Capstone Turbine Corporation F3Q10 (Qtr End 12/31/09) Earnings Call Transcript

Feb. 9.10 | About: Capstone Turbine (CPST)

Capstone Turbine Corporation (NASDAQ:CPST)

F3Q10 (Qtr End 12/31/09) Earnings Call

February 09, 2010 4:45 p.m. ET

Executives

Jayme Brooks - VP, Finance & CAO

Darren Jamison - President & CEO

Ed Reich - EVP & CFO

Jim Crouse - EVP of Sales & Marketing

Mark Gilbreth - EVP, Operations & CTO

Analysts

Sanjay Shrestha - Lazard Capital Markets

Eric Stine - Northland Securities

Meghan Moreland - Ardour Capital

Rob Stone - Cowen and Company

Operator

Good day, ladies and gentlemen and welcome to the third quarter 2010 Capstone Turbine Corporation earnings conference call. My name is Stacey and I'll be your conference moderator for today. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today, Jayme Brooks, Vice President, Finance and Chief Accounting Officer. Please proceed.

Jayme Brooks

Thank you. Good afternoon and welcome to Capstone Turbine Corporation’s conference call for the third quarter ended December 31st, 2009. I am Jayme Brooks, your contact for today's conference call.

Capstone filed its quarterly report on Form 10-Q with the Securities and Exchange Commission today, February 9, 2010. 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 ir@capstoneturbine.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 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 attaining profitability, the ability to reduce costs and improve inventory turns and contribution margins, higher average selling prices, continued growth in current market conditions, the availability of a 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, growth in the oil and gas, office building, biogas, UPS and electric vehicle markets. The successful integration of the Calnetix Power Solutions Microturbine Business, revenue growth and increased sales volume, our success in key markets, our ability to enter into new relationships with channel partners and distributors and other third parties, the energy-efficiency, reliability, and low cost of ownership of our products, and the expansion of production capacity and manufacturing efficiency.

These forward-looking statements are subject to numerous assumptions, risks and uncertainties, included the following. Our expectations about expansion into key markets may not be realized. Certain strategic business initiatives and relationships may not be sustained and may not lead to increased sales. We may not be able to reduce our manufacturing costs.

The growth in our backlog has significantly exceeded our internal forecast. In order to meet this increased demand, we will likely need to raise additional funds to meet our anticipated cash needs for working capital and capital expenditures in the near term. The current recession can make it difficult or impossible for us to raise necessary funds or for our customers to buy our products. We may not be able to utilize our line of credit, for example as a result of a failure to meet a financial covenant. 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 relations that are expected to result in an increase in volume and revenue. We may not be able to comply with all applicable government regulations. We may not be able to retain or develop distributors in our targeted markets in which case our sales will not increase as expected.

We may not be able to successfully integrate the acquired Calnetix asset and achieve productive relationships with the distributors. And if we do not effectively implement our sales, marketing service and product enhancement plans, 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 be materially different from future results predicted or implied in such statements. We refer you to the company’s Form 10-K, Form 1-0Q and other recent filings with the Securities and Exchange Commission for a 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 revision to any forward-looking statements to reflect events or circumstances after the date of this conference call or to reflect the current and anticipated events.

I will now turn the call to Darren Jamison, our President and Chief Executive Officer.

Darren Jamison

Thank you, Jamie. Good afternoon and welcome everyone to Capstone’s third quarter fiscal 2010 earnings call. With me today are Ed Reich, our Executive Vice President and Chief Financial Officer, Mark Gilbreth our Executive Vice President, Operations and Chief Technology Officer; and Jim Crouse our EVP of sales and marketing.

Today I will start the call with a general overview of the third quarter fiscal 2010 results and then turn over the call to Ed who will review the specific financial results. Ed will then turn the call back over to me and I will discuss what is happening in some of our key markets and update you on our progress toward our strategic objective of positive gross margin and positive cash flow. For today’s call I will be using several slides in my presentation that can be found on Capstone’s website under the Investor Relations section.

We’ve had an extremely busy quarter as the company continues to build positive momentum. Slides 1 and 2 of my presentation summarize some of these recent events. We have signed up new distributors in Malaysia and Mexico and recently OEM partners PowerTherm and Velozzi. I am very hopeful about the PowerTherm boiler that makes electricity products especially with a company like WESCO providing the channel the market. The customer base and marketing reach of WESCO is similar to that of the UTC Carrier.

The addition of WESCO to our team selling the PowerTherm product should be very positive for Capstone for years to come. The signing of Velozzi brings us our first of what I hope is many commitments to put our microturbine technology into an automotive platform. As electrical vehicle market expands over the coming years I am positioning Capstone to be a key player in the range extender market.

Capstone also had many firsts in the quarter as we sold our first Class 1 Division 2 explosion proof C200 offshore oil and gas product as well as our first C1000 in the Midwest and our first C200 and C1000 sold in Philadelphia.

Also recently we received notice of award on two product development grants, one from the Department of Energy and the other from the Bird Foundation to further our microturbine technology development in both the agricultural biogas markets or [simgas] market and a large solar market. During the quarter we commissioned the Syracuse University Data Center that is one of the greenest data centers in the world. Capstone is very proud to be working with IBM as part of their Smarter Planet initiative.

We also had follow-on orders from a Texas Data Center, received several new orders for our Capstone factory protection plan or FPPs for long-term service contracts. Last and certainly not least is the most recent strategic acquisition and OEM agreement with Calnetix Power Solutions. They broadened our product range, our intellectual property portfolio and adds a critical 24 more distribution channel to our markets. I am pleased with our direction of result in the third quarter as we set new company highs in both quarterly revenue and new orders.

Our revenue through the first three quarters was $45 million, which is already ahead of last year’s $44 million total year revenue.

Capstone is poised for another strong year of double-digit growth in revenue and in phase of the current difficult economic conditions. If you look at bookings, we added $31 million in new orders which is by far the most in the company's 21 year history. As shown in slide three, Capstone continues to demonstrate strong revenue growth over the prior-year, same period for the last ten consecutive quarters.

I would venture to say it is a fact that is not matched by most companies in the market today. Slide three is also a proof of our growing market share and growing market adoption of our new ultra-clean and energy efficient products. Capstone's third quarter revenue of $16 million was achieved despite our two biggest customers not taking significant shipments in the quarter. BPC, our Russian distributor took only two C65 in the period while leaving in excess of $2 million in finished goods sitting on Capstone shipping dock on December 31st.

UTC Carrier continues its relaunch of the [Pure Comfort] product in throughout the Eastern Seaboard Carrier locations in with NORESCO. We expect order flow to be pick up soon, but unfortunately had no unit shipments during the quarter. The fact that Capstone achieved the highest revenue in company history without the significant revenue of two of its historically largest customers is indeed impressive. The ability to continue to grow the business without two key players proves that all of our hard work to strengthen and broaden our distribution channels is working.

I realized the announcements of new distributors may seem mundane to many Capstone stockholders, but they build the Capstone brand awareness and channels the market that become the future revenue stream for years to come. James is here today and he will tell you that Capstone's goals is to nurture as many as possible of the some 90 distribution partners to a minimal level of $3 million annually. This level of revenue drives value to the Capstone franchise for distributors and allows them to reinvest in their business with additional sales, marketing and engineering resources.

This diversified worldwide network of strategic distribution partners is critical to help us continue to grow the business at a constant and sustainable rate. Recall, when I joined Capstone just over three years ago, we were coming of $2.9 million revenue quarter and had only $5.5 million in product backlog. In the last three years, this management team has grown revenues almost sevenfold and backlog 15fold when you factor in the Calnetix acquisition.

Slide four illustrates our Capstone's product backlog increased substantially as a result of the record $31 million in new orders for the quarter. Total product backlog, not including part service and accessories at the end of Q3 is a staggering $78 million. At the recent addition of the Calnetix TA100 product backlog from the strategic acquisition and Capstone has approximately $85 million in backlog to ship over the next five quarters. New orders received included our first orders for the 1000 product and more C200s for the US market.

Capstone saw the official UL witness test phase for the C1000 product this week and anticipates receiving UL listing no later than the end of April. Backlog also was positively impacted by increased orders from Russia, France, Poland, Germany, Mexico and more orders from Columbia. Capstone’s impressive backlog represents a year’s worth of shipments at a healthy growth rate and sets up another year of projected double digit revenue growth. Our growing revenue and backlog are driving the company towards our near term goal of positive gross margins which is the most exciting result of this quarter and management is extremely impressed with our improved gross margins.

Slide five illustrates Capstone’s gross loss improved from a negative 19% to almost $3 million gross loss on a revenue of $15.5 million in Q2 to only 1% or $200,000 gross loss on $15 million of revenue is Q3. This dramatic improvement in just one quarter is a direct result of our C65, C200 and C1000 cost reduction program combined with the effect of the new prices and past product price increases. I believe you will agree that this quarter validates Capstone’s cost reduction programs are being effective and now as we continue to combine improving material costs with even higher average selling price we will continue to drive improved gross margins and move toward profitability.

At this point I would like to turn the call over to Ed to review the specific fiscal 2010 third quarter results. Ed?

Ed Reich

Thanks Barry. Good afternoon everyone. I would like to provide you with our financial results for the third quarter of fiscal 2010 which ended December 31, 2009. Revenue for the third quarter was $16 million an increase of 39% from the $11.5 million reported in the same period last year. Capstone shipped 122 units during the third quarter compared to 116 a year ago although average revenue per unit in the third quarter increased to $100,000 per unit from $66,000 per unit last year. We expect our average revenue per unit to increase as we book new orders at higher prices and continue to increase manufacturing rates on the C200 and C1000 series products.

Gross loss for the third quarter was approximately $200,000 or 1% of revenue compared to $600,000 or 5% of revenue from the same period last year and $3 million or 19% of revenue for the second quarter of this year fiscal 2010. The improved the gross loss reflects higher sales of C200 and C1000 series systems resulting in an overall higher margin from the change in the product mix. Progress on direct material cost reduction efforts and lower manufacturing costs compared to the prior period.

R&D expenses were $2 million for the third quarter, a decrease of $100,000 or 5% of the same period last year. R&D expenses were lower in the third quarter because of just lower overall spending. SG&A expenses remained unchanged at $7.4 million compared to the same period last year.

During the third quarter stock based comp to employees and consultants increased while travel, marketing and salaries have all decreased compared to the same period last year. Our net loss is $7.2 million for the third quarter of fiscal 2010 which improved $2.8 million from the $10 million reported for the same period last year.

The primary reason for the improvement in the net loss was a result of the adoption of Accounting Standards Codification 815, Derivatives and Hedging which affects our accounting for warrants with certain anti-dilution provisions. We recorded a non-cash benefit this quarter of $2.3 million to warrant liability expense. The net loss to corresponding loss per share before the effect of the new warrant accounting with $9.5 million and $0.05 per share respectively.

Please refer to slide number six for reconciliation. As our stock price decreased, as it did from a $1.32 at the end of the second quarter to a $1.28 to the end of this currently reported quarter, bit lowered our loss conversely if our stock price had increased from the second quarter. Our loss would have been higher as a result. Our loss from operations for the third quarter was $9.6 million, at 5% lower than the same period last year.

Loss per share for the third quarter was $0.04, the loss per share for the same period a year ago was $0.06. The loss per share for non-cash benefits related to warrants was $0.05 per share and again please refers to slide six.

As of December 31, 2009 cash and cash equivalents were $15.7 million. Cash decreased to $8.3 million during the third quarter. Our backlog at the end of the third quarter was $78.1 million which increased 37% from the same period a year ago, and increased $18.8 million from our second quarter of this fiscal year. I'll now turn the call back over to Darren.

Darren Jamison

Thanks Ed. An encouraging sign of the economic recovery is that we continue to seek rotation and order activity grow in almost all of our vertical markets which is reflect in slide seven. Auto markets provide us balance and diversification as we have opportunities in markets worldwide. I'm most excited with this activity in the oil and gas market, office building, biogas, UPS and Hybrid vehicle markets.

I think it's important to step back and look at the size of our overall vertical markets. It's important that its impressive is our $85 million in backlog. It is less than 1% to the total opportunity across our addressable markets.

As you can see from slide eight Capstone's addressable annual markets are estimated to be in excess of $14 billion. I believe our continued capturing of market share despite poor economic conditions is of the hint of what can happen after the markets fall or recover and project financing finally becomes readily available.

In addition, we continue to plant seeds with every insulation of our exciting new products including the C200 and C1000 and our UPS products. As I mentioned earlier, some of the major developments during the quarter were in the hybrid vehicle markets. We are amazed by the opportunities for our US hybrid transit bus customer DesignLine where there were 500 buses in backlog for New York, Baltimore, Charlotte and several California transit properties. In addition we are also working with bus OEMs in Italy and Russia.

On the car front, as I said Capstone recently announced the first automotive OEM, Velozzi, a California based cars designer and manufacturer plans to release its electric super car utilizing a C65 in late 2010 and so well a cross over vehicle utilizing a C30 in 2011.

Slides nine and 10, showcase the two new and innovative Velozzi vehicles. Capstone is also in talks with other companies to develop electric trucks. The Capstone range extenders for delivery vehicles and refuse vehicles.

A plug-in electric or ATV market continues to be a small portion of Capstone's revenue today that continues to have strong, potential upside in the not so distant future. Capstone electric vehicle strategy is to revive microturbine solutions today based on our current industrial 80,000 hour product. The car, truck and bus manufacturers can immediately integrate into their innovative plug in electric vehicles, while simultaneously collaborating with two key Fortune 500 automotive component manufacturers drilled a new high volume lower cost 10,000 hour automotive version of both our C30 and C65 product.

We are in the process of finalizing the cost and design analysis on a new automotive product and hope to have firm agreements in place with one or both of these firms in the not too distant future. The fact that we achieved our second consecutive record revenue quarter, the fact that we surpassed last fiscal year’s total revenue in just three quarters, and the fact that we dramatically improved our gross margins from the second quarter to within 1% of positive gross margins, for the first time in the company’s 21 year history, [reasonably] that fiscal 2010 will be the year of continued significant growth beginning with cost reduction, higher average selling prices, and improved operating expenses.

Slide 11 graphically shows that management continues to believe that Capstone is on a clear path of the short term goal, positive gross margins followed by profitability. The critical drivers continue to be revenue growth, continued manufactured cost reduction, continued margin improvement, continued management of inventory with a near term goal of achieving four inventory terms. I believe the Q1, Q2 proved that Capstone is well on its way to hire revenues and lower operating expenses and improved inventory terms. Q3 demonstrated our ability to lower material costs and improve gross margins. I believe that Q4 should see has reached positive gross margins as we continue to execute against our strategic business plan. Our recent strategic acquisition of Calnetix TA100 product and OEM arrangement of 125 kilowatt waste heat recovery generator can and will only help us move along this path to profitability.

As shown in slide 12 and 16 this new strategic relationship substantially strengthens Capstone's business with additional intellectual property, a broader product offering and increased simple cycle efficiency, not to mention 24 new channels to market.

I know I speak for the entire Capstone management team when I say we firmly believe that we are in the right markets with the right drivers, with the right products, with the right team, with the right incentives, with the right partners and we are absolutely focused on all the right things.

This company has come a long, long way in the last three years and now I look forward to what the next three years will bring to Capstone, its employees, customers and stockholders.

At this point I'd like to open the call up for the analysts for their questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Sanjay Shrestha with Lazard Capital Markets. Please proceed.

Sanjay Shrestha - Lazard Capital Markets

A couple of quick questions here. First off, pretty impressive progress here on the backlog slide. I kind of wanted to understand, how should we think about the profitability in this backlog versus the backlog that has been sort of flowing though a P&L up to this point with the price increase and that you've been implementing now with the expansion of the product portfolio and second I wanted to make sure that the stock log number does not include the contribution from the recent acquisition of the 100kW stuff from Calnetix correct?

Darren Jamison

Correct. The backlog of $17 million is prior to the Calnetix acquisition. After that acquisition that's going to bring the number up to around $85 million. Absolutely, I think the important point is the backlog and the bookings we had for the quarter very much look like we've seen in the past. Russian distributor was one of the bigger players in that. the most exciting thing we're seeing our Polish distributor are getting orders, our Germany distributors getting orders, Australia, South America and really more importantly the U.S. market finally kicking in especially with the larger products the C200 and C1000.

Sanjay Shrestha - Lazard Capital Markets

Now in terms of sort of the price increases that you guys have implemented, is there any more room for that and that's one of the additional factor that's going to help you sort of continued to move forward of that positive margin and sort of cash flow positive territories or and now we're at the point where it's really more about the volume?

Darren Jamison

Really right now, we're at the point where the backlog has multiple price increases built into it, so we're still having products that ships out in the quarter, that’s only seen one price increase.

Sanjay Shrestha - Lazard Capital Markets

Got it.

Darren Jamison

Next quarter and the following quarter, you will see two and three price increases layered in. that being said, we're still moving down the cost reduction path. I think you saw this quarter, the good work that Mark and his team has done, your cost reduction is down and we get older higher price parts of our inventory and new lower cost parts into our inventory. That being said Jim is always working to increase the backlog to increase orders even though we've raised prices, we will negotiate with the customers on the large order as we need to or what we have to do to be competitive in the market place. Our goal is not to price ourselves down to the market, but to be market-based pricing and get the maximum we can for our product.

Sanjay Shrestha - Lazard Capital Markets

And one last question for me then guys. So, obviously there is some slight energy you guys have about the addressable market opportunity obviously $14 billion a big number and hopefully if you guys sort of doing the revenue run rate of what you are doing at this point in time so help us understand as to big near term opportunity the things we need to see, to sort of get further appreciation of the fact that you guys are getting a good traction in this market. Can you sort of talk about this is great granularity lets sort of talk through this a little bit as to what are the near term milestone we should be looking at to get better appreciation for a good traction that you guys are getting and what is it pretty large addressable opportunity?

Darren Jamison

Yeah, I think that we always talked about how big the market was, there was a multi-billion dollar market because our company was so small, it’s a small market share didn’t make sense I think this show people we are a $20 million company and a $14 billion market as we start getting significant traction and we start opening up of these markets I think its appropriate in time to say here is how big these markets are and as we team up with carrier UTC or Wesco or continue to get some doubles and triples.

Just frankly Sanjay we have been hitting singles as you know. We have not had huge roll out of the national chain. We have had some pipeline activity, the small pipeline we have over a 100 units going into that project but for the most part it's been ones and two in the orders and as we look at getting substantial market share, the numbers can grow exponentially obviously.

Operator

And your next question comes from the line of Eric Stine with Northland Securities. Please proceed.

Eric Stine - Northland Securities

Hi, guys congrats on the gross margin number and the bookings. Just wondered previously question kind of touched on this but as far as the gross margin can you give us a sense of kind of what inning we are in on both sides materials and also price increases and then also it sounds like that the margin number is pretty clean and there aren’t any one-time benefits in there.

Ed Reich

That’s correct; it's what we consider a clean margin quarter. Since Mark and his team are the ones that delivered that great gross margin I'll turn it over to him let him answer the question.

Mark Gilbreth

Yeah as far as the cost reduction is concerned I would say that we are probably just north of 50% of the way through where we are headed to right now so we still have a lot of, we have a lot of cost reductions that are still the flow through as we work out some of the inventory Darren mentioned that a little bit in his script but as well as we look to the future you know next year we are continuing to try and identify other costs reduction opportunities to continue to drive that net role and continue to be a major focus for the operations organization.

Darren Jamison

And it is important to note as we look at an automotive version of the C30 and the C60 any relationship we put in place with an automotive company would include our ability to buy those components or complete assembly back for the industrial markets. So if we could have a $3000 or $4000 C30 or $6000 or $8000 C65 and turn around and leverage that product or components out of that product back into the industrial market that will have a huge impact on our profitability. Now obviously give us some more pricing flexibility against the incumbent technologies.

Eric Stine - Northland Securities

Okay so still a lot of room on both sides. Again the price…

Darren Jamison

Your question was what inning we are and I'd say we are in the fourth or fifth inning. We still have a way to go on the cost production side even to just get to what we wanted to deliver short-term. Obviously long term and for the automotive markets those are different applications although they (inaudible).

Eric Stine - Northland Securities

Okay it sounds like pricing earlier than that, is that…

Ed Reich

Yeah, exactly Eric. I remember its two components of the increase, the average selling price increasing in the DMC or the Direct Materials Cost decreasing at the same time. So the revenue is hitting and that’s why on a quarter with $500,000 more in revenue than in the prior quarter you have a $200,000 loss versus the $3 million loss. So we're beginning to see the results of it. Our goal is for the fourth quarter to be a better gross margin than the third. So even though the DMC's are what I guess slightly behind schedule, we still see and we still know when the completion dates are now and we're comfortable with getting the whole thing done.

Eric Stine - Northland Securities

Okay. That’s helpful. I will just switch gears to the bookings. I was just trying to go through the numbers in your filing before the call. It looks like the C65 and the C1000 were particularly strong. Was there are specific end market that you can point to as driving that?

Jim Crouse

This is Jim Crouse. No I think as Darren said we saw a little bit from a lot of different regions. So we had new orders from South America or Columbian Distributor had placed some orders for some bigger units. We got some C200, C1000 orders from North America and Europe continues to be strong as well. But there is a little bit from a lot of different places which was reassuring.

Eric Stine - Northland Securities

Okay. Last thing, just on the C200, can you update us on where production levels are and you mentioned that you had about $2 million sitting in inventory at the end of the quarter. Were those C200's and have those shipped?

Darren Jamison

The majority of those were C200's. We also had some C65's in there as well. I guess on the manufacturing run rate I'd that Mark and his team can build C200s faster than our customers are taking them right now, so I think the good news here the gloves are offering manufacturing standpoint we can C200 a day if we need to at this point, so really matching our heart rate with the heart rate of our customers as we know we are project-based business financing still is difficult from slow to get, but as our customers have deliveries we have no problem building C200s in meeting those deliveries.

Eric Stine - Northland Securities

And so the C200 number, the C200 equivalent number in the quarter was more a function just down slightly sequentially more of a function of this project timing in financing?

Unidentified Company Representative

We had couple of C1000s sitting on the dock have been to the quarter. This is really a matter of time, so the good news is that customers ramp production or as Jim grows the business after, a very comfortable those C200, C1000 production line keeping up.

Operator

Your next question comes from the line of Meghan Moreland with Ardour Capital. Please proceed.

Meghan Moreland - Ardour Capital

Did I hear correctly that you expect $85 million in the backlog to reach the top line over the next five quarters and that's of course including the Calnetix backlog?

Darren Jamison

We got $17 million in backlog today, and then obviously we had the Calnetix to that as well, that's $85 million. Traditionally, we talk about backlog in four quarters, but to include total backlog five quarters is a reasonable number correct, so including Q4 and then all in the next fiscal year. We realized that's only product backlog that does not include our service backlog, which last time we announced that I think was $17 million head and then we have the parts service accessories training other revenue as well.

Ed Reich

And Meghan, there is about $4 million of the 78 that's non-current, so by that definition it's outside to 12 months.

Meghan Moreland - Ardour Capital

And could you just breakout what the operating cost consumption was for the three months.

Ed Reich

A majority of it is going to be from the net loss. So GN&A and R&D expense and selling expense. We had a little over $2 million of the one charge. That’s going to be the total of it. Cash used from operations was 7.28 Ed.

Operator

(Operator Instructions). Your next question comes from the line of Rob Stone with Cowen and Company. Please proceed.

Rob Stone - Cowen and Company

I just wanted to beat the dead horse a little bit more and talk about backlog. My question is, is that so much about backlog but about the composition of the ramp in terms is the quarterly gross a function of your manufacturing run rate ramping up is that customer project timing, what causes a customer to book something now that shipping in four or five quarters, help us understand the puts and takes that drives the ability assuming orders in hand to ramp up the revenue?

Darren Jamison

Sure. I think that’s a good clarification. First of all, we are at a point to today C200 to c1000 production and C65 and C30 production that we are driven by customer requirements. and so customers will give us an order with an expected ship date and that can be anywhere from 12 weeks to some cases longer than the year, if its longer than a year its typical DesignLine I think its our biggest one that’s in there where they have given us kind of a year's order book for their bus manufacturing. So they have got contracts with New York, with Baltimore that are multi-year contracts and so they drop orders on us to match that contract, so obviously they can’t build a year’s worth in a quarter, take some time to ramp their production and push the busses out. The majority of our product does ship in a couple of quarters, C30 and C65s go quicker. C200, C1000s tend to take longer, but our challenge is and the challenge that Mark and his team have is that a delay in financing or delay in a permit or some sort of issue on the sight can delay a shipment to [infinitively] and severe cold weather, construction delays, process of getting a crane, we had an issue in Bogota Columbia, where they didn’t have a crane big enough to lift it on a 10-storey building for C1000.

So many things will impact it, obviously being a public company a week impact or two weeks’ impact at the end of the quarter can give us lumpy quarters, obviously to our customers a couple of week delay is nominal. So that’s really the issue, some with the mercy of the how our distributors can get the projects done, how the customers get the projects done. I think that’s why one of the focuses for me has always been on strengthening our distribution channel with partners with bigger balance sheets that can take some of those ripples out of the schedule as well as a more diversified portfolio of customers worldwide, so if one project slips, another project pulls forward or fill the spots.

So I think that’s really the key for us. Now we were limited on the C200 build rate initially but those days are behind us and we are fully functional on the C200 and C1000 product line.

Rob Stone - Cowen and Company

So should we expect as you start to integrate the Calnetix sales and do you have visibility on a rebound from your two largest customers that you would see more of a step up in Q4 revenues as opposed to relatively flattish from Q2 to Q3 that we just saw.

Darren Jamison

Yes, I think you are going to see Q4 you are going to see BPC get back online, their biggest two customers are oil and gas customers, Gazprom and LUKOIL. Both of them were managing some end-of-year budgeting issues and didn’t take product in November, December and that caused some delays.

Now that the new budgeting cycle, a new year for them, they have projects that will move forward. The [EMAL] pipeline, we have over 100 units going to that pipeline in Siberia for Gazprom. That pipeline project got moved back about nine months and so it obviously impacted us as well. So as project schedules move around, those things happen. But in Russia, in fact I was over in Moscow two weeks ago.

There is a lot of infrastructure spending going on. The government unlike the US Government, European governments are spending money on energy efficiency and on infrastructure projects to build in that efficiency. So, we're seeing some opportunities there outside of oil and gas that are very exciting. So I except BPC to get back online this quarter.

UTC Carrier is a little different story. In fact representatives from Carrier were here yesterday and today. We're renegotiating our OEM agreement that expired in December. That being said, they are rerolling, the [Pure Comfort] initiative out across the Eastern Seaboard, across several carrier locations, most of New England, Boston, New York, Connecticut, New Jersey to good success.

We're seeing some deal pipeline start to fill up, then NORESCO is an interesting play carrier, bought them in 2008 and from an energy services perspective there is some interesting plays we’re exploring there with Carrier. So I expect Carrier to be maybe some orders this quarter and then some revenue in Q1 or Q2 as they start to re-ramp that. Unfortunately, when they decided to move it from UTC Power, the pier comfort product over to Carrier, we probably lost nine months worth of momentum as they retooled and rerolled the product out under the Carrier banner.

Ed Reich

And then as far as Calnetix and the TA100, what Darren previously mentioned that we expect probably $10 million or so in additional revenue from sales of the product, the TA100 and then from sales of our product made it up with the way heat recovery generators that we have the rights to sell. So I would say think of it as $10 million over the next 12 months, but slower in the beginning.

Darren Jamison

And so I look at next year, we expect another solid growth year, year-over-year, you should see costs continue to come down. Working capital continue to be managed as closely as possible, so we want to make sure that we can fund the growth, another balance sheet for the growth we are experiencing. Obviously as the economy grows, as green energy and energy efficiency and more oil and gas projects get implemented, that's going to help grow our business, and I think as I mentioned in my script, every time we put a 200 or 1000 or any of our new products out there in the UPS market, it becomes a showcase and new customers are going to see that, so we've just seen the kind of leading edge of that momentum with the larger product.

Rob Stone - Cowen and Company

Final kind of strategic question if I may, you hinted very large potential, both directly and indirect benefits for the industrial business out of new automotive designs and volume, the platforms that you announced on so far are large bus and it’s really exotic as vehicle platforms both of which equate to relatively low unit numbers compared to say, the mainstream consumer vehicles. Can you give us a sense of where you see the opportunity with these few large customers if you're able to give any more or potential customers I should say, if you are able to give any more color of what type of platform or market segment you think you would enter in?

Darren Jamison

I know I think it's a great clarification. We're really running two strategies at one time. We're trying to get microturbine technology out there in the mainstream market and really demonstrate and showcase the technologies. So, what we are doing with Velozzi, what we are doing with DesignLine, what we are doing in low volume call it more niche markets is showing up the technology, proving the technology, the product we have today though is an industrial product, in automotive terms it will run two or three million miles, that is way over kill obviously for an automotive applications.

So we don’t need an 80,000 an hour product, we need a 10,000 an hour product. So we will make changes to design from a material standpoint or design standpoint and then make changes to have it manufactured for high speed, high volume manufacturing. That being said, we have got about 4000 unit capacity in our current plants and equipment, that’s nothing in the automotive world. So, simultaneously with Jim and his team have found short-term more niche applications to drive revenue today for the product. We are looking to get into the automotive space with a partner.

And one or two partners that are already in the automotive space, already making automotive components whether that’s drive trains or engines or turbo charges or whatever they are making today for the automotive OE industry, then have them partner with us to manufacture the product. So how that would look would be either a royalty or a joint venture, some type of application in that perspective with us getting a piece of the pie on the automotive side, ingredient branding on the automotive side and then access to lower cost, higher manufactured components to go back to the industrial side.

I don’t intend to take on the automotive market directly with our limited balance sheet, limited experience and limited plant equipment doesn’t make sense, but partnered with the right technology who is already in that market has the high volume manufacturing expertise and equipment makes a lot of sense. So, we have been working with these folks, each company one for more than six months, one for about a year, these things obviously take time to get through the automotive PPAP process takes time. So even if we reached agreement tomorrow, we are probably two years away from a showroom floor, but the intent is to have a C30 in the $3000 to $4000 range, a $10,000 hour life that would go into the hood of a Ford or Chevy or Toyota or whatever the platform would be.

Operator

At this time I would like to turn the presentation over to Darren Jamison for closing remarks.

Darren Jamison

I definitely appreciate the questions. I think you guys are all honed in on all the key issues we have with the company. We are very excited about third quarter results with the record $16 million revenue. We are excited to have more revenue through three quarters than we did through all of last year and have another positive growth quarter, but really what’s important is the gross loss improvement. Growing revenue and not having it be profitable doesn’t make a lot of sense to empty calories.

We are now growing revenue with gross margin improvement and hope to quickly get the positive gross margin and then hit to our target of 40% gross margin eventually. Record orders from Jim and his team did a great job, $31 million, that’s staggering when you think back that I think in fiscal 2008 we did $31 million in total revenue and Jim booked that and his team and distributors since last quarter not counting Calnetix.

So you look at the backlog, you look at the revenue growth and you look at the margin and cost improvements and you can’t help, but be excited about looking to go forward. So with that I appreciate the comments and the call and look forward to talking to everybody after our fourth quarter. Thank you, operator.

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.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!