that's where the discussions -- with many, that's where the discussions are.

I think that with new customers, and I am thinking of a few now, that I think the issues are convincing them -- I think it's much easier to convince them when you take people to BMW. You take Honda; really taking them to a Walmart facility is what convinced them. But with new customers, I think it's just making sure that they become comfortable that this is a commercially viable product. And, obviously, all the reference customers, all the reference sites, quarters like this just help demonstrate we can deliver.

It's much nicer now that I can walk into customers' sites and say -- and show them this factory. I know you have been here. And people can see that, look, we have had days that in 12 hours we have put out 35 units. So it's showing them that we can actually do what we say we're going to do. And I know I have one at the Pottsville site looking at our hydrogen infrastructure.

So that's really where we are in the sales process. And so it's a -- and I think internationally, it's a fact that these auto companies -- that we are sitting down with them in Germany and planning global activities with companies instead of local.

Understood. That's very helpful. My second question actually ties into your comments on the hydrogen infrastructure. Is there a way to quantify, when you look at your top customers, the number of forklift units at a distribution site versus the retail centers? And how much could that potentially increase your total market opportunity?

Sure, that's a great question, Aditya. So if I think about a distribution center -- take a Walmart site with 264 units. If you move that into the store, you are talking about 300 units in the stores. So it's a huge, huge increase, as well as an increase in service and hydrogen.

And the reason they would do this is actually twofold. One is that it really simplifies logistics, both in the store and for deliveries. Often these trucks in stores, the batteries are left uncharged. Truck comes for delivery; or a place like Lowe's, a customer comes to pull units off the top shelf, and the 17-year-old kid working the back room didn't charge the truck. And it throws the logistic delivery schedule off by 30 minutes. Or, worse yet, a customer doesn't get their goods and goes across the street.

The second item is that they overcharged the batteries. And I have been told by many retailers that often every year they have to buy batteries because of damaged batteries in their retail centers. So we have a -- we really believe that movement into the retail market can increase our servable, addressable market in the US by 30%.

Thank you. Thanks for all the updates.

(Operator Instructions) Jeff Osborne, Cowen and Company.

I wanted to explore the expense trajectory for the Company. You mentioned several initiatives in R&D, international sales, as well as ramping up the service. I just didn't know if you could either use 2Q as a baseline or give us a sense of flavor what the quarterly OpEx trajectory should be both exiting the year and early 2015?

Jeff, I would expect on the OpEx line -- and let me make sure I read this right here, Jeff -- that in the fourth quarter we will be -- I'm sorry, Jeff. I got to make sure I grabbed the right numbers here. I expect that we will be exiting the year, I would say, Jeff, approximately 15% higher than we presently are.

Does that get you enough in terms of some of those initiatives to get them kickstarted in those four or five international markets that you highlighted, as well as the service personnel for the existing 11 sites that you have?

The service personnel, Jeff, would actually go into COGS.

Okay.

Okay? So they would be going directly into COGS. On the OpEx front, it would be moving into -- those activities with the sales team and others will be hitting the expense line.

Excellent. And then I heard you on the service -- kind of breakeven in early 2015, first or second quarter. Looking out a year or two, what do you think a target gross margin for the service business is? What is your aim to achieve over time?

Over time, Jeff, we aim to achieve 30%. And I think that -- and this one is not a commitment, but I think that by the fourth quarter 2015 we can be in the 15% to 20% range.

We are close. It almost feels like the product to me, as it was a bit ago, that we are just so close. We have a few loose ends to tie up, and we can dramatically change the performance of the service business.

That's great to hear. Just two other lines of questioning for me is: one, more bigger picture, as you evaluate your hydrogen strategy for 2015 or 2016, whenever that kicks off, how do you think about your current cash balance and other adjacent areas that you could go into relative to the hydrogen strategy? And in particular, how much capital are you willing to potentially commit with being a joint partner with someone? That seems like it would be quite expensive.

That's a good question, Jeff. I would say that there is a possibility we could look at both equity and debt to pay for a capital expense of that nature. I think the Company is in a much different position. I think we closed the quarter with over $168 million on our balance sheet.

I am not -- I think you look at the ReliOn acquisition, and you can see that at least on paper, I underpaid for the asset. So I am not going to go spend money unless there is a clear path that it can support the growth of the business and help make us more profitable. So I would think -- just to give you a gauge, I think the extreme would be somewhere in the $20 million-type range.

And I don't foresee us having to spend that type of money. One thing even in these -- owning a portion of a plant or working with an industrial gas company, one thing I can bring is value. And that makes me very, very attractive as a partner.

It makes perfect sense. Would that be $20 million per site? I would assume you would need these distributed around the country?

I think, Jeff, it depends. So I would say I think the most you would do for liquid generation plant would maybe be two sites, geographically placed in regions where we could really impact the margins the most. So you probably would be talking $40 million.

Okay, excellent. And just one last question. Sorry to come back to this, but was just the nature of the high power failures. Could you give us a flavor on how old some of these systems were? I know you have moved from air-cooled to liquid-cooled or vice versa, I forget. But with some of these units, were these several iterations ago that were shipped three, four years ago? Or were these something more recent that had technical issues that you were un-anticipating?

That is actually a real good question. First, Jeff, is that I know you just joined back with us here recently. That our low-power units, which are the class 3, actually use an air-cooled stack. And we have -- actually quite pleased with the field performance of the air-cooled. On the liquid-cooled, I would say primarily many of the issues have been with our older GenDrive units. Some of those issues, I would say, were caused by Plug Power, some by our supplier.

I see some with the newer units. Mostly when we look at many of them, it is because of environmental conditions. And I think you did hit on a very important point. Part of the improvement -- as we shipped more and more newer units, the newer units have worked so much better than the older units. I have had days -- I have received letters from customers saying how -- you know, customers who have hundreds of units having days where they didn't see units go down at all.

So the newer units are far, far superior. And part of the projections of how you reach double-digit service margins are really associated with the fact that as we put more and more new units in the field, we see less and less problems.

I will give you an example. I had one site, which we put out 3 1/2 years ago, and when we arrived and we heard about -- we saw some problems with stacks. And this was old unit on an extended DOE program that we had to support. And we found at the site that routine maintenance wasn't being done by the third-party provider, which led to many problems.

And we actually in that site were actually able to go out and clean the radiators, and when we cleaned the radiators out, actually, the stacks came back. So it is a combination of items.

I think also -- quite honestly, Jeff, I think there is probably a training issue with our team that we continue to work on and make sure that we are just not pulling a stack out when you could -- when the problem is something else. So I think part of our problem is -- part of our challenge is ramping the staff up.

But that's part of our ongoing, and we have a pretty detailed plan ahead to make the service business profitable. And, quite honestly, we have spent -- operationally, the products -- it is really clear. Roadmap is really clear. The management team has to spend very little time on product margins, and where we spend most of our time operationally is how to make sure the service business becomes as profitable as the product business in time.

Excellent. I appreciate all the detail to that question. It gives me a sense of comfort. Thank you.

There are no further questions at this time. I will turn the conference back over to management for closing remarks.

I would like to thank everyone for joining the call today. And additionally, the Plug Power team will be at the NASDAQ today closing the NASDAQ at 4 o'clock this afternoon. Hope many of you can catch us on TV. So have a great day.

This concludes today's conference. All parties may disconnect.