Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

American Superconductor Corporation (NASDAQ:AMSC)

F3Q09 (Qtr End 12/31/08) Earnings Call

February 03, 2009 10:00 AM ET

Executives

Jason Fredette - Director of Investor and Media Relations

Gregory Yurek, Ph.D. - Founder, Chairman, President and Chief Executive Officer

David Henry - Senior Vice President, Chief Financial Officer and Treasurer

Analysts

Carter Shoop - Deutsche Bank

Paul Clegg - Jefferies & Company

Timothy Arcuri - Citigroup

Corey Tobin - William Blair & Company

Walter Nasdeo - Ardour Capital

Michael Carboy - Signal Hill Group LLC

Nick Allen - Morgan Stanley

James Ricchiuti - Needham & Company

Stuart Bush - RBC Capital Markets

Operator

Good day, everyone and welcome to American Superconductor's Third Quarter Conference Call. This call is being recorded. All participants will be in a listen-only mode until we reach the question-and-answer session.

With us on the call this morning are American Superconductor's Founder and CEO, Greg Yurek; Senior Vice President and CFO, David Henry; and Investor Relations Director, Jason Fredette.

For opening remarks, I will turn the call over to Jason Fredette. Please go ahead, sir.

Jason Fredette

Thanks, Cynthia and welcome to the call everyone.

Before we begin, please note that various remarks management may make on this conference call about American Superconductor's future expectations, plans and prospects constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors including those discussed in the Risk Factors section of the company's annual report filed with the SEC on Form 10-K for the fiscal year ended March 31, 2008 and subsequent reports filed with the SEC.

In addition, these forward-looking statements represent the company's expectations only as of today, while American Superconductor anticipates that subsequent events and developments may cause the company's views to change. The company specifically disclaims any obligation to update these forward-looking statements. These forward-looking statements should not be relied upon as representing the company's views as of any subsequent date.

We will be referring to EBITDAS this morning or earnings before interest income, other non-operating expense, incomes taxes, depreciation, amortization, and stock compensation. EBITDAS is a non-GAAP financial metric and a reconciliation of EBITDAS to net loss on a GAAP basis is included in the press release we issued and filed with the SEC this morning on Form 8-K.

We also will be discussing a new non-GAAP net loss metric. A reconciliation for this metric can be found in the Investors section of our website, amsc.com. All of our SEC filings also can be accessed from this section of our website.

Now, I will turn the call over to Greg.

Gregory Yurek, Ph.D.

Thanks, Jason and good morning everyone.

AMSC achieved another quarter of record revenues in Q3 and posted its eighth consecutive quarter of growth. We also increased total backlog sequentially to 602 million over our September 30th backlog of 597 million.

Our two core growth drivers; the Chinese wind power market and U.S. power grid market remained strong through our third fiscal quarter, a trend we expect to continue for the foreseeable future.

Wind continues to be our primary growth engine. However, more than $27 million of our $46 million in third quarter bookings were for our D-VAR Smart Grid solutions. With these new orders, we now have more than $175 million of backlog in hand that we expect to recognize as revenues in fiscal 2009.

The backlog position for both fiscal 2009 and the following two fiscal years, and the strength of our core markets, position us for strong growth in fiscal 2009 and beyond.

We're also in a position to increase revenues again in our fourth quarter, and for the first time achieve GAAP profitability. However, before we continue with our outlook, I'd like to comment more on our third fiscal quarter results.

We encountered some challenges that negatively impacted our gross margin for the third quarter. These challenges included a technical issue in the development of a switching device for our first ever transmission voltage SVC, Static VAR Compensator, a revision in cost to complete estimates on certain wind check turbine development contracts and a technical problem with a vendor supplied component for our PM1000 power converter.

We have addressed each of these items operationally and do not expect a recurrence going forward. In the case of the SVC, we identified a technical solution in Q3 and we expect to implement it this quarter. Once implemented, we believe we will have broadened our SVC product portfolio for both distribution and transmission voltages. We are highly confident in our solution.

Regarding estimates to complete wind turbine development contracts, we have instituted additional steps in our business processes to track estimated cost and identify changes on a timelier basis. The reserve we took for excess inventory at a subcontractor is for a component to be utilized in our PM1000 converters that was coming through our subcontractor from a new second source. The objective was to both have a second source for the component, and to also reduce cost.

The problem was that during production, we determined that the component did not fully meet our requirements after being incorporated into the converters. We immediately stopped the use of that component at our subcontractor, which resulted in excess inventory at the subcontractor.

We maintained production levels of PM1000 converters as required for the third quarter by utilizing our primary source for the component. We are working with our subcontractor to minimize our exposure with respect to this excess and unusable inventory.

We have also instituted additional qualification requirements for all sourced components to help ensure that all of our specifications are fully met when we introduce secondary sources of components. Once again, we have addressed each of these items operationally and we do not expect a recurrence going forward. Dave will speak more about the financial impact of these items later on the call as well as the impact of foreign exchange rates on our Q3 results.

Now let's look forward. We expect to achieve our first GAAP profit in the current fourth fiscal quarter, and we expect to be profitable for full fiscal 2009. The degree of profitability in fiscal 2009 will depend in large part on the growth in revenues we are able to achieve. Of course at the same time, we will continue to do all we can to control our manufacturing cost and operating expenses to optimize profitability.

We are maintaining our forecast to achieve more than $225 million in revenues in fiscal 2009, which as we stated in our Analyst Day in December, is at the top end of the revenue range for GAAP breakeven. Achieving $225 million in revenues next fiscal year requires that we continue to grow our global workforce.

We expect to grow our workforce from 382 employees on April 1st, 2008 to over 500 employees by April 1st, 2009. Current plans call for this total to increase to over 700 employees by April 1st, 2010 with many of those additions coming in China.

While the investments we're making in production scale up and human resources may limit us to a profit of only a few cents per share for full fiscal 2009, they are essential to our long-term growth plans. Notwithstanding this challenge, we expect to be GAAP profitable for the full year 2009, and we expect to be net cash positive in both the current fiscal 2008 and for full fiscal 2009.

Cash is always king, and never more so than in today's global economic climate. We have a strong balance of cash, marketable securities and restricted cash. We have no debt. This provides a strong platform from which to grow. Dave will comment more on the numbers later in this call.

I'd like to now step back and review briefly our broader business vision. At our Analyst Day in December, we spoke to AMSC's three ways of growth; wind power, the power grids and superconductors.

We are riding the wind power wave today, thanks in large part to our business in China. We spent a great deal of time at Analyst Day and on our last conference call discussing market drivers and business conditions in China's wind power sector. As we have discussed, the Chinese government continues to invest aggressively in the wind sector to increase electricity supply, reduce pollution and very importantly today create new jobs.

While we're still waiting the official statistics out of the Chinese Wind Energy Association, our sources in China report that China's installed capacity of wind power likely exceeded 10 gigawatts by a wide margin at the end of Calendar 2008. That is up from about 6 gigawatts installed at the end of 2007, and already surpasses China's official 10 gigawatt objective for 2010.

Our information also shows that nearly 75% of the wind turbines installed in China in 2008 came from domestic manufacturers. Just a couple of years ago, domestic manufacturers had about 40% market share. We've also surveyed our customers in China once again, and confirmed that they are not slowing their growth plans. Certainly, the third quarter order we received from our CSR-ZELRI for 100 sets of core electrical components for the 1.65 megawatt wind turbines supports this trend.

CSR is the second AMSC Windtec customer to enter volume wind turbine production in China. The first of course was Sinovel Wind. While it will be difficult to match Sinovel's level of growth, CSR's order pattern is certainly reminiscent of Sinovel's early scale up.

We first began working with CSR in January 2007, providing them with a license for a 1.65 megawatt doubly fed induction wind turbine. We executed an aggressive timetable with them and managed to get their first prototype up and running within about 10 months, quite a feat in the industry.

As CSR approach commercial production near the end of calendar '07, they started placing orders with us for the proprietary core electrical components that serve as the brains for all the wind turbines designed by AMSC Windtec. Like Sinovel, they were ordering small increments at the outset, 10 and 20 at a time. But in the third quarter, we received our first significant contract from CSR for 100 additional sets of our core electrical components, all of which will be delivered in calendar 2009. This brings the total number of core components ordered by CSR to more than 170 sets, so the scale up is clearly under way. And as we've seen with Sinovel, we would expect CSR orders to continue increasing in magnitude going forward.

Our other Chinese wind turbine customers remain on track to complete their prototypes and enter volume production on schedule. So, the growth forecast for the wind industry in China remains strong.

And beyond China, just yesterday, Hyundai Heavy Industries announced that it plans to complete construction of a new factory in Korea and initiate production in October 2009, of approximately 360 1.65 megawatt wind turbines per year. Hyundai licensed the 1.65 megawatt design from us in October 2008. We remain on track to build and certify their first prototype 1.65 megawatt wind turbine by mid 2009.

In the U.S., the wind industry is expected to continue growing in 2009, although at a slower rate than we saw in 2008, when more than 8 gigawatts of wind power was added domestically. Well, with all the focus of the new administration and the new Congress on wind and the grid, there is good reason to believe the wind industry will recover later in 2009 and continue growing in the years ahead. We'll need to wait and see how this goes in the U.S. We do not have any of this opportunity in our forecast because Washington remains quite uncertain about what it is going to do regarding economic stimuli. Our focus at this time remains on foreign markets.

While we are clearly already starting up the steep slope of the wind growth wave today, the power grid wave is just getting started, and was the real highlight of the third quarter. As I mentioned before, more than 27 million of the 46 million in new orders we received in the third quarter were for our Smart Grid solution.

While many conversations about the Smart Grid center on communications and metering technologies, the actual definition of the Smart Grid is much broader. It encompasses grid infrastructure, the brawn as well as the brains.

U.S. Department of Energy's Modern Grid team recently detailed the seven key characteristics of the Smart Grid. These include optimizing the grid's utilization and efficiency, providing greater power quality, enhancing resiliency against attack and natural disasters and anticipating and responding to system disturbances.

All of our power grid solutions fit this profile. In fact, the Department of Energy has exclusively called out superconductors and flexible AC transmission systems or FACTS devices as fundamental technologies needed for the Smart Grid.

Superconductor cables can increase transmission efficiency and significantly enhance the flow of power under our city streets to meet growing demands for electricity and enable widespread adoption of plug-in hybrid electric vehicles. The same cables, also can automatically suppress power surges and enable resilient power grid that can survive attacks and disasters.

Our FACTS devices, namely, our D-VARs and SVCs interact with the grid on a real time basis to regulate voltage, prevent blackouts and relieve congestion on existing transmission lines. So all of the discussion you're hearing in Washington these days about grid enhancement and Smart Grid deployment is in our sweet spot.

We think the stimulus package presents us with some great near-term opportunities and we're aggressively seeking a share of the money that will be distributed under that plan. But, we look at the stimulus package as upside to our core business for helping power grid operators incorporate smart muscles into their power grid, both here in the U.S. and overseas. None of this is incorporated in our financial model for fiscal 2009.

Our Smart Grid bookings in Q3 also included a couple of turnkey D-VAR orders. As a reminder, the term turnkey applies to deals where we package our proprietary products with other complementary technologies, then handle the installation and ongoing maintenance and support for the customer.

One of our turnkey orders in Q3 was with Basin Electric, one of the largest electric generation and transmission cooperatives in the U.S. We will deploy a D-VAR solution for them near Wright, Wyoming to help Basin maintain transmission, system stability and reliability in the region. This deployment will be completed by the end of calendar 2009.

The second order came from National Grid, one of the world's largest investor-owned energy companies. National Grid manages Long Island Power Authority's electricity network. Given the Long Island's rising population and high peak electricity demand in the summer vacation months, National Grid and LIPA determined they needed a large-scale reactive compensation solution to stabilize voltage, relieve power grid congestion, improve electrical efficiency and prevent blackout.

Our D-VAR was selected after a thorough competitive bidding process, and we'll complete the installation by mid 2010. The systems we've installed for Basin and LIPA were ranked among North America's largest static compensators or STATCOMs and our deployment on Long Island will be our largest installation ever.

Based in large part on the strength of this technology, we believe we will gain further traction in the U.S. Smart Grid market in the quarters to come. But our focus extends well beyond U.S. borders. We are afraid to speak about our international sales in countries like Canada, the UK, Australia where D-VAR has become the de facto standard for connecting wind farms to the power grid.

However, China might well be our biggest power grid opportunity. According to the International Energy Agency, China's power grid will require approximately $1.5 trillion in investments by 2030. So there is a lot of opportunity for AMSC.

We got our first D-VAR order for the Chinese power grid in the third quarter as Beijing-based SNTA, one of China's primary suppliers of reactive compensation product and turnkey power grid solutions ordered four of our 4 megawatt D-VAR systems. SNTA will install the D-VAR systems in a 220 kilowatt substation located in Chifeng that is operated by North East Power Grid, one of China's main power grid operators.

This system will help and safely connect seven wind farms that produce a combined 600 megawatts of power through the local grid. We'll deliver this first D-VAR solution to China in mid-2009, which the Chinese Wind Energy Association is calling a showcase installation of D-VAR technology. We believe success with this installation will lead to additional D-VAR order opportunities in China in the years ahead.

And finally, while our third wave of growth has not yet begun, superconductor technology took a big step forward in the third fiscal quarter as the Navy completed its long awaited full load testing of our superconductor ship propulsion motor. This superconductor milestone follows a series of other recent successes including commissioning of LIPA's Superconductor Transmission Cable System in April, 2008 and successful operation of two other superconductor power cables in commercial U.S. grids over the last couple of years.

We are hearing from customers today that they are not concerned at this stage with the new technology per se. The concern is about the cost of the first commercial installation. That's fairly, fairly standard in the costumer adoption cycle. As we stated at our Analyst Day in December, we believe we're on track to start up the superconductor growth curve in the 2011-2012 timeframe.

The interesting additional catalyst that might just help us along is the inclusion of funds in the pending economic stimulus package for the adoption of Smart Grid technologies. That will help a tremendous amount, and we are in fact aggressively pursuing a number of parallel paths to help finance large scale superconductor projects.

Once again, we have no way of knowing what Washington will do in this arena, so none of this is included in our financial models. Our focus for superconductors remains on booking the first commercial sales over the next few years.

Before we leave our discussion of the superconductor business, I want to emphasize that the time and money we invested in our superconductor motor development program is also being applied to other rotating machines like superconductor generators for wind turbines.

Wind turbine power ratings have been increasing steadily while the price per megawatt has declined, enabling wind power to achieve economic parity with conventional generation sources in prime wind locations. We believe superconductor technology will enable 10 megawatt plus wind generators that would weigh approximately 120 metric ton, compared with approximately 300 metric tons for conventional direct drive generators with this power rating.

For the past 15 months, we have been working with TECO-Westinghouse Motor Company to develop the technology needed for a generator that would power 10 megawatt plus superconductor wind turbines. Based on our relationships with more than a dozen wind turbine manufacturers around the world, AMSC's leadership in superconductor technology, our experience with superconductor rotating machines and AMSC Windtec's proven commercial wind turbine design capabilities, we are uniquely equipped to commercialize this breakthrough technology. Expect to hear more on this initiative soon.

So, in summary, while AMSC has posted some good results based on the strength of its wind power growth wave, the best is yet to come as we start climbing our Smart Grid growth wave now, and as our superconductors growth wave begins kicking in over the next few years. In the meantime, we are looking forward to posting our first GAAP profit in the fourth fiscal quarter and achieving profitability for full fiscal 2009.

Now, I will turn it over to Dave for our financial review. Dave?

David Henry

Thanks, Greg and good morning everyone.

As you heard, our third quarter bookings were good, resulting in a sequential increase in backlog. This is all the more noteworthy given that we did not receive an order from our largest customer, Sinovel. We are building a substantial backlog based on the strength of our wind power and Smart Grid, which we expect to lead to further revenue growth in fiscal 2009.

Our primary focus is now on translating that growth into profits beginning this quarter. Before we get into that, I'll just review our results for Q3. AMSC delivered its eighth consecutive quarter revenue growth, generating 41.3 million in revenue for the third quarter of fiscal 2008 compared with 40.4 million in the second quarter of fiscal 2008 and 32.6 million in the third quarter of fiscal 2007.

The stronger dollar in relation to the euro reduced revenues for the third quarter of fiscal 2008 by approximately 4.4 million when compared to the prior quarter.

In January, we began shipping products for Sinovel Wind under a new $150 million contract that calls for billings to be denominated in Renminbi or RMB. As a result, a significant portion of our revenues and profits will be denominated in RMB, which has been historically more stable versus the U.S. dollar than the euro. As long as this remains the case, volatility in our revenues and profits caused by exchange rate fluctuation should be reduced.

Additionally, our exposure to the euro is lessened. Starting in January, we are now in a position having more of our cost denominated in euro than revenues, which is the opposite of our exposure up to December 31st, 2008. We are of course accounting for this in our hedging strategy going forward.

AMSC Power Systems revenues increased 32% to 38.3 million or about 93% of our total revenue in the third quarter of fiscal 2008 compared to 28.9 million in the third quarter of fiscal 2007. The year-over-year increase was driven primarily by higher wind turbine core electrical component sales, partially offset by lower D-VAR sales and unfavorable foreign exchange impacts.

Our AMSC Superconductor segment generated the remaining 7% of sales. AMSC Superconductor's revenue in the third quarter was 3.1 million, which compares with 3.7 million in the year ago quarter. This decrease is primarily the result of lower revenues for Project HYDRA as well for winding down of the Navy motor testing project after its successful completion.

This was partially offset by higher revenues from the second phase of the LIPA cable project and the Southern California Edison Fault Current Limiter project. We generated approximately 46 million in third quarter bookings and had approximately 602 million in backlog as of December 31st, 2008. That is up significantly from 168 million at the end of calendar 2007, and is up from 597 million as of September 30th, 2008.

Foreign exchange reduced backlog at December 31st, 2008 by approximately 1.5 million compared to September 30th, 2008.

Gross profit for the third quarter was 9.6 million, resulting in a 23.2% gross margin. This compares to a gross margin of 26.5% for the second quarter of fiscal 2008 and 30.9% for the third quarter of fiscal 2007. The year-over-year decline in gross margin was due to several factors that we noted in our press release on January 20th, which Greg described earlier in this call. Let me quantify the effects of these items here.

First, the strengthening of the dollar versus the euro negatively impacted gross margin by approximately 240 basis points year-over-year.

Second, we incurred a charge of approximately 1.1 million to recognize future cost overruns on one of our turnkey SVC projects because of a technical problem in the development of a switching device for the SVC.

A third factor related to AMSC Windtec engineering cost to complete certain long-term wind turbine design contracts. Revenues under these contracts are recognized on a percentage of completion basis. As is the case each quarter, in Q3, we reviewed all of our open wind turbine design contracts. In the course of this review, we determined that the cost to complete some of these projects were higher than we previously estimated, resulting in lower license revenues compared to our previous expectations.

The fourth factor related to excess inventory of a component for our PM1000 power converter at a subcontractor. In the aggregate, the higher cost to complete our SVC and certain wind turbine license contracts and the reserve for potential excess inventory negatively impacted gross margin by approximately 520 basis points compared to the prior year.

Continuing down the P&L statement, R&D expenses for the third quarter were 5.3 million or 13% of revenue. This compares with 4 million or 12% of revenue for the third quarter of fiscal 2007, and 4.7 million or 12% of revenue for the second quarter of fiscal 2008.

SG&A expenses for the third quarter of fiscal 2008 were 9.4 million or 23% of revenue. This compares with 7.7 million or 24% of revenue for the third quarter of fiscal 2007 and 8.8 million or 22% of revenue for the second quarter of fiscal 2008. For the fiscal year-to-date, combined R&D and SG&A expenses are a little under 35% of total revenue.

Given our expected increase in revenues in the fourth fiscal quarter, we continue to expect combined R&D and SG&A expenses as a percent of total revenue for the full fiscal year in the range of 31% to 33%, in line with our forecast at the beginning of the year for lower year-over-year operating expenses as a percent of revenue.

In Q3, we incurred approximately 433,000 in amortization of acquisition-related intangibles, related to our acquisitions of Windtec and PQS. This is down from 1.6 million in the year ago quarter because we have nearly fully amortized a portion of our Windtec intangibles that were tied to purchase backlog. Intangibles amortization should remain roughly flat at 400,000 to 500,000 per quarter in the near-term.

We recorded a restructuring charge of approximately 200,000 for additional cost related to the consolidation of our Massachusetts operations and the closure of our former headquarters facility in Westborough compared to 2.9 million for this program in the year-ago quarter.

Our operating loss was 5.7 million for the third quarter of fiscal 2008. This compares to an operating loss of 6.2 million in the third quarter of fiscal 2007, and 3.8 million in the second quarter of fiscal 2008. The aforementioned reductions to gross margin were the primary cause of this sequential increase in our operating loss.

These same items impacted AMSC Power Systems' operating income for the third quarter. Power Systems generated operating income of 3.2 million or 8% operating margin in the third quarter of fiscal 2008. This compares to Power Systems' operating income of 4.1 million or 14% operating margin for the third quarter of fiscal 2007 and 5.5 million or 15% operating margin for the second quarter of fiscal 2008.

AMSC Superconductors generated an operating loss of 6.3 million in the third quarter of fiscal 2008. This compares with an operating loss of 5.6 million in the third quarter of fiscal 2007. AMSC Superconductors operating loss was 5.9 million in the second quarter of fiscal 2008. The increase in the operating loss year-over-year was primarily due to lower revenues and higher depreciation on a 2G manufacturing equipment.

Please note that stock compensation expense is not allocated to our reporting segments.

Income tax expense increased to 2.3 million from approximately 1.1 million in the year ago quarter due to growth in sales and profits in foreign jurisdictions. International sales were 88% of revenue in the third quarter of fiscal 2008, compared to 74% in the year ago quarter.

For the third quarter of fiscal 2008, we reported a net loss of 7.8 million or $0.18 per share. This compares to a net loss of 7.3 million or $0.18 per share in the third quarter of fiscal 2007 and a net loss of 4.1 million or $0.10 per share for the second quarter of fiscal 2008.

Our net loss includes non-cash pre-tax charges for amortization of acquisition-related intangibles and stock compensation expense. In addition, our year ago net loss included a mark-to-market adjustment on a stock warrant that was exercised in full in August 2008. These charges totaled 2.8 million for the third quarter of fiscal 2008, compared with 4.2 million for the third quarter of fiscal 2007. These charges were 2.3 million for the second quarter of fiscal 2008.

EBITDAS of the non-GAAP metric we've been tracking to gauge our financial progress. We report EBITDAS results each quarter and also provide annual forecast using this metric. These numbers are reconciled to GAAP in tables at the end of our earnings press release.

For the third quarter of fiscal 2008, we reported an EBITDAS loss of 1.3 million. This compares with an EBITDAS loss of 1.9 million for the third quarter of fiscal 2007 and an EBITDAS profit of $1.1 million for the second quarter of fiscal 2008. Because we expect to achieve positive EBITDAS results for full fiscal year 2008 and are beginning to generate positive operating cash flows, we will replace EBITDAS for more typical non-GAAP measure of net income and earnings per share.

This metric will exclude amortization of acquisition-related intangibles, restructuring, stock compensation and related tax effects to better reflect ongoing operations on a cash basis. We'll officially be introducing our non-GAAP net income in fiscal 2009. However, we have posted a table in the Investors section of our website containing a reconciliation for both current and historical non-GAAP net loss to GAAP net loss.

Our non-GAAP net loss for the third quarter of fiscal 2008 was 4.9 million or $0.11 per share. This compares with a non-GAAP net loss of 600,000 or $0.01 per share for the third quarter and 1.4 million or $0.03 per share for the second quarter of fiscal 2008.

Turning to the balance sheet; cash, cash equivalents, marketable securities and restricted cash on December 31st, 2008 are $122.6 million. This is down from $128.9 million on September 30th, and is up from $119.4 million at the end of fiscal 2007. Sequential decrease in cash was primarily driven by our operating loss, cash used for working capital and unfavorable foreign exchange effects.

In the third quarter, our cash flow from operations was a negative 4.4 million. We continue to expect the operating cash flow positive for all of fiscal 2008. And as Greg stated earlier in this call, we expect to be generating cash on an annual basis going forward.

Moving on to our guidance, we are expecting increased revenues for our fourth fiscal quarter. Based on our enhanced visibility into Q4 results, we have narrowed our revenue guidance for full year fiscal 2008 to a range of $178 million to $182 million from a range of $175 million to $185 million. This equates to revenues for the fourth quarter in the range of $56.5 million to $60.5 million, which is expected to enable us to generate our first GAAP profit as a public company.

We expect that AMSC Power Systems' revenues will represent more than 90% of total sales for the year. We continue to expect that approximately 75% of our revenues will come from some international markets, and approximately 75% of our sales will come from the wind energy market for the full year fiscal 2008.

We expect that our net loss will be in the range of $17 million to $18 million or $0.40 to $0.42 per share for the full fiscal year. This equates to a range of breakeven to a profit of $1 million or $0.02 per share for the fourth quarter. We are narrowing our guidance for fiscal 2008 EBITDAS to be in the range of $8 million to $9 million. Our previous guidance was for EBITDAS in the range of $7 million to $10 million.

Our capital expenditures were $5.2 million for the first nine months of fiscal year. We continue to expect capital expenditures in the range of $7 million to $8 million for the full fiscal year.

Looking out to fiscal 2009, we continue to expect that we will generate a GAAP profit of more than $225 million in revenue. The investments we intend to make in fiscal 2009 to help achieve our long-term growth plans may limit us to earnings of a few cents per share for full fiscal 2009. This is in line with the operating model we presented at our Analyst Day in December for GAAP breakeven in the range of $215 million to $225 million in revenue.

To reiterate, we expect to be profitable for full year fiscal 2009. Profitability is our number one priority.

With that, we will open the call to questions. Cynthia, would you please provide the instructions.

Question-and-Answer Session

Operator

Thank you, sir. The question and answer session will be conducted electronically. |(Operator Instructions). We will take our first question from Carter Shoop with Deutsche Bank. Please go ahead.

Carter Shoop - Deutsche Bank

Good morning.

Gregory Yurek, Ph.D.

Good morning.

Carter Shoop - Deutsche Bank

The first question I have is just on the backlog for fiscal '09. Could you provide a breakout between the wind, utility and superconductor divisions?

Gregory Yurek, Ph.D.

Carter, the backlog is now more than $175 million, but we do not in fact provide that segmentation. So the answer I guess is basically, no.

Operator

We will take our next question from Paul Clegg with Jefferies. Please go ahead.

Paul Clegg - Jefferies & Company

Hi, guys. Another question around backlog. You've been getting great traction on D-VAR orders and in fact, we've seen a few of them announced since the beginning of the year. I was wondering if those D-VAR orders are also included in the backlog number you gave, which is dated December 31st.

Gregory Yurek, Ph.D.

Yeah, again those were orders for Q3; so more than $27 million worth of D-VAR orders, all of those were achieved in Q3.

Operator

We will take our next question from Timothy Arcuri with Citi. Please go ahead.

Timothy Arcuri - Citigroup

Thanks. Can you give us what the revenues were from Sinovel? And also wondering, whether in your wind business, you've seen any pricing pressure recently, any of our large customers come back and ask for any pricing concessions from you?

Gregory Yurek, Ph.D.

This is Greg speaking. I will take the second and let Dave speak to the first part of your question. We have seen no pricing pressures whatsoever, so everything is moving at pace. And with respect to Sinovel, we started delivering on schedule this quarter in January, the first of the $450 million order that we received from Sinovel. So again, Tim, no changes, no pricing pressure whatsoever.

David Henry

Hi Tim, this is Dave. The Sinovel was 70% of revenue in the third quarter as we have mentioned earlier. And we expect the D-VAR sales would be at a bit of a low in the third quarter. So that's why Sinovel is higher and they are 67% year-to-date.

Operator

We will take our next question from Corey Tobin with William Blair. Please go ahead.

Corey Tobin - William Blair & Company

What's the gross margin assumption that you have taken here for the fourth quarter of '09 and for your 2010 guidance? Thank you.

David Henry

Yeah. Our gross margin assumption remains what we said at our Analyst Day in December, that we are expecting gross margins in the range of 28% to 30%.

Operator

We will take our next question from Walter Nasdeo with Ardour Capital. Please go ahead.

Walter Nasdeo - Ardour Capital

Thank you. I'd like to jump over to the wire side real quick, if I could and as I ask every quarter, what's your current capacity and how are things going on with the Secure Super Grid here in the city and what is your expectations for total wires deployed in that program?

Gregory Yurek, Ph.D.

So, I guess, Walter, same question same answer. We remain at a total gross capacity of 720,000 meters of 344 superconductors here in our manufacturing operation. The Project HYDRA for Secure Super Grids going in Manhattan is on schedule. Testing of the first prototype cable is on schedule for the spring, and we still expect the deployment of the full cable system in Manhattan in 2010. So I think that answers all the questions.

Operator

We will take our next question from Michael Carboy with Signal Hill. Please go ahead.

Michael Carboy - Signal Hill Group LLC

Hi, good morning, ladies and gentlemen.

Gregory Yurek, Ph.D.

Hi, Mike.

Michael Carboy - Signal Hill Group LLC

Greg, can I get you to elaborate a little bit on what's hot (ph) that we see for interconnection standards coming into the U.S. for a wind farm integration perhaps in the back of the stimulus bill?

Gregory Yurek, Ph.D.

Sorry for that. I was a little bit cynical always about Washington, Michael. But eventually, they will have to be -- there are standards now for grid interconnection of wind farms. What is not included in those standards is dynamic voltage regulation, the dynamic reactive compensation in other words. Will that come into U.S. market? The answer has to be yes, eventually, don't ask me when. I can't make that kind of forecast. And the reason I say eventually yes is because it's happening in all other countries where major amounts of wind going in.

As you know, there are national standards in Australia, New Zealand, Canada, UK and now Spain. Spain is even reaching backwards to existing wind farms not just for new ones, which is different from all the other countries. China is actively engaged in the process of designing, and by the way, we are helping, designing dynamic reactive compensation standards for wind farms. And that D-VAR order that we announced, that came at the end of the third quarter, for the first one going to showcase as China Wind Energy Association calls it, D-VAR to seven wind farms connecting to a substation, is right on the money with respect to dynamic reactive compensation standards. So not there in China yet, but I expect that that will occur also in China with their fast growth.

Operator

And we'll take our next question from Sean Hazlett with Morgan Stanley. Please go ahead.

Nick Allen - Morgan Stanley

Hi, this is actually Nick Allen from Morgan Stanley. You made a number of parallels between the CSR contracts that you recently announced and Sinovel. Are we supposed to infer that that relationship is tracking in a similar magnitude and timing as Sinovel did? So in other words, should we be expecting to see some more of the announcements along those same lines?

Gregory Yurek, Ph.D.

No. I said in the comments, Nick that it's hard to imagine any company going as fast as Sinovel, the ramping in orders, the magnitude of those orders as they kept coming in would be hard to be matched by any other company. I don't think for sure, CSR-ZELRI will match that.

The point that we were trying to make is that it started out with 10, 20, orders for 10 or 20 sets of core electrical components and then it ramps up, but the cumulative now 170 -- and orders for 170 sets of core components from CSR. So they had a ramped curve, is the point here.

But if I draw two curves for Sinovel and CSR, CSR is at a much lower level, but ramping. If you want to look for a big ramp, with Hyundai starting up their new volume production plants in October this year, at least that's what they announced yesterday, that major corporation, Fortune 500 Company, I think is the one that probably can give Sinovel a run for the money down the road, not in fiscal 2009 obviously with their production starting in October 2009.

In all of these cases however, and we said this at Analyst Day, so let me take this opportunity to repeat. As these various companies, whether it's Hyundai or CSR continues to ramp or Xinjiang blow works comes online in late 2009, early 2010, they are going to have to give us orders six to nine months ahead of that schedule so we can meet their needs for the core electrical components. So that should be the pattern going forward.

Sinovel, by the way, as we said at Analyst Day, continues to ramp. We started shipping of the $450 million that they gave us back in June. We expect that to continue on schedule.

Operator

We will take our next question from Jim Ricchiuti with Needham & Company. Please go ahead.

James Ricchiuti - Needham & Company

Thank you. You had a great quarter for D-VAR bookings, and I am just wondering going forward Greg, it tends to be lumpy business. But, what's your sense on certainly in North America, your visibility into potential new business?

Gregory Yurek, Ph.D.

Well, it's quite encouraging to see these major orders for STATCOM, D-VAR STATCOMs coming from Basin and from LIPA in Q3. That built on our previous reference base of D-VAR grid solutions, Smart Grid solutions, that only adds to the reference base, if you will. The need is certainly there. I think we all understand that, and with or without a stimulus package that includes Smart Grid incentives, I expect to see that market to continue to grow. That's why we talk about the power grid or Smart Grid, may be we should call it now, being our second wave of growth.

So we'll see how this goes in this quarter and going forward. You should expect utilities to start slowing down from just stand afar looking at the economy; you might expect utilities to start slowing down in terms of ordering products that enhance the grid. That probably will be true. But we haven't seen that and the discussions with costumers continue the pace.

So we're encouraged and then by the way, the other point about the reference base that continues to build in the U.S., as we're going into China, India now, Turkey, the other three economies that I'd expect will start to grow again substantially once this economic malaise is somewhat behind us. They look back to the U.S., that is reference base and feel very comfortable if not excited about bringing in D-VARs and SVCs into their markets. I think the SNT order we announced at the beginning of this quarter is in fact a great example of that situation.

David Henry

Jim, to clarify or to just add on that, I think that while we are very happy with the D-VAR orders that we received, I don't think that anything about the recent order trends suggest that D-VAR orders will continue to be lumpy when you look at on a quarter-to-quarter-to-quarter basis, but I think the general trend is favorable.

Operator

And we'll take our next question from Stuart Bush with RBC Capital Markets. Please go ahead.

Stuart Bush - RBC Capital Markets

Yes, good morning. A year ago in Q3 '07 you said you expected to have commercial orders for the 344 superconductors in 2009 other than Project HYDRA. Do you still expect that or has the commercialization point then pushed back?

Gregory Yurek, Ph.D.

Stuart, we never said that. What we said is that we're working on commercial order opportunities. There are active discussions which continue today. So that hasn't changed. And what we said is, we'd expect the deployment in Manhattan to be the watershed event that would lead to commercial orders.

However, we also said based on the level of discussions we were having, we wouldn't be surprised to see the first commercial order before or when that cable is deployed in New York. So we never said 2009. So maybe you're thinking end of fiscal 2009 or something which gets us into 2010. But we never said we expected a commercial order in 2010.

Operator

And we'll take a follow-up question from Paul Clegg with Jefferies. Please go ahead.

Paul Clegg - Jefferies & Company

Hi guys, thanks. I just wanted to understand what specifically in the stimulus package could have a direct impact on the near term, say over the next 12 to 18 months and what kind of an impact it has on margins, if it's related to the superconductor side of the business? Is it going to be more of a drag on margins by extending the amount of lower margin business that's in test projects or would it be an overall improvement do you think?

Gregory Yurek, Ph.D.

Yeah. So Paul, I've to always take a deep breath when we get into the discussion because I'm always cynical about Washington and the timing of what's going on and so forth and so on.

So let's assume for the moment and that's just a broad assumption that some stimulus package gets passed. Let's assume that the folks in Washington do some of the right things at least to in fact put monies into construction including building out the power grid in the U.S., putting in connections for renewable energy source, all the wonderful things that we heard about for months. That may or may not end up in a stimulus package. Moment, hope they would, all the good, there is a strong and good rationale for that to happen if any kind of stimulus package goes in place.

So having said that, all the talk in Washington, the talks we've had with the transition, Obama transition came before the new administration went in place, all the talks we are having on Capitol Hill are encouraging at this stage of the game. And with respect to superconductors, very clearly there's a strong interest in using superconducting power cables to move massive amounts of power from remote energy generation site, electricity generation sites to load centers.

The variety of forms in which that can take, there is a tremendous interest in rewiring urban grids with Secure Super Grid type of cable systems and so forth. All of these, and I am not sure this is still the term in vogue in Washington; it changes a lot as you know, but they're supposed to be shovel ready.

So back to your gross margin question, these are shovel ready projects, they're going to be funded by the government, may be a small amount of cost sharing but shovel ready means that somebody is going to pay for a project, the basic we have the commercial terms.

So we will see where it all pans out. It's quite encouraging; we are working very hard at it. We will be crazy not to go after the huge amounts of money that are going to be now made available, but again none of this is modeled into our fiscal 2009 forecast.

Operator

|(Operator Instructions). And we will take a follow-up question from Corey Tobin with William Blair.

Corey Tobin - William Blair & Company

Hi. With respect to the backlog, the $600 million backlog, how much of that do you expect to be recognized in fiscal year end march 2010? Thanks.

Gregory Yurek, Ph.D.

March 2010...

Corey Tobin - William Blair & Company

I'm sorry, 2009, March 2009.

David Henry

I think what you're asking is, I'll try to answer your question in a couple of ways, make sure I covered everything. So first off, for next fiscal year, we are saying, of the $600 million that we have, we have about $175 million towards the $225 million plus on backlog for next fiscal year.

Now if you are asking for how much do we have on backlog for the fourth quarter of this fiscal year, most of that is on backlog. There is a couple of things we need to work on, but it's substantially there on backlog.

Operator

And we will take our next question from Michael Carboy with Signal Hill. Please go ahead.

Michael Carboy - Signal Hill Group LLC

Regarding the balance sheet David, could I get you to elaborate on the increased DSOs and increase in days inventories and then may be perhaps provide a breakdown of raw, finished and WIP on inventory that will be published in the 10-Q?

David Henry

Yeah, I don't know if I have that quite handy on there. I didn't bring my copy of the 10-Q with me. But I can tell you on inventory, most of the increase was driven on raw material because we are buying materials ahead not only for purposes of meeting future demand that we see ahead of us in the coming quarters here, but we're also putting some safety stocks in place to make sure that we don't run out of key components. So, most of the inventory growth in the third quarter was purchases of raw materials.

And then on DSO, we just had -- it wasn't the best of collection quarters particularly in North America. That was the primary driver behind the bit of increase in DSO quarter-on-quarter.

Operator

And we will take our final question from Timothy Arcuri with Citi. Please go ahead.

Timothy Arcuri - Citigroup

Hi. Can you give wind as a percentage of the Power Systems revenue? And relative to Power Systems gross margins, I think they were in the high 30s last quarter. Can you give us a sense of what they were kind of this quarter relative to what they were last quarter?

David Henry

The question on... hopefully, Greg you caught the second question. The first question was on how much of Power Systems revenue relates to wind? Just doing a quick calculation here off, mark my numbers here, I would say it's about in the neighborhood of 85% to 90% of revenue for Power Systems was generated from wind in the third quarter. Then the second question relates to gross margin.

Gregory Yurek, Ph.D.

Gross margins, right.

David Henry

Gross margin related...

Gregory Yurek, Ph.D.

Versus this quarter for Power Systems.

David Henry

Yeah, we don't disclose... if it's on Power Systems, we don't really disclose gross margin in our segments. We disclose the operating margins in our segments. And as I mentioned in my comments, operating margins sequentially were, it was 14% I believe operating margin in the second quarter. That compared to 8% operating margin for Power Systems this quarter.

Operator

And this will conclude today's question-and-answer section. Mr. Yurek, I will turn the conference back over to you for closing comments.

Gregory Yurek, Ph.D.

Thank you for your attention and good questions today. We are very eager to deliver on our quarter profitability this quarter, I should say and also next year. This is exciting time for AMSC and its shareholders. Again, we're eager and we're going to drive and deliver on these objectives. Thank you very much.

Operator

Ladies and gentlemen, this will conclude American Superconductor's third quarter conference call. We thank you for your participation. You may disconnect at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: American Superconductor F3Q09 (Qtr End 12/31/08) Earnings Call Transcript
This Transcript
All Transcripts