Eric David Financial Newsletter

Text Interview with John Penver CFO-– Active Power

 

1.      EDS: Please give us a general overview on your Company.

 

Active Power is a leading designer, manufacturer and distributor of efficient, reliable and green critical power solutions that provide business continuity and protect customers in the event of an electrical power disturbance. Our solutions are designed to protect customers from voltage fluctuations such as surges and sags, frequency fluctuations and also provide temporary power (or ‘bridge power’) to bridge the gap between a power outage and the restoration of utility power or the time required to switch to electrical generator power. Our target customers are those global enterprises requiring “power insurance” who have zero tolerance for downtime in their mission critical operations.

 

Since our inception in 1992, Active Power has deployed more than 1,900 flywheels in systems in more than 40 countries on six continents, resulting in more than 46 million hours of runtime in the field.

 

 

2.      EDS: What makes your Flywheel based UPS systems more energy efficient when compared to your competition?

 

Active Power’s flywheel based UPS systems store kinetic energy by constantly spinning a compact steel flywheel driven from utility power in a low friction environment. When the utility power used to spin the flywheel fluctuates or is interrupted, the flywheel’s inertia causes it to continue spinning. The resulting kinetic energy of the spinning flywheel generates electricity for short periods until utility power is restored or a backup generator starts and takes over generating long-term power.

 

This simple design of our patented flywheel based UPS system offers much higher energy efficiencies as compared to a conventional battery based UPS system. Our systems are up to 98 percent energy efficient as compared to a conventional system at 75 percent load or greater. This high energy efficiency reduces energy costs which directly impacts the customer’s bottom line. At 40 percent load, Active Power systems are 96 percent efficient versus 86 percent. This 10 percent differential can save customers approximately $110,000 per year. Speaking in larger terms, consider a 10 megawatt deployment over 20 years. Operating expenses are approximately $10.3 million for an Active Power system versus $30.3 million for a battery based system. In fact, Active Power has saved customers more than $55 million in energy costs since 1996.

3.      EDS: Who do you market your products to?

 

As I mentioned earlier, our target customers are those organizations who oversee mission critical operations that require 24x7 uptime. We market and sell our products and solutions to commercial and industrial customers across a variety of key vertical markets including data centers, healthcare, broadcast, financial, education and airports. We continue to expand our global sales channels and direct sales force and now sell in all major geographic regions of the world, but particularly in North America, Western Europe and Asia.

 

4.      EDS: Please discuss your new relationship with Sun Microsystems.

 

Our relationship with Sun Microsystems is truly a win win. In late June, we announced Sun had identified and approved our PowerHouse system to complement the Sun Modular Datacenter. We leveraged our expertise in manufacturing flywheel based UPS systems and evolved our UPS technology

through the design and development of containerized systems. PowerHouse provides a modular, integrated power and cooling infrastructure solution for the Sun Modular Datacenter that includes a standby generator, high efficiency flywheel based UPS system, chiller and switchgear.

 

Sun’s Modular Datacenter is the computing side of the support infrastructure Active Power provides. With Active Power, Sun can now offer customers a high density data center in a very small footprint while reducing overall cooling costs by 40 percent that account for the largest electricity expense in the data center. The fact the data center is mobile lends itself well to customers having to deploy in various geographic locations on a continuous basis and securing the initial investment because it can be picked up and placed at a new site.

 

Sun and Active Power together is an ideal situation because we are the first to bring a modularized data center and the associated mission critical grade power and cooling infrastructure to the customer. Other server OEMs have followed Sun with containerized data centers, but few have effectively solved the issue of powering and cooling the solution. These OEMs often don't get involved in the power and cooling aspect of their server appliances which this container essentially is. Sun identified the need to do so to help make their customers successful in deploying data centers economically and rapidly.

 

 

5.      EDS: What kind of services do you offer your clients who purchase your products? 

 

Active Power delivers worldwide customer support through our technical services division. We offer customers assessment, implementation and lifecycle support services for all Active Power systems. One of the critical elements of our service growth strategy is to build a portfolio of services to work with our customers through the life cycle of their process. Through our portfolio, we offer:

 

·        Infrastructure needs assessment

·        Vetting and validation

·        Alignment with business objectives

·        System design

·        Deployment

·        Start up and commissioning

·        Service, support and monitoring

 

 

6.      EDS: I was reading that Your Company received certification from the China Ministry of information Industry. Please tell us how this relationship with China began and what this certification means for the future of ACPW.

 

The MII (Ministry of Information Industry) certification was necessary for us to be able to sell our product into China. We maintain similar certifications in the EU (with the CU designation) and in the United States with the UL mark. The certification indicates the product is in compliance with local laws pertaining to electrical equipment and for the designated uses that we sell our product for. We could not expect significant success in China without this. The MII certification validates our product integrity as we execute our growth strategy of native geographic expansion.

 

We have sold products in China indirectly in the past through our OEM partner Caterpillar and through regional sales representatives. We have found the potential size of the China market requires us to segment the market along vertical lines and to establish different relationships where they make sense with organizations that already have sales and relationships within those submarkets. The market is simply too large to expect any one partner to have the depth of relationships and customers across all verticals. This approach also mitigates risk to Active Power of tying up such a large market with few partners. Our experience to date indicates the quality of our partners will be the biggest factor in our success in the China market. Relationships matter greatly and the wrong business partner will not have the necessary relationships for us to be successful in a meaningful way in this market.

 

As we continue to add partners and resellers into China, we will back this up by creating our own service organization to meet our customer needs. We are in the process of establishing a wholly owned subsidiary in China that will manage all of our business relationships and operate our service and spares organization in this region. If we follow the same path as we have in other international markets, you would expect us to add direct sales capabilities in the next several years.

 

 

7.      EDS:  We see that you’re doing business in China with a China Utility, please tell us how that relationship started.

 

On June 2, we announced an order from a China utility, one of the largest subsidiaries of the China National Power Grid, for eight PowerHouse containerized continuous power systems. This was a big win for Active Power. This order is a perfect example of our native geographic expansion strategy at work. In first quarter 2007, we opened our Asia Pacific office in Tokyo, placing sales representatives in this market who understand the business culture and industry pain points as it relates to power management and quality. This particular opportunity came about via a relationship with the China utility.

 

We have and continue to take deliberate and methodical action to expand our local sales and service teams into the markets we have designated as the highest potential growth opportunities for Active Power. Our commitment to geographic expansion ensures we leverage the right products and services for customer applications around the world.

 

 

8.      EDS: Are you actively looking to expand your technology in China and to what extent of China businesses can use this and in what service sectors? 

 

The common vertical markets where we have had product success include data centers, industrial, airports, broadcast, utilities and high tech manufacturing. We see those same vertical opportunities in the Chinese market also. The factors that drive demand for our product and the business requirements are similar in China as they are in our other markets. In fact, they may be greater because of more underlying problems the Chinese government has in meeting energy demand, which has resulted in higher reliability issues for energy users. The value proposition for customers may be greater and more compelling because they are familiar with and susceptible to brown out and power disruptions.

 

Our initial success in China has been through the utility market in one province. There are obviously many more provincial opportunities in this sector. We are evaluating partners in other vertical markets currently and although it will take some time, we do see a great opportunity from this marketplace for Active Power.

 

9.      EDS: What are your revenue projections from China and do you foresee your technology spreading into other areas of the Far East?

 

While we do not provide forward revenue projections or by geographic region, I can indicate that directionally, we see significant growth opportunities in the Asia Pacific region including India and China. This year, we expect a doubling of revenues from this region and we would expect at least that much revenue growth again next year. Approximately 1/3 of the global UPS market is in this region and it is the fastest growing part of the global UPS market. To date, we have had a very limited footprint in this region and so it has more growth opportunity for us than the more traditional U.S. and European markets.

 

The great opportunity for Active Power is that the same macroeconomic factors that are driving our growth in the U.S. and EMEA also exist in the Asia Pacific region –  rising energy prices; need for a green and reliable solution; and poor underlying electricity grid infrastructure. The growth in energy demand, particularly in India and China, is forcing many customers to seek power protection at their point of use because they cannot count on the reliability and dependability of their national power grids.

 

The business challenge and great opportunity for Active Power is to establish sales distribution capabilities across this region. Our Asia Pacific headquarters is located in Japan and we have sales capabilities in Korea, China, Malaysia and the Philippines. We still have a lot of work to do in expanding this sales capability and providing matching service coverage for our customers. But you will see strong growth in data center, commercial and industrial customers.

 

 

10.EDS: No doubt those third world countries are in need of your technology. Do you feel that the International market revenues will out perform your domestic revenues?

 

Yes. We have historically been under represented in this region of the world, but it is the one of the fastest growing geographies, up to 20 percent per year. As a result, the growth opportunities are definitely greater.

 

Historically, Active Power generated the majority of its revenues from U.S. sources. In the last two years, we have added sales and distribution capabilities in many foreign markets so that we now almost have a 50/50 split between U.S. and international revenues. In fact, sales to EMEA increased by 66 percent in fiscal 2007 compared to the prior year. The international growth is definitely higher than our U.S. markets and we would anticipate the international markets will continue to grow faster simply because we are starting to access more foreign markets.

 

The underlying reasons why folks want our product (efficiency, reliability and green) are universal. Many third world countries have under developed utility grids and cannot provide continuous, reliable power to business, requiring them to get protection at point of use to minimize the costs and effect of power interruption. Resolution of these problems often takes political and economic resources over a long period of time. Thus, suppliers offering a cost competitive solution that directly addresses these pain points is in the right place at the right time with the right solution. This is one of the big reasons we’re optimistic about Active Power.

 

 

11.EDS: Do you have a plan in place to raise capital for this expansion and if so will it be conventional financing?

We have not announced any plans for raising additional capital. We completed a small financing in August 2007 that we indicated would get the company to operating profitability and meet its requirements for the next two years. We also have a bank credit facility we have not used, which was designed to provide us with the working capital needed to fund our continued growth. Most of our capital requirements are to fund the higher sales and order rates we have experienced. These capital requirements are also needed to build inventory for specific orders and to cover the cost of receivables. We have stayed away from unconventional financing and have a very simple balance sheet with one class of capital that we use.

12.EDS: How many shares of ACPW are outstanding and what is the public trading float?

We have approximately 60 million shares outstanding and the public float is approximately 46 million shares.

 

EDS: Mr. Penver, thank you very much for your time in answering our questions and we will be sure to follow this story well into the future.  

 

Interview conducted by Steven Weiss CEO and Publisher of the Eric David Financial Newsletter