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Executives

Steve Rhoades – President and CEO

Leah Gibson – IR Manager

John Peacock – Corporate Controller

Analysts

Dale Pfau – Cantor Fitzgerald

Adam Krop – Ardour Capital

Brad Leclare [ph]

Sam Brookel [ph]

Eugene Riser [ph]

SatCon Technology Corporation (SATC) Q4 2008 Earnings Call Transcript March 5, 2009 5:00 PM ET

Operator

Good day and welcome everyone to SatCon’s fourth quarter fiscal 2008 conference call. Today's call is being recorded. You may listen to the webcast on SatCon’s website located at www.satcon.com. In addition, today's news release is posted on the site for those of you who did not receive it by email.

With us today are SatCon's President and Chief Executive Officer, Mr. Steve Rhoades, Investment Relations Manager, Ms. Leah Gibson, and Corporate Controller, Mr. John Peacock.

At this time for opening remarks, I would like to turn the call over to Ms. Gibson. Please go ahead, ma’am.

Leah Gibson

Thank you, John.

The comments made on this conference call today may include forward-looking statements that involve a number of risks and uncertainties. For this purpose, any statements contained herein that are not statements of historical fact maybe deemed to be forward-looking statements and may include the words believes, anticipates, plans, expects, intends and similar expressions which are intended to identify forward-looking statements. Important factors that could cause actual results to differ materially from those inferred by such forward-looking statements are set forth under the caption Risk Factors in SatCon's annual report on form 10K for the year ended December 31, 2008. These factors are included there for reference. Once filed with the SEC, copies of the 10K will be available from SatCon upon request and will be posted to the company's website at www.satcon.com.

Today's call is being recorded and a webcast replay will be available on the SatCon Investor Relations website. This conference call and associated recordings belong to SatCon and are prepared for the benefit of our investors. No unauthorized recording of this call or preparation of transcript is permitted without the written permission from SatCon management.

I would now like to turn the call over to our President and Chief Executive Officer, Mr. Steve Rhoades. Steve?

Steve Rhoades

Thanks, Leah; and thank you everyone for joining us this afternoon.

Let me start our discussion today talking about the financial highlights from the fourth quarter and full year. Then I will review some of the significant events during the quarter and discuss the recent developments in our core business segment, advanced power conditioning solutions for large commercial and utility scale renewable energy.

We had a very successful fourth quarter and fiscal year on many fronts. Q4 was highlighted by strong sales of $19.3 million. Total year end revenue was $62.5 million, which marks a record year for us. These exceptional results were driven by the continued growth in our global market share of our PowerGate Plus line of photovoltaic and fuel cell renewable energy solutions, which grew 83% over the fourth quarter of 2007 and 106% over the full year of 2007 to $17.4 million and $52.3 million respectively.

We continued to see increased volume in our larger scale units, as the average size of PV and fuel cell systems climbs toward utility scale. Approximately half of SatCon's revenue in 2008 was driven by SatCon’s product portfolio above 100 kilowatts in size, demonstrating the global trend toward larger scale systems. Over the past year, SatCon has successfully delivered our PowerGate Plus solutions to the world's largest rooftop installation in Zaragoza, Spain, North America's largest rooftop installation in Atlantic City, New Jersey and Canada's largest solar farm in Ontario. As large-scale installations continue to grow in both volume and size, our advanced utility grade solutions are well-positioned to deliver the performance and reliability required to ensure stable and secure renewable energy, while delivering maximum power production and profitability for the project owners.

In Q4 2008, we were able to improve gross margin to 24%, up from negative 3% in the same period in 2007 and 18% in Q3 2008. Our ability to continue to improve our gross margin reflects the successful execution of our ongoing supply chain and manufacturing efficiency initiatives. On the bottom line, debt loss attributable to common shareholders for the quarter was $977,000, or negative $0.02 per share compared to the net loss of $3 million in Q3 of 2008 and a net loss of $20 million in the same period last year.

Backlog at year end was approximately $23 million, which is a decrease from approximately $37 million at the end of Q3. The decrease in backlog was due to two factors: First, the solar PV industry historically experiences a slowdown in activity in the winter months, due to the timing of annual budgeting cycles and construction constraints caused by incumbent weather. As in 2008, we expect to see a significant increase in orders for the second and third quarters of 2009, as projects ramp-up and funding becomes more abundant. Secondly, in line with the current macroeconomic environment, the tightening of the global credit market has also affected the solar PV industry. Despite these challenging global financial conditions, we are confident that we will meet our goals of growth and profitability in the second half of 2009.

Now for some business highlights. During 2008, we were able to dramatically improve operational efficiency, introduce new best-in-class products and services, grow revenue and increase our global market share. The company also completed its restructuring goals and successfully aligned all resources behind our leading renewable energy solutions. This included strong growth in Europe and Asia as well as continued market share leadership in North America. A good example of the commercial benefits of our operational improvements is our ability to dramatically decrease cycle time of customer order days until order fulfillment. This has allowed us to offer some of the industry's most aggressive product lead times, providing a significant advantage for SatCon over our competitors’ standard lead times. In addition, it helps our customers be more successful in delivering their projects on time.

Our goal to be the leading innovator in renewable energy solutions was highlighted in 2008 with the introduction of our 1 megawatt PowerGate Plus PV inverter, our 3 megawatt PowerGate Plus fuel-cell inverter, our SatCon Aurora 100 kilowatt hybrid inverter, our PowerGate Plus smart combiner, the launch of our SatCon design services portfolio and the industry's first twenty-year 99% uptime guarantee available on all of our PowerGate Plus PV inverters.

Further supporting our revenue and market share growth, is the recent addition of two major distribution and supply agreements. First is a 180 megawatt deal with Samsung C&T Corporation, which we signed in November. Samsung C&T is Korea's largest engineering construction trading and investment firm and a leading company in the worldwide renewable energy market. This agreement has provided Samsung the rights to market and sell SatCon solutions globally, greatly strengthening our presence overseas, particularly in Asia’s rapidly growing solar market.

The second significant distribution agreement that we have signed during the quarter was with Silicon renewable energy, a North American subsidiary of Spanish-based System Integrators Silicon SA. This 40 megawatt strategic supply agreement provides our reliable and cost effective renewable energy and power solutions to Silicon and its customers for large-scale installations throughout North America and overseas. By partnering with these world-class leaders in the renewable energy space, we have further strengthened our market share at the global large-scale and utility grade PV market, which is expected to see a compound annual growth of nearly 48% by 2015.

As we have mentioned on past calls, there has been an increasing interest from utility companies worldwide to develop utility scale solar installations. This interest is primarily driven by targets set by local governments for utilities to develop a percentage of their power through renewable means and countries such as Spain, Italy, France, Czech Republic, Slovakia, Greece and the US are making large investments to achieve the renewable energy goal. In the US alone, the recent adoption of the American Recovery & Reinvestment Act and its focus on creating a clean energy infrastructure will accelerate large-scale PV projects and future capacity expansion. We believe the focus of the new US administration may offset the recent difficulty in the market has experienced in financing large projects.

In addition, the centerpiece of a President Obama's green stimulus plan is his vision of the Smart Grid, an electricity network that uses information technology to manage generation, distribution, and consumption of energy more flexibly. We see this focus on Smart Grid solutions as a natural entry point for SatCon to capitalize on our technological innovation, thought leadership and rich intellectual property in the distributed renewable energy generation markets.

During the year, SatCon was recognized by the Federal Government as a best-in-class innovator in developing solutions for Smart Grid technology. Through our futures grant, we have been working closely with the Department of Energy to develop Smart Grid inverters that address the technical barriers associated with the large-scale adoption of solar PV by the utilities. These challenges include the requirement from the utilities to have control over the solar installation, limitation standard energy storage mitigating solar intermittency, and the ability to ensure the grid load is always powered, albeit key components of this market. Most recently, SatCon was invited to participate in a deal we initiated landmark project on the island of Lanai, where PV makes up approximately 30% of the grid. In parallel with our CDES work, the Lanai project required many of the same specific advanced command and control features, allowing the local utility to monitor, manage and control the PV installation from a remote location, while maintaining power quality at the point of demand. For this project, we successfully implemented our SatCon Spectrum MicroGrid solution that enabled the local utility to supply stable, high quality renewable power to the island through an integrated network of solar PV and legacy power sources. The SatCon MicroGrid solution Spectrum is built on the proven PowerGate Plus photovoltaic hybrid inverter architecture and is an ideal system for delivering stable renewable power to remote locations or independent entities that require isolation from the grid.

SatCon’s MicroGrid solution is the core building block for the future Smart Grid. In this design, SatCon’s MicroGrids become the Smart Grid framework, enhancing network-wide quality and performance by localizing speed, control and intelligence through renewable power conditions. Our work on this MicroGrid project has been well-received in the North American utility grade PV market and lays the groundwork for our next wave of innovation, as key contributors to supply Smart Grid solutions. It has further positioned SatCon as the technological innovator in the industry, and has highlighted how our leading edge intelligence solutions are responding to utility demand for optimal utilization and efficiency, greater power quality, and enhanced resiliency.

We believe that SatCon's breadth of products and services are unmatched in an industry rapidly advancing toward grid parity and high utility utilization. The solutions and technology that we have and will continue to bring to market provide a highly differentiated product offering that gives us significant competitive advantage. Our utility grade solutions are the most proven large-scale solutions in the marketplace today, as reflected in the over 1 million powers that our high power large-scale investors have connected to the grid. As planned, we started taking orders for our 1 megawatt inverter in the first quarter and we will begin shipping units in Q2. As more utilities look towards solar energy as a major contributor to their current and future renewable energy portfolios and as governments place more importance on energy efficiency through tax credits, ease in tariffs and available portfolio standards, the long-term momentum for our large-scale products continues to grow. For SatCon, the opportunity extends well beyond North America, as demand for infrastructure and good development projects reach worldwide.

Looking more near-term, the challenging economy and recent market developments have affected the timing of solar projects, as financing weakens and programs lose momentum. We are not immune to this environment, and we expect to see this trend reflected in our results in the first half of the year. However, the long-term prospects for the solar industry are very promising. And we still expect 2009 to be a robust year for SatCon.

Our focus for the year continues to be on the four core objectives that I introduced back in August: First, to become a leading worldwide innovator in utility scale renewable energy solutions for the solar industry. Second, to continue to increase our presence overseas, while maintaining leadership position we have established in the US. Third, to expand our business and infrastructure to support our growth and execute our strategic objectives. And finally, to establish an operating model that will enable SatCon to execute profitable growth. Profitability is our number one priority right now and we look forward to posting an operating profit in the second half of the year.

With that, I will turn it over to John Peacock, our Corporate Controller, who will review our financial results. John?

John Peacock

Thanks, Steve. Revenues for the fourth quarter ended December 31, 2008, was $19.3 million, an increase of 58% or $7.1 million over the same period in 2007. For the year ended December 31, 2008, revenue was $62.5 million, an increase of 49% over the same period in 2007. Fueling that growth were increases in our renewable energy product revenue of approximately 82% over the fourth quarter of 2007. In addition, full year 2008 renewable energy product revenue, which includes our PowerGate Plus photovoltaic and fuel cell inverter product lines, increased 106% over the same period in 2007.

Our engineering revenues through our applied technology division were $1.9 million, a decrease of approximately $774,000 over the same period in 2007. The decrease was due to the shipment of a one-time large order during 2007. For the 12 months ended December 31, 2008 our engineering revenue was $8.2 million, a decrease of approximately $770,000 from the same period a year ago.

For the fourth quarter, our gross margins increased to 24% compared to a negative 3% in the same quarter of 2007. For the year ended December 31, 2008, gross margin was 16% compared with 4% in the same period in 2007. Driving the growth in our margins was our continued ability to improve our operational and manufacturing efficiencies. We anticipate this trend to continue into 2009, as we continue to focus on reducing the cost to manufacture our products and enhance our manufacturing capabilities to meet the ongoing demand for our large-scale utility-ready solutions, both domestically and overseas.

Our operating loss for the three months ended December 31, 2008 and was approximately $2 million, compared with an operating loss of $4.2 million in the same period of 2007. The main drivers for this loss in Q4 2008 include restructuring costs of approximately $300,000 associated with recent management, personnel, and other operating changes, a $600,000 increase in research and development investments, increased employee stock-based compensation cost of approximately $1 million, and $2 million related to general increases in sales and marketing to support the continued growth in our product line and our expansion globally. Operating losses for the 12 month period was $13.2 million, compared with an operating loss of $10.3 million in the same period of 2007.

Net loss from continuing operations for the fourth quarter were $636,000 compared with a net loss of $7.8 million in the fourth quarter of 2007. During the quarter, we recorded a $1 million non-cash gain related to the evaluation of our warrant viabilities. This compares with a non-cash charge of $1.8 million that was recorded in 2007 in interest expense associated with the retirement of our outstanding debt in 2007 of approximately $2.1 million.

Net loss from continuing operations for the year ended December 31, 2008 was $12.3 million as compared to a net loss of $16.6 million for the same period in 2007. During the year, we recorded a $265,000 net non-cash gain related to the valuation of our warrant liability. This compares with a non-cash charge of approximately $2.3 million recorded in 2007 in interest expense associated with our outstanding notes and the retirement in 2007 of approximately $3.8 million.

During the fourth quarter of 2008, we recorded net income of $134,000 compared to a net loss of $8 million for the same period in 2007. In addition, during the quarter, we recorded net income from discontinued operations of approximately $800,000 related to the recognition of revenue and cost of some legacy products sold in prior years. Our net loss attributable to common shareholders for the quarter was $977,000 or negative $0.02 per share.

Net loss for the year ended December 31, 2008 was $13.2 million compared with the net loss of $17.8 million for the same period in 2007. During the year, we recorded a net loss from discontinued operations of approximately $1.1 million. Our net loss attributable to common shareholders for the year ended December 31, 2008 was $17.1 million or a negative $0.34 per share.

Now turning to the balance sheet; we burned $500,000 in cash during the fourth quarter, ending the year with approximately $10 million in cash, down slightly from $10.5 million at the end of the third quarter of 2008. At December 31, Accounts Receivable was approximately $11.5 million, up from the third quarter of $9.5 million. Our days sales outstanding was 57 days at the end of the period, up 12 days from the prior quarter. We continue to experience little or no collection issues in 2008 and we will continue to monitor this into 2009, given the current economic landscape.

Inventory balances at the end of 2008 was $11.5 million, down from $16.3 million at the end of the third quarter. This decrease is a direct result of a reduction in inventory related to the recognition of legacy discontinued products of approximately $1.5 million during the period and the company’s focused efforts to manage working capital.

Looking at our credit facility; to date, we have $3 million outstanding on our $10 million line of credit with the bank. At quarter end, we had an additional availability under the line of approximately $4.4 million in addition to the $3 million already drawn. We continue to believe our relationship with our banking partner is strong. Our backlog, which consists of firm fixed purchase orders with our customers, was $23 million at the end of the quarter, a decrease of 38% over backlog of $37 million at the end of the third quarter of 2008.

And let me now turn the call back over to Steve.

Steve Rhoades

Thanks, John. So in summary, we are extremely pleased with our performance in 2008 and the progress we have made toward accomplishing our strategic objectives. During the year, we completely realigned our business strategy to focus on renewable energy solutions for the solar market. We grew our management team, sales and marketing and core operational functions to support our new strategy. We expanded our manufacturing capabilities and implemented cost management efficiencies that have greatly contributed to the success of our business so far. We have built a solid foundation for growth, not only in the US, but overseas with significant contract wins and landmark supply agreements. And we maintained our technological advantage by introducing the world’s first single block 1 megawatt inverter, all the while generating double-digit top line growth and record gross margins.

Looking ahead, we continue to expect revenue growth, both on a year-over-year and a sequential basis. However, we do expect to see some softness to the state of the worldwide economy and typical seasonality. We expect margins will continue to trend favorably as we continue to work toward lowering the costs associated with our operating business. And finally, we continue to guide toward operating profitability in the second half of 2009.

With that, I will ask the operator to open the call for questions. Operator?

Question-and-Answer Session

Operator

(Operator instructions) And our first question is from Dale Pfau, Cantor Fitzgerald.

Dale Pfau – Cantor Fitzgerald

Good afternoon. Congratulations. I like those gross margins and I also liked your cash management. That is superb in these trying times. Couple of quick questions here and help me square in your commentary saying at the end you said you would – you are expecting to see sequential growth quarter over quarter this year?

Steve Rhoades

I should say year over year, Dale.

Dale Pfau – Cantor Fitzgerald

Okay, you are going to see growth year over year in all the quarters of the year, is that correct?

Steve Rhoades

I think so. I think first quarter last year was $11.3 million, yes. So we wouldn't have sequential quarter to quarter, like Q4 to Q1. That is not what we're projecting.

Dale Pfau – Cantor Fitzgerald

I understand that. Okay. And you expect to grow full year over full year, correct?

Steve Rhoades

That is correct.

Dale Pfau – Cantor Fitzgerald

And necessarily that is going to be a little bit on the back half loaded. How much softness are you looking at, I mean we're sitting here with a $23 million backlog.

Steve Rhoades

Order flow at the end of the quarter in Q4 was pretty low and is picking up now, but definitely we saw a dip at the end of the fourth quarter. So we're going to see some softness, talked about that in the past, Q1 is going to be a little more challenging, but we're seeing order volume pickup right now and I like the trend for the rest of the year.

Dale Pfau – Cantor Fitzgerald

And how much of a contribution are you going to get out of the 1 megawatt inverters in the second quarter?

Steve Rhoades

It will be a small component of our revenue. But it is good to see with a new product, we have got a lot of pipeline for the 1 megawatt inverter, it won't be a really large component of our Q2 revenue, but we expect that our 500 kilowatts will remain our largest volume single product line in the company.

Dale Pfau – Cantor Fitzgerald

The gross margin of 24% was considerably higher than I had modeled, which is nice. Are we going to see a little bit of a drop down here in the first quarter and then maybe a rebound through the rest of the year?

Steve Rhoades

I think that would be reasonable to expect. We have to lay off overhead, so yes, we definitely will, that is probably the right way to model.

Dale Pfau – Cantor Fitzgerald

How about the trend on your funded engineering work?

Steve Rhoades

We're not really focused on growing that business significantly, Dale.

Dale Pfau – Cantor Fitzgerald

Okay. And maybe a quick comment about the competitive landscape that you're seeing out there both in North America and internationally?

Steve Rhoades

I think in North America we continue to win more than our share and we like our chances to continue to do that. It has been a really good year for us for growing market share in North America. As we look overseas, we are the developing products with the right compliance, the right certification to compete in the EU, to compete in Korea, to compete in China and we are hiring sales and marketing folks and establishing the partnerships that we're going to need to be successful overseas. So we're definitely looking to grow in the EU and to grow in the background as we look into 2009.

Dale Pfau – Cantor Fitzgerald

Are we going to see any revenues out of Samsung and Silicon in either the first or second quarters?

Steve Rhoades

I'm not going to protect individual companies right now. We're very focused on those agreements; I think they're solid agreements. We have to fire up marketing with each of those groups, but I just can't project individual companies’ revenues.

Dale Pfau – Cantor Fitzgerald

Any 10% customers in the fourth quarter?

Steve Rhoades

Two of them in the fourth quarter, John?

John Peacock

I think in the year there was two.

Steve Rhoades

Two for the year, who were they? We had two, Dale.

Dale Pfau – Cantor Fitzgerald

Okay, great, I will get back in queue. Thanks.

Operator

Our next question is from Adam Krop, Ardour Capital.

Adam Krop – Ardour Capital

Hey, Steve, John. Just a little bit more clarity on the backlog. It is down a $23 million in the quarter. I guess could you give us a little more color as far as were there any cancellations in there than you pushed back from any of your customers?

Steve Rhoades

We're not seeing significant cancellations, Adam. It is really just that as credit tightened up at the back half of the year, we just saw order flow slow, and I guess that is picking up now, but that led to a dip in our backlog.

Adam Krop – Ardour Capital

Okay, thanks, and then –

Steve Rhoades

One thing to remember of course – and you have been following the company for a long time. But – we did adjust the backlog down for the sale of those two units (inaudible) in Q3, so that might look like – your memory might be backlog and it is a – we have that backlog, I am not saying we haven’t, but just to be clear that we did adjust down for those units.

Adam Krop – Ardour Capital

Okay, that helps. Thank you. And as far as your capacity goes, looks like you are at about 400 megawatts on an annual basis now. Can you give us any projections as far as what you're thinking for utilization rate for 2009?

Steve Rhoades

You know I think that we model manufacturing to have burst capacity and I don’t worry so much, we don’t have tremendous amount of our overhead associated with that 100 megawatts, I'm not sure it is a great measure of the company, Adam, because we may well need that 100 megawatt capacity in any given week that we're shipping and our focus is on having the appropriate lead times and being able to respond aggressively when somebody needs something quickly and so we put in additional capacity to be able to handle that. But we have a very flexible workforce in our manufacturing area, we don't keep around a lot of the temporary labor that we can and do employ when we have moments of high use in the factory.

Adam Krop – Ardour Capital

I understand that. I guess I'm just trying to get a little bit more detail or maybe some help on what are shipments going to look like as far as unit growth for 2009? Can you help me out at all there?

Steve Rhoades

Well, we did about 175 megawatts last year and we expect to grow from that year over year. So we're not projecting revenues for the full year but we're definitely projecting order growth for the year in 2008.

Adam Krop – Ardour Capital

Okay. And I guess with the increased competitive landscape that we are seeing out there, especially as we're seeing a lot more announcements from US-based utilities of late, are you seeing any pricing erosion at all with maybe increased competitors coming into the marketplace?

Steve Rhoades

Well, the utilities are customers for us, that is actually good news for us that we are seeing announcements from big utilities. And our average right now for across all the different product lines on sort of a price per lot has been pretty steady for several quarters. We haven't seen much erosion in that. There are not very many players that are at the utility scale and so we actually feel like the move toward larger-scale systems is working to our advantage, not to our detriment right now.

Adam Krop – Ardour Capital

I will agree with that. And then just one last question, maybe for John on the balance sheet. You talked a little bit in the prepared remarks about the inventory down considerably, inventory days were down considerably. How should we be thinking about inventory levels going forward, I mean in the first half, should we expect that to kind of spike up a little bit or are you able to kind of somewhat idle your – the Ontario plant a little bit while you are experiencing maybe some slow demand in the first quarter?

John Peacock

We don't anticipate it on going up at all. In fact it probably should come down as we continue to become more efficient at what we do.

Steve Rhoades

We're being very proactive on management, Adam and I think that we're also focused on increasing turns in the manufacturing environment. I mean, I consider inventory just like you would your home credit cards; you want to be keeping that balance as low as is possible for you to continue to manage them.

Adam Krop – Ardour Capital

Okay, I appreciate it, Steve. Have a good day.

Operator

Our next question comes from Brad Leclare [ph], a private investor.

Brad Leclare

Hello, thanks for taking my call. So I just had a question in regards to the credit line, whether you could disclose who the bank is and how you guys are feeling about your ability to access that credit line moving forwards?

John Peacock

Sure, it is a public document filed last year but it is with Silicon Valley Bank in California. And we have no problem accessing it, we have good relationship with our bank, meet with them regularly and we would have no problem if we needed to draw on it. So no issues so far.

Brad Leclare

Understood. Thank you.

Operator

Our next question is from Sam Brookel [ph], a private investor.

Sam Brookel

Yes, sir. Could you tell me what the percentage of an installation would SatCon be, is there any type of an equation you could give to that?

Steve Rhoades

Yes, it kind of depends on what we offer in a particular installation, if we are just doing, say, the inverter components or whether we have switchgear and transformers, the combiner boxes and design services. So I think that number can range between 10% and 15% of the total capital cost of a plant depending on how much we're going to be offering.

Sam Brookel

Ergo if the government decides to support a $100 billion in solar energy in the future and SatCon has a percentage of that business, that you would say that 10% to 15% that you are a leader in the area, you have got 60% of the market, so you might be 6% of that, which would be very nice I guess of a $100 billion.

Steve Rhoades

Not projecting that particular number right now and that is just the capital cost and the other costs associated with a renewable plant for operation. Yes, I like our chances. You know, the commitment from what we see in the US administration to invest a lot of renewables and the many announcements we're seeing right now from large-scale utilities. Again, we think that plays in our favor in the long term and I think it is a good portion of the market to be in.

Sam Brookel

You are no part of the wooden power, are you, just solar?

Steve Rhoades

Solar and fuel cell would be our primary markets today.

Sam Brookel

Okay. Thank you. Good luck.

Operator

(Operator instructions) And our next question comes from Dale Pfau, Cantor Fitzgerald.

Dale Pfau – Cantor Fitzgerald

Hi, back again. Could you talk a little bit about some of the Smart Grid initiatives and have you done a broad-based rollout of that technology to your customers as yet?

Steve Rhoades

If you look at MicroGrids, which I think is a good example of where we believe we are going to participate, we have a number of significant sized MicroGrid installations in the country, one in California with (inaudible) we have the project we talked about in Lanai we have a 2 megawatt system in Western Colorado. I think there aren't very many people that have the experience that we do with MicroGrid installations and it is – that we think is going to be really core. If you look at a lot of what is talked about with Smart Grids today, it is two ends of the scale. Either big, high-voltage transmission line, 400,000 volt long distance transmission lines or at the other end, people talk about meters for the house. And neither of those is really focused on the stability and reliability and power quality of the grid itself.

When you look at the kinds of things that we can do with very fast response high-bandwidth amplifiers with high penetration of PV into the grid, we can work with utilities to generate the active power to shift voltage, shift frequency to respond to grid events and those are the capabilities that we are building in to the inverters that we are selling today. The project that we have with the DOE, our CDES project, is aimed at the kind of advanced features that inverters are going to have to have for high percentage of penetration of renewables under the grid. So it is an early effort, Dale, but we think it is a really critical one and one that plays well into a lot of what is happening with the conversation around Smart Grid right now.

Dale Pfau – Cantor Fitzgerald

And right now as far as sort of tying into the grid on some of those of those utility scale projects, are you working with the utilities to ensure that tie in and so that there is metering of the grid there so that they are constantly in contact on that?

Steve Rhoades

We have worked with – I kind of get the name of the specific utility wrong so I'm not going to try to lie, but we have worked with the utility that is managing the Lanai grid for instance and we're working closely with them on this installation. I mean this one of the highest penetrations of renewables I know of. The Lanai grid is two 2 megawatt diesel generators and a 1.2 megawatt PV plant. So it is a very, very high level of penetration on Lanai Island; and we put in the control architecture that allows the PV system to be interoperable with that grid. It's kind of a skater controlled by the utility itself, so it is tightly integrated with the operation of the total power system there in Lanai.

Dale Pfau – Cantor Fitzgerald

And can you tell us anything about what is going on particularly here in California, there are a couple of very large programs with PG&E, there is the one that – the (inaudible) you just bought from OptiSolar and the other one with SunPower.

Steve Rhoades

Yes, so far those are pretty early, they have not of the suppliers then, they haven’t broken ground on any of those projects. So we're involved with – we are in those conversations, but we are not announcing anything in terms of us winning in those spaces, because nobody is, that is very early days for those projects.

Dale Pfau – Cantor Fitzgerald

Great. Thank you very much.

Operator

And our next question comes from Eugene Riser [ph], a private investor.

Eugene Riser

Yes, hello. Just a couple of questions. One is, are there any future plans I guess near future plans to build bigger sized inverters, bigger than 1 megawatt? And the second question is, maybe you could update us a little bit on your fuel cell inverters for the fuel-cell markets and how do you see that market growing over the next few years?

Steve Rhoades

Okay. Well we did actually just introduce a 3 megawatt fuel cell inverter, so have built larger systems, we do think that scale is going to matter in this space. We're just starting to take orders and we will have our first shipments of the 1 megawatt in the coming quarter in Q2. We think that actually 1 megawatt is an interesting size for a block for any given installation, because the system sort of geometry limits to how big a central inverter can get, with the wiring that comes from the solar panels and into it. So we think 1 megawatt is actually a really, really powerful size for us and could be the base for block designs for utility scale installations.

But in terms of our capability to produce larger units, we do make 3 megawatt fuel cell inverters, 2.4 megawatt fuel cell inverters and that is a capability that we have and are going to continue to push forward on. As far as the fuel-cell market, it is affected by the project finance that is affected the overall PV market and in the near term, it has got its challenges. But fuel cell stacks are becoming more efficient. They are coming down in cost pretty fast, just like PV and it is a type of energy that utilities like, it is essentially a base-load generation technology, so I think it has got a very good promise in the next few years. It is not as kind of now and ready as solar is. I mean solar is coming down very rapidly in cost and it is going to be I think a very important generation source over the next few years. But we are excited about it and we are going to continue to work and innovate in that area and work with our partners in the fuel cell solar industry.

Eugene Riser

That is great. Just a last question. Are you currently doing anything in Asia or particularly in China?

Steve Rhoades

Yes, we actually – as I mentioned we signed a deal with Samsung Corporation and we are working on marketing and sales efforts with them in Korea. Korea was actually a pretty good market for us last year. We did about 8 megawatts total in Korea in PV and I think a lot of our fuel cell products actually ended up in Korea, even though we didn't sell them in Korea, but I think three of our big units actually ended up in Korea last year. So Korea was a good market for us. And we recently just signed our first Chinese retailer and we're working with them on a project up in Northwest China. So we're very interested in the efforts of China. They actually just announced that they're going to do the largest solar system in the world, up in Northwest China. So it could be a very interesting market for us.

Eugene Riser

Thank you very much and good luck in the future.

Operator

This concludes our question and answer session. At this time, I would like to turn the conference back over to Steve Rhoades for closing comments.

Steve Rhoades

Well, thanks everyone. We look forward to speak with you on our first quarter 2009 conference call. This is going to conclude today's call. Take care.

Operator

This concludes today's conference. We thank you for your participation. Have a nice day.

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Source: SatCon Technology Corporation Q4 2008 Earnings Call Transcript
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