SatCon Technologies Corp. Q1 2010 Earnings Call Transcript

May. 6.10 | About: SatCon Technology (SATCQ)

SatCon Technologies Corp (SATC) Q1 2010 Earnings Call May 6, 2010 5:00 PM ET

Executives

Steve Rhoades – President, Chief Executive Officer

Donald Peck – Chief Financial Officer

Analysts

Dale Pfue – Cantor Fitzgerald

Adam Krop – Adour Capital Investment

Scott Reynolds – Thomas Weisel Partners

Pavel Molchanov – Raymond James

[Joe Eisenburg – Renewable Analytics]

[Steve Bogman – Diversar Capital Management]

Operator

Welcome to SatCon’s first quarter 2010 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 to today’s call, today’s news release is posted on the site for those of you who have received it by email.

With us today are SatCon’s President and Chief Executive Officer, Steve Rhoades, and Chief Financial Officer, Don Peck. At this time, for opening remarks, I would like to turn the call over to Mr. Peck.

Donald Peck

Welcome to the call everyone. Before we begin, please note that 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 statement contained herein that are not statements of historical fact, may be deemed to be forward-looking statements and may include the words believe, anticipate, plan, expect, intend and other 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 annual report on Form 10-K for the year ended December 31, 2009. These factors are included there for reference. Copies of the 10-K will be available from SatCon upon request and the Form 10-K is posted on the company’s investor relations website at www.stacon.com.

Today’s call is being recorded. A replay will be available on the investor relations website. This conference call and associated recorded belong to SatCon and are prepared for the benefit of our investors.

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

Steve Rhoades

Thanks, Don and good afternoon everyone. I’m pleased back to you on another strong quarter here at SatCon. SatCon posted revenues of $14.7 million in the first quarter, which represents roughly twice what we did in renewable energy in Q1 of 2009.

In addition, bookings for the quarter reached $66 million, reflecting increasing global demand for the company’s utility ready Silver PV solution. As of May 3, 2010, the company’s backlog, which consists of firm, fixed purchase orders with customers totaled over $80 million. We expect to deliver product and satisfy this entire existing backlog during this fiscal year.

This growth in backlog reflects a strong global market environment for large-scale silver inverters and we have seen no increasing pricing pressure during the quarter. During the first quarter we shipped 234 units of our industry leading PowerGate Plus solutions and completed the first commercial deployments of our next generation Solstice power conversion systems.

SatCom’s 500 kilowatt PowerGate Plus solution continued to be our strongest performing product. The 71 units representing 82% growth over the number of 500-kilowatt units shipped in the first quarter of 2009.

The robust global demand for our 500-kilowatt solutions is a clear indicator of the strengthening of the worldwide solar market and the trending toward larger essential inverter solutions for these projects.

Our revenue and margin performance is in line with our guidance. We generated gross margin of 13.8% during the first quarter of 2010, further expanding on improvements we achieved over recent quarters.

The restructuring plan for our Burlington, Ontario operation is complete and in Q1, we manufactured over 60% of our product shipments of our Shenzhen, China facility. We expect that percentage to fluctuate as we begin to ship against a strong backlog of orders and near term pipeline for Ontario feed in terra projects, which require local content.

Looking forward to the second quarter, we expect our revenues will increase significantly to between $25 million and $28 million. In addition, we expect our gross margin to increase to over 20% in the second quarter as we complete our transition of production to our lower cost facility in China.

We remain on target to have the operations plan fully implemented by mid 2010 and expect to achieve greater than 30% gross margin in the second half of 2010 as a result of the continuous improvements that are part of this plan.

Focusing for a moment on our record booking number, the first quarter marks a significant milestone for us with each of our three core markets of China, North America and Europe all making significant contributions to our overall bookings total.

In the U.S., we booked over 41 megawatts in this first quarter, traditionally a seasonally slow quarter for us. The Canadian market continues to generate significant pipeline with 20 megawatts of bookings secured in the quarter for our PowerGate Plus solutions, the only large-scale solar inverter solutions that are 100% compliant for the Ontario Feed and Turf domestic content requirement.

We continue to affirm our position as the best in class solutions provider for large-scale solar projects and remain committed to maintaining our dominant position in North America. Europe has also recorded significant growth with over 47 megawatts of orders booked in the Czech Republic, German and Greece and our first project in both Belgium and France.

The demand for utility scale solar power in China continues to grow at a rapid pace, and is on target to become the world leader large-scale solar PD market place. In the quarter, we received two previously announced orders from GCL Solar Ltd. for the company’s 500-kilowatt inverters.

The solutions will be installed across multiple solar plants in China, with construction complete in the fall of 2010. The total volume ordered under the company’s partnership with GCL is now over 200 megawatts and establishes SatCon as a strong player in the Chinese solar market. Also in the quarter, we received an additional 32 megawatts of orders from new customers across China for multi-megawatt utility scale installations.

With our investments in both Asia and Europe delivering growth, and the increasing momentum of Ontario’s projects, these markets will continue to be key components of our growing global market share, enabling us to diversify the effects of seasonality and macro economic forces to achieve a more balances growth rate.

We continue to see positive results from our strategy of ongoing utility scale solution innovation. In addition to our category leading PowerGate Plus solution, we have and will continue to achieve competitive advantage through our new product introduction strategy.

In the fourth quarter of last year, we launched our 100-kilowatt Solstice solution. SatCon Solstice is the first complete utility grade solution for large-scale solar power plants. With peak efficiencies above 98% and our proprietary two stage DC architecture, Solstice redefines the large scale solar value equation by increasing the overall system energy yield while at the same time, reducing the overall balance and system install cost.

We’re pleased to report the first commercial deployments of the Solstice solution and are looking to continue to expand our solution portfolio to include a wider range of power ratings as well as offering for both the Asian and European markets throughout 2010.

With bookings for the first quarter far outpacing total revenues for all of 2009, and strong order levels continuing into the second quarter, we are well positioned to deliver significant top line growth in 2010.

With that, I’ll turn it over to Don, our CFO, who will review our financial results.

Donald Peck

Thanks, Steve. Revenue for the first quarter ended March 31, 2010 was $14.7 million, an increase of approximately 10% or $1.4 million over the same period in 2009 and was directly in line with the guidance the company provided during the last quarter’s earnings call of first quarter revenue between $14 million and $16 million.

Please note that all numbers have been adjusted to reflect the sale of our Applied Technology Division, which closed in January 2010.

During the quarter, we sold 234 units with total megawatt capacity of over 55 megawatts. Gross margin for the quarter was 13.8% compared to 8.2% in the same period in 2009 and 13.2% for the fourth quarter of 2009. This gross margin achievement is slightly ahead of our goal announced during last earnings call of flat margins over the fourth quarter of last year and reflects solid improvement in our manufacturing processes, as we were able to generate greater margins in our first quarter on lower revenues than we generated last quarter.

We continue to transfer our manufacturing processes to our lower cost China contract manufacturing facility and expect that process to be completed by the end of the second quarter. As Steve mentioned in his remarks, we expect our gross margin percentages will continue to improve over the next three quarters as we complete our manufacturing transition to China and rationalize our supply chain to utilize a greater percentage of lower cost, manufactured components.

Our operating expense before restructuring charges for the quarter were approximately $8.3 million compared to operating expenses of $6.2 million for the same period last year. The main driver to the increase in our operating expenses as compared to last year, were higher research and development expenditures as we continue innovation through our new product introduction center here in Boston as well as higher selling, general and administrative expenses as we extend our sales and operations footprint globally to prepare for growth.

During the first quarter we completed the realignment of our Canadian operation, incurring a restructuring charge of $784,000 during the quarter. With our second non operating items, during the first quarter of 2010, the change in the fair value of outstanding warrants generated credit of $1.l million compared to a charge during the first quarter of last year of $5.4 million. This valuation swing resulted in much improved bottom line GAAP results between periods.

The net loss attributable to common shareholders for the first quarter of 2010 was $7.2 million compared to a net loss attributable to common shareholders for the same period last year of $11.9 million. On a weighted average per share basis, both basic and fully diluted, we had a net loss of $0.10 per share this past quarter compared to a net loss of $0.23 per share for the same period last year.

Turning to our balance sheet, we ended the quarter with a healthy $11.7 million in cash. Accounts receivable at the end of the first quarter were approximately $13.3 million, down from $11.6 million at December 31, 2009 primarily due to lower revenue volume.

Inventory at quarter end was $15.8 million, up from $11.9 million at December 31, 2009 and it ramped up for increased orders on hand during the second quarter. Our accounts payable decreased from $20.8 million at the end of last year to $14.6 million as we continue to enhance our relationships with our suppliers and enhance our supply chain in preparation for future growth.

Our backlog which consists of firm, fixed purchase orders from our renewable energy customers was $56.4 million as of quarter end, and as Steve mentioned, was approximately $80 million as of May 3, 2010 as compared to $32.5 million on March 4, 2010, the date of our last earnings call.

With that, I’ll turn it over to Steve.

Steve Rhoades

We’re very pleased with our performance in Q1 and believe we have laid the foundation for a very successful year. With that, I’ll ask the operator to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Dale Pfue – Cantor Fitzgerald.

Dale Pfue – Cantor Fitzgerald

Congratulations. I like those bookings. I have to ask the obvious question today. Are you taking your orders in U.S. dollars and if not, are you hedged?

Donald Peck

The vast majority of our orders are in U.S. dollars. There are some that are starting to come in foreign currencies. We will be pursuing hedge strategies before those materialize into revenues.

Dale Pfue – Cantor Fitzgerald

Since you saw such a huge demand in first quarter, particular in the U.S. which North America I was impressed at, how has demand been through the second quarter and are your customers telling you to expect maybe a drop off in the third quarter as the German fit ripples through the industry.

Steve Rhoades

We actually gave two numbers. $56 million in backlog at the end of the quarter and $80 million today, so our quarter strength has stayed strong. As you know, we’re not as exposed as most to the German primarily residential market and we’ve seen strength across all three of the regions that we serve, so we’re not actually at the moment, seeing a big drop off in demand as we look into the second half of the year.

It will take time for all of that to materialize, but I don’t think that we’re as exposed to it as some players are out there.

Dale Pfue – Cantor Fitzgerald

With the strong bookings in the first quarter, even if we see bookings at somewhat lower levels, are deliveries going to stretch out or are you ramping to try and capture them all?

Steve Rhoades

We are ramping up our manufacturing capacity. Our total worldwide capacity for delivery is up over 200 megawatts a quarter and so we expect to be able to deliver on the orders that we’ve taken and we’re trying to prepare for a bigger second half. So our goal is to be able to serve our customers and deliver on what they need.

Operator

You're next question comes from Adam Krop – Adour Capital Investment.

Adam Krop – Adour Capital Investment

Just to follow on that last question, it sounds like you’re about 800 megawatts per year in terms of capacity. Can you comment on any kind of expansion you’re expecting there maybe through the back end of this year or into 2011?

Steve Rhoades

We’re adding capacity to take that number up by about 50% in the second half of the year.

Adam Krop – Adour Capital Investment

So by the end of the year, you’ll be at about 1.2 gigawatts.

Steve Rhoades

Right, and that’s across both factories. That across the Burlington and the Shenzhen facility.

Adam Krop – Adour Capital Investment

Is it going to be about a gigawatt in Shenzhen?

Steve Rhoades

It’ll be a little less than that in Shenzhen. It’ll be about 900 and 300. As we’ve talked about before, if we see the need, we can probably react and bring more on in China if we need to, but that’s not our current plan.

Adam Krop – Adour Capital Investment

On the GCL order and maybe on the other Chinese orders, is there any way to handicap the risk in terms of shipping product over there given that the feed and turf looks like it’s going to be delayed until late this year, maybe even 2011.

Steve Rhoades

I don’t know how to answer whether there’s a hedge. I think in working with our partners there, they believe that they have that level of demand independent of the feed and turf and so I think that we have a reasonable high confidence that that’s going to ship inside of this year.

Adam Krop – Adour Capital Investment

How would you characterize the supply and demand scenario in terms of the supply of inverters that you’re seeing out there in the industry given the demand that you’re seeing as well. I guess depending on your answer to that question, is there an opportunity to increase pricing in the back half of the year if demand starts to pinch supply?

Steve Rhoades

I think that we’ll take the opportunity to adjust our discount levels if that seems appropriate but I think that bigger point for us is that the opportunity has just gone up dramatically this year, and we’re just working as hard as we can to make sure that we can meet the demand for our customers and gain the market share that we think that we can.

Discount levels are always driven by the amount of demand out there, so every single project is a negotiation.

Adam Krop – Adour Capital Investment

Expected restructuring charges in 2010, can you help me out with that?

Donald Peck

We have completed our restructuring in Q1, so there won’t be any more this year.

Operator

You're next question comes from Scott Reynolds – Thomas Weisel Partners.

Scott Reynolds – Thomas Weisel Partners

OpEx ticked up quarter over quarter. Should we expect a continued run rate in the $8 million to $9 million range?

Donald Peck

We are planning for our growth and expanding our footprint globally. I would certainly say that Q1 is more indicative of what it’s going to be in the future than in prior years, and indeed if that were to pick up over the next few quarters because of opening new sales offices and incur the expenses that come with a higher revenue target, that would certainly be reasonable to model.

Scott Reynolds – Thomas Weisel Partners

Of the current backlog, do you expect to ship most of that this year?

Steve Rhoades

We said in our remarks we expect to ship all of it this year.

Scott Reynolds – Thomas Weisel Partners

In the industry, we’re hearing a lot of problems about component shortages. Are you seeing any issues there?

Steve Rhoades

We’re growing rapidly. We have a few short parts that we expect to be able to get. I think that what’s a little different for us from a lot of inverter suppliers, we’re not in the very high volume residential market, so our shipments in Q1, 230 units, it’s not quite the volume you’d see if we were doing string inverters so it maybe doesn’t hit us quite as hard.

Operator

You're next question comes from Pavel Molchanov – Raymond James.

Pavel Molchanov – Raymond James

Do you want to talk about your product mix? As you see this nice revenue ramp up, are you seeing any changes in terms of 500 kW products comprising larger or smaller proportion of the total and what is this doing to your margin profile?

Donald Peck

Certainly if you look at the backlog that we have currently and the recently announced GCL order, you’ll see a continuation of a trend that you’ve seen over the last few quarters to the higher kilowatt and one megawatt product families. So indeed, while I don’t expect that to have an effect in margins if you look at it on an average kilowatt revenue per kilowatt basis, you could expect to see those come down as that mix moves to the higher kilowatt product family.

Pavel Molchanov – Raymond James

So the per unit margin profile, just on a percentage basis is fairly constant across your product family, is that right?

Donald Peck

Our higher power products are actually a little bit better on margin than lower power even though the revenue per watt is a little bit lower.

Operator

You're next question comes from [Joe Eisenburg – Renewable Analytics]

[Joe Eisenburg – Renewable Analytics]

On your capacity build out, how much do you expect that to cost and when will that be realized just from a cash flow perspective.

Steve Rhoades

We use an out sourcer for our China facility so the amount of capital we have to invest for added capacity is really mostly around test stems which is not a huge amount of cash. We could probably get a number later for what we’ll have in CapEx. It’s not a big number.

Operator

You're next question comes from [Steve Bogman – Diversar Capital Management]

[Steve Bogman – Diversar Capital Management]

Just to follow on that last question of your plan to meet this really strong demand that you’ve done a great job of booking; can you review your capital situation? If you talked about how much availability you had on the line, I missed it. And then how you meet the working capital requirements of the revenue that’s to come.

Donald Peck

We’ve got the resources we need currently to meet our demand going forward. To the extent that we can augment them over the next few quarters with various strategies. You can see we’ve got no long-term debt on our balance sheet so to the extent that we consider those alternative strategies to enhance our liquidity in the short term. Those options are certainly available to us if we were to need them, but our current line of $10 million in Silicon Valley Bank is certainly enough to cover us in the short and medium term.

[Steve Bogman – Diversar Capital Management]

Do you have any availability under that line? I thought it was limited to $8.6 million or something.

Donald Peck

It’s a $10 million line. At the end of March we had $8.6 drawn on it.

[Steve Bogman – Diversar Capital Management]

And you did have excess availability?

Donald Peck

That was our availability at that time.

Operator

There are no further questions at this time. I’d like to hand it back to you for closing comments.

Steve Rhoades

Thanks everyone for joining us. We look forward to speaking with you on our second quarter 2010 conference call, and this will end today’s call. Thanks a lot.

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