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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) Q2 2009 Earnings Call August 13, 2009 5:00 PM ET

Operator

Welcome to Satcon's second quarter 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. At this time for opening remarks, I would like to turn the call over to Ms. Gibson.

Leah Gibson

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 July 4, 2009. These factors are included there for reference. Copies of the 10-Q are available from Satcon upon request and are 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 Rhoades

I’ll begin today by providing a brief review of our top line results before highlighting our current operational efforts and product roadmap. Then John will take you through the detailed financials before we turn the call to your questions.

The challenging economic environment continued to adversely affect the commercial solar market and in turn Satcon’s ability to meet our revenue and cost targets for the second quarter. Total sales for the quarter were $9.2 million, down from $13.4 million in the same quarter in 2008. Gross margin was also significantly below our previous performance and well below our targets for 2009. This was caused by several factors, including lower than expected unit volumes partially due to major customers’ burning down inventory as opposed to placing recurring orders as well as costs associated with releasing new solutions, such as Satcon’s Prism, our S-type PowerGate invertors, and the soon to be generally available Solstice.

Also contributing to our lower than expected margins was the costs associated with executing our worldwide manufacturing strategy. Continuing to meet the global demand for our products while our manufacturing solution in China comes on line is costly. While this will quickly lower our profitability breakeven point, it has had a short term impact on our cost structure and margins.

On the positive side, in the first half of 2009, we did see a modest increase in our solar business when measured against the first half of last year. This was primarily driven by our corporate commitment to the utilities scaled renewable energy power conversion market that continues to strengthen our brand equity and global market share in the solar industry.

Although the continued strain on the global market diminished the funds available for large scale commercial and utility solar projects and pushed most renewable energy developments out to the second half of the year, this early year trend significantly bolstered our pipeline into the second half and contributed to the solid upward trend in our backlog. In fact, our bookings in the first 5-1/2 weeks of the current quarter have already topped what we booked in all of Q2.

In addition to a strong global pipeline and increased sales activity, we see positive signs coming from the US and foreign governments accelerating the recovery of the solar market. For instance, the US Department of Energy announced last week that it will make available $30 billion in loan guarantees for advanced renewable energy and electric grid modernization projects. This government-backed program is expected to boost capital that has otherwise been unavailable for renewable projects during the recession.

In addition to the loan guarantee, the DOE is continuing to directly support critical R&D projects focused on creating solutions for the wide-scale adoption of the solar power by utilities. The goal of these programs is to accelerate the penetration of solar PV energy resources onto the national grid, while at the same time modernizing the energy network through the utilization of distributed advanced power electronics. An example of these important programs is the solar energy grid integration system or SEGIS project backed by the DOE and Sandia National Laboratories.

For the second year in a row, Satcon has been granted a significant award out of the SEGIS program. We’re honored by the DOE’s selection of Satcon as a key partner in the development of utility ready renewable energy technology. We plan to focus the investment of these grant funds toward the ongoing development of next generation solar PV solutions which will provide utilities with the ability to effectively manage and control their cellular power plant assets and support the nation’s power grid.

In executing against our overall strategy to be cash positive exiting the year, we continue to invest I operational enhancements to better serve the global renewable energy market as well as lower our overall cost structure. In June, we announced the opening of our manufacturing plant in China that added 200 megawatts to our total capacity and which is expected to grow to 600 megawatts by mid 2010. This new plant, coupled with a more refined supply chain strategy, will allow us to lower material and overhead costs while increasing quality and meeting the growing demand for our solutions around the world.

While the significant slowdown in worldwide demand for commercial solar equipment caused the second quarter to come in well below our expectations, we remain very optimistic about the future. We continue to execute on our strategy that will allow us to generate cash on a run rate by the end of this year. Executing this strategy required driving topline growth through the introduction of high-value solutions such as Prism and Solstice for large scale utility market, continuing to develop strategic partnerships with utilities, major system integrators, and panel manufacturers as well as aggressive expanding operations in Asia. We must also complete our established plan of manufacturing and sourcing in low cost regions and tightly control below the line expenses.

Despite the slow start to 2009, we believe that the worst part of the slowdown is behind us, and we’re in a good position to capitalize on our leadership in the solar industry in the coming quarters and be cash positive on a run rate basis by the end of the year. For instance, truly looking at the business from the volume perspective, the company signed more than 168 megawatts of multiyear supply and distribution agreements during the second quarter. That number includes 7 new distributor partners throughout North America, China, and Europe. In the third quarter so far, we have approximately 120 megawatts in agreements, bringing the total number of signed deals year to date to over 400 megawatts as we continue to strengthen our presence in key growth markets around the world.

Included in the Q3 signings are distribution and supply agreements with two major Chinese solar panel manufacturers that total over 100 megawatts on an annual basis. These two new partnerships will ensure a tight sales relationship for us in both North America and the emerging Chinese utilities solar market.

Another key element of our growth focus is on leveraging our industry-leading intellectual property and systems expertise to establish the new standards for quality, performance, and return on investment in the large scale solar industry.

Looking at our sales during the quarter, our 500 KW inverter continued to gain momentum in the market representing more than 44% of the total megawatts of renewable sales shipped by us during the quarter. To date, we have shipped more than 335 of our 500 KW units since its introduction to the market in 2005, representing more than 500 KW units in the field than any other manufacturer. One 1 MW solution is also gaining traction, already representing over 10% of our system sales in the quarter.

To further support out long-term growth, we continue to leverage our industry leading intellectual property and systems expertise to develop new products and service offerings that established the new standards for quality and performance. Recently, we introduced Prism, a fully integrated 1 MW medium voltage optimized for utility scale solar installations. Leveraging our PowerGate Plus PV inverter platform, Prism is a customizable solution that includes factory integrated transformers, switch gear, and electronics. Prism’s single enclosure packaging enables rapid installation through a modular design, dramatically increasing the ease and speed of a typical utility scale solar installation.

The Prism launch met with great response from our customers with 9 MW sold in the first of release. Our dedication to developing industry leading utility scale solutions was also represented by the introduction of our next generation power conversion solution—Solstice. Solstice provides higher total power production with the combination of benefits of both large central and micro-inverters. It optimizes panel level performance management and remote controllability without altering traditional system design or adding significant costs. Solstice is currently in alpha testing at our Boston facility with several of the world’s largest solar panel manufacturers and will be available in North America in the fourth quarter.

We also introduced the company’s S-type PowerGate Plus inverters targeted at the next generation thin film solar panels. Satcon’s S type inverters are optimized to operate at high efficiency over the wider voltage range, making them the preferred choice for these new panel technologies. All of these next generation product offerings demonstrate our continued focus on innovation and solutions that will enable the large scale integration of renewable energy into the grid.

Although the market very slow in the first half of the year, we believe as the commercial and utilities solar sector rebounds in 2010, Satcon is uniquely positioned to take advantage of the expected high growth of utility scale solar projects. In June, on the strength of our market position and our successful strategic and operational performance in 2008, we were able to raise $23 million from the public market. This infusion of capital strengthens our balance sheet and provides the cash required to execute our plan and effectively manage the company to profitability.

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

John Peacock

Revenue for the second quarter ended July 4, 2009, was $9.2 million, a decrease of approximately 31% or $4.2 million over the same period in 2008. For the six months ended July 4, 2009, revenue was $24.1 million, a decrease of approximately 3% or $671,000 over the same period in 2008. Total revenue for the second quarter of 2009 consisted of renewal energy product revenues of $7.3 million for the period, combined with $300,000 in industrial power supply product revenue and $1.6 million in funded research and developed revenue.

Total revenue for the 6-month period ended July 4, 2009, consisted of renewal energy product revenue of $16.5 million combined with $300,000 in industrial power supply product revenue, $4.2 million in legacy product revenues, and $3.1 million in funded research and development revenues during the period.

For the second quarter of 2009, our gross margins were essentially zero compared with 11.4% for the same period in 2008. The overall decrease in gross margins was due to a decrease in production volumes, costs associated with executing our worldwide manufacturing strategy, and additional costs associated with new product introductions during the period. Going forward, we anticipate improved gross margins as we continue to implement operational and manufacturing efficiencies.

For the sixth months ended July 4, 2009, gross margin was approximately 6% compared with 9% of the same period in 2008. The decrease in our gross margin for the 6-month period ended July 4, 2009, was for the same reasons previously mentioned.

Our operating loss for the quarter was approximately $7 million compared with an operating loss of $5.1 million for the same period in 2008. The main drivers for the operating loss during the quarter were lower margins on our product revenues, an increase of $1.1 million in research and development related to new product development, certification, and engineering staffing.

Operating loss during the second quarter of 2009 was also offset by $600,000 in restructuring charges taken in 2008 as compared to the same period in 2009 and lower selling, general, and administrative costs of approximately $100,000.

Our operating loss for the six months ended July 4, 2009, was approximately $12.1 million compared with an operating loss of $7.8 million for the same period in 2008. The main drivers for the operating loss during the period as compared to 2008 was due to the reasons previously mentioned in addition to increased non-cash employee stock-based compensation of approximately $600,000 during the period and $1.5 million related to general increases in sales and marketing to support our global expansion and continued growth in our product offerings.

Net loss from continuing operations for the second quarter of 2009 was $5.8 million, compared to a loss of $7.5 million for the same period of 2008. During the period, we recorded $1.8 million non-cash gain related to valuation of our warrant liabilities. This compares to a non-cash charge of $2.4 million that we recorded in the same period of 2008.

In addition, during the second quarter, we modified certain provisions of our Series C preferred stock warrants resulting in our ability to reclassify these warrants to equity from warrant liability. We will no longer be required to mark these warrants to market in future periods. In addition to the capital raised mentioned by Steve, this further straightens our balance sheet.

Net loss from continuing operations for the six months ended July 4, 2009, with $16.6 million compared with the loss of $10.4 million in the same period of 2008. Year to date, we recorded a $3.6 million non-cash charge related to the valuation of our warrant liability. This compares to the non-cash charge of $2.9 million in 2008.

Now turning to the balance sheet, in June, we successfully completed a public sale of 17.9 million shares of common stock resulting in approximately $21.5 million in cash, net of underwriters’ fees and transaction cost. As we stated last quarter when we filed out self-registration statement, we will use this capital to fund our future growth plans.

We ended the quarter with approximately $22.9 million in cash, up approximately $12.9 million from our balance at December 31, 2008. Accounts receivable at the end of the second quarter were approximately $8.6 million, down from $11.5 million at December 31, 2008. The overall decrease in accounts receivable was due to increased efforts on collections and lower sales volume during the period.

Our days sales outstanding or DSO was 76 days at the end of the period compared to 57 days at December 31, 2008. The increase in our DSO is due to our extending payment terms to a few large international customers for sales in the first quarter of 2009. We have not experienced any significant collection issues and continue to work closely with our customers to ensure we collect balances owed to us through these tough economic times.

Inventory at quarter end was $6.7 million, down from $11.5 million at year end. The decrease in inventory was related to the value of the frequency converter revenue recognized during the first quarter and our continued focus effort on managing our working capital.

Our backlog which consists of firm fixed purchase orders with our customers currently is $16 million as compared to $12 million at the end of the first quarter of 2009. With that summary, I will turn this call back over to Steve.

Steve Rhoades

Despite a challenging economy in the first half of the year, Satcon’s total value proposition remains strong. We continue to execute against our strategy to reduce expenses, to move to a low-cost manufacturing and supply chain solution while introducing industry-leading next generation solution with the commercial and utility solar market. As the market recovers, demand for Satcon’s solutions remains strong and our global market share continues to grow. With bookings up significantly in the first half of Q3 and our backlog growing steadily, we believe that while the second half will remain challenging under the current economic climate, we will still meet our goal of cash positive on a run rate at year end, and with that I’ll take questions.

Question-and-Answer Session

Operator

We’ll now be conducting a question and answer session. (Operator Instructions). Our first question comes from the line of Dale Pfau with Cantor Fitzgerald.

Dale Pfau – Cantor Fitzgerald

How is Q3 shaping up to be from a revenue perspective and maybe you can tell us how that’s breaking out in terms of products, the 500 KW or the 1 MW, that you expect to be shipping in Q3?

Steve Rhoades

We’re not going to give revenue guidance because we said backlog is up, but we are not going to give revenue guidance for the quarter. What we are seeing as we look at the first half of year is that our higher power solutions that are dominating our sales in terms of both the megawatt shift and in terms of the revenue, that was true in the first half, and I expect that to continue as we look in the second half of the year.

Dale Pfau – Cantor Fitzgerald

You said that your bookings in the first five and a half weeks or so of Q3 were greater than your bookings for all of Q2. Is that correct?

Steve Rhoades

That’s right, and we currently sit at about $16 million in backlog total for the company.

Dale Pfau – Cantor Fitzgerald

Is that currently or is that with backlog at the end of Q2?

Steve Rhoades

That’s the current backlog.

Dale Pfau – Cantor Fitzgerald

What was the backlog at the end of the quarter?

Steve Rhoades

$9.9 million.

Dale Pfau – Cantor Fitzgerald

Could you talk a little about the competitive landscape, any pricing pressure out there Steve?

Steve Rhoades

It’s a tough climate, and there is some pricing pressure. As I said before, we haven’t faced the kind of pressure that the panel manufactures have, but we have seen some aggressive deals done. We’re continuing to develop high value solutions, and as I said we are heading toward a rate where we can generate cash and little bit higher revenue number as we role into 2010, but we seen some decrease in ASP.

Dale Pfau – Cantor Fitzgerald

In the quarter, could you tell us where your shipments were on a geographic basis?

Steve Rhoades

Yes, I can. Inside the quarter, it is a little over 80% in North America and not quite 20% international.

Dale Pfau – Cantor Fitzgerald

On your backlog, is that about the same split or is there is a difference?

Steve Rhoades

I don’t have that breakout in front of me.

Dale Pfau – Cantor Fitzgerald

Where are you seeing the strength in your bookings if you have seen a big uptick here in Q3? Where is most of that coming from?

Steve Rhoades

It’s a mix of international and North America. We’re seeing it from both the European region and the US. Most of our shipments in the second quarter, 80% North America, so most of our bookings are also in North America, but we have seen increasing strength in Europe as well.

Dale Pfau – Cantor Fitzgerald

The projects that you’re seeing that are coming in, are they in the 1 to 10 megawatt category or some of them, are we seeing any of the really big projects move forward?

Steve Rhoades

We haven’t seen a lot of the multi-tens of megawatt projects move forward, and we have seen a mix of projects up to 1 megawatt and projects between 1 and 10. There is a lot of talk about big deals out there, and we’re involved in a lot of them ourselves, but we haven’t seen any of the really big deals close during Q2 or even at the beginning of Q3. Your characterization is right. It’s the stuff under 10 megawatt that’s getting funded, and we’re seeing deals.

Dale Pfau – Cantor Fitzgerald

Are you seeing any revenues yet out of China? Your China facility is great. The deals with the Chinese panel manufacturers are great. What are you anticipating over there? We’re certainly hearing a lot of buzz about the Chinese stimulus. Tell us how you’re thinking about that, whether you’re looking for projects next year, what were your thoughts there?

Steve Rhoades

I think it’s going to be an exciting market. I think like most of the solar markets, it’s going to take time for it to get large and real, but we feel that we’re very well positioned. We have manufacturing both in the US and in Asia right now, and we are developing solid partnerships in China. I think it’s going to be an interesting market as we roll into next year. There is not a lot of deals closing right now, but I do think it’s going to develop well as we look into next year.

Operator

(Operator Instructions). The next question comes from the line of Adam Krop with Ardour Capital.

Adam Krop - Ardour Capital

It sounds like you missed internal projections on the revenue line, and it certainly missed our projections as well. Could you comment whether or not you missed internal projections due to cancellations or was it more pushouts of orders? Can you just comment on that?

Steve Rhoades

Just delay. We started to see orders pick up at the end of May, and order volume has continued to trend well since the end of May, but it took a while for it to get restarted. We just hit a really nasty dip in the solar industry here at the beginning of the year, and it’s taken a while to work through the system.

Adam Krop - Ardour Capital

And then the inventory days were up, that 76-79 number, should we be looking for that as a run rate going forward or do you see that ticking back down towards the 50 range in the near term?

John Peacock

That was the DSO number—days sales outstanding?

Adam Krop - Ardour Capital

Yes.

John Peacock

We would anticipate it that it would start ticking down.

Steve Rhoades

We gave terms for a couple of deals in the quarter, but it’s not something where we’re seeing a lot of, so I think we’ll see that. We’re not having any collection issues Adam.

I do want to point out, maybe it’s not so clear with the capital raise, but the team here has been very aggressive on working capital management. We did a good job of managing receivables. We did a great job of bring down inventories, so the actual cash burn inside of the quarter net of the capital raise was only about $3.2 million, so I think we have done an creditable job on working capital management.

Adam Krop - Ardour Capital

I was hoping we could talk a little about the deal with Ecostream. Obviously, that business was acquired. Can you talk about that contract a little bit? Have you been making any deliveries?

Steve Rhoades

We have taken orders to get that contract. They did get picked up, and we’re continuing to work with the new people there. We have taken bookings against that contract, so we still think that’s going to be a valuable partnership or relationship for us in Europe going forward. I think they have scaled back their plans a bit, but I think it’s still going to be a very valuable partnership for us.

Adam Krop - Ardour Capital

Just as you look at both the European market and the Chinese market, can you just talk about any changes in the product architecture that you might need to address to get into those markets or any licensing issues that you need to address to get into those markets?

Steve Rhoades

That’s an interesting question. One of the big expenses we had inside of the quarter was doing all the testing and certification that we needed on our PowerGate lines for all of the different European markets, and it was a significant expense, one that we’re largely through, we’re almost completed on that, but it did take quite a bit of effort and spending for us for testing and certification for our standard lines to bring them into the different European countries, so that is an issue for us as a company going forward as we develop products, we have to develop both UL versions, CE versions, and then there are specific testing requirements in some countries, and it’s something we’re planning for as we look forward on our new products.

Operator

There are no further questions at this time. I would like to turn the floor back to Mr. Rhoades for any closing comments.

Steve Rhoades

Thank you, everyone, and we’ll look forward to speaking to you again on our third quarter conference call.

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Source: Satcon Technology Corp. Q2 2009 Earnings Call Transcript
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