Plug Power Inc. (PLUG) Q3 2015 Earnings Report, Transcript and Summary

Greetings, and welcome to the Plug Power 2015 Third Quarter Results Conference 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] It is now my pleasure to introduce Ms. Teal Vivacqua, Director of Marketing & Communications. Thank you. You may begin.

Thank you. Good morning and welcome to the Plug Power 2015 Third Quarter Financial Results 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; GenKey and GenFuel hydrogen infrastructure; revenue, gross margins, and EBITDA; customer, geographic and market expansion. 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 Sections 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, the risks and uncertainties discussed under Item 1A, risk factors, in our annual report on Form 10-K for the fiscal year ending December 31, 2014, 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 the call. At this point, I’d like to turn the call over to Plug Power’s CEO, Andy Marsh.

Thank you, Teal, and good morning, everyone. Thank you for joining the Plug Power 2015 Third Quarter Conference Call. Before jumping into the details of the call, I’d like to start by measuring our performance to date versus the milestones that were set out at the start of the year during our January business call. On that call, this is actually a duplicate of that slide, I outlined the following goals for Plug Power to accomplish in 2015: achieve revenue of more than $100 million; real life bookings of more than $200 million; install 15 GenFuel hydrogen storage and dispensing systems; achieve gross margins of over 25% for our GenDrive product line by the fourth quarter; and to book six new customers; and finally to continue to make progress in the hydrogen fuel business. Now, that we’re three quarters through 2015, let’s review how we’re doing against our stated milestones. At the end of the third quarter, Plug Power recognized more than $65 million in revenue for the year with $55 million reported over the past two quarters. We expect to achieve $35 million in revenue in the coming quarter to meet our $100 million sales goal. Number two, Plug Power has $166 million in bookings at the end of the third quarter, 83% of our goal and we are in line to meet our stated target. Three, at the end of the third quarter we have turned on 12 GenFuel infrastructure systems in 2015 with an additional six prepped for commissioning in the fourth quarter. Fifth, and regardless the GenDrive gross margins, we’re ahead of our schedule at 17% for the quarter and with the fourth quarter introduction of the next generation Class-2 and -3 products with a goal of 25% gross margin is attainable. We are also excited about our new customers in 2015 including FreezPak, Dietz & Watson, Young’s Market, Uline, one that I will name later. And additionally, I’m heading to Europe after this call and we’ll be signing a contract with six new customers later this week. The customer is a major northern European retailer. With this deal, we will have achieved this goal. As we acknowledged during the January 2015 business update call, we understand the legitimate criticism in the past that although we continue to demonstrate industry leading growth we are still not meeting our enunciated target. In January, I clearly stated the goals Plug Power is intended to achieve. I also outlined the timeframe in which we expected to achieve them. I am pleased with Plug Power’s execution in the business and the fact that we stayed on track and on pace to achieve the goals and milestones laid out at the beginning of the year. Later in 2015 we will announce the date for our January 2016 business update review. Now, let’s take a look at the third quarter. I’d like to discuss three subjects: revenue, expansion and funding. I’ll start with revenue. Once again, Plug Power had a record revenue quarter, fueled by customer success. Plug Power solutions continue to save customers’ money and help them achieve a more productive workforce. Walmart remains a steady key customer impacting Plug Power’s growth. During the third quarter, we continue deployments in new sites, including New Katy, Texas and Cleburne, Texas. To this point, Plug Power has 14 sites deployed with Walmart and expects at least another 10 sites in 2016. Additionally, during the quarter, Plug Power completed our first deployment with new GenKey customer Uline in Pleasant Prairie, Wisconsin. Currently, Uline is operating more than 130 GenDrive units between two facilities, and there is room for growth at Uline as they plan expansion with a second fleet into their newly constructive facilities in the coming months. By the way, we received that purchase order this morning. In addition to Walmart and Uline deployment, Plug Power continued working with customers including Newark Farmers Market, BMW, AWG and Stihl. We’ve recognized revenue for 1,221 units quarter and have already manufactured 454 units. Moving on to discussion of expansion, in July, Plug Power acquired full control of the HyPulsion hydrogen and fuel cell business in Europe. With this expansion, Plug Power has now invested in converting the $20 billion European electric lift market to hydrogen fuel cells. Plug Power and Air Liquide founded HyPulsion in 2012 to jump-start the hydrogen fuel cell market in Europe. The original agreements intended for Plug Power to ultimately control HyPulsion. This was accelerated as a result of Plug Power’s success in the North American market. And Plug Power wasted no time in leveraging the tremendous opportunity in Europe. We announced Prelodis, our first European customer, in September. A full fleet of GenDrive units has been commissioned in North-Central France that run in Prelodis’ three shift operation. As I mentioned before, European customers share the same value proposition as a material handling counterpart in the North American market. Increasing productivity through the fast fueling and sustained power level of hydrogen fuel cells versus batteries remains of value to these customers. We have our international business development and sales team currently targeting manufacturing customers in Europe, including the United Kingdom, Germany and Spain to broaden the use of GenDrive and GenKey. For more than 95% of the forklift trucks in the world Plug Power offers a drop-in GenDrive product that can convert their battery powered truck to a hydrogen fuel cell powered truck in less than 30 minutes. And now, finally I’d like to - and this probably excites me the most, to discuss Plug Power Capital, a wholly-owned subsidiary of Plug Power formed as a capital financing arm that facilities customer financing, giving customers easy access to third-party leases. Through this financing, which we call GenFund, Plug Power Capital will work with its customers and commercial banks to facilitate project funding for the purchase of Plug Power hydrogen and fuel cell solutions. GenFund lease program represents only the start of our customer financing activities. GenFund will support customers who want to directly lease our equipment. We have some customers like Walmart and others who would like to take it off their balance sheet via leaseback program. This type of financing is very common way to finance solar project and Plug Power is a leader in introducing the concept to the fuel cell industry. A successful leaseback program is one of the reasons companies like SolarCity experience such rapid growth. And Plug Power views this as a broader opportunity to accelerate adoption of our products. We have been discussing with our financial advisors regarding this activity and over the next three or six months we’ll be making number of announcements about this program. I want to highlight and clarify now. We have no plans to dilute our share present plans to dilute our shareholders doing equity rates to support this program. I understand the sensitivity of the issue. I want to let shareholders know that this program is a win-win for them. Now I’d like to spend a bit of time discussing margins. GenDrive achieved gross margins of 17% in the past quarter, we reached this level faster than we originally planned and we expect gross margins to hit 25% and continue expand throughout 2016 as a result of the new cost reduced GenDrive units that will shift in the fourth quarter. One of the main contributors to our rapid increase in gross margin is the introduction of Plug Power’s own stack technology. Our air-cooled stacks are shipping today in our new Class-3 GenDrive products. Initial shipments of our liquid-cooled stacks will occur this quarter in the new Class-2 GenDrive offering. All of our stacks are made in America, the air-cooled stacks are shipped from Plug Power western Spokane, Washington and the liquid-cooled stacks are manufactured in Latham New York facilities. Let’s now talk about the margins in our service business. These have continued to improve with the year-over-year improvements from minus 33% to minus 21%. Service margins however have burdened with premature failures of liquid-cooled stacks used in our Class-2 and -3 products that have shorten our useful wave and require premature field replacement. Margin reduction impact of these failures was about $1 million in the past quarter. We feel that the underlying problem with the stack had been resolved both through our collaboration with power when enhancing their membrane and through the introduction of the new Plug Power stack which incorporated enhanced membrane to eliminate this issue as well. We’re now shipping newer repair product that will achieve the predicted life. We still have units in the installed base that will fail prematurely over the next six to eight quarters. We’ve improved the install base in the field resulting in a 30% performance approving in line. This still does not allow Plug Power to meet the projected life of these stacks. Since these stacks will fail prematurely we expect similar cost for stack replacements over the next six to eight quarters until the older stacks are washed out of systems. Our product is becoming more reliable in the long-term. We expect to serve this business to reach gross margins comparable to our GenDrive business. And finally, our GenFuel hydrogen business has presented itself with a focus with Plug Power doing their third quarter and over 2015. We’re continuingly investing in the hydrogen business as it is critical piece in the fuel cell puzzle. Plug Power is making greater investments in the research and development of viable GenFuel solutions to support expanding our total severable market globally. Most of the investments over the past nine months have been cost reducing and optimizing our infrastructure, that makes the equipment more efficient and cost effective, GenFuel gross margins will start growing. During our initial deployment we had higher cost like as we witnessed with GenDrive, this is not unusual for new product in the market. But now, the GenDrive has become GenFuel has become mature improving offering we were anticipating similar gross margins improvements with GenFuel through that we have experienced in GenDrive. In 2016, our development efforts will be geared towards generation of hydrogen. Plug Power Latham team through earlier products has a great deal of experience and recognition of a multiplicity of gases. In parallel, the Plug Power west employees were experts in hydrogen purification. We will be increasingly leveraging these two capabilities to expand our product line with the ultimate goal of dramatically increasing our hydrogen gross margins. In conclusion, we’re building a big business of Plug Power. We’re making all the necessary moves to enable Plug Power to grow to $500 million in sales from our material handling customers in the next three to five years. By the same time, I believe that Plug Power is more than that. I spend a lot of time tapping into my team’s expertise, to help really understand what Plug Power is good at. It’s quite evident we can imply our technology and human ingenuity to powering electric vehicles and building hydrogen infrastructure beyond our current market focus. And it’s just not me saying that, there are facts to support why Plug Power is unmatched in the industry. Our GenDrive fuel is also reliable, GenDrive units operate more hours in a year than a passenger car will realize in a lifetime. Our GenDrive units have proven collectively they provided more than 170 million hours combined with customers’ locations globally. Our GenFuel infrastructure is improving, customers perform 4350 fueling daily from GenFuel dispensers that’s close to 100 million today. We are the market leaders with a 90% of our hydrogen we’re fueling today go into Plug Power fuel cells. This should come as no surprise, for the past five years I’ve emphasized over and over again that we’re laser focused on the material handling industry, that’s how we built the sales momentum we see today and the real world experience of the hydrogen fuel cells, but 2016 will be different. It’s time to leverage our expert capability empowering electric vehicles and building hydrogen fueling infrastructure for the broader market, that’s the gas on our growth. Our teams are going to work now to target the right applications and the right solutions for Plug Power. We’re going to move deliberately with the right customers and partners as we are going to leverage working expertise gains not just in the past year, but over the past 18 years. Because it’s clear no one powers the world like Plug Power. I’d like now to turn the call over to Paul to discuss the third quarter results.

Thank you Andy and good morning everyone. I’ll like to start off by sharing some financial highlights for the third quarter. We ended the quarter with over $31.4 million in revenue representing 58% growth over the third quarter of 2014. This growth stands primarily from the continued commercial traction we are gaining and proliferating our GenKey solution. The third quarter 2015 not only represents sales growth, but equally important to another quarter of continued momentum in orders and build activity preparing for the number of GenKey programs slightly for the balance of the year. Plug recognized revenue associated with 1221 GenDrive units and seven hydrogen installation sites compared to 835 GenDrive units and three hydrogen installations in the third quarter of 2014. This growth is a clear indication, the traction plug continues to make in the market. Total gross margin as a percentage of sales was breakeven for the third quarter of 2015 as compared to the total gross margin loss of 5% in the third quarter of 2014. This operating improvement is indicative of our ongoing progress both in terms of volume and cost-down initiatives. This improvement in performance is despite higher than average product developing cost incurred in the third quarter for every product enhancements being launched over the third and fourth quarter. We recorded approximately $60 million in orders in the third quarter of 2015 and ended the quarter with approximately $234 million in backlog. Our backlog is a combination of units and installations planned for the near term, as well as the service and hydrogen delivery commitments for the next three years. The growth and overall backlog is also indicative of our success in the market. Given the majority of the backlogs associated with long-term revenues that provides the strong base as we focus on delivering on 2015 forecast and beyond, we used $13 million in cash for operating activities for the third quarter of 2015 to fund the ongoing commercial efforts as well as required working capital investment. We ended the quarter with over $115 million in cash, cash equivalents and restricted cash and over a $110 million in working capital. In total, we believe its ample liquidity to support our growth for the balance of 2015 and beyond; and strongly position us to continue strategically investing in the right path to accelerate long-term growth. Breaking out revenue for the third quarter, the company recognized product revenue of $18 million. Overall, this compares to $12.6 million in product revenue in the third quarter of 2014. The third quarter of 2015 results reflects growth and overall volume, but comparatively higher concentration of Class-3 units which impacts the sales mix. In addition, the third quarter of 2015 product revenue includes stationary power sales that were more than doubled to comparable sales in the third quarter of 2014. This also impacts mix. Gross margin for product revenue for the third quarter of 2015 was over $2.8 million positive or 60% of sales as compared to $1.5 million or 12% of revenue in the third quarter of 2014. Volumes certainly contributed the improvement, but equally important has been the company’s continued focus on product design enhancements, supply chain leverage and manufacturing process improvements. All of these streamlining has continued to drive margin enhancement. Service revenues for the third quarter of 2015 were $13.4 million compared to $6.9 million in the third quarter of 2014. This growth stands primarily from the new GenKey solution and sales associated with seven hydrogen installations in the third quarter of 2015 compared to three hydrogen installations in the third quarter of 2014. The growth also stems from the growing number of GenCare service contracts and fuel delivery agreements both associated with the success of the GenKey offering. Gross margin for service revenues in the third quarter of 2015 was negative in the amount of $2.8 million or negative 21% of revenue as compared with negative gross margin of $2.3 million or negative 33% of revenue in the third quarter of 2014. The margin rate improvement on service revenue stems primarily from the tremendous improvements in our installed GenDrive base and cost to support them. The company continues to make great strides in product design and resource leverage, the key drivers that will enable our service business to achieve our longer-term margin profiles. Research and development cost for the third quarter of 2015 were $4.1 million as compared to $1.6 million in the third quarter of 2014. The incremental investments are commensurate with the company’s growth, including our investments associated with our ongoing stack development as well as increased investment in productizing our hydrogen infrastructure platform and improving the offering designs. SG&A and amortization expense for the third quarter of 2015 was $8.2 million as compared to $5.6 million in the third quarter of 2014. The majority of the incremental costs as associated with tremendous sales growth and investments and required resources to support and drive future growth, like the cost associated with the HyPulsion acquisition. Excluding the change in fair value of common stock warrants of $2.2 million, the net loss on the HyPulsion acquisition transaction activity of $0.1 million and acquisition and startup cost associated with completing the HyPulsion transaction of $0.9 million, adjusted net loss for the third quarter of 2015 was $11.4 million as compared to the comparable adjusted net operating loss for the third quarter of 2014 of $7.5 million. Turning briefly to our view on the full year of 2015, our confidence continues to build on the projections we previously shared a total revenue of 2015 exceeding a $100 million. Consistent with our January 2015 stated goals, we believe we will recognize revenue for over 3300 GenDrive units and over 15 new hydrogen infrastructure site in 2015, as compared to over 2600 GenDrive units and 10 hydrogen infrastructure sites in 2014. As we previously forecasted, we saw a sequential ramp in the third quarter and we anticipate this trend continuing to the balance of the year. In terms of total administration expenses as we previously shared we believe we approached the required critical mass level and will only need to invest incrementally to support continued growth. Therefore, we see tremendous leverage opportunity in our 2015 forecast and we envision we will leverage this even further as we move into 2016. In regards to margin expectations, we are seeing and still anticipate sequential improvement throughout the year and cross all product and service businesses. Overall, gross margin and EBITDA margin rates are moving in the right direction. In the fourth quarter of 2015, we still anticipate we’ll exceed 25% gross margin on our GenDrive units driven from increased volume leverage, supply-chain cost-downs and product design improvements. In regards to overall service margins, we still foresee substantial improvements which will stem for many factors growth and hydrogen infrastructure a continue positive blending in the run rate of the newer more reliable GenDrive unit designs and our continued significant progress in addressing up time issues of installed fleet. As we move into the final quarter of 2015, we look forward to continue building on our strong platform and sharing with you our continued success. We believe we are making the right market and product investments to not only achieve our 2015 objectives, but equally important to set the stage for another successful year in 2016 and beyond. We’ll now open up the line for questions.

Thank you. We will now be conducting a question and answer session. [Operator Instructions] our first question comes from Eric Stine with Craig-Hallum, please proceed with your question, your line is live.

Hi, Andy and Paul.

Hi, Eric, how are you?

Fine. So, you guys you laid up the mix on the GenDrive gross margins, but could you just clarify again I don’t know if I missed it, but maybe some other onetime items that meant that was down sequentially and then if you could just talk about kind of the confidence that you have in that or what you see in sequential improvement in fourth quarter, is it fully transitioning to the low powered stacks or any details that would be helpful?

Sure, Eric, this is Andy. First, the difference between the second, third quarter is purely mix, our cost structure for GenDrive remain the same. We’re about to see a dramatic change that we’re here in the fourth quarter. You’ve mentioned the air-cooled stack from Plug Power, but it is actually a bit more than that. Because, we’ve actually revamped and simplified that product line not surprising as we gained more and more experience like any offering and we’re still early on the learning curve. We’re about to take another dramatic - make another dramatic improvement in our Class-2 or Class-3 units lot of that driven by using the Plug Power stack. Additionally, we have less impact in the second quarter we’re, in the fourth quarter here we’re also introducing a newer version of our Class-2 product again leveraging the new Plug Power stack and the impact would be bit less because we’ll be shipping a smaller percentage for the overall units with that stack, but well positions us in 2016. So, and we say we’re confident about the 25% as I mentioned in the call we’ve already manufactured 454 units this quarter and many of them went out the Plug Power stacks.

Got it and you’re seeing those types of margins.

You got it.

Okay. Thanks for that. Then maybe just on bookings just wonder maybe to some context I know you’re reiterating that you think you’ll be over $200 million in bookings, but I mean, you’re now at a $166 million. So, I mean, is it fair to say that you expected to be well over that number or you looking at the term maybe as a little bit of a lumpiness and deceleration in 4Q on your backlog?

We’ve chopped the numbers for the year, Eric, and haven’t changed them, could be a little lumpiness, but we’re stating publicly that will be $200 million which will be $34 million in bookings and I think that $200 million number is one that I think investors should use.

Okay. Then last thing, just you mentioned the new customer and I know you’ll give more details in a few weeks, but I mean, anything you can share there just in terms of size maybe, how we can compare with some of the customers you currently have or anyway that we can think about what that potentially is?

That’s a good question. So, one of the customers has somewhere around 30 distribution centers globally either directly managed or indirectly managed and the other one has fewer distribution centers with some very, very large centers with over a 1000 forklift trucks. And I hope to be able to share much more soon with everybody.

Okay. That’s it for me. Thanks.

Our next question comes from Matt Koranda with ROTH Capital Partners.

Good morning, Andy and Paul. Thanks for taking my questions.

Good morning, Matt.

Good morning.

So, just wanted to clarify. I did jump on the call little late, so sorry if I missed this in the prepared remarks, but how many of the 396 units that you guys had shipped in prior periods were recognized during the quarter?

All of them.

All of them, okay.

The ones that were shipped in second quarter, you were saying?

Yes, yes, okay.

Yes, they roll into fourth - the third quarter, yes.

Got it. Okay. And then, on a go-forward basis it does sound like we’re going to see less of a lag here. Could you just comment on sort of the implications of the financing developments that you guys have made, and are we going to see any more lag between unit shipped and recognized or is it all going to kind of coincide together now, going forward?

They coincide together.

Yes, that’s definitely narrow and be - which more coincide - run together.

Okay. Got it. And then, in terms of the - the Q4 implied guidance here, I mean, you guys are reiterating your full-year guidance for revenues. I think that implies about $35 million in revenue in Q4. Could you talk about maybe the split between product and service revenues and what are the implications for how many GenDrive units we can expect in the fourth quarter?

So, Paul, you want to take? I’ll take a crack, and Paul, unless you got some exact numbers there. Why don’t you take a crack?

Well, I think in terms of the units, I think it’s going to be relatively proportionate in term of the - as you go out. So we don’t see a big disparity in that regard, in terms of the third quarter, mix I guess I would say.

So let me kind of elaborate just a little bit more. We’ll - I would ratio everything, Matt, so if we did 31 this quarter it probably would be, if you took each of our lines and did 35 over 31 times the revenue value, you’ll be pretty close.

Okay. All right, got it, I can do that. And then, just - sorry, go ahead, Andy.

This will be probably a little less by that ratio just because it’s kind of just grows about 10% per quarter, but it gets you - that will get you in the right range.

Okay. And then, the implication I think from the release, you guys said that there were about six GenFuel stations in progress. Do you expect to recognize all six of those during Q4?

I would say at least five of them, Matt.

Okay. So that implies roughly five sites.

My COO is in the room shaking his head in agreement. So…

Okay. Got it and that implies about five sites delivered during Q4, is that fair to say?

Absolutely.

Or are we looking at additional sites as well?

No, I think that’s fair to say.

Okay. Got it. And then, just looking a little further out, I know you guys probably aren’t going to want to provide too much commentary in 2016 just yet, so given that we’re still in 2015. $234 million in backlog, a lot of that is long-term service revenue. Could you just talk about what portion of that $234 million is in products that could be delivered in 2016 and the visibility you have into 2016?

Matt, so when we think about 2016, first let me say this. In January, we are going to have an update call we mentioned during the prepared portion of the script. And during that update call we’ll give an update for 2015, as well as our projections for 2016. I think that a good deal of our rollouts and I’ll do it in terms of rollouts. I think a good 60% to 70% of the rollouts are well-established and we know what’s going on.

Okay. Got it. And then, last one, I mean, with the ITC potentially expiring beyond the end of 2016, what are the implications for 2016, specifically I guess, do you expect to see a pull in of revenue during 2016. And then, how would - what would the cadence of revenue look like if the ITC were to expire in 2017 and beyond?

That’s a real good question. And, we’ve - I think that we’re certainly keeping a close watch on what’s going on in Washington. What we’ve been planning and operating the business as if the ITC is going to go away. We have a clear financial roadmap which we shared with our board through 2017, 2018 and beyond. In many ways we kind of take a step back, because we’re so far in the learning curve. The ITC going away could be an advantage versus competition, because we’ve learned and shipped so many units and driven our cost down. That being said, we’re not attempting to overdrive customers to deploy in 2016, because Plug is going to be in the same place delivering good units and growing rapidly in 2017 and 2018. We think the ITC being around will help and continue to accelerate this market. So we’re a strong supporter of continuation. So I’m not giving you a direct answer, Matt. As far as - I’ll give you this direct answer. Our plans for 2016 will not include acceleration due to expiration of the tax credit. And two, the company has really defined clear plans. I have shared them with many of our customers about what happens post 2016. And we feel we’ll be in a strong position, especially those who were earlier on the learning curve, in case it does go away.

Got it. That’s helpful. One more if I could, in your remarks, I think Andy you’d mentioned some dramatic improvements in the Class-4 units, beyond just the stack that you guys are introducing your own internal stack. Could you just highlight some of the design changes maybe in the Class-3 and then if you could maybe with the Class-2 as well.

Yes, so Class-3 is actually kind of simpler, Matt. In the Class-3, the product was designed originally as more of a - not surprising a very generic product and had every bell and whistle you can imagine in there to make sure that we weren’t surprised in the field. As we gain more and more knowledge of the applications we’ve been able to actually simplify the product. So there’s probably 30% less components by eliminating duplicity between what happens if there’s a high throughput product versus a low for product. And if you have taken a look at - I don’t know when you were here if you had a chance look at it, but it’s actually a much, much simpler product with less components. With the Class-2, there is less - there is less dependence on being liquid cooled. There is much more a dependence on fans and blowers, which again kind of like the original Class-3 product reduction. That simplifying the thermal management systems has dramatic impact of cost across the platform. Look, the next generation after this Class-3 and Class-2 drives and we have roadmaps out through 2017, 2018. We still see opportunities for dramatic simplification, reduction in cost.

Got it. Thanks, Andy. And I’ll jump back in queue here.

Our next question comes from Carter Driscoll with FBR.

Good morning, gentlemen. Thanks for taking my questions. I wanted to get a sense with the hydrogen infrastructure, the growth in installations in terms of new customers versus existing customers driving in the new sites. Just trying to get a sense of that mix as it goes forward and maybe your expectations that change over 2016 without necessarily quantification?

So, Carter, this is Andy again. I will give Paul a chance. And that, I don’t believe we’ve had a customer this year, whether new or old, who hasn’t selected our GenKey solution, who’s starting their installation up. So I don’t expect to hit a 100% every time. But when we start GenKey we expected about acceptance rate of 50%, 60%. It’s more than 90% in this year. I can’t think of one that we haven’t - not used GenKey. So I think that we’re 95% of the new installations we do next year I think, it’s fair to say it will be GenKey and I think it’s because looking mix of these year and nobody cares as much about this market developments is Plug. So, customers want to have one company that controls their service, controls their product, controls the hydrogen infrastructure just to make their activities simpler and it was - we were directed by customers who do this quarter over the last two years and it seems to be the way people want to buy and that’s we expected to continue in 2016 and beyond.

And I’m assuming that really is there any different rate between North America and Europe in terms of the adoption of the power solution?

Yes. I think that’s actually a good question. I think in Europe like we did here in North America we’ll leverage partners who start but likely North America what we found in the long run that being more vertically integrated allows us to better service our customers in the long run as well as provide better quality products and probably just as important more margin dollars to Plug Power eventually.

Obviously, that’s going to filter through the service margin as the scale continues to grow and you get machine [ph] efficiencies as well, is that a fair statement if we have our obviously our own assumptions about that mix shift and the percentage of total GenKey growth. I’m assuming that as a pretty healthy effect on the service margins going forward?

Yes. Volume obviously helps great deal and the new units we’re shipping are going to be a big factor as well, but yes I think, that’s a fair assumption as we added new GenKey leverage for hydrogen units it certainly adds a backlog of service and fuel deliveries that are going to be dividend that continue to pay as we leverage our revenues in the next five to six years.

Maybe a couple more from me. You talked about swapping out some of the staffs overtime if I think I heard Andy’s prepared remarks you think that might lead out over the next 16 quarters at kind of a steady dollar impact, is that fair could that be a decelerating impact overtime or is it just kind of a schedule of when you think some of these stacks are going to have their early failure rates?

I think Carter, I think what we saw in this last quarter was an indication, but there is a good deal of analysis going on internally. Now, that we know how far we can push the life of the stacks out in the field, the liquid cool. I think, that how that plays out during the next six to eight quarters I think, we’ll be in a much better position during the January update call that provide more specific numbers, but I don’t expect to be accelerating.

Okay. And then just following up on the previous question in terms of the ITC, do you see the introduction once you get all the Is dotted and Ts crossed of the financing arm, is that something that might help mitigate the loss of the ITC in terms of bringing down the cost capital and making a more attractive solution, because it’s be our balance sheet for number of your customers? I mean, was that one of the ideas behind introducing the financing was to get ahead of this exploration of the ITC was is it more of just kind of a straightforward, it’s easier for us to sell if we can have a cheaper solution?

I’ll answer your question yes and yes. So, I see the assets we believe that there is multiple paths that the company will take if the ITC goes away. It’s a combination of the leasing programs and the value of the assets in long-term. It is combination of GenDrive products where we see continual cost reductions and continual improvements, because we really believe we still have room to go and I think the third area that we see is that there may be some opportunities on the pricing side of the equation.

Fair enough. That’s all I had at this time. Thanks for your time.

Okay.

[Operator Instructions] Our next question comes from Jeff Osborne with Cowen and Company.

Yes, good morning. Just a couple of questions on my end, I wondering, Paul, if you can talk about the services loss of $2.8 million. I think you called out in the prepared that the replacing of the stacks was about $1 million and you expect to run that million per quarter run-rate for the next six to eight quarters, as Carter was asking. But can you just talk about what the other $1.8 million was coming from and what you’re doing to address that.

Yes, so, Andy had actually talked about the stack. That’s one component of the overall equation. But the service revenue is a combination of our hydrogen installations, our fuel deliveries and servicing of the units in those sites. So I’d say, - Andy also talked about the hydrogen infrastructure being really kind of a product that we’re focusing on with cost down. It’s a relatively new product for us. For any of you, who have followed us, know that last year was the first year we really started selling that infrastructure. So as we continue to deliver and build on that, both in terms of volume, design improvements, as well as just supply chain levered with volume, is going to kind of enable us to drive those margins down. And we’re pretty confident we’re going to get those margins in the same projector as we’ve seen with GenDrives. And on the fuel, today, it’s the resale agreement so we have the big gas companies. But as we go forward and Andy’s talked about, we’ve looked a lot of different hydrogen strategies where we think there’s plenty of opportunity there to continue kind of leveraging more margin out of that business stream as well.

Got it. And then, Andy, on the Texas wins that you announced with Walmart. Clearly, Praxair has a facility in Texas. I was wondering, A, are you using Praxair for those facilities given the location advantage that you have. And then, B, I would have thought, now that you’re four, five years into a relationship with Walmart that we might start seeing more framework agreements to go over multiple sites at one time. And I think Walmart has close to a dozen sites in Texas. Is that something that’s being considered or are you just focused on kind of one-off still?

Okay. So, Jeff, we do have a framework agreement with Walmart, which was signed in February of 2014 if I’m getting my years right. And in that framework agreement, for additional sites all that’s executed is a one-page agreement with Walmart. We sign, they sign, we move on. We have a clear plan actually where all sites having been identified through next calendar year, where we’re going to go, where we’re going to deploy. In the call I mentioned at least 10 sites. Those are planning sites. And now, four months, five months prior to - with the start of the site, we receive a signed addendum. We’re off the races, but I can tell you, I know every site that we plan to do through next September. And we could be adding more on for the remainder of the year.

And just given your geographic dispersion of them, they seem to be concentrated in clusters. Is Texas the next cluster then?

Yes, Texas and - many people have founded and figured it out. Florida is the next cluster after that.

Got it. And then, can you just touch on - Andy in past calls you talked about acquisitions in the in the fueling strategy in Electrolyzers or whatnot. Where do you stand on looking at the M&A pipeline? And then, related to that question, just assuming you’re using cash for foreign acquisition, if you chose to do so, can you just touch on what the GenFund terms are. Are there any minimum cash balances or debt covenants? There just - I didn’t see a 10 - sorry, an 8-K about the closing of that. Clearly, there were some stuff on the Internet about it. But any specifics around the terms would be helpful.

I’ll let Paul answer that portion. But, let me talk about acquisitions. John Cococcia spends a good deal of time looking opportunities, primarily focused on hydrogen generation and infrastructure. I think we continue to look at - scan the universe to see if there is someone who could add to our capabilities and not drain our cash. I think there are a number of discussions that we continue to have all the time. Nothing, I’ll say there’s nothing that’s been signed or agreed to. But if we could find someone who could dramatically increase our capability, not hurt our bottom line and help grow the market faster, and there may be some people like that out there, we would welcome the opportunity to consider bringing them into the Plug Power fold. I’ll let Paul talk a little bit about GenFund, and maybe a little bit more about how we see GenFund evolving.

So today, the way to think about it is - we’ve set the structure up as a platform to be an efficient interface between our customers and sources of capital. So were already - and have been working on making the process to finance our customers’ offerings and solutions that they choose much more efficiently. And so we’ve been building relationships with the capital markets and the banks. And we’ve got that moment already in place. So it’s not necessarily today a capital committed to specifically that structure as much as alliances with institutions to drive much more efficient financings and closings of those process. But as we move forward, quite frankly, that platform enables Plugs to use it in many different strategic ways. And as we continue to kind of leverage different sources of capital to fund that, those initiatives - it will continue to be a fairly broad strategic platform that we can use to do that.

Okay. That makes sense. I thought I had read that one of your capital partners had agreed to finance $9 million a month of transactions starting last month I believe it was through the end of next year. And so you’re just saying there’s no minimum requirement of any equity value or cash value that you need to have on the balance sheet for them to make that capital commitment on their part?

There’s a broker that’s helped us facilitate this structure and they’ve helped reach into financial institutions in the capital market much broader. And they’re helping us do that much more seamless through those institutions. We have had a number of institutions have signed in kind of nonbinding letters of intent to participate to support more efficient processes to enable this private-label captive financing solution to be operate more independently and more seamless with our customers. So that’s really the phase one that we’re under as we speak.

Got it. And then, just last one. Sorry for so many questions. But, Andy, you mentioned the Northern European retailer that you’ll be signing a contract for, is that a trial that you’ve had? I think at your Analyst Day you talked about five to six trials that were underway in Europe several months ago. And IKEA obviously being from Northern Europe would be a good candidate. But can you just touch on what you are seeing from trial conversion from the HyPulsion?

Sure, so this is a customer that we had a trial going on. So that is a - while look at - we have Prelodis, which went from a trial to deployment. This customer will do the same. And I have a third customer which I - we put close in a similar position.

Got it. And then, gross margin profile over time should be similar to the 25% range for Europe as that ramps-up next year?

Yes.

Great to hear. Thank you so much, guys.

Okay. Thanks, Jeff.

Thank you. I would now like to turn the floor back over to Andy Marsh for closing comments.

I appreciate everyone’s time today. And I look forward to providing the updates on our January update call not only for 2015, but for 2016 and beyond. So thank you, everyone. Have a good day.

Thank you. Ladies and gentlemen, this concludes today’s conference. You may disconnect your lines at this time. Thank you all for your participation.