6/16/09

Active Control Technologies (ACT.V) Contract Announcement

Earlier today, ACT announced that it has won a $1.4 million net new contract for two underground mines somewhere in the United States. According to management, this contract increases its current backlog, and will not be fully deployed until after its fiscal year-end (July 31). As a result, investors should expect revenue to be recognized during Q1, FY 2010.

Management believes that a small portion of the factored pipeline could turn into additional backlog before the end of its fiscal year, which is modest progress. The Company has clarified the definition of its factored pipeline as "written quotes". Management believes that "written quotes" total more than $20 million in potential contract value. However, it is difficult to understand how much of that total will actually translate into revenue during fiscal 2010.

As expected, the U.S. Federal Government has relaxed some of the guidelines for compliance to the MINER Act, allowing more time for mine operators to select vendors, and to substitute vendors later. As well, MSHA still has to approve the emergency communications and response plans submitted as of yesterday. As a result, investors should expect that a portion of quoted contracts may not be awarded for up to six months from now.

Due to the relaxation of various guidelines for compliance, competition for contracts is likely to intensify over the next few months. Although ACT appears to offer clear competitive differentiation in terms of throughput, breadth of offering, and MSHA certification, it has not yet developed local relationships (which can run generations deep). As a result, even with its technical superiority, investors should expect ACT to offer pricing discounts to win some business. As a result, gross margins may be impacted.

The value of the backlog has been clarified by management. The $6 million value cited earlier includes both contracted deployments, and future indicated deployments by current customers. As a result, prior to today's new contract announcement, the $5.2 million backlog (the company probably recognized approximately $0.8 million of the backlog since it last disclosed) was split approximately 50/50 between current and future indicated deployments. In essence, the current backlog was approximately $2.6 million prior to today. The new $1.4 million contract increases the current backlog to approximately $4.0 million. Without this understanding, expectations for near-term revenue recognition may have been too high.

For a more accurate reflection of near-term performance, investors should measure the current pipeline, and ignore/discount future indications by current clients. Analysts should continue to get clarification from Management on this measurement going forward.

The Company continues to find its footing as it begins to commercialize. The rubber is now hitting the road, and management must prove execution.

Disclosure: I own shares of ACT

1 comment:

  1. On the ACT Bullboard at Stockhouse there appears to be some confusion that the factored backlog represents secured orders. At no time have I ever stated in any report that the $20 million (now $35 million) pipeline was "secured orders". It is a pipeline, not a backlog. The clarification was to help investors better understand what management was using to qualify its factored pipeline. If one were to use traditional strategic selling measurement guidelines, the the probability rate is usually tagged at approximately 50% at the point of quotation. Due to the regulatory uncertainty investors may choose to discount the probability further. Hope that helps.

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