SatCon Technology Corporation Q3 2009 Earnings Call Transcript

Oct.28.09 | About: SatCon Technology (SATCQ)

SatCon Technology Corporation (SATC) Q3 2009 Earnings Call Transcript October 27, 2009 5:00 PM ET

Executives

Leah Gibson – IR Manager

Steve Rhoades – President and CEO

John Peacock – Corporate Controller

Analysts

Dale Pfau – Cantor Fitzgerald

Adam Krop – Ardour Capital Investments

Operator

Good afternoon and welcome to SatCon's third 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 site for those of you who did not receive it by e-mail.

With us today are SatCon's President and Chief Executive Officer, Mr. Steven 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.

Leah Gibson

Thank you, Doug. 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 October 3rd, 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.

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

Steve Rhoades

Thanks, Leah. Good afternoon, everyone. I’m pleased to say that we are hosting today’s call from the first day of Solar Power International Trade Show being held out here in Anaheim, California. I’ll begin today by providing a brief overview of our top line results before highlighting our current operational and commercial effort. Then John will take you through the detailed financials before we turn the call over to questions.

During the third quarter, our operating performance continued to be challenged by the global recession in the solar industry. Sales for the third quarter were $11.7 million, up 27% from the $9.2 million in the second quarter of 2009, but significantly lower than our performance in Q3 2008.

During the quarter, we saw a peak in costs associated with the transition of our manufacturing to China that lead to a significant increase in our manufacturing costs. These transition costs will continue into the fourth quarter, but will be lower than our expected Q4 revenue and we expect to largely complete the transaction within the quarter.

On a more positive note, as the credit markets recovered, we saw a dramatic increase in bookings in North America, Europe, and China, resulting in a current backlog of over $24 million. Growth of revenue and bookings was primarily driven by sales of our 500 kilowatt and 1 megawatt Utility Grade, PowerGate and Prism solar PV solution.

Our 500-kilowatt PowerGate inverter continue to be our top performing product, representing more than 35% of total megawatts of renewable solution shipped during the third quarter. And our 1-megawatt Prism solution, introduced in June, has quickly become one of our most successful products, representing 15% of total megawatts shipped in Q3.

Our growth in revenue and bookings demonstrate the success of our evolving product suite, our commitment to grow our dominant market position in North America, and our aggressive expansion into the European and Asian markets. The combination of our continued product innovation, focus on quality, global manufacturing strategy, and world-class operational and maintenance services enable us to better serve the global renewable market and will lower our overall cost structure.

These initiatives, combined with strong bookings in the third and fourth quarter bring SatCon to the turning point of cash generation on a run rate as we exit 2009. This was the first key profitability milestone that we described to our shareholders approximately a year ago and we remain on track.

At the center of this strategy is the ability to develop and launch the industry’s most advanced utility scale solar PV inverter solution and continually establish the new standard for quality, performance, and return on investment in the industry.

In the second half of 2009, we introduced Prism, a fully integrated 1-megawatt medium voltage solution, optimized for utility scale solar projects. Prism’s factory integrated complete system solution enables rapid installations through a modular design, dramatically increasing the ease and speed of a typical multi-megawatt solar installation. The Prism launch has been met with great response from our customers with 17 megawatts in orders received since its launch.

Continuing on this tradition of innovation, today we introduced our next-generation power conversion solution, SatCon Solstice at Solar Power International. Solstice marks a significant leap forward in solar power conversion. This new solution revolutionizes energy production, while utilizing traditional solar design.

Solstice will deliver a 5% to12% improvement in overall system power production through fine grained harvesting with a stream-level DC optimizer, coupled with a highly efficient central inverter. The high-voltage output of the DC optimizers reduce conduction losses, enabling a reduction in overall system material costs.

Solstice addresses the performance of the entire system, combining the power harvesting benefits of this two-level power conversion architecture with advanced utility control capabilities that will enable widespread adoption of solar by our utility customers. We believe this solution gives SatCon a distinct competitive advantage. The 100-kilowatt Solstice system is available in North America starting this week and the 500-kilowatt Solstice system will be available before the end of the year with more power levels to follow throughout 2010.

To execute against our overall strategy, we continue to invest in operational enhancements to better serve the global renewable energy market. Last quarter, we announced the opening of our plant in China, which has strengthened our manufacturing position internationally and added an additional 400 megawatts to our capacity. With the shift to our new facility nearing completion, we have successfully transitioned manufacturing of our UL-certified commercial products along with most of our CE-certified utility class solutions to China.

When this transition is complete, it will allow us to significantly lower material costs and overhead costs, improve our worldwide supply chain efforts, and leverage current domestic content requirement in China. Completion of this transition is key to our projections of cash generation beginning in 2010.

In addition to the globalization of our production capability, we have also increased our international sales and marketing efforts by adding seasoned experts from the European renewable energy industry. At the beginning of this quarter, Peter Deege joined SatCon as our General Manager of Europe, Middle East and Africa. Peter brings to SatCon the leadership and experience in the EMEA market that will enable us to accelerate our growth and presence in the region.

We further strengthened our presence in key growth markets around the world by securing a number of international multi-megawatt supply and distribution agreements during the quarter. These deals bolstered our project pipeline and created a solid upward trend in our booking.

In terms of market penetration, we received a 23-megawatt order from a large Chinese reseller for our 500-kilowatt solution. This is our largest single order for our renewable energy solution to date and delivery of all of these units will be complete in the fourth quarter of 2009. We also recognized orders from several of our recently announced master supply agreements including an agreement from one of our new European customers for a large-scale solar project in Belgium.

In addition, we secured a number of landmark customer wins that are significant to the growth in the utility scale solar market in North America. We received a 9-megawatt order for our First Light project in Ontario, Canada. This project covers over 98 acres of land and is the largest system currently deployed under Ontario’s Renewable Energy Standard Offer Program.

We also delivered 5 megawatts of our Prism solution to CalRENEW, the largest utility-scale PV solar facility being developed under California's Renewable Portfolio Standard program. CalRENEW is expected to be one of the most advanced PV solar facilities in the world and will generate electricity to be sold to PG&E that will help California meet its renewable energy and carbon reduction goals.

And finally, 9 megawatts of our Prism solution were selected for the nation’s largest urban solar PV power plant located in the Midwest. SatCon’s Prism solution will connect over 32,000 solar panels to the local utility, producing enough clean and reliable electricity to meet the annual energy requirements of approximately 1,500 homes per year. The plant will be online before year’s end.

Two government-backed programs were launched in North America, designed to help accelerate the widespread adoption of renewable energy, resulting in significant growth opportunities for SatCon. The American Recovery and Reinvestment Act will bring billions of dollars of funding into the U.S. solar industry. The second program announced by the government of Ontario, Canada established the first significant feed-in-tariff program in North America.

With production facilities in both the U.S. and Ontario, Canada, SatCon is uniquely positioned to satisfy the local content requirement for both programs. To date, we have booked over 7 megawatts of orders under the ARRA program and completed the installation of the first ARRA-funded solar PV site with eight additional sites set for completion by the end of the year.

We have also expanded our channel network in order to successfully address the emerging opportunities in Canada. Our recently announced strategic partnership with Canadian Solar provides customers with a complete best-in-class system solution while meeting domestic content requirements outlined by the Ontario government.

The combination of our industry-leading intellectual property and systems expertise, the establishment of strategic value chain partnerships and distribution agreements and our continued selection into the world’s largest and most advanced landmark projects positions SatCon as both the technical and commercial leader in the large commercial and utility scale solar industry worldwide.

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

John Peacock

Thank you, Steve. Revenue for the third quarter ended October 3rd, 2009 was approximately $11.7 million, a decrease of approximately $6.7 million over the same period in 2008. For the nine months ended October 3rd, 2009, revenue was $35.7 million, a decrease of $7.5 million over the same period in 2008.

Total revenue for the third quarter of 2009 consisted of renewable energy product revenue of $9.9 million for the period combined with $100,000 in industrial power supply product revenue and $1.6 million in funded research and development revenue.

Total revenue for the nine months of 2009 consisted of renewable energy product revenue of $26.5 million combined with $400,000 in industrial power supply product revenue, $4.2 million in legacy product revenue, and $4.7 million in funded research and development revenue.

Gross margin was approximately 1% compared to 19% for the same period in 2008. The overall decrease in gross margins was due to a decrease in production volume, duplication and manufacturing overhead due to our decision to aggressively transfer manufacturing to low-cost region and additional costs associated with new product introductions during the period, which required utilizing our Canadian plant more than initially anticipated. Going forward, we anticipate improved gross margins as we finish our aggressive product transfer and leverage our low-cost supply chain.

For the nine-month period, gross margin was approximately 4% compared with 14% for the same period in 2008. The decrease in our gross margins for the nine-month period was for the same reasons previously mentioned.

Our operating loss for the quarter was $7.3 million compared with and operating loss of $3.3 million for the same period in 2008. The main drivers for the operating loss during the quarter as compared to the same period in 2008 were lower margins on our product revenue of approximately $3.4 million and an increase of $500,000 in research and development related to our Solstice product launch and engineering staffing, increases in global sales and marketing of approximately $300,000 due to our continued international expansion in China and Europe, all of which were offset by $300,000 from lower restructuring charges during the period.

Our operating loss for the nine months ended October 3rd, 2009 was approximately $19.5 million compared with an operating loss of $10.9 million for the same period in 2008. The main drivers for the operating loss during the period as compared to 2008 was due to an increase in research and development expenses of approximately $2.6 million over that of 2008, an increase of sales and marketing of approximately $2.4 million over that of 2008 to support our increased sales and marketing efforts in global expansion, in addition, to increase non-cash employee stock-based compensation of approximately $600,000. These increases were offset by a reduction in restructuring charges of approximately $900,000 as compared to that of 2008.

Net loss attributable to common shareholders was a loss of $0.12 per share for the quarter and a loss of $0.47 per share for the nine-month period ended October 3rd, 2009 as compared to a loss of $0.06 per share and $0.33 per share for the same periods in 2008.

Now, turning to the balance sheet. We ended the quarter with approximately $16.4 million in cash, up approximately $6.4 million from December 31st, 2008. Accounts receivables at the end of third quarter were approximately $11.7 million, slightly up from $11.5 million at December 31st, 2008. The overall increase in accounts receivable was due to the timing or order shipments during the period as the order flow improved as we moved away from the second quarter.

Our day sales outstanding or DSO was 89 days at the end of the period compared to 57 days at December 31st, 2008. The increase in our DSOs was due to the timing of the sale during the quarter as shipment volumes increased substantially in the last six weeks of the periods. 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 tough economic times.

Our inventory at the quarter-end was $9.6 million, down from $11.5 million at December 31st, 2008. The decrease in inventory was related to the value of the frequency converter revenue, recognized earlier in the year and our continued focused efforts to manage our working capital. These were offset by the value of inventory intended from our China facility, (inaudible) and then units were put into containers.

Our backlog, which consists of firm and fixed purchase orders with our customers is currently at $24.4 million as compared to $16 million at the end of the second quarter – on our second quarter conference call. During the third quarter, we saw a significant increase in order volumes, which has continued into the fourth quarter.

Now, back to Steve.

Steve Rhoades

Thanks, John. While the significant slowdown in worldwide demand for commercial solar equipment caused a very slow start to the first half of the year, we believe that the momentum of our business is steadily growing. The third quarter rounded out a positive start to the second half of 2009 and positioned us well for a successful fourth quarter. We continue to target reaching our first key financial milestone of cash generation on a run rate basis by the end of the year.

With that, I’ll turn it over to questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question comes from the line of Dale Pfau with Cantor Fitzgerald. Please proceed with your questions.

Dale Pfau – Cantor Fitzgerald

Good afternoon, everyone. Can you hear me okay?

Steve Rhoades

We can hear you fine, Dale. How are you?

Dale Pfau – Cantor Fitzgerald

Great, thank you. Thanks for your time. A few questions here, Steve. You talked about cash flow break-even. Let’s get this – make my notes clear. So you are going to reach cash flow break-even this quarter or early next year.

Steve Rhoades

Yes, our goal is to get all of our restructuring, to get all the transition done as fast as possible as we get over to our low-cost manufacturing sites. So we are pushing forward very aggressively through this last quarter and through the current quarter. And we’ve said and continue to say that we are going to reach cash enrichment on a run rate basis by the end of the quarter. We’ve had strong bookings coming into this quarter, we are set up for a strong quarter and – but we are still going to continue to have a lot of aggressive work here in front of us to finish that transition.

Dale Pfau – Cantor Fitzgerald

So, on a run rate basis, that means on a quarterly basis with normalized gross margins, excluding restructuring in your costs. That – is that what I’m hearing?

Steve Rhoades

That and we just – we have to get through the transition. We’ve got costs here in the – with that we had in the third quarter and coming up in the fourth quarter that are associated with the transition. People flying over to train Chinese employees, inventory being transferred, some freight going the wrong way because we are still getting all of our operations set up there in China. But we largely completed with that as we exit the year and we’ll reset our cost structure appropriately when we’ve got that transition complete.

Dale Pfau – Cantor Fitzgerald

Okay. What were your total megawatts shipped during the quarter?

Steve Rhoades

33.5.

Dale Pfau – Cantor Fitzgerald

Okay. And I missed this. What was the total stock-based comp in the quarter?

Steve Rhoades

I actually don't know.

John Peacock

The total collective comp, we haven’t – $700,000.

Dale Pfau – Cantor Fitzgerald

$700,000? Okay, I appreciate that. Okay, Steve, you also said in your commentary that the bookings have remained strong into the fourth quarter. Is that – should we characterize – ?

Steve Rhoades

Yes. We've really seen a good repair in the credit markets that has helped the North American market in particular to come back on a bookings basis. And then we booked our largest order in our history out of China for 23 megawatts at the end of last – in the last quarter. So our bookings have been very, very strong and should be – it’s continued to be that way as we moved into October.

Dale Pfau – Cantor Fitzgerald

And those bookings now, are you seeing those – or people trying to pull things into the fourth quarter or some of these orders are going to stretch into the first quarter?

Steve Rhoades

There is a mix here. The bulk of them are going to be delivered in the fourth quarter, but we are definitely now booking into Q1 on new orders we’re receiving today. We are – we try to achieve eight weeks lead times to our customers. That’s our target, that’s our goal. But as we get into November here, we are really booking mostly into Q1.

Dale Pfau – Cantor Fitzgerald

And you said that some – you are going to have some transition costs again in the fourth quarter. Can we see gross margins do better than the first and the third quarter?

Steve Rhoades

There is no question that we are going to see stronger gross margins in the fourth quarter. We are going to have better revenue for sure and we are getting through the bulk of the costs that we have associated with the transition. I mean – there is no doubt that in the third quarter, we were still depressed on the revenue level relative to the year before and the recession still held the solar industry in its grip under the end of Q2 and our bookings were not high enough to have a big revenue quarter in Q3. But as I said earlier, we’ve seen a lot repair in the credit markets; we are seeing a lot of projects get (inaudible) in all three of our major geographies. So we are set up for a much stronger end of the year.

Dale Pfau – Cantor Fitzgerald

Okay. And could you give us an indication; can you ship more than your current backlog in the fourth quarter?

Steve Rhoades

We don't do our revenue projection. So – I think that we do – we attempt to go for an eight-week lead time. Some of that backlog, as you know, is the R&D that we do for our government contracting business. So that’s not going to ship inside the quarter or at least not all of it. We will be in kind of on a run rate basis for the portion of our business, but we are continuing to try to hold eight-week lead time on the renewable energy portion of our bookings.

Dale Pfau – Cantor Fitzgerald

And could you give us a little bit of flavor, color, how do you see next year going from a competitive standpoint and do you think bookings can continue a little stronger heading into next year?

Steve Rhoades

We are really – we are really excited about the new product introductions we’ve done. We’ve got a big pipeline of potential projects with our Prism solution and we just introduced it in June and we are already shipping quite a bit of product. If you were here at the Show, which actually you are at the Show, there is a lot of excitement around our new product launch today for Solstice. So we think that we’ve got a competitive advantage with the Solstice solution on power production and integration into the grid and we think this is going to continue to keep us in front in North America and help us to penetrate in Europe and Asia.

Dale Pfau – Cantor Fitzgerald

Okay, great. Thanks for your time, Steve.

Steve Rhoades

Thanks a lot, Dale.

Operator

(Operator instructions) Our next question comes from the line of Adam Krop from Ardour Capital Investments. Please proceed with your question.

Adam Krop – Ardour Capital Investments

Hi there, how are you doing?

Steve Rhoades

Doing well, Adam. How about yourself?

Adam Krop – Ardour Capital Investments

Good, thanks. Just to follow on the Shenzhen costs. Can you give us a little more granularity there? Can you maybe quantify how much was involved in terms of costs in the quarter related to the transition?

Steve Rhoades

I don't know that I can give you an exact number. I actually don't have a total up for me, it is significant. It’s cost tight; we are shipping product from China (inaudible) Canada to China, our inventory from Canada to China, it’s well over $1 million just in transition costs. So it could – on a relatively light quarter, it costs us 10, 11, 12 points of margin as we look at our overall performance.

So it’s a significant number and a number like that is not unusual for what we are looking at into the – into Q4. But we made the decision despite the fact that recession was real and here and affecting our revenue that we just needed to continue to move as aggressively as possible to complete this transition and set ourselves up well for the future. So we – strategic decision is a tough one, it’s never easy to report numbers as well as we just reported, but it’s a temporary number and it’s one way to get through by the end of the year in large part.

Adam Krop – Ardour Capital Investments

That helps a lot. Thanks. And – so I guess if you look at the overall costs of the transition over to China, which you say you are 75% done or can you give me a number for that?

Steve Rhoades

My guess on a cost basis, Adam, it’s like two-thirds done.

Adam Krop – Ardour Capital Investments

Right.

Steve Rhoades

And we are just going to keep continuing to go just as quickly as we can. I mean, it’s important to us to get it finished, it’s disruptive for our business frankly to have it that way. But – and I do think it’s going to set us up well. We made a commitment to you and everybody else that we were going to get our cost structure righted by the beginning of next year and that’s still our target.

Adam Krop – Ardour Capital Investments

Okay. And then just a follow-on on the Shenzhen facility. Can you just give us a little bit of color on how you are thinking about quality control over there in terms of personnel and material? Can you just talk about that – briefly about it?

Steve Rhoades

Absolutely. First up, to set a baseline, the quality coming out of the Shenzhen facility right now is equal or better to the quality from our other operations. And the reason that’s so is we chose our partners carefully, they are experienced high volume manufacturing experts. They cut their teeth in the hard disk drive business, they are trained in Six Sigma, trained in lean manufacturing and they are just a solid group.

We’ve added the new suppliers that we employ in Asia, we look at their quality systems, we review them on a monthly basis along with our contract manufacturing team. The guys run a very solid factory information system over in excel store that we can access from the U.S. and from our Canadian facility so that we can monitor quality on a real-time basis. We use SPC on the line, we have a tough incoming inspection, we have a tough outgoing inspection system from our Shenzhen facility.

Frankly, I’m really proud of the quality that we are seeing coming out of the Shenzhen facility right now.

Adam Krop – Ardour Capital Investments

Okay, great. And then just a couple of news related questions. On your accelerated lead time program, the eight weeks for the 500-kilowatt products?

Steve Rhoades

Yes.

Adam Krop – Ardour Capital Investments

Can you just talk about the – should we expect additional costs with that program in terms of logistics or personnel to make that program work?

Steve Rhoades

There is cost inside of the quarter. We are adjusting to the fact that we have two factories and we ship around the world. So there are some costs. I think we are going to wring that out of the system as we move into next year, but in the near term, there are some costs associated with that.

Adam Krop – Ardour Capital Investments

Okay.

Steve Rhoades

But our customers are in a little bit of pain. I mean, the availability of inverters worldwide because of the ramp-up in the industry is a little bit tight and we are trying to do everything we can to make sure we serve those customers and so that they can meet their goals.

Adam Krop – Ardour Capital Investments

Right, right. And then over to Solstice, can you just give us a little color on how you are packaging that product? Can that product be sold as a – on a standalone basis or I guess what kind of premium as a package does it add to the – to your inverter platform?

Steve Rhoades

Yes, let me try to tackle this. Solstice is an integrated system. It’s the combination of the converters packaged into the sub-combiner boxes, along with an optimized inverter to go along with those. When you combine those solutions with the reduction in the balance of system costs, we are running these things at much voltage on the output of the converters, which allows us to cut wiring costs, the home runs back to the central inverter.

We don't expect our customers to experience a significant increase in their balance of system costs, but we do expect them to get a much, much higher performance in terms of both power production and the grid interconnection and the utility control features that we’ve added inside of the system.

Adam Krop – Ardour Capital Investments

So can you give me a number in terms of what kind of premium that’s demanding versus your previous product?

Steve Rhoades

Well, we are getting the premium – our list price premium I think is about a 15% premium over our standard products and we have to take a hard look at individual deals and how that compares with people’s previous products. But we expect our customers to actually save money by putting this in both in near – in the initial capital costs and their overall balance of system and more importantly, over the lifetime of the system for an increased power production from the same capital investment.

Adam Krop – Ardour Capital Investments

Right. Right, okay. And then just one final question. It sounds like you are getting good traction from the new Chinese customers. Can you just talk about Europe a little bit? Are you seeing any additional pull-through from the expected feed-in-tariff aggression over there?

Steve Rhoades

We’ve – as I said in the notes here, we had a good sized order from Belgium, we’ve had another continued success in Czech Republic and we have got a great pipeline in many other countries in Europe. We’ve never been a big player in Germany as you know. And so the – lot of a talk around the potential reduction in the German feed-in-tariff shouldn’t impact our business at all. I mean, we are going to attempt to crack the German market with the addition of Peter Deege and a bunch of other new staff in Europe. But in terms of our past performance, it’s not been a – it’s not really been a significant portion of our revenue.

Adam Krop – Ardour Capital Investments

Okay, great. Thanks a lot, Steve.

Steve Rhoades

You bet, Adam.

Operator

There are no other questions in our queue at this time. I’d like to hand the call back over to Mr. Steve Rhoades for closing comments.

Steve Rhoades

Well, thanks, operator. And thank you, everyone. And we look forward to speaking to you on our year-end conference call in 2010. This concludes today’s call.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.

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