Good day, ladies and gentlemen and welcome to the first quarter 2010 Capstone Turbine Corporation earnings conference call. My name is Stacey and I’ll be your conference moderator for today. At this time, all participants are in a listen-only mode and we will be facilitating a question-and-answer session toward the end of the conference. (Operator Instructions)
I would now like to turn the presentation over to your host for today’s call, Ms. Jayme Brooks, Vice President of Finance and Chief Accounting Officer. Please proceed.
Thank you. Good afternoon and welcome to Capstone Turbine Corporation’s conference call for the first quarter ended June 30, 2009. I am Jayme Brooks, your contact for today’s conference call. Capstone files its Quarterly Report on Form 10-Q with the Securities and Exchange Commission today, August 10, 2009. If you do not have access to this document and would like one, please contact Investor Relations via telephone at 818-407-3628 or email email@example.com or you can view all of our public filings on the SEC website at www.sec.gov or on our website at www.capstoneturbine.com.
During the course of this conference call, management may make projections or other forward-looking statements regarding the future events or financial performance of the company within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. These statements relate to, among other things, future financial performance in obtaining profitability, the ability to reduce costs and improve inventory turns and contribution margins.
Reduce working capital requirements, the availability of the line of credit, the success of the C200 and C1000 products, compliance with certain government regulations and increased government awareness of our products, growing market share and market adoption of our products, new applications for our products, revenue growth and increased sales volume, our success in key markets, our ability to enter into new relationships with channel partners and distributors in other third parties, the energy efficiency, reliability, and low cost of ownership of our products, and the expansion of production capacity and manufacturing efficiencies.
These forward-looking statements are subject to numerous assumptions, risks and uncertainties, included in the following. Our expectations about expansion into key markets may not be realized. Certain strategic business initiatives and relationship may not be sustained and may not lead to increased sales. We may not be able to reduce cost, our improve customer satisfaction. The growth in our backlog has significantly exceeded our internal forecast.
In order to meet this increased demand, we may need to raise additional funds to meet our anticipated cash needs for working capital and capital expenditures during the next 12 months. The current recession can make it difficult or impossible for us to raise the necessary funds and for our customers to buy our products. You may not be able to utilize our line of credit, for example as a result affiliate to meet a financial covenant relating to our net loss for the recent completed quarter.
As a result of this, we are not in compliance, and are relying in our discussing with the lender what effect this will have on our future ability to access the line. We may not be able to expand production capacity to meet demand for our products. We may not be able to obtain sufficient materials at reasonable prices. Our release of new products maybe delayed or new products may not perform as we expect.
We may be unable to increase our sales and sustain our increase or profitability in the future. We may not be able to obtain or maintain customer distributor and other relationships that are expected to result in an increase in volume in revenue. We may not be able to comply with all applicable government relations. We may not be able to retain or develop distributors in our targeted markets in which case our sales will not increase as expected.
If we do not effectively implement our sales, marketing service and product enhancement plan, our sales will not grow and therefore, we may not generate the net revenue we anticipate. These are among many factors, which may cause Capstone’s actual results to material differ from the future results predicted or implied in such statement. We’ll refer you to the company’s Form 10-K, Form 10-Q and other recent filings with the Securities and Exchange Commission for description of these and other risk factors.
Because of these risks and uncertainties, Capstone cautions you not to place undue reliance on these statements, which speak only as of today. We undertake no obligation and specifically disclaim any obligation to release any revisions to any forward-looking statements to reflect events or circumstances after the date of this conference call or to reflect the occurrence of unanticipated events.
I will now turn the call over to Darren Jamison, our President and CEO.
Thank you, Jayme. Good afternoon and welcome everyone to Capstone’s first quarter fiscal 2010 earnings conference call. With me today are Ed Reich, our Executive Vice President and Chief Financial Officer; and Mark Gilbreth, our Executive Vice President Operations and Chief Technology Officer.
Today I’ll start the call with a review of our first quarter fiscal 2010, and then Ed will review the specific financial results. Ed will then turn the call back over to me, and I’ll discuss our progress towards our strategic objective of positive cash flow. I however, will not be reviewing specific market developments in our key market segments, although I’ll cover market developments during our upcoming Annual Meeting of Stockholders to be held on August 27.
The presentation from the Annual Meeting we made available on our website for those who are unable to attend in-person. This year’s Annual Meeting of Stockholders will be held at Capstone World Headquarters in Chatsworth, California and we’ll showcase our new C200 product, new C1000 product, C30 rental units and a C30 powered hybrid bus from DesignLine.
As I look at the results for the Q1, I’m pleased with the strong revenue of $13.7 million compared to Q1 ‘09 of $7.5 million, and Q1 ‘08 of $5.6 million. As shown in slide one, Capstone continues to demonstrate a strong revenue growth over the prior year’s quarter. This is indicative our growing market share and market adoption of our new clean and energy efficient C200 and C1000 products. It goes without saying that these revenue results are impressive against the backdrop of the global recession.
Also impressive is slide number two that shows, despite the increased revenue and poor economic conditions, we experienced only a minor reduction in our overall product backlog from 72 megawatts at March 31, to 67.4 megawatts at June 30, 2009. This large backlog is not only impressive in this market; it reflects the markets acceptance of our new products.
This large backlog is critical, as we continue to ramp our C200 production line from three C200 equivalents per week in the first quarter of fiscal 2010 to now, four C200 equivalents per week in the second quarter of fiscal 2010 and beyond. This production ramp is shown in slide three and illustrates how the company is successfully executing its stair-step launch strategy.
Capstone I think committed to growing the C200 and C1000 product lines in a responsible and orderly fashion using this stair step production ramp philosophy intended to achieve the highest quality, efficiently manufacture product with decreasing material costs. It also allow the company to validate and optimize our product design based on actual field experience, from fleet leading units commissioned early in the production ramp process. These units today have an excess of 3,000 real world operating hours.
We recently announced that we finished the scheduled UL testing for the C200 product. The company believes we are very close to receiving our formal UL listing, enabling us to begin shipping product here in North America. Also during the quarter, we received the final payment from UTC and formally closed out what was a very successful C200 development and commercialization program. This program was accomplished on schedule, as it relates to the successful product launch and the program R&D spend came in under budget.
You can see the impact of the final UTC payments and program closeout, totaling a $700,000 R&D expense reduction for the quarter. For the first quarter, Capstone’s R&D expenses dropped from over $2 million in Q4 to approximately $800,000 in the first quarter. In addition, we substantially lowered selling and G&A expenses during the quarter, as part of our cost reduction plan to be discussed further.
At this point, I’d like to turn the call over to ED, to review the more specific financial results for the quarter. Ed.
Thanks, Darren. Good afternoon everyone. I’d like to provide you with our results for the first quarter of fiscal 2010 ended June 30, 2009. Revenue for the first quarter ended June 30, 2009 was $13.7 million, an increase of 83% from the $7.5 million reported in the same period last year.
Capstone shipped 80 units in the first quarter of fiscal quarter 2010, compared to 89 in the same period last year. The average revenue per unit increased in the first quarter of fiscal 2010 to $100,000 per unit compared to 56,000 per unit for the first quarter of fiscal 2009.
The gross loss for the first quarter was approximately $2.8 million or 21% of revenue compared to $1.3 million or 17% of revenue from the same period last year. The increase in gross loss reflects increased manufacturing costs related to the product launch in C200 and C1000 series systems along with decreased sales of C60 series systems resulting in a lower margin product mix, which was offset by improved warranty expense. R&D expenses were $800,000 during the first quarter, a decrease of $1.2 million or 60% from the same period last year.
R&D expenses decreased as a result of lower spending for consulting supplies, labor costs and facilities expense, offset by reduced UTC Power Corporation funding benefits for the cost sharing program. The program was completed during June 2009. SG&A expenses were $6.2 million, a decrease of $0.5 million or 8% from the same period last year.
Net decrease in SG&A expenses was comprised of a decrease in travel, labor and marketing, offset by an increase from the reversal of a loss contingency that was booked in the first quarter of fiscal 2009 and an increase in professional services compared to the same period last year. We recorded a non-cash charge of $5.2 million to operations for the change in the fair value and warrant liability during the first quarter of fiscal 2010.
Our net loss was $15.3 million for the first quarter of fiscal 2010, an increase of $5.4 million from the $9.8 million from the same period last year. The increase net loss, as I mentioned, was the result of the adoption of the emerging issues tax force issue 07-5 determining whether an instrument or embedded feature is indexed to a entities own stock, which affects our accounting for warrants that have certain anti-dilution provisions.
Our loss from operations from the first quarter of fiscal 2010 improved $200,000 or 2% over the prior year comparable quarter as a result of the company’s continued efforts to reduce expenses. Loss per share for the first quarter of 2010 was $0.08. The loss per share for the same period last year was $0.07. As of June 30, 2009, cash and cash equivalents were $25.4 million.
Cash balances were increased $5.9 during the first quarter ended June 30, 2009. We completed a registered offering of our common stock during the first quarter, resulting in net proceeds of approximately $11.2 million. Backlog at the end of the first quarter ended June 30, 2009, was $59.1 million, an increase of 38% from the prior year comparable quarter and a decrease of 4% from March 2009.
Now let me turn the call back over to Darren.
Thank you, Ed. Despite some minor reschedules in the quarter, Capstone ended the first quarter with $13.7 million in revenue, which as Ed mentioned is 83% growth over the same quarter last year, and 145% over Q1 two years ago. It’s important to note we’re still not experiencing significant order cancellations, and we are still seeing quarter-over-quarter growth in new project quotation activity and total project pipeline.
I attribute the quotation success and growth to our new C200 and C1000 products continuing to gain market share as we market our efforts in the new products along strong customer support from success of early installation. I believe fiscal 2009 was best described as a Capstone year of growth while I believe 2010 will best be described as Capstone’s year cost reduction, working capital improvement and positive cash flow.
We took significant steps in late fiscal 2009 to right-size our human capital and reduced our professional expense our staff by 41 and eliminated 16 other open positions. This was a difficult decision as was in the face of approximately a 20% reduction of Capstone’s workforce. These reductions were in the face of 40% year-over-year growth in revenue and 120% year-over-year growth in product backlog as of the end of 2009.
Today Capstone has successfully implemented the cost reduction initiative to lower its operating expenses in fiscal 2010. The results of these actions are very much evidence in our first quarter results as our operating expenses dropped to approximately $7 million in Q1. In addition, as discussed previously, we have a detailed plan in place to achieve improved product margins this year and drive towards a 30% overall gross margin by the end of fourth quarter fiscal of 2010.
We intend to achieve this reduction by reducing direct material costs for the C200 and C1000 systems. We began to see C200 product cost improvements late in the first quarter. As previously discussed, our C200 cost improvements will be realized over the remaining quarters of fiscal 2010 as lower cost materials enter the production flow.
Mark will talk about the details of this program. However, I’m very confident in our ability to hit our margin targets, as Capstone has purchase orders in place for the majority of the parts identified or in reduction or firm quotes from qualified vendors. Mark and his team are actively moving through first article and new part qualification processes now, so that we can realize a majority of the cost savings reductions during the balance of this year.
In addition, we have implemented two C200 and C1000 price increases over the past 16 months. These two price increases total 6% increase on the C200 and a 14% increase on the C1000 product. Most of the C200 and C1000 product shipped in Q1 were orders received before the two price increases. As these orders clear the backlog, we’ll begin to shift with product with a benefit of a both the lower materials cost and orders at a higher average selling price, which should enable positive cash flow followed by profitability.
If you look at slide four, it illustrates how management believes it’s Capstone’s clear path to profitability and meeting our short term goal of cash over even in the current fiscal year. As I look at the chart, the most critical drivers to me are revenue growth, operating expense reductions, margin improvement and improving our inventory turns.
I believe that Q1 has proven we are well on our way to increase revenue levels and lower operating expenses. Therefore, the two remaining critical initiatives that must be demonstrated are the C200 and C1000 cost reduction program and improving our overall inventory turns.
I would like to now turn the call over to Mark Gilbreth, Capstone’s Executive Vice President of Operations and Chief Technology Officer, who’s leading the efforts on both of these two critical initiatives. Mark.
Thanks, Darren. As Darren indicated, we are focused on delivering the necessary C200 and C1000 cost reductions and inventory churns to get the company to positive cash flow. Let’s start with inventory turns. We’ve taken steps to increase Capstone’s inventory turns by recently introducing fixed production slots, just in time deliveries, establishing tier one suppliers and using a con-bon production strategy. This production slots enables stable growth in revenue, while maintaining control over inventory levels.
Suppliers are now able to synchronize and level out their business operations to both lower costs and provide just in time deliveries. Many components are moving to tier one supplier, who will manage the supply chain upstream reducing long lead material stock within Capstone’s inventory. Finally, the con-bon strategy provides a double benefit, of notifying suppliers of next material deliveries as well as driving the movement of raw material within Capstone factory into finished goods for delivery against customer sales orders.
As you can see from slide five, the inventory churns are starting to improve as a result of these efforts. Capstone’s inventory turns, which had been running from 1 to 1.5 turns, increased to 2.2 turns in the first quarter. Our plan is to continue to reduce inventory to approximately $18 million by fiscal year end, improving churns to approximately four per year. This plan will drive lower working capital requirements, and turn approximately $9 million of inventory to cash.
I’m pleased with the support of our internal Capstone personnel to make the necessary process changes and our suppliers for their commitment and support to improve our inventory turns. The C200 cost reduction program is well underway. We anticipate the majority of the savings to flow through by the end of the fiscal year. The cost reduction initiative underway is similar to the launch of many new products, and is a process of maturation of the C200 bill of material.
As our product enters the initial production phase, components are produced with initial manufacturing techniques that are capable of meeting rapid design change requirements, but tend to be more costly. Alternate manufacturing techniques, such as, extrusions forgings and castings along with the supporting longer lead time tooling are then put in place to provide parts at a lower cost.
As these processes are implemented, we will move to offshore suppliers to provide parts at even lower costs. This strategy has enabled us to meet time to market requirements, flush out early field issues, manage production tooling investments and ultimately drive costs towards business objectives to achieve product margins modeled to achieve cash flow positive.
Now let me turn the call back over to Darren.
Thank you, Mark. As I reflect on the first quarter of fiscal 2010, I’m very pleased with the continued progress of the company and specifically the following quarterly achievements. The $13.7 million in revenue, that is an 83% year-over-year revenue growth from Q1 ‘09. It’s hard to imagine today, that when I joined Capstone some two and half years ago, the company was coming up with $2.7 million revenue quarter and had only about $5 million in backlog. We’ve come along way in two and a half years.
I am pleased with the successful shipment of 39 C200 equivalents that is more than double last quarters 19 units and three more than our internal plan of 36 or three per week. I’m encountered by the continued growth of our product backlog that is still at 67 megawatts after a strong revenue quarter with 39 C200 units coming out of backlog.
It is encouraging to see the early impact of our operating expense cost reduction plan that delivered a substantial decrease in quarterly operation expenses in Q1. I’m also encouraged by the $2.8 million reduction in inventory and the improvement of inventory turns from 1.5 to 2.2 turns, as Mark and his team implement the new inventory management program.
It is good to see the reduction in finished goods inventory, as we work to better match customer requirements and order ship dates in the current challenging economic and financial environment. Again, fiscal 2010 is the year management’s primary focus will almost entirely be on C200 and C1000 product cost reduction, working capital improvements, including lower inventory and increased inventory turns and a focus on finally generating positive cash flow for the end of the fiscal year.
At this point, I’d like to open the call up to questions, operator.
(Operator Instructions) Your first question comes from Sanjay Shrestha - Lazard Capital.
Sanjay Shrestha - Lazard Capital
A couple quick questions; number one, you guys went through this numbers, but I couldn’t jot all of them down. Can you guys talk about the pricing increases you guys were able to implement during the quarter?
The price increases, Sanjay we had two of them over the last 16 months. So as we sold C200 and C1000 product, we were able to fold in two price increase, 6% on the C200, 14% on the C1000. I think that’s even more impressive in light of the fact the dollar strengthened quite a bit over that period of time. So for our European customers, they saw a very large increase in the C200 and C1000 product and it’s still managed to get great market penetration.
Sanjay Shrestha - Lazard Capital
So you guys also talked about the gross slots related to the higher component cost for your C200. How much will you say, what that impact during the quarter and how should we sort of think about, if there is a way to think about excluding that a normalized gross profit line even at this point in time?
I think the twofold, Sanjay. One we’re shipping product at the original prices before the two price increases. So most of the backlog is burning up now is the older backlog at the older price and then we’re just now seeing kind of the leading edge of Mark’s cost reduction activities.
So you’re going to see over the next few quarters the 30% cost reduction comedown and on the C1000 a 14% higher ASP. So essentially, a C1000 we shipped in Q1 and the C1000 we shipped in Q4 could have a 44% difference in material costs, which is extremely, obviously.
Sanjay Shrestha - Lazard Capital
A few other specific questions, if I may. You guys talked about also the end of the UTC relationship now. The funding ended June of 2009 or at this quarter if you would. So how has that relationship changed in that going forward?
This relationship is influx. I mentioned last quarter that we had not received an order form UTC for a couple quarters. They’ve now finished locating the share comfort group from UTC Power embedded now in the carrier organization. Several meetings during the quarter with senior management and the new team at carrier, we did get an order during the last quarter from carrier for another grocery store chain, not one that we’ve used before tested markets third grocery store chain.
They’re very excited about the product. They had to go through their own passport process and get it into their own carrier division. They’re very focused on the East Coast, the Eastern Seaboard and California as being the first markets they’re going to really focus on.
So, I think you’re going to see in the next couple of quarters going forward, the carrier group, which frankly is probably a better match for our product, because it really is a combined heat and power sale. I think it’s a better fit. Carrier has got some 130 sales organizations in the U.S. alone, not counting internationally.
So, we’re excited. The transition obviously took longer than we had hoped. The big companies don’t move quickly, they moved deliberately. So, we’re excited about the relationship going forward, and I think it will be better than it was in the past, but it’s definitely been painful. UTC has been a top two or three customer to have them disappear for a couple of quarters as they reorganize their house as painful for us, but we seem to weather that storm pretty well.
Sanjay Shrestha - Lazard Capital
Daren, you kind of mentioned that this year is going to be more about cost reduction, sort of getting to that cash flow breakeven and clearly you guys have done a pretty good job with that. So, how should we think about the backlog as we fast forward to few quarters or given the inherent lumpiness on a quarter-by-quarter basis? So, can you talk about that a bit as to how we should be thinking about that?
Well, obviously we’d like as we continue to ramp the C200. We’d like to see revenues continue to build quarter-over-quarter. That being said, backlog should be flat or may be slightly down each quarter, depending on what happens in the market. I think people now realize though, on the C1000, which is the majority of the units we shipped for the quarter, were C1000 is not C200, that’s a completely different market.
We’re bidding jobs a day that are 5 megawatts, 7 megawatts. One job in specific is 5 megawatts with another 25, 5 megawatt opportunity if the first one goes well. So, the megawatt space is huge from a market standpoint and if we get good traction and good customer acceptance in that market, it’s really going to drive the company going forward.
Your next question comes from Eric Stine - Northland Securities.
Eric Stine - Northland Securities
I was just wondering, can you just go in depth a little more on UL certification? I know it sounds like you expect to get that shortly. Maybe your take on what the holdup is and then, also maybe timing on testing for the C1000?
Yeah. I’ll lob that over to Mark. He’s very much involved in that. Obviously, we’d like it to go quicker, but anytime you’re working with certification boards and very complicated products like this, it never goes as fast as you’d like. Unfortunately, we’re not certifying a toaster; the C200 is a very complicated product. So, with that, I’ll let Mark talk about the final certification process and then the C1000.
With the UL certification process, we had already made a public announcement through our press release on the completion of testing, and that is one of the primary components to achieving our UL certification. The next two steps that we need to work through is all of the supply components into the product also need to be UL certified, and while we choose UL certified components primarily to shorten that process, there’s always one or two components that need to go through that exercise.
The final step is our manufacturing processes. We anticipate UL goes through a series of checklists to ensure that the product has been produced to those specifications. So, they will be coming in here. We expect sometime in August to approve our manufacturing processes. At that time or shortly thereafter, we should receive formal certification from UL.
As far as the C10000 product, since the C10000 product is combined of five C200 units, it’s really critical, before we step into that process full board that we close out the C200 exercise, as much of the testing. We are anticipating will be by similarity to the C200 product.
So, now that that’s coming to a close. We’re working through that test plan with UL right now and as we get that solidified; we’ll have better visibility on the schedule.
Eric Stine - Northland Securities
Can you comment about the CARB certification some of the stuff we’re doing with the C30 and the C200 as far as certification on addition standpoint?
With the C200, we’ve already completed the testing for both the natural gas and the digester here in house, using our third party. That process then, as we wait for lab results to come back and then we have a formal submission that we put to CARB.
CARB by law has a 90 day administrative cycle that they are allowed to and typically go through before they provide us formal certification. So we’re already completed the testing on two of those and hope to receive a certification later this year, calendar year.
We’re also with our C30 product we’ve been working with CARB to get that CARB 2010 compliant to the Heavy Duty Diesel Engine standard. We have passed the testing here within our own facility and we are now that we formalize the test plan that we’ll be going through with CARB, we will go out to third party agency and moving also later this year towards getting formal certification on CARB 2010 for our hybrid electric vehicle applications, operating on liquid fuel, diesel.
Eric Stine - Northland Securities
Can you just give us a sense, I mean, do you think that the UL certification, that may be something that’s limiting orders in some markets?
We can’t sell in most parts of the U.S. without the UL listings. We’re very complicated to sell without it. So, we know, you have some orders in backlog. Like Office Power has at least four or five C1000s in backlog waiting for C1000 UL certification. We’ve got some other C200 sold in New York. So there’s no doubt that our C200 and C10000 sales are all going outside the U.S. today. Our shipments are, and the most of the sales really going into backlog or waiting for this.
So definitely getting that UL listing will help enable more business in the U.S. and North American markets as well as help us empty some more of the backlog and turn that to revenues, so very critical. Mark talked about CARB certification, is very critical. We see the California market as being one of the primary markets for it as well as the leader worldwide when it comes to emissions. The C30, there’s a lot of pent-up bust demand waiting for the EPA and CARB 2010 certification that were as Mark mentioned, we’re working on.
So all these certifications are crucial to us to be the industry leader in emissions to prove it and then lead some more orders going forward.
Eric Stine - Northland Securities
Could we just turn to backlog quick? I missed it just in the prepared statements. Is it still kind of the same situation? No cancellations on a backlog or very minimal. Can you just kind of go into detail on that?
No significant cancellations in backlog. Backlog was down slightly, because of the ramp in the C200. If you look at the numbers, we actually shipped mostly C1000s for the quarter a Russian distributor pulled forward a couple of C1000 deliveries and pushed back some C65 deliveries, which was fine. We accommodated that also we don’t want to miss any order dates and keep our best distributors happy. It did hurt us from a mix standpoint.
Obviously, the margins on our C65 products are much better than today’s margins on the C1000. So that impacted the gross margin for the quarter, but I’m happy that we’re able to shuffle the deck, keep them happy and continue to get the C1000s out there. So we now have several C1000s in Russia, and we’ve got three in Australia being commissioned. We’ve them in Spain, we got them in France, the Dominican Republic, and some of the oil and gas applications as well.
So we’re really getting a good, kind of seeding the environment out there with great sites that are getting good reports back; and again, it’s word of mouth. So, the more customers can go see a C1000 in the field, see a happy customer, in fact I’m proud to announce our first C200 customer, which is a wastewater treatment plant in Italy ordered to second unit.
So I think as you start to see satisfied customers with the product, and more word of mouth you can leverage more sales of the successful installations.
Eric Stine - Northland Securities
Just one last question, and then I’ll jump back in line. Can you just talk a little bit about, kind of what you see as far as the stimulus I know you mentioned some pretty large megawatt opportunities, one of those are stimulus related, or separate from that?
The megawatt opportunity, I was talking about was an oil and gas opportunity, the 5 megawatt natural gas drilling operation. They’re being squeezed for emissions and liability issues.
So, we’re looking at selling 5 megawatt plant, if that were to work, there are 24 more drill rigs that would need 5 megawatt each, so this is an oil and gas customer that previously used the C200 or C1000 products, so very important that if we do get that order, it performs well that’s not stimulus related.
We’ve seen probably two or three dozen identified stimulus shovel-ready type projects, our first one in Pennsylvania was installed recently and got some press; definitely, we’re going to see business from that, though we’re kind of still on the front leading edge I think everybody is frustrated at the pace of which that is being spent, but we think this summer, we’re going to see some more stimulus opportunities.
So, not building our based on that, but we think it will improve especially our U.S. business, which is live to our international business.
Eric Stine - Northland Securities
I would assume DesignLine is involved in some possible projects as well.
Yes I am probably this not mentioned you design they maybe the biggest benefactor from the stimulus package. They’re looking at adding or doubling the size of the manufacturing plant in North Carolina, which would build a couple 200 to 300 more buses next year. They’re looking for stimulus help to do that they’re seeing great traction with our product, or their product with our turbine in it.
I mentioned at the upcoming shareholder’s meeting, we’ll have bus here we are going to shareholder meeting in the morning and there have a large sales open house in the afternoon are probably have a doesn’t California trance its here looking at the bus, so getting great opportunities for New York, continuing to light the product Baltimore is getting a products several California properties are ordering the product, and all the reports initially have great.
The biggest issue with design modest been building the manufacturing facility, ramping up production, not that different from what Mark and his team are going through they brought in a new gentleman who was setup the hummer plant from General Motors, now heading the manufacturing operations for DesignLine to get that manufacturing ramp up as fast as possible. So, we’re definitely looking for more orders from DesignLine going forward over the next 18 month, and a lot of stimulus upside with them if they get the right brand or the right support.
Your final question comes from Megan Moreland - Ardour Capital.
Megan Moreland - Ardour Capital
Are you still targeting gross margins of 30% to 40% by year’s end, or has that changed?
No, no change there. The target remains the same.
Yes. I think this quarter was a little bit receiving because we had the high amount of C1000s in the business, but no, we definitely filled our on target to get there by the end of the year by 30%. As I mentioned in the call, it’s not a hope or dream, we got parts identified with cost reductions, specific tied to those parts. In many cases we have appeals in place and are evaluating first article parts and components.
In other cases we have quotes from qualified vendors. I know it sounds frustrating we’re not moving faster, but we can’t take a non-qualified part and put it in the product. We’d be risking our entire reputation and so I mentioned the one oil and gas opportunity of we move quickly and put a non-property better part into that C1000 insulation, risking 24-5 megawatt projects by going too quickly and not properly getting that part.
So, as painstaking as it is we have a process we go through from a quality standpoint. We’re not going to jeopardize that process.
Megan Moreland - Ardour Capital
I recall, at the end of last quarter, you had said about $45 million of the backlog at that time was scheduled to go to the top line over the next 12 months. Can you still expect about that range for the next, 9 months to 12 months.
If you look at the backlog table in the latest queue, it’s shifted this quarter back to 64 megawatts, current, out of the 67. So, you can expect to see some shifting back and forth like that based on changes in customer requirements.
Megan Moreland - Ardour Capital
Yes. As I mentioned before, I think that Eric’s question we’re not seeing order cancellations, but we are still seeing customers move orders around some forward, but more to the right. We’re trying to manage that customer shift date issues and make sure we have very little finished goods.
We did better job this quarter, that they were overselling the airplane making sure that seed fall we take off our finished goods rash it down for the quarter compared to the last two quarters. That will still be a challenge, I think, in this economy.
The only product we have in long term backlog at the end of the quarter is C30s.
At this time I would like to turn the call back over to Mr. Daren Jamison for closing remarks.
Thank you, operator. Again I think this is a very strong quarter for Capstone, very please with the revenue numbers we put up. Obviously it would be a little better if we got to see 30s out of backlog, but actually showed a nice improvement on the C200, C10000s in building the overall revenue growth of the company. Backlog still remains strong and is really one of the key issues for our success going forward.
The operating expenses were tremendous Ed and I are very happy with what the management team has done. Obviously it’s always difficult to have a reduction in force, but I think we took the right actions at the right time as we rolled off the C200 development program, the timing is perfect in what we did. So, really it’s all about inventory turns, working capital and cost reduction and I think we’ve had good programs in place, the teams are dedicated really motivated and very focused.
I’m happy that most of the issues we have are internal to Capstone. We have nobody blame but ourselves to make it happen. We’re working hard to make it happen. So look forward to talking to you again next quarter. If anyone can make it out to the annual shareholders’ stockholder meeting, you’ll see an actual C200, C1000 there you can walk around and tough in feel as well as ride a designed hybrid bus.
So I look forward to seeing anybody who can come out. If not we’ll put the presentation on our Website so that everybody can see the update. Thank you, operator.
We thank you for your participation in today’s conference. This does conclude your presentation. You may now disconnect, and have a great day.
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