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Executives

Leah Gibson - Investor Relations Manager

Steve Rhoades - President and Chief Executive Officer

John Peacock - Corporate Controller

Analysts

Adam Krop - Ardour Capital

Dale Pfau - Cantor Fitzgerald

Satcon Technology Corp. (SATC) Q1 2009 Earnings Call May 6, 2009 5:00 PM ET

Operator

Good day and welcome everyone to Satcon's First Quarter Fiscal 2009 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 website 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. And now at this time for opening remarks, I would like to turn the conference over to Ms. Gibson. Please go ahead.

Leah Gibson

Thank you, Justin. 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 may be 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 quarterly report on Form 10-Q for the year ended April 04, 2009. These factors are included there for reference.

Once filed with the SEC, copies of the 10-Q 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.

Operator

Ladies and gentlemen we apparently have had some sort of technical issue. We apologize for the inconvenience and ask you please remain on line until we get our speakers reconnected. Until then you will hear music. Thank you.

Leah Gibson

Hello, this is Leah Gibson again. We had some technical difficulties and our line went dead.

Steve Rhoades

Leah, are you ready for me to speak now?

Leah Gibson

Yes.

Steve Rhoades

Thanks Leah and thank you everyone for joining us this afternoon. This is Steve Rhoades.

Let me start our discussion today by providing a brief review of our top line performance in Q1. Then I'll highlight some of the significant events during the quarter before turning the call over to John for the financial review.

Briefly recapping our top line results for the quarter, total sales increased 30% to 14.9 million compared with the period last year. Sales of our renewable energy solutions were relatively flat on a year-over-year basis, which was consistent with our expectations for the quarter.

While global market conditions stressed the overall solar industry, we continued to see strong demand for our utility scale products, such as the PowerGate Plus 500 kilowatt PV inverter which represented more than 60% of our 32 megawatts of renewable sales in the quarter. To date, we have shipped over 300 500 kilowatt units since its introduction to the market in 2005 logging million of kilowatt hours of power production.

We also focus heavily on growing our global operations and international customer base, opening our European headquarters in Prague (ph), expanding our worldwide sales and marketing organization and establishing regional field service teams to support the high demand for our solutions around the world, including emerging markets, such as Eastern Europe, Asia and the Mediterranean.

Of the 30 megawatts of PV and fuel cell inverter solutions shipped worldwide in Q1, approximately 64% of the total represented international orders, an increase from approximately 12% over the fourth quarter last year. This diversification into new markets is a key indicator of demand for Satcon globally.

Recently, we have secured major supply and distribution agreements with some of the world's largest solar industry leaders. This is highlighted by the three-year deal we signed with Ecostream. Under the agreement, Satcon will support Ecostream's commitment to developing sustainable energy systems by providing approximately 330 megawatts of our PowerGate Plus line of PV inverters for their commercial and utility renewable energy projects around the world.

The second significant agreement that we signed was with Survey Digital based at Athens Greece. Under this agreement, Survey Digital will be the preferred reseller of Satcon solutions in Greece, Cyprus, Bulgaria and Macedonia.

We also signed our first distributor agreement in China with Parity Solar, a solar project developer and manufacturer of thin-film PV modules. This partnership will offer Satcon end to end solutions for the large scale commercial and utility solar energy market in China, increasing our sales penetration in Asia.

And I'm very pleased to report that we recently entered into a master supply agreement with one of North America's largest system integrators in the solar market. Although I am not able to provide the integrator's name for competitive reasons, through this two year agreement, we have secured approximately 50% of their North American business.

So despite challenging conditions during Q1, we've continued to build out our commercial and operational foundation for what we expect to be an improved environment for the solar industry in the second half of the year.

We continue to execute on a number of key strategic initiatives, including expanding our global field service organization to accommodate our growing international footprint. We've further strengthened our world class international supply chain capabilities to ensure that our customers receive the industry's shortest product lead times, most efficient global logistic services and the highest quality solutions on the market.

To support long-term growth, we continue to develop new products and service offerings that will further differentiate Satcon solutions portfolio. In March, we introduced Solstice, a new generation platform for renewable energy power conversion that enables fine-grain solar panel, string level power optimization and advanced control capabilities for grid interconnection.

Solstice offers the benefits of both Satcon's industry leading large scale central inverters coupled with the advantages of panel level power performance management. Solstice will provide significantly greater power production in today's standard solar power plant without altering traditional system design technique or adding significant costs. Solstice is in beta testing now and will be generally available in the fall.

We also recently announced Satcon Spectrum, the world's first complete micro grid solution. Spectrum is built on the PowerGate Plus hybrid inverter platform. It utilizes integrated intermittency and provides the advanced control capabilities that utilities require in order to incorporate solar energy as a stable and controllable generation asset.

Satcon Solstice and Spectrum demonstrate our continued focus on innovation and solutions that will enable the large scale integration of renewables into the grid. They are also examples of Satcon's ability to deliver grid connected power electronics for the features and functionality capable of power and tomorrow's (ph) smart grid.

By concentrating our effort on these next generation technologies, we are providing our commercial and utility customers with solutions that will deliver the energy security, reliability, safety, sustainability and cost effectiveness required for large scale solar adoption.

We've made solid progress in our renewable energy solutions business so far, and we have a robust pipeline of opportunities. We will continue to make additional investments in our core business as customers look to Satcon to introduce the next generation of industry leading solutions.

With that, I'll now turn the call over to John Peacock, our Corporate Controller who will review our financial results. John?

John Peacock

Thanks, Steve. Revenues for the first quarter ended April 4, 2009 was 14.9 million, an increase of approximately 31% or 3.5 million over the same period in 2008.

Total revenue of 14.9 consisted of renewable energy product revenue of 9.2 million for the period combined with 4.2 million in legacy frequency converter product revenue and 1.5 million in -- on the research and development revenue.

We saw a slight decline in our renewal energy product revenues of approximately 6% as compared to the same period in 2008 while our funded research and development and legacy frequency converter revenues increased over the same period last year.

For the first quarter, our gross margins increased to 10% compared to 6% for the same period in 2008. The 4.2 million of deferred frequency converter revenue was recognized during the current quarter and had zero gross margin as the amount recognized as revenue equaled the related costs recognized for the period. Without this single item, our gross margins would have been approximately 14% for the period.

After taking the steps necessary to complete this contract and recognizing the revenue on the legacy frequency converters, we have initiated actions to apply for recovery of the cost of programs (ph) on this contract which is in the initial stages at this point.

Going forward, we anticipate improved gross margins as we continue to implement operational and manufacturing efficiencies.

Our operating loss for the quarter was approximately $5.2 million compared with an operating loss of $2.8 million for the same period in 2008. The main drivers for the operating loss during the quarter as compared to 2008 were an increase of approximately 900,000 in research and development related to new product development certification and to a lesser extent engineering staffing, increased non-cash employee stock-based compensation of approximately $600,000 as compared to 2008 and approximately $1.5 million related to general increases in sales and marketing to support our global expansion and the continued growth in our product offerings.

Net loss from continuing operations for the first quarter of 2009 was $10.8 million compared to a loss of $3.4 million in the same period of 2008. During the period, we recorded a $700,000 non-cash charge related to the valuation of our warrant liability. This compares with the non-cash charge of $500,000 that we recorded in the same period of 2008.

In addition, due to the changes in the accounting for derivative instruments under the new EITF 07-05, we had to move warrants previously recorded as equity to liability, and value these at fair value at the end of the period resulting in an additional non-cash charge to operations of $4.7 million. These charges do not reflect any new financing activity and will continue in subsequent periods due to the mark-to-market accounting required under FASB 133.

Net loss attributable to common shareholders for the period was $11.9 million or $0.23 per share.

Turning to the balance sheet, we ended the quarter with approximately $6.8 million in cash, down from 3.2 million at December 31st, 2008. Accounts receivable at the end of the first quarter were approximately $9.4 million, down from our December 31st, 2008 balance of $11.5 million. Accounts receivable at the end of the period does not include any amounts related to the frequency converter revenue recognized during the period as these amounts have been paid to Satcon in prior years.

The overall decrease in the accounts receivable is due to increased efforts on collections and lower sales volume during the period. Our days sales outstanding or DSO was 56 days at the end of the period compared to 57 days at the end of December 31st 2008.

We have not experienced any significant collection issues and continue to work closely with our customers to ensure we collect balances owed to us in these though economic times. Inventory at the end of the quarter was $7.4 million, down from $11.5 million at year end. The decrease in inventory is related to the value of the frequency converter revenue recognized during the period and our continued focus on managing our working capital.

Our backlog which consists of firm fixed purchase orders with our customers was $12 million at the end of the quarter compared to 23 million at the end of 2008.

In addition, this afternoon, we filed a shelf registration statement for up to $25 million in new capital to enable Satcon to be optimistic and flexible on the capital raising process. Once it is declared effective by the SEC and should favorable market conditions present themselves, this shelf registration will put Satcon in a position to take advantage of financing opportunities to fund our future growth plans.

Now back to Steve.

Steve Rhoades

Thanks, John. So in summary, we believe that the most challenging quarter in 2009 is behind us, and we're very encouraged by the future of our renewable energy solutions business.

In addition, we expect to gain future market share as we continue to introduce more leading and innovative product solutions to the global utility scale solar market. Looking ahead, while we continue to see the weak economic environment modestly impact our financial results in the second quarter, we are confident that we'll reach our goal of operating profitability in the second half of 2009. And we expect to achieve modest growth on our top line throughout the year.

With that, I'll ask the operator to open the call for questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) And we'll go first to Adam Krop with Ardour Capital.

Adam Krop - Ardour Capital

Hi, Steve. Hi, John.

Steve Rhoades

Hey Adam, how are you doing?

Adam Krop - Ardour Capital

Just a little bit more color on the backlog if you could. Looks like about a $12 million decline in the quarter versus the previous quarter. I guess, were there any cancellations in the quarter or was it all kind of shipped product?

Steve Rhoades

We had a small number of cancellations. It was not a very significant fraction of that number. A lot of it was just -- we shipped out of backlog inside of the quarter. And it was a relatively slow bookings quarter. We're seeing a pickup now as we're getting into Q2 -- 2Q timeframe for bookings but very slow during the first quarter.

Adam Krop - Ardour Capital

Okay, yeah we noticed that -- obviously 400 megawatts is in the pipeline, is very encouraging. Could you give us a little bit more color as far as when you expect that to kind of move into the backlog status? I mean what are your -- some of your utility customers saying in terms of when they expect the growth to hit? I mean are they looking towards 3Q period when this grand program is slated to begin?

Steve Rhoades

Well, two different things there, the Ecostream supply agreement, that is the bulk of that number that you are talking about is Europe of course mostly. And the teams there in Europe are saying that they're starting to see project finance free up a bit. When does it exactly break? It's hard to see. We got a really strong pipeline of opportunities. And I talk to a lot of executives in the solar industry. People are talking about the second half. I think as we look in Q3 and Q4, we're going to continue to see it get stronger. But it's most projects that have been delayed -- have been delayed for project finance.

And we are starting to hear probably (ph) -- that project finance here is getting a little bit better as we look into the second half of the year.

Adam Krop - Ardour Capital

Okay. Great. And just a little bit more color on the S-3 filed this afternoon. Is it safe to assume that use of proceeds is primarily going to go towards CapEx? As you look into kind of 2010 with ramping growth, is that a safe assumption?

Steve Rhoades

We don't have a near-term -- we don't have a specific plan right now to raise money of the shelf registration. And we'll be opportunistic as we look at it. Or if we do raise funds, it will be to fund growth for the future. That's right what you listed out.

Adam Krop - Ardour Capital

All right. That's all I have for now. I'll jump back in the queue, with some other.

Operator

(Operator Instructions). We'll go next to Dale Pfau with Cantor Fitzgerald.

Dale Pfau - Cantor Fitzgerald

Good afternoon Steve. Can you hear me?

Steve Rhoades

I can, Dale.

Dale Pfau - Cantor Fitzgerald

Great. I missed a little bit of that discussion about the gross margin. Could we go over that again, and how much of that was attributable to this frequency converter product? And how much of that was maybe to -- on the utilization in the factory?

Steve Rhoades

Well, certainly we're down quite a bit on the factory. So gross margins has -- it's got a lot of leverage on the total volume in the factory as you and I have discussed in the past. The frequency converter revenue was equal to costs. So it came across as zero, but this is one of those cases where even though we are public company not everything works on the quarter boundaries, recognizing that revenue -- and the work it took to recognize that revenue was a critical step for us to go back and get cost overruns that are owed to us for that program. And that's money we expect to collect inside of the calendar year.

So it was good work to get done. It was something I inherited when I joined the company. And we're owed quite a bit of money there. So we're in the process of working to get that inside of the year. But certainly the renewables revenue out of the factory was not flat with last year. So we're up in terms of gross margin over where we were last year but obviously not as strong as we were in Q4.

Dale Pfau - Cantor Fitzgerald

Okay. Net, net, how mush was that revenue -- again, I may have missed that number too?

Steve Rhoades

The frequency converter revenue was 4.2 million.

Dale Pfau - Cantor Fitzgerald

4.2 million. Okay, they came across as zero gross margins.

Steve Rhoades

Yeah, exactly. Like we said -- if we took that number out, gross margin for the quarter would have been about 14%.

Dale Pfau - Cantor Fitzgerald

Okay. And not to beat a dead horse, but your trends on order, excuse me, okay. Have you seen the order trends begin to pick up a little bit?

Steve Rhoades

I think that we've seen some pickup and we've also seen that the language out of our customers is more encouraging for the second half of the year. Again we can't predict exactly when it's going to break. But the pipeline for business looks very strong, and we are encouraged by the language we are hearing out of our customers. But it would be very difficult and I'm not going to try to forecast exactly when that's going to turn.

Dale Pfau - Cantor Fitzgerald

Okay. Thanks guys.

Operator

(Operator Instructions) And we'll go to the follow-up to Adam Krop of Ardour Capital.

Adam Krop - Ardour Capital

Just one quick follow-up on the Solstice product. I guess when can we expect revenues to begin to hit the financials from the product? And what type of gross margin profile should we expect from that product going forward?

Steve Rhoades

Well, our expectation is that gross margin will be quite strong for that. But well -- we're going to -- we're targeting numbers in the high 30s to low 40s for that product line. But the timing for that -- for significant revenues is booking -- bookings in the last quarter of the year and starting this year and beginning of next year.

We've got a lot of work to do -- that we're doing right now with interested customers on beta testing. And as we said we'll have general availability on the product in the fall.

Adam Krop - Ardour Capital

Okay. Thanks, Steve.

Steve Rhoades

You bet.

Operator

At this time there appear to be no further questions. I'd like to turn the conference back over to Mr. Rhoades for any additional or closing comments.

Steve Rhoades

All right. Well, thank you everyone. And we look forward speaking with you on our second quarter conference call in 2009. This is the end of today's call.

Operator

Thank you. And that does conclude today's conference call. Thank you for your participation.

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