Capstone Turbine's CEO Discusses F3Q2014 Results - Earnings Call Transcript

| About: Capstone Turbine (CPST)

Capstone Turbine Corporation (NASDAQ:CPST)

F3Q 2014 Earnings Conference Call

February 11, 2014; 04:45 p.m. ET


Darren Jamison - President & Chief Executive Officer

Ed Reich - Executive Vice President & Chief Financial Officer

Jayme Brooks - Vice President of Finance & Chief Accounting Officer


Rob Stone - Cowen & Company

Matt Koranda - Roth Capital Partners

Eric Stine - Craig-Hallum Capital Group

Colin Rusch - Northland Capital Markets


Good day ladies and gentlemen and welcome to the Capstone Turbine Corporation earnings conference call for third quarter fiscal year 2014 financial results ended on December 31, 2013. During today's call Capstone management will be referencing slides that can be located at under the Investor Relations section.

All participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) As a reminder this conference call is being recorded for replay purposes. I would now like to turn the call over to your host for today Ms. Jayme Brooks, Vice President of 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 of fiscal year 2014. I am Jayme Brooks, your contact for today's call.

Capstone filed its Quarterly Report on Form 10-Q with the Securities and Exchange Commission today, February 10, 2014. 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 or you can view all of our public filings on the SEC website at or on our website at

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 provisions of the Private Securities Litigation Reform Act of 1995. These statements relate to among other things, growth of the Alaskan market; increased production rates; higher average selling prices; ongoing new order flow; reduced cash usage; growth in revenue; gross margin and backlog; attaining profitability; improvement in certain key performance indicators and strategic initiatives; achievement of our EBITDA and cash goals; increased aftermarket performance; shift to larger markets for our products; benefits from our cost reduction initiatives and opportunities from our relationship with the Department of Energy and Oak Ridge National Laboratory.

Forward-looking statements maybe identified by words such as expects, objective, intend, targeted, plan and similar phrases. These forward-looking statements are subject to numerous assumptions, risks and uncertainties described in Capstone's Form 10-K, Form 10-Q and other recent filings with the Securities and Exchange Commission that may cause Capstone's actual results to be materially different from any future results expressed or implied in such statements.

Because of these risks and uncertainties, Capstone cautions you not to place undue reliance on these statements, which speak only as of the today. We undertake no obligation and specifically disclaim any obligation to release any revisions to any forward-looking statements to reflect events or circumstances after the date of this conference call or to reflect the occurrence of unanticipated events.

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

Darren Jamison

Thank you Jayme. Good afternoon and welcome everyone to Capstone's third quarter, fiscal 2014 earnings call. With me today is Ed Reich, our Executive Vice President and Chief Financial Officer.

I'll start with a general overview of the third quarter and then turn the call over to Ed, who will review the specific financial results. I will then close with some comments on our markets and new order flow. As Jayme said during our remarks, we’ll be referring to presentation slides that can be found on the Capstone website under Investor Relations.

Lets start with slide two of that presentation. Third quarter marks another significant milestone for the company. We set new company records for quarterly revenue, quarterly backlog and operating loss, as well as strong new order bookings, but most importantly we reached a new milestone with 20% gross margin that generated $7.3 million, up an outstanding 59% year-over-year and putting us on track to reach our goal of EBITDA breakeven in this current fourth quarter.

Total revenue was up 11% year-over-year to a record $37 million, product revenue was up 14% year-over-year to a record $29.9 million. New product orders were an outstanding $40.5 million, which translates to a very good book-to-bill ratio of 1.4:1. We also ended the quarter with a healthy cash balance of $31.6 million.

Lets go ahead and turn our focus to slide three. Slide three shows the year-over-year margin expansion for the past four years. The third quarter marks our fifth sequential quarter of double-digit gross margin with positive gross margin in 13 of the past 14 consecutive quarters.

For fiscal 2014 we provided the five key performance measures that you see on slide four. These performance measures are the best way to gauge our execution and success. First let’s look at higher average selling prices. In the third quarter average revenue per unit increased 16% to approximately $184,000 compared to approximately $158,000 just a year ago.

Our second measure listed on slide four is the continued increase in C200 production rates, which is a reflection of our continuous refinement to our C200 production line and C200 supply chain. We will also have an annual price increase this coming April, which gives us some additional wind in our sales, as we continue the migration to larger units and higher prices per megawatt.

The third key measure is our lower direct material cost. Our efforts to bring these costs down have had a positive impact in gross margin as you’re seeing in today’s record numbers.

Fourth is a healthy new order flow. As I mentioned earlier, backlog reached a new record as of December 31, 2013. On the unit basis we had 722 units or 178.4 megawatts in total backlog compared to 646 units of 152 megawatts as the same time last year. As we always say, our ending backlog is a good indicator of future revenue growth, so we are feeling much better about our revenue outlook for next year.

And the fifth key measure is reduced cash usage. We are pleased with our efforts to manage working capital, and when combined with our lower net loss for the year, it has resulted in lower cash usage. We’ve adjusted our cash balance goal for the year-end upward from $30 million to between $33 million and $36 million by March 31. This adjustment reflects $6 million in cash we received during the quarter from the exercised outstanding stock warrants.

As Ed noted on our second quarter call, the remaining warrants expired on October 31, and there are no longer any outstanding warrants in Capstone's capital structure. With nearly $32 million in cash at the end of December 31, we are very close to achieving our year-end cash goals.

At this point I’ll pause and turn the call over to Ed for more details on the third quarter financial results.

Edward Reich

Thanks Darren. Good afternoon everyone. Let's begin on slide five. Revenue for the third quarter of fiscal 2014 was $37 million, up 5% from $35.3 million for the second quarter and up 11% from $33.3 million for the same period last year.

Product revenue was $29.9 million, increased 4% quarter-over-quarter and 14% year-over-year. For the third quarter fiscal 2014 revenue from accessories, parts and service was $7.1 million compared to $6.6 million in the prior quarter and $7 million for the third quarter last year. This year-over-year increase is primarily related to increased factory protection plan enrolments and higher sales of parts, offset by decreased service billings.

Gross margin for the third quarter was $7.3 million or 20% of revenue, compared to $4.9 million and 14% of revenue for the second quarter, $4.6 million and 14% of revenue for the same period last year.

As Darren mentioned, the 600 basis point year-over-year increase in gross margin was primarily related to $2.2 million in additional revenue from increased shipments of C65 to C1000 and lower direct material cost during the third quarter. In addition royalties were down $400,000 and warranty was down $100,000 and higher revenue during the three months ended December 31 compared to the same period last year.

Our warranty expenses are declining as a result of completion of our liability and repair programs for the C200 and C1000 series systems and the continued maturation of these products.

Also noted on last quarters call our royalty expense is down because the fixed rate royalty for each microturbine system covered by our agreement with Carrier Corporation successor in interest to UTC Power was reduced by 50% during the second quarter. This permanent reduction benefited gross margin to $600,000 in the third quarter and of course will continue to benefit margins in future periods.

On slide six you can see the progress that we’ve made. On our long-term goals we achieved 35% gross margins. As we’ve said in the past, this will be accomplished due to a combination of factors including higher average selling prices, material cost reductions, lower warranty and the now accomplished rate reduction on the royalty. We made good progress towards these goals during the quarter with the gross margin percentage increasing about 600 basis points sequentially.

R&D expenses were $2.3 million for the third quarter of fiscal ‘14, compared to $2 million last quarter and $2.2 million for the same period last year. This slight year-over-year increase is primarily related to higher supplies expense. We continue to invest in R&D as we focus on new product development, product robustness and direct material cost-reduction initiatives.

SG&A expenses were $7 million for the third quarter, up from $6.6 million last quarter and $6.8 million in the same period last year. The year-over-year increase was primarily due to a combined $300,000 increase in travel and bad debt offset by a $100,000 decrease in marketing expense.

Loss from operations for the third quarter of fiscal 2014 decreased to $1.9 million, an improvement over the $3.7 million operating loss for the second quarter, as well as an improvement on the $4.4 million operating loss for the same period last year.

Net loss was $2.2 million or 1% per share for the third quarter compared to a net loss of $3.9 million or $0.01 per share last quarter and a net loss of $4.5 million or $0.01 per share for the same period a year ago.

I'll now provide some comments on the balance sheet and cash flow activity. Please turn to slide seven. Cash and cash equivalents totaled $31.6 million at December 31, 2013, increased $3.3 million from the $28.3 million cash balance at the end of the second quarter. Capital expenditures for the third quarter of fiscal 2014 were $200,000 compared to $300,000 in the second and flat when compared to the same period last year.

Receivables were $22 million compared to $18.4 million in the prior quarter and $19.3 million a year ago. The DSO increased on a sequential basis to 54 days for Q3 compared to 48 days in last quarter and 53 days for the same period last year. Inventories were $25.1 million at December 31, an increase of $1.3 million sequentially and the inventory turns increased to 4.9 times compared to 4.6 times last quarter.

Finally on slide eight you can see a visual record of our growth and backlog since fiscal 2007. As Darren mentioned, we ended the quarter with a backlog of $160.4 million of 8% from the beginning of our fiscal year and up 18% from one year ago. Because this backlog is product only, it doesn’t include our factored protection plan backlog, which has topped $45 million for the first time.

After market gross margin percentages continue to improve, as our strategy and vision for customer service lead by Paul Campbell, is dividends via reductions in waste and efficiencies within our remanufacturing organization. Specifically we have reduced the after market pretty substantially and we had meaningful reductions in the cost of engine repairs. This coupled with the increase reliability has given us a great foundation to work with in fiscal ’15 and beyond.

And that concludes my comments; back to Darren.

Darren Jamison

Thank you Ed. Lets go ahead and turn to slide nine for our third quarter global shipment mix. 59% of shipments were oil and gas applications, 19% used in energy efficiency applications, 3% in renewable applications, and at last 19% used in other applications, including critical power supply and mobile products.

We’ve seen a particularly strong pickup in critical power supply solutions this year, as customers want solutions that handle both primary and backup power. We are also experiencing what we believe is an important paradigm shift in the way Capstone solutions are being perceived in the overall market.

Capstone used to be considered primary for 1 to 5 megawatt opportunities or insulations, so we migrated up in project size, so that Capstone is now being considered frequently as a solution for projects that are in 25-megawatt range.

Geographically we are becoming well diversified in terms of distribution. in North America. The U.S. market is being led by oil and gas sector, where we have lots of activity in the Marcellus and Eagle Ford shale plays, as well as our first major order in the Permian Basin of Texas and New Mexico.

We recently received new orders from Hawaii and Alaska, two markets that have been historically under performing. So this is a very positive development for Capstone. And of our top five distributors for the trailing 12 months, four are in North America, including two that are based in Mexico where we continue to broaden our footprint and is a very dynamic evolving market.

The European market has picked up due primary to strength in the Russian oil and gas market. Continental Europe is still down year-over-year although we’ve had some recent success with new orders out of Germany and Italy. However according to our European distributors, we are still a year to 18 months away from the previous levels of activity we enjoyed across Europe.

Turning to slide 10, you can see our order flow since the beginning of the third quarter. Starting with multiple orders from our new Alaskan distributors Chenega Energy, the orders were for a single C1000 and multiple C200s for the use on offshore platforms in Alaska’s cooked inlet.

Chenega Energy President Greg Porter sums up the opportunity of Alaska nicely when he said, “Capstone microturbines are an amazing solution for Alaska’s growing energy needs.” For the state that covers an area of one-third of the size of the contiguous 48 states our challenges our diverse. Rising energy cost, remote locations and a lack of statewide grid infrastructure require creative and reliable solutions.

In addition, often in this Arctic climate, 70% of our needs are heat. I believe we are seeing the beginning of a proliferation of Capstone solutions in Alaska across multiple industries and market sectors. I agree with Greg and look forward to this future success.

Next in the U.S. was an order for two C1000 for the use of a combined heat and power application at a pharmaceutical facility in Northern California; this project was sold by Regatta Solutions.

We also received an order from an Hawaiian Resort for a C1000 to be used in a combined cooling heat and power application. Our system was chosen as a preferred operation for power generation due to its high efficiency and ability to provide stable power operating on propane.

In the U.S. oil and gas market we received multiple orders from E-Finity for microturbines to be used for operations in Marcellus and Utica regions. These orders totaled 6.4 megawatts and came from two current customers and two new customers.

We also recently announced orders from Horizon Power for two C1000s and an order for 25 C65s to be used in the oil and gas production in the Permian Basin located beneath West Texas and Southeastern New Mexico.

The oil and gas market continues to be our fasted growing market worldwide, and in Russia we received two orders totaling 24 megawatts per BPC for new associated gas and pipeline projects. This is a good example of what the shift we are seeing to bigger orders for larger load regimes. BPC continues to be a very strong partner for Capstone and today has over 1200 Capstone units successfully operating throughout their territory.

In addition to the U.S. and Russia, we are seeing significant interest from producers in Africa and the Middle East for Capstone high reliable, low maintenance associated oil and gas solutions.

Finally in the good industry we received orders for two C600 for use in two Italian food-manufacturing plants. This was a positive sign of increased order flow from IBP, our Italian distributor, as continental European market continues to slowly strengthen and rebound.

Turning to R&D, in R&D we continue our careful balance of applying critical investments to maximize short-term value by supporting longer-term goals for strategic growth.

Last December we were invited by the DOE to participate in the American Energy and Manufacturing Competitiveness Summit in Washington DC. The purpose of this annual event is to discuss and share American innovation, progress and competitiveness in energy and manufacturing sectors, with senior leaders from government, industry, academia and the national laboratories. I’m very proud to say Capstone has featured at this event as a leader in American innovation and energy productivity for green distributed generation. In fact, the DOE-sponsored video of our story can be found on their official website at

I’m also pleased to see our continued work with the DOE’s advancement manufacturing outlets and Oak Ridge National Laboratory to develop a new class of corrosion and creep-resistant steels. We are currently in phase I of the commercial viability and expect to have preliminary results this summer. This is an exciting opportunity to significantly reduce the material cost of our microturbines, by having a lower cost alternative to the traditional high temperature nickel-based alloys used in today’s product. I look forward to sharing our progress on this exciting program on future earnings calls.

We are very pleased with the success we’ve been having in penetrating our key markets. At the same time we’ve been successful in bringing down material costs, lowering warranty costs, reducing royalty expense, all while increasing revenue and holding production, labor and manufacturing costs in line.

We expect to meet our year-end cash and EBITDA goals during the current fourth quarter and look forwards to closing out another year of exceptional progress for Capstone and achieving another historical milestone in the company’s history.

That concludes our prepared remarks for today. Thanks for your continued attention. Operator, we’re now ready to open the call up to our analysts’ questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of Rob Stone with Cowen & Company; please proceed.

Rob Stone - Cowen & Company

Hi guys. I wanted to ask a couple of questions with respect to backlog and incoming orders Darren. You mentioned that the average order size, average ASP is going up and we’re seeing larger projects. Can you say if there’s a change in project lead times? Are those getting any shorter or longer and then what would you say is the average project lead-time?

Darren Jamison

Great question, Rob. I think the average project lead-time really depends on the market vertical. Oil and gas tend to be longer lead-time than CHP or other markets renewable. I’ll say as you move into the larger load regimes, the project cycles are going to be on the -- tend to be on the longer side. That being said, when we have 10, 20, 25 megawatts at a crack, we’ll need some time to obviously get the supply chain ramped up, so its actually a good thing for us.

Overall our backlog is $160 million, is what we believe we’ll deliver in the next 12 months, but typically the case, sometimes it flips out and sometimes it delivers sooner. But in general I would say nine to 12 months is a fair average lead-time to ship our product.

Rob Stone - Cowen & Company

So with respect to the backlog versus, you traditionally said backlog is a good way to think about the next four quarters of revenue, but your backlog doesn’t include FPP sort of backlog. So is $160 million a more sort of a, say a products revenue number for the next 12 months and how much might FPP adds to that?

Darren Jamison

Yes, traditionally what we’ve seen is whatever the kind of ending year backlog is, is a good sign for the following year. Obviously some of that backlog slips outside of the 12 months and that kind of gets backfilled with the accessories parts and service. With that I think our FPP backlog is growing at a nice pace. Ed mentioned in his comments that we’re over $45 million now in backlog, but traditionally I’d still guide to the total product backlog as being your best indicator for total revenue, correct.

Rob Stone - Cowen & Company

Great, thanks. I’ll jump back in the queue.

Darren Jamison

Thanks Rob. Thanks.


Your next question comes from the line of Philip Shen with Roth Capital; please proceed.

Matt Koranda – Roth Capital Partners

Hey guys, this is Matt on for Philip; thanks for taking our questions.

Darren Jamison


Matt Koranda – Roth Capital Partners

Just wanted to dig into the gross margins. First of all, congrats guys; that’s a huge improvement quarter-over-quarter. Just wondering maybe if you could breakout the improvements in the specific buckets. So you guys usually break out stuff by pricing, cost reduction, warranty and royalty. If you could break those out a little bit more for us it would be helpful.

Darren Jamison

Yes Matt, we can comment on the royalty part of that equation. For sure we picked up about two points from there. I said earlier that with a $600,000 benefit from the rate reduction on the royalty and that’s worth about two points on the quarter’s revenue. The remainder of it is a mix between improved warranty costs quarter-over-quarter and then slightly higher ASPs and some benefit for cost reduction.

Ed Reich

Yes, I think you can look at our previous waterfall chart and you can kind of walk through the changes quarter-over-quarter.

Matt Koranda – Roth Capital Partners

Okay, that’s helpful guys. And then can you just give us your latest update on specific cost reduction measures. So that 10% in margin gain that you guys have on slide six, how long will it take to capture that full 10%?

Ed Reich

Yes, what we said is if cost reduction is probably still 18 months or 24 months out to finalize the program, but we’ll be getting reduction as we go. The 3% price increase is last year’s price increase. As we said on the call, we’ve got another price increase that’s not included in this waterfall chart that will go into effect.

The warranty is down quarter-over-quarter of higher revenues. So obviously as the more we ship the more warranty reserve we put in place, so that’s actually even more impressive than it looks, the first blush. But overall you should see over the next two years, we kind of continue to march from the 20% margin today, up to about 35%.

Obviously the C250 with the additional benefit, the AFA fields could be additional benefits. We’ll continue to do price increases where the market will bear it. So we feel very good about the trajectory we’re on.

As we talked about for Q4, to get to EBITDA breakeven you need about roughly $40 million in revenue and 21%, 21.5% margins. So we’re very close to both of those numbers, so we feel very good about continuing the trend and achieving those goals.

Matt Koranda – Roth Capital Partners

Right, that’s helpful and just one more here if I may. The critical power piece of revenues, it looks like it was up pretty significantly; you guys just briefly commented on that. Maybe you could provide just a little bit more color as to what’s going on there and what are you seeing in this market and then is this sort of a normal mix going forward or is this kind of a blip on the radar here?

Darren Jamison

I would characterize it as a sandy effect. I think folks that are buying turbine today, there’s an option to buy it in grid parallel or in standalone or both, so they are opting to go fully loaded and do the standalone application to where they can run in parallel to the grid or run standalone without the grid. And so I think customers are seeing the value of not only distributor generation on site, but then having the ability to back up key loads, life safety, data centers and the like, so.

That’s a good shift for us. I think that strengthens our value proposition and it shows that people are learning from the unfortunate mistakes of the past and weather conditions and other natural disasters.

Matt Koranda – Roth Capital Partners

Okay, that’s helpful guys, thanks. I’ll jump back in queue.

Darren Jamison



Your next question comes from the line of Eric Stine with Craig-Hallum; please proceed.

Eric Stine - Craig-Hallum Capital Group

Hi everybody. Great to see that gross margin in the quarter.

Ed Reich

Thank you.

Eric Stine - Craig-Hallum Capital Group

Maybe, could we just start on the – you talked about and this has been a dynamic that’s been happening for some time. The number of orders in the pipeline, the size, any thoughts? I mean what do you attribute that to? Is it that the C200’s been in the market for a number of years and is proven? Is it your distributor base getting build out, any thoughts there?

Darren Jamison

Yes, I would say it’s a combination of both. The C1000, C200 series product has been in the market four years and that’s enough time for a lot of customers to get comfortable with the performance and the reliability of that product.

In addition as you know, we’ve been working hard to improve the reliability and performance of that product. We pareto every failure and we work diligently to our R&D group to make that product even more robust. So as the product matures, as it gets more happy customers in the field and we get more hours on the machines, that’s leading to more opportunities.

I think the paradigm shift we are seeing is a lot of folks are saying microturbine is really not micro when you put it in a megawatt solution and the fact that you can daisy-chain together as many megawatts essentially as you want, people are realizing that it may make sense for 10 megawatt, 20 megawatt, 15 megawatt solutions to use our technology, which is excellent. Obviously that will give us more revenue growth, baseline, some bigger customers and open more doors for us. And I think our distributors in general are maturing.

You mentioned the overall pipeline. Our pipeline is still well north of a $1 billion, about $1.3 billion. So as we see more and more opportunities, its really about the maturation of our distributors; how to turn those opportunities into orders and so the better the distributor, obviously the higher the hit rate or the close rate.

We still see a lot of – especially commodity heat and power project that are slow to close. I mentioned obviously before the Palace Hotel in New York, it took four years to close the project with less than a three-year payback.

I still think we’re going to see some of that, but as the economy improves, hopefully we’ll see those projects close much faster and the distributors basically mature and get better at closing those jobs I think will knock the hurdle down even quicker than they’ve done in the past.

Eric Stine - Craig-Hallum Capital Group

It is fair to say that you – I mean I guess we've seen a sizable order announcement in early January. Is it fair to say whether fourth quarter of fiscal year ‘15 we should see more of those?

Darren Jamison

Yes, you know timing is always difficult, but I would say we’ve got probably close to a dozen larger than 5 megawatt orders that are getting fairly mature, so hopefully if we don’t close some in Q4, we’ll be announcing in Q1. But I think they will start impacting next year’s revenue and definitely the year after that. So I think – and again, once we get to larger sites, that’s going to help other customers take the same plunge and get more comfortable using our technology and those load regimes.

Eric Stine - Craig-Hallum Capital Group

Yes, absolutely. Maybe just talking about orders, any thoughts or an early read on what you're seeing in the March quarter, you know just in light of the December quarter being pretty strong? Any change to the thought that the March quarter would be your seasonally strongest?

Darren Jamison

We talked about that in our last earnings call. I mean obviously year-end, since we do a lot of oil and gas work. We tend to get a little bit of a spike in the third quarter because of unused capital budgets; people have to use them before they lose them. So we did see some nice oil and gas orders in Q3.

Obviously in Q4 we’ll have our price increase April 1, so that should potentially drive a little bit of customers, but maybe around the fence, ordering to order in March, but in general I would say the same macro environment is what we’re seeing. A very strong market in the U.S., Hawaii and Alaska obviously are nice kind of windfalls with new opportunities there and two markets that make a lot of sense, which has never really performed very well for us.

Mexico is going through a lot of changes with Pemex and with the local utility grid there, I think there’s going to be more privatization and more opportunities in Mexico and its already a big market for us, so that’s getting better. I was just in Columbia last week. That market has had a lot of opportunity, both oil and gas and CHP. Brazil we’re excited about opportunities there.

Currently, we’ve got folks over in the Middle East. That’s a market we’ve done very little in the past that had some very good upsides. I think Africa is going to be something we’re going to talk a lot about in the next couple of quarters. So I think in general besides Europe the rest of the world is either trending in the right direction or continuing to be strong.

I think we’d like to get more out of Asia. China and India still aren’t as strong as they could be for us, but I think in general the majority of the markets we are in and the majority of the verticals are all trending in the right direction.

Eric Stine - Craig-Hallum Capital Group

Okay, that's great. Maybe just last one from me, talking about the oil and gas orders out of Russia. On the associated gas side in early January it looks like the order announcement was not with Tatneft. So just curious, maybe a way to size the opportunity with that customer, but then also potential timing we maybe should look for in terms of a follow-on from Tatneft. Thanks

Darren Jamison

Yes, no thank you. That is correct. That order for the 24 megawatts is not with Tatneft; it’s with other oil and gas users in Russia and specifically Associated Gas. The follow-on Tatneft’s order, we expect in the next probably two quarters, hopefully Q4 but not Q1. I would say they are getting very comfortable with the technology, with the performance and so we go down to how big the next order is going to be and pricing obviously is bit of an issue.

Even though our margins have improved dramatically at 20%, we’re still not inclined to discount the product substantially, so that’s obviously an ongoing conversation. But I look for probably at least a 10-megawatt order of Tatneft in the next couple of quarters.

Eric Stine - Craig-Hallum Capital Group

Okay, thanks a lot.


Our next question comes from the line of Colin Rusch with Northland Capital Markets; please proceed.

Colin Rusch - Northland Capital Markets

Thanks so much. Can you guys give us an update on the upgrading, the distributor network? You talked a little bit about going through an online review process with some of those distributors. Can you just get us up to date on where you’re at with that now, particularly as you look at expanding into developing economies?

Darren Jamison

Yes, no we’re up to 99 distributors I believe to-date. We’re still doing a lot of – we used to call it weed and feed and now we’re calling it feed and weed; it’s a little more positive. But the reality is we’re giving the good distributors more territory. We are working hard on the weaker distributors and make sure they improve. I think it’s an area that we’re focused on probably for the next several years. We continue to grow the distribution channel that’s key to our overall success.

Colin Rusch - Northland Capital Markets

Great, and the and then can you give us an update on what’s going on with the rig market in the U.S.? Obviously your going geography by geography, but it seems like there’s still a material opportunity there? Are there some big fish out there that you guys are working with potentially?

Darren Jamison

Absolutely. The first unit for weighted will be commissioned here probably next quarter. I think as the later gets several of their buildings going that will be kind of our first full foray into that market. Obviously the equity option of the world will hopefully fall behind that.

Colin Rusch - Northland Capital Markets

Okay, great. And then can you talk a little bit about the mix shift? Obviously, you're seeing ASPs go up per unit, but that seems largely to be a product of just the system size. Can you talk a little bit about the pricing dynamics as you talk about your targets? How much of that is being driven by this shift in unit size and how much of it is on a per-watt basis?

Darren Jamison

Yes, I think the bigger shift we’re seeing is just more C1000’s just shifting to larger machines. C65 has done well. We’ve seen a slowdown in C30’s, but I think the biggest shift we’re seeing is multiple C1000s and larger well machines like I talked about. So we started doing more north of 5-megawatt sites that’s going to obviously drive the C1000 business much faster than the rest of the business.

Colin Rusch - Northland Capital Markets

Great, thanks a lot guys.


That concludes our Q&A session. I would now like to turn the call over to Mr. Darren Jamison for closing remarks. Please proceed.

Darren Jamison

Great, thank you and really great questions as usual. Obviously this is the best all around quarter in the company history. We’re very happy with the results; highest revenue, highest product revenue; gross margin in both dollars and percentage, record backlogs like we discussed, both in FPP and in product; a tremendous book-to-bill ratio of 1.4:1, average selling price is at the highest levels and strong cash, I mean our cash position is becoming more of a strength for us.

So we look forward to moving up into larger load regimes. We look forward obviously to more oil and gas fueling our growth, to mention Mexico, Columbia, Brazil, Middle East to Africa, all very promising; Alaska and Hawaii here in the U.S. So we still are maintaining our goals for Q4 -- as these are breakeven and a cash balance of $33 million to $36 million. So hopefully we can achieve those goals and have a great Q4 call. Thank you everybody.


Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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