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Executives

Leah Gibson – IR Manager

Steve Rhoades – President and CEO

Donald Peck – CFO

Analysts

Dale Pfue – Cantor Fitzgerald

Joseph Maxa – Dougherty & Company

Michael Kumatsky -American Capital

Pavel Molchanov – Raymond James

Jeff Osborne – Stifel Nicolaus & Co.

Adam Krop – Adour Capital Investment

Chris (ph) – Treaty Oak Capital

Joe Eisenberg – Renewable Analytics

Dragos Georgescu – Cambria Capital

Satcon Technology Corporation (SATC) Q2 2010 Earnings Conference Call August 5, 2010 5:00 PM ET

Operator

Good afternoon and welcome everyone to SatCon’s second 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 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 and Investor Relations Manager, Leah Gibson. At this time for opening remarks, I would like to turn the call over to Ms. Gibson. Please go ahead.

Leah Gibson

Thank you Devon and 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 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, and the company’s quarterly report on Form 10-Q ended June 30, 2010. These factors are included there for reference. Once filed with the SEC, copies of the 10-Q will be available from SatCon upon request and will be posted to the company’s investor website at stacon.com.

In addition today’s call is being recorded and a webcast 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.

Finally I would like to mention that Satcon is presenting at the Needham Clean Technology Conference in New York on Monday August 9, at 1:20 PM. A live webcast of management’s presentation will be available on our investor website at satcon.com and an archive recording will be available for 90 days.

With that I’ll turn the call over to our President and Chief Executive Officer, Steve Rhoades, Steve?

Steve Rhoades

Thanks Leah, good afternoon everyone. I’m pleased to report to you in the largest revenue quarter in SatCon’s history. We are very pleased to have posted revenues near the high end of our guidance of $28 million with Q2 2010 ending at $27.6 million.

This represents an increase of almost 2.5 times our reported renewable energy solutions revenue from the same quarter a year ago. Gross margin also came in above our goal at 21%. A significant improvement over the last quarter’s recorded 14%. And we expect this trend in gross margin to continue throughout the second half of the year and into 2011.

Our gross margin improvement has been fuelled in part by the now completed transfer of our primary supply chain and manufacturing to our lower cost facility in Shenzhen, China which delivered over 85% of our products that were shipped in the second quarter. We have also completed efforts to streamline our manufacturing operations in Burlington, Ontario which now provides Satcon additional capacity to meet global demand and better serve the rapidly expanding Ontario’s solar market.

We’ve seen this market grow in the last six months, fuelled by the introduction of the problem since first Feed-In Tariff which requires a significant portion of the equipment to be installed to be manufactured locally.

During the quarter, we shipped a 105 megawatts of SatCon’s industry leading solutions. SatCon’s 500 kilowatt PowerGate Plus solution continued to be our strongest performing product. Shipping 66 megawatts and representing 300% growth over the number of 500 kilowatt units shipped in the second quarter of 2009. Our 500 kilowatt PowerGate Plus is the most widely deployed utility ready solar PV inverter of its size with over 600 megawatts sold worldwide since its introduction in 2005.

As of August 3, 2010 the company’s backlog which consists of firmed fixed purchase orders with customers totaled over $110 million. This is a significant increase over the $80 million in backlog announced last quarter and it shows the growing market for utility projects as well as the demand for SatCon’s industry leading technology for this sector. The current backlog consists of 390 megawatts of our large scale inverter solutions at 250 kilowatts and above and reflects our growing global footprint and success securing large portions of market share in Europe and Asia while maintaining our dominant position in the evolving large North American inverter market.

Given our first half shipments, along with our second half backlog in pipeline, we firmly believe that we will acquire well over 20% of the 2010 global market for PV inverters in 250 kilowatts and above. This global demand has driven our recent move to raise our global manufacturing capacity to over 1 Gigawatts and move towards the 2011 global capacity of 1.75 Gigawatts.

Focusing for a moment on our strong sales performance, we continued to see significant contributions from each of our core growth markets in North America, Europe and Asia Pacific. In North America, sales represented 49% of total revenue for the quarter, bookings reached over 140 megawatts of our global bookings of 220 megawatts. One driver behind this region’s strong performance is the growth in utility scale solar in the US and Canada.

Just last month, we announced our largest single Canadian order to-date and solar industry leader Q-Cells selected Satcon for a 20 megawatt plant which is as we speak installing 20 of our Prism fully integrated one megawatt medium voltage solutions. Ontario’s Feed-In Tariff has also generated a generous pipeline of projects which was highlighted were our recently announced agreement with OZZ Solar International. We’ve requested over 18 megawatts of our products designated for Ontario Rooftop installations in mid 2010.

These multi megawatt and multi site systems rank among the largest solar PV installations in North America and SatCon’s partnership with these industry leading solar PV developers support our position as the number one supplier of large inverter systems for ground mounted and rooftop solar installations in Ontario. We have also continued to establish ourselves as the leading inverter provider to US utilities, including a land mark deal with Southern California Edison to supply our inverters for a minimum of 75% of their 250 megawatt Solar Photovoltaic Program.

As part of this program Southern California Edison will leverage the Satcon PowerGate Plus 500 kilowatt and the newly launched Equinox 500 kilowatt platforms for its solar rooftop initiative which will utilize unused large warehouse rooftops. SCE plans to develop these installations over the next five years of which 75 megawatts are expected to be installed in 2010.

Our utility scale systems have also been chosen by Pacific Gas and Electric to power the largest solar firm to-date on that utilities network. Satcon on the one megawatt Prism fully integrated solution is being used for this five megawatt CalRENEW-1 site in Mendota, California.

Our goal over the last two years has been to maintain our dominant footprint in North America while growing Satcon into a global brand and supplier to the key utility scale solar PV markets around the world. In the last three quarters we have been pleased to see our hard work and effort payoff in both Asia Pacific an Europe.

In Europe our revenues for the first half of 2010 are up over 400% from the same period in 2009. In the second quarter of this year alone, our revenues were $12.5 million and our backlog per year now stands at over 86 megawatts. We see no decline in our growth rates in this regions for the balance of 2010 as we continue to expand our market share toward a leadership position similar to what we have established in North America over the last two years.

Since mid 2009, Satcon is becoming leading choice for large scale inverter developments capturing major projects in Germany, Italy, Belgium, Czech Republic, Slovenia, Greece and France. In the Czech Republic for instance in a very short time Satcon has established itself as the number one supplier of utility scale solar PV inverter solutions with over 60 megawatts shipped since 2009.

We are also increasing our traction in Germany, where we received orders from four large German PV project developers. And again we see no deceleration in our bookings for the Czech, German or any of the other major markets in Europe at this time. The growth in the European market is anchored by our PowerGate 500 kilowatt CE solution which continues to be the most utilized 500 kilowatt solution from large scale solar PV systems on the market.

Recent example of Satcon growing European presence is in France, where Infinity, one of the world’s leading solar energy development company. Infinity recently completed an 18 megawatt plant using SatCon’s utility ready PowerGate Plus 500 kilowatt CE inverters. Many parts of Europe are implementing utility scale solar power at a rapid pace and it is through our leadership and technology, strong partnerships and competitive service networks that we are poised to continue to increase our market share in this region.

We also continue to see strong growth and opportunity in Asia Pacific, most rapidly in China and we are also recognizing opportunities in the greater Asia markets recording initial orders in for utility scales solar polar solutions in the highly anticipated solar markets in Taiwan and India. The strength of our brand in Asia Pac is driven by key partnerships we developed in late 2009 and early 2010 with industry leading companies such as GCL Solar Limited.

Our increasingly dominant position is further strengthened by the technology and the liability leadership of our 500 kilowatt PowerGate platform which continues to be the market leader in the region at this power level. Our focus over the past two years is not just been about building a new Satcon, it is been about building a solution portfolio that defines the new standards for performance, quality and value for the solar industry.

Our core strategy of expanding our leadership position through solution innovation has resulted in significant commercial and technological growth in the past quarter as evident by their significant increase in demand for Solstice 100 kilowatt systems solution in North America.

Since its launch in October of last year, Solstice has redefined the value of creation for large scale solar production delivering performance gains that are order of magnitude greater than any of the technology before. By breaking larger arrays up into smaller controllable income less than 3 kilowatts Solstice enable to fine grain energy harvest and combines it with an optimize central power conversion system.

In the quarter our customer Broadweld (ph) actually energized our Solstice installation in North America. We expanded our Solstice product portfolio to include a 500 kilowatt system solution in the region and we introduced a 125 kilowatt solution for Europe and Asia. The demand for our Solstice solution is growing dramatically with nearly 90 megawatt identified in our current pipeline. With the 500 kilowatt solution now available in the US and Canada and European and Asian certified products related to general availability later this year, the impact of Solstice will mark an inflection point in the standards for performance and quality in large scale solar power production.

In the quarter, we also launched our third generation central inverter solution, Equinox. Our Equinox 500 kilowatt units improves upon our industry leading PowerGate plus 500 kilowatt solution bringing with it improved efficiency and performance superior design and advanced good features such as the control of real and reactive power, our mode of cancellation and standardize (inaudible) interface.

As our industry matures, we are committed to driving clear technology leadership. This means that our focus on value driving innovation expand beyond just a component focus in to building better, compete systems from panel to grid.

Solstice is our first expense – example of this expanded system solution approach and we are committed to driving value deeper across the system itself addressing the sweet value driving opportunities that can be improved upon with better and more intelligent processes and technologies.

By concentrating our efforts on next generation technologies we are positioning Satcon for a long-term growth which a clear differentiation form our current and future competitors. Our global sales organization is reporting a growing pipeline in the regions we serve and we continue to identify new opportunities to expand our customer base through key partnership agreements in almost all geographic areas. supported by our strong first half bookings we are able to invest in operational enhancements that will grow our current capacity significantly in the second half of the year and we expect to reach 1.75 Gigawatts of capacity worldwide in 2011.

As we look to the third quarter of 2010, we expect our revenues will increase significantly to between $43 million and $47 million. With the increase in our backlog and the strength of our bookings pipeline, we expect revenues in the fourth quarter of 2010 to be higher than Q3. In addition we expect to achieve greater than 30% gross margin in the second half of the year as a result of a continuous improvements we are making to our operations and manufacturing supply chain.

We remain on target to have our operations plan fully implemented by the end of Q3. With these improvements we expected our margins in the third quarter will be in the mid to high 20s and margins for Q4 2010 will be in the low to mid 30% range.

With that, I will turn the call over to our CFO, Don Peck who will review our financial results.

Thanks, Steve. Revenue for the second quarter ended June 30, 2010 was $27.6 million, an increase of approximately 252% or $20 million over the same period in 2009 and as Steve mentioned at the top end of the guidance the company provided during the last quarter’s earnings call of second quarter revenue between $25 million and $28 million.

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

Our revenues of $27.6 million for Q2 is also an 88% increase over our revenues just last quarter of $14.7 million. In combination Q1 and Q2 2010 totals bring our year-to-date revenues to $42.4 million compared to $21 million for the similar six month period last year or a 102% increase in revenues year-over-year.

Bookings for the first half of the year were $123 million, an increase of 1100% over the bookings we recorded for the first half of 2009 of $10.1 million. As we continue to be in a market leadership position in North America and China and expand our sales presence in Europe. Our backlog which consists of firm, fixed purchase orders from our renewable energy customers was $82 million as of quarter end, and a record $111 million as of August 3, 2010. about 90% of this backlog is currently scheduled to shift this calendar year.

During the quarter we filled 405 units with total megawatt capacity of over 105 megawatts as compared to a 106 units with 25 megawatts of capacity for the same quarter last year. Year-to-date we have sold 643 units with total megawatt capacity of 161 megawatts. (inaudible) in the 240 units we thinks another megawatt capacity for the first six months of last year.

Continued acceleration in our growth margin was evident as our gross margin was 21% for the second quarter of 2010 compared to negative four for the same period in 2009 and 14% for the first quarter of 2010.

This growth margin statement is ahead of our goal announced during the last earnings call of 20% margins for the quarter and reflects solid improvement in our manufacturing processes and the impact of higher volumes.

As Steve mentioned in his remarks, we expect our gross margin percentages will continue to improve over the next three quarters as we leverage our Chinese contractor and manufacturing operations and rationalize our supply chain to utilize a greater percentage of lower cost, manufactured components.

We expect that we would achieve margins greater than 30% for the second half of the year with margins in the mid to high 20% range for the third quarter and increasing to the low to mid 30% range of the fourth quarter as continue to drive margin expansion in our business.

Our operating expenses for the quarter were approximately $11 million compared to operating expenses $6.7 million for the same period in 2009, and $9.1 million last quarter. 26 months ended June 30, 2010 our operating expenses were approximately $20.1 million compared to operating expenses for the first half of 2009 up $12.9 million.

The main drivers for the increase in our operating expense that compares to the same period in 2009, where higher research and development expenditures as we continue to fund product utilization and higher selling, general administrative expenses as we continued to expand our sales and marketing personnel and facilities, take on global travel requirements, invest in our IT infrastructure and expand our general sales and operational foot prints globally through the response that are made for our products and fuel our growth.

In particular, during the second quarter of 2010, we increased our allowance for relative accounts by approximately $950,000 to a full exposure on a few specific accounts. $800,000 with this amount involved in a one customer offer reimbursement to us for a non OR non PV product that we procured for the customer last year from the third-party going on manufacturer.

This year’s revenues have been inversely entirely from our PV business. We do expect we will report increased and allowances were double accounts, anyone close to this magnitude in the coming quarters. I’m happy to report that our customers (inaudible) and on time.

Operating loss per share which is operating loss from continuing operations decided by the weighted average number of common shares outstanding, decrease from $0.13 a share with second quarter of last year to $0.07 a share in the past quarter.

Turning into non-operating expense items, during the second quarter of 2010, a change in the fair value of outstanding warrants generated a charge of $858,000 compared to a credit for the second quarter of last year of $1.8 million. Because of big non-cash swing in our other income and expenses periods and impacted our net loss attributable to common shareholders.

Our foreign exchange loss this second quarter of 2010, was about $250,000 or less than 1% of revenues. year-to-date it’s about $350,000 also probably less than 1% of revenues. As we continue to minimize our exposure to foreign currencies including the Euro. Net loss attributable to common shareholders for the second quarter of 2010 was $8.5 million and year-to-date with $15.7 million compared to a net loss attributable to common shareholders for the same three month period last year of $7.1 million and the six month period of $19 million.

On a weighted average per share basis both fully and basic and fully diluted, we had a net loss of $0.12 per share this past compared to a net loss of $0.13 per share for the same period last year. Turning to the balance sheet, we ended the quarter with a healthy $14.4 million in cash. Accounts receivable for the end of the first quarter were approximately $28.5 million, up from $17.6 million at December 31, 2009. of the $28.5 million at June 30, 2010 accounts receivable approximately $6.6 million of that represents pre-billings on orders to be delivered and recognized as revenue in Q3 of 2010, which is also driving our current deferred revenues up from $451,000 at the end of last year to $7.1 million at June 30 of 2010.

Inventory at quarter end was 18.7 million, up from 11.9 million at December 31, 2009 as we ramped up for an increased demand for our products.

During the quarter, we closed a $12 million (inaudible) facility to provide us additional liquidity. In addition, we announced today that we have increased the amount available under our revolving one of credit with Silicon Valley Bank to $15 million. These debt structures provide us with the resources we need to meet the working capital demands of the business, while we march towards profitability and casual positive operations.

With that, I’ll turn the call back to Steve.

Steve Rhoades

Thanks, Don. And with that, I’ll ask the operator to open the call for questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Dale Pfue with Cantor Fitzgerald. Please proceed with your question.

Dale Pfue – Cantor Fitzgerald

Good afternoon. Congratulations, bookings are pretty spectacular.

Steve Rhoades

Thanks, Dale.

Dale Pfue – Cantor Fitzgerald

A couple of housekeeping and then we’ll get to some real questions. On the $111 million that you had as of August 3rd, is the regional breakdown approximately the same as ending, the quarter ending or is there a significant shift there?

Donald Peck

The backlog of 111 is about 30% in Asia Pacific, 20% in Europe and about 49 to 50% in North America.

Dale Pfue – Cantor Fitzgerald

Okay, that’s very helpful. And then for the quarter, could I get roughly the same breakout, where were your revenues for the quarter on a regional basis?

Donald Peck

Well, EBITDA was about 50% in North America.

Dale Pfue – Cantor Fitzgerald

Yes.

Donald Peck

5% in Asia Pacific and 45% EMEA.

Dale Pfue – Cantor Fitzgerald

Okay, fabulous. Now, as we’re looking forward here into the second half of the year. How are the bookings trends? Are they continuing to be strong and we do hear about potential shortages, booking, and air freight for December timeframe and so on. Are the bookings still coming in? Are you going to be able to meet those yearend demand targets and can you give us any kind of thoughts about what the January 1, 2011, looks like?

Donald Peck

We’re not providing any guidance on Q1 of next year, if that’s what you’re asking Dale. But I will say that bookings remain very strong. I’ve had this conversation, in fact, this is always our strongest time of year for bookings, the July, August, September timeframe and that’s certainly been true this year.

Dale Pfue – Cantor Fitzgerald

And that trend, can you give any – we know certainly Europe is strong. It sounds like the U.S. is coming on even stronger. Do you think there’s a seasonal trend there in the U.S.?

Donald Peck

Yes, we always see the U.S. stronger in the second and third quarter, and into the beginning of fourth quarter for our business. But as we pointed out in the call, we haven’t seen a slowdown in Europe, in fact the other direction, and our business in Asia Pac continues to grow. But we’ve seen a lot of strength in North America, a lot of strength of Canada and continued strength in Europe.

Dale Pfue – Cantor Fitzgerald

And one last question and I’ll go jump in queue. Thank you very much for those estimates on your market shares out there. Could you give us any kind of thought? Are you taking market share and if you are who are you taking it from? Are you maintaining market share and what about new entrance?

Steve Rhoades

Well, given our growth in Europe and Asia, I think we’d have to be taking market share in Europe and Asia, right. We did not have a strong presence, either of those regions last year. We are primarily North American. We had some good business in Europe, but not a lot. Whereas, this year we’ve seen quite a bit of strength in many of the countries in Europe as we mentioned particularly strong in the Czech Republic, but the increasing prevalence in France, in Germany, in Italy, in Greece, in Slovenia, so I think we’re competing against the providers of large scale inverters.

Almost all of our product in Europe has been 500 kilowatt inverters, so it’s really against the players that are the large central inverter market in that space. I think we’ve definitely taken and share from both Chinese and European inverter suppliers in China, and we continue to believe that we are the number one player here for the large central inverters in the U.S. and we have very, very strong (inaudible).

Dale Pfue – Cantor Fitzgerald

Great, thanks. I’ll jump back in queue. Congratulations, again.

Steve Rhoades

Thanks.

Donald Peck

Thanks, Dale.

Operator

Thank you. Our next question comes from the line of Joe Maxa with Dougherty & Company. Please proceed with your question.

Joseph Maxa – Dougherty & Company

Thank you. Don, I want to ask on the SG&A expense line. Quite a bit higher than Q1, what trends should we be looking at particular in that line item going forward?

Donald Peck

Sure, Joe. Thanks for the question. Again, we’ve had a rather large private expense, more allowance production accounts entry this quarter of about 951,000. Again, I would characterize as extraordinary nonrecurring. So, if I were modeling I would, certainly, would put that in there.

But to give you a sense of what the other increases were over Q1, we did have about an increase about $315,000 SG&A related non-cash stock op expense. Our SG&A payroll increase were like about $500,000. Our number of employees went from 258 employees to the end of March to about 291 at the end of June. And we spent about $250,000 more on IT as we built out our IT infrastructure to support our global growth.

So, we do indeed expect that as we continue to grow our revenues and grow our margins, there is a fair amount of operating leverage for us to (inaudible) the company. I would expect that SG&A will continue to go up, but certainly not as the segments revenues by end games.

Joseph Maxa – Dougherty & Company

So, are you aggressively continue to add employees from – you added 35 or whatever the number was in the quarter. So, is that a number you continually to aggressively add or is that going to slow down here?

Steve Rhoades

We are still hiring.

Joseph Maxa – Dougherty & Company

Got it.

Donald Peck

So, we’re growing in every region that we try to serve right now and we’re growing service personnel. We’re growing on the sales side and we see a big opportunity for ourselves as we look into the balance of this year and beyond and into 2011, so we’re adding folks in an R&D in the Boston office.

Joseph Maxa – Dougherty & Company

Okay, wanted to ask on the Southern California Edison Project – 75 megawatts, they expect to install this year? Is that in your backlog now or would that be considered upside if it’s accomplished?

Steve Rhoades

We’re not. Kevin commented on specific customers in our backlog, but I’m still glad to say that we expect to see continued orders. They’re putting them in as they need them in terms of the order, right.

Sorry, I’m not going to break out exactly how much of that’s in our backlog, but we do expect some upside from that.

Joseph Maxa – Dougherty & Company

Got it, okay. And in the capacity you commented 1.75 gigawatts in 2011. Can you refresh us on your comments regarding current backlog and then what you’re looking for about year end?

Steve Rhoades

Our current backlog is just over gigawatts worldwide.

Donald Peck

Capacity.

Steve Rhoades

Capacity, excuse me, and we would expect by year end to be at about one at a quarter.

Joseph Maxa – Dougherty & Company

1.25 gigawatt by the year end, okay. Thanks. I’ll jump back in the queue.

Steve Rhoades

Yes, sir.

Operator

Thank you our next question comes from the line of Michael Kumatsky (ph) with American Capital. Please proceed with your questions.

Michael Kumatsky –American Capital

As the gentlemen from Cantor try to pry out the guidance for our first quarter of 2011. Maybe I could ask the question, a different way. You have in June – for the closing June quarter you had 82 million in backlog and then another close to 30 million on top of that brought you to 111. Now, you say that 90% of that is expected to shift into this calendar year. Well, a better way to ask the question is you have accumulated $29 million worth of backlog in about a month’s time. What trajectory do you think this will remain going forward?

Steve Rhoades

Right now, bookings are very strong and we would expect that to continue as we move in to the beginning of the fourth quarter. But there’s definitely a seasonal slowdown that we’re going to see in order trends as we get to the back half of Q4. And we have intended overtime to have the first quarter to be our lowest quarter and then see strengthening through the whole year, for our revenues. That’s been our trend for several years and I’ll expect that to be the same next year, but we also significant growth in our PV business from 2009 to 2010, and I would like for that same growth from 2010 to 2011.

Michael Kumatsky –American Capital

Good answer. What are the backlog do you expect to leak in to that first quarter of 2011?

Steve Rhoades

Again, it’s difficult for us to say right now. We try to be as open as we can, but we have 100 million right now that we expect to ship at least 90% continuing to both into current quarter, the next quarter, and into beginning of last year. So, I don’t exactly but we are going to see a strong finish to the year and we’re going to see stronger Q1 than we thought (inaudible).

Michael Kumatsky –American Capital

That’s great answer, Steve (ph). I just have one last question on as a gentleman from modeling on to SG&A expense. You would say for a modeling purposes strip out that 951k?

Donald Peck

I would characterize that as nonrecurring.

Michael Kumatsky –American Capital

Would there be any other items that I would strip out or?

Donald Peck

Nothing to strip out, it’s just – you said you want to characterized to the non-cash or cash. I guess you may want to take a look at that. Again, our total stock op expense for Q2 was about 1.1 million up from $700,000 in Q1.

Michael Kumatsky –American Capital

Yes.

Donald Peck

Depreciation remained about the same. It was $396,000 in Q2 versus $382,000 in Q1.

Michael Kumatsky –American Capital

Okay. All right, that answers my question. I’m jumping back in the queue. Thank you.

Steve Rhoades

Thanks, Michael.

Operator

Thank you. Our next question comes from the line of Pavel Molchanov with Raymond James. Please proceed with your question.

Pavel Molchanov – Raymond James

Thanks for taking my question and again, great backlog numbers. Can you clarify again current capacity, yearend capacity and then which are targeting for 2011?

Donald Peck

One gigawatt currently worldwide level and then about a year end, one in the quarter gigawatts per year with a target to be up to 175 sometime in 2011, don’t have an exact date for that, I know.

Pavel Molchanov – Raymond James

And given that just looking at the trajectory from one gig to 1.7, so 70% increase in a year and many of your competitors are following suit of course. Do you worry that even if PD demand stays pretty strong next year, we could be getting into an over capacity on the inverter side perhaps?

Steve Rhoades

So, I think it’s important to note, Pavel, where the majority of our business is. We’re at 250 kilowatts and above for the vast majority of our business, not on a unit volume but on a megawatt volume and on a revenue basis. And while we may see a little bit of slowdown in the residential market, it’s not something I know a ton about because we don’t compete in that space.

What we see across any geography is continued growth in this category of large scale commercial and especially utility scale solar installation. So, for the portion of the market that we’ve targeted, we see growth looking out into the next year, and so we’re trying to get ready for that growth.

Pavel Molchanov – Raymond James

And then just real quick to expand capacity by that 70%, what’s going to be the CapEx number we should be assuming?

Steve Rhoades

It’s not a tremendous amount. Most of the capacity increase that we’re looking at right now is improvements in our test process to lower test time and to get more efficient of the use of our test phase, and wait for us to test in our multiple units with the same equipment. So, we’re not looking at really big number. I don’t have an exact CapEx perhaps we could give that to the world at a different time – but I don’t, it’s not a big number.

We said in the past, even if we started from scratch on a facility at a say 500 megawatts a year, it’s only a few million dollars and we aren’t starting from scratch for our additions here.

Pavel Molchanov – Raymond James

Thanks.

Operator

Thank you. Our next question comes from the line of Jeff Osborne with Stifel Nicolaus. Please proceed with your question.

Jeff Osborne – Stifel Nicolaus & Co.

Hey, good evening and congratulations on the strong results. Just a couple of quick questions, I was wondering if you had any comments on what lead times are currently for you folks.

Donald Peck

We are seeing challenges in slide chain and lead times for most of our products as stretch to 12 to 14 weeks. And so we’re working hard to improve our deliveries and increase the amount of supply that we can bring on stream, but most of its constrained by parts of life – not our own capacity, but we are furiously fighting to get our share for (inaudible) out there and we’re trying to bring out more capacity every day.

Jeff Osborne – Stifel Nicolaus & Co.

Guys, so if somebody wanted something from the end of November to December then probably best to place the order in the third quarter then?

Steve Rhoades

Well, we tell people.

Jeff Osborne – Stifel Nicolaus & Co.

All right. I figure there’s much. Now, that 30% gross margins is in kind of striking distance at what point do you think especially with the variability on OpEx this quarter, but I understand or appreciate it was to one-time items. It would just be helpful if at some point you gave kind of a target operating model. Is that something you’d prepare to do today, mid-30’s gross margin sounds like is on the road map for the fourth quarter. But how do we think about that over the next two to three years?

Steve Rhoades

Why don’t we take that under advisement here and see when we believe that that would be a good thing to do. I don’t think we’re going to do it today. Just –

Jeff Osborne – Stifel Nicolaus & Co.

I understand.

Steve Rhoades

But I think that as we get more stable. As we see our success worldwide, which helps us take some of the slings out of our business?

Jeff Osborne – Stifel Nicolaus & Co.

All right.

Steve Rhoades

As that increases, I think we should be able to give you more guidance on an overall operating model for the business. So, stay tuned. We just started giving revenue guidance in Q1 and gross margin guidance in Q2, so we’re working our way down to where we believe we can get as much information as possible.

Jeff Osborne – Stifel Nicolaus & Co.

Fully appreciate that. Just two more quick ones, any comments on pricing changes as lead times of stress years. Is that something that you see changing going higher or lower? How should we think about that going forward? Is there any pressure in the industry as new entrants enter the 500 kilowatt market?

Donald Peck

The biggest thing that we see in variability is the sizes of orders, right. So, when we get a very, very large order, those deals are more and more competitive. But in general as you noted in our last report, our ability to hold price has been pretty good at this end of the market and at this time of pretty constrained supply, we’re in a good position in our space.

Jeff Osborne – Stifel Nicolaus & Co.

Got you. And then the last one, speaking of sizeable orders, you did have a very large order I believe in March with TCL that run through October. How (inaudible) visibility, if any, do you have into the growth of the Chinese market with that key strategic partner just kind of – as we look in late in 2010 and into 2011?

Steve Rhoades

They continue to win business and to work their way through that large order this year. I think that they’re getting to the success. There are a lot of people coming into the Chinese market. It’s turning into a pretty strong market, pretty competitive place. It’s going to be the largest component of our revenue this year, but we have pretty strong hopes for it as we look out into 2011.

Jeff Osborne – Stifel Nicolaus & Co.

Thanks, (inaudible). Congratulations again on the results.

Steve Rhoades

Thanks, Jeff.

Operator

Thank you. Our next question comes from the line of Adam Krop with Adour Capital. Please proceed with your question.

Adam Krop – Adour Capital Investment

Hi, guys. Thanks for taking my question.

Steve Rhoades

Sure, Adam.

Adam Krop – Adour Capital Investment

Just wanted to kind of follow-up on the component shortage of question. Obviously, one of your key competitors has been talking a lot about what semiconductor components shortage. I guess are you seeing the same shortage and any other shortages out there that you can comment on would be great.

Donald Peck

Well, we’ve seen leads signs go up (inaudible). We’ve seen leads signs go up for some of the key patterns out there. You got to be aggressive and get your share of it and we think we will be able to get the supply that’s going to be required to lease the demands of our customers. But it’s a tough market out there and you got to go and work hard to make sure you could secure sources of supply.

Adam Krop – Adour Capital Investment

Any idea on when, maybe that logjam maybe freed up here in the near-term or is it more of a 2011 event?

Donald Peck

It’s seems like the tight supply happen at the small end of the market at the beginning of the year, and now it’s moved into our area, where it’s a little bit tougher – not nearly as bad as it hit some of the residential inverters suppliers at the beginning of this year. And I think it will take probably to the beginning of 2011 before that really clears up. But gain, we believe that we are going to be able to secure what we need to meet the lead times that we provided to our customers and to meet the revenue that we provided out in (inaudible).

Adam Krop – Adour Capital Investment

And then in terms of your supply chain in China. Can you just comment on how that’s kind of shaping up? Is that going according to your expectations?

Donald Peck

As we said a little bit earlier, we are expecting to improve margins in the mid to high 20s in Q3. We get closer to our targets on our material cost every day. We roll our standards quarterly, so that’s why we see jumps on a quarter basis in our margin, or at least a portion of that, the other portion of it is increases in revenue allowance (ph) to lay off overheads. But yes, we are getting what we need out of our Asian suppliers and it’s been very gratifying to see plan that we have been working on for almost two years now, come together and work out fast (ph).

Adam Krop – Adour Capital Investment

And then, in terms of contract manufacturing, I mean given your strong position up in Canada and the market growing strong, are you getting increased inquires in contract manufacturing? I know that’s something we talked about before and have you thought about that recently?

Donald Peck

We thought about it. I think that’s not something we are going to do in the near term. We like our position in the Ontario market and we are really, really business. So we are really working hard to keep up with the demand that we see for both the Ontario market and to augment the manufacturing capacity we have in China with our Ontario facility.

So I think right now that’s probably not going to part of our model.

Adam Krop – Adour Capital Investment

Okay, and then just one last one for me. We have talked about this before as well. But your current diluted share count, our current share price levels, where would that come out to be once you kind of start turning a profit here?

Donald Peck

Well, again on a fully diluted basis I think we are around 111 million shares using the treasury stock methods. I can (inaudible) offline.

Operator

Our next question is a follow-up question from the line of Dale Pfue with Cantor Fitzgerald.

Dale Pfue – Cantor Fitzgerald

Quick question, Don. Prepaid jumped up and you said that that has to do with the big orders out there. Have you been requiring larger down payments, is this just a – because of the percentage of your backlog, maybe a little comment on that please.

Donald Peck

Sure, with many of our customers, particularly new customers, we often times require 20% to 100% at the time of order. So again, with those shipments scheduled to go out in Q3, those invoices went out towards the end of Q2, generated $6.6 million of (inaudible) balance. So that’s not in revenue at the other side entries, down in deferred revenue.

Dale Pfue – Cantor Fitzgerald

And so, we can infer there is a fair number of new customers sitting here?

Donald Peck

New windows for which we have those payments established.

Operator

Our next question comes from the line of Chris (inaudible) with Treaty Oak Capital (ph).

Chris (ph) – Treaty Oak Capital

First one is do you have any worries about what the German free field market going away in 2011 and that being larger scale inverters, those European manufacturers with the large scale inverters coming more into the U.S. and Czech Republic and other markets where you are strong ?

Steve Rhoades

It’s already announced right, that one of our competitors has got a factory here in the U.S. and a couple others are putting contract manufacturing relationships into Ontario. So that’s real. But our commitment to bring the technical and the system solutions that are going to help us to maintain our position as the one of the biggest players out there for large scale central inverters. I like our ability to compete technically, we tend to do well in situations where it’s a large installation where we have a tough customer, tough installation, that’s what we do really well, got a long history as a supplier for big central inverters.

So we are going to have (inaudible), it’s going to be challenging as this market gets bigger and bigger and more players want to come play. But we certainly believe we’re out in front technically now and have a great reputation that we build overtime and that’s what’s going to sustain us going forward.

Chris (ph) – Treaty Oak Capital

Okay, great. Then, on the positive side, as I understand the replacement cycle in the large inverters, it’s somewhere between on five years and 10 years. Is that a fair assessment? Can you help me I’m tightening up that range for –?

Steve Rhoades

Certainly, we wouldn’t believe that. We believe that we make a device that can last 20 years.

Chris (ph) – Treaty Oak Capital

Okay.

Steve Rhoades

We provide the ability for our customers to buy a 20-year warranty from us on our devices. We will also sell both the O&M contracts, along with an uptime guarantee up to 97%, 98% on our equipment for that entire time. So we believe that the products we make are rugged outdoor inverters and they should last the life of a solar field and that’s how we market them and that’s our commitment to our customers.

Chris (ph) – Treaty Oak Capital

Okay, thanks. And then, lastly, remind me the structure of the Series CE preferred. You touched on it with Adam a minute ago. But I’m – what – when does this get forced to convert and what is the strike price and that type of stuff?

Steve Rhoades

Yes, it’s forced to convert at $7 a share.

Chris (ph) – Treaty Oak Capital

Okay. And there is no time limit on that? Does it come mature – does it mature at some point?

Steve Rhoades

It’s redeemable in November 2011 and the company has the option either to pay that in cash or in stock.

Chris (ph) – Treaty Oak Capital

Okay. All right, so the company has the option to redeem.

Steve Rhoades

They have the option to speak redemption. We have the option to pay it in either cash or stock.

Chris (ph) – Treaty Oak Capital

Okay, thanks.

Steve Rhoades

Thanks Chris.

Operator

Thank you. Our next question comes from the line of Joe Eisenberg with Renewable Analytics. Please proceed with your question.

Joe Eisenberg – Renewable Analytics

Hi, guys. Thanks for taking my call. I was actually – my question was asked and answered. Thank you.

Steve Rhoades

No problem.

Operator

Thank you. (Operator Instructions). Our next question comes from the line of Dragos Georgescu with Cambria Capital. Please proceed with your question.

Dragos Georgescu – Cambria Capital

Hi guys, congratulations on the great backlog number.

Steve Rhoades

Thanks Dragos.

Dragos Georgescu – Cambria Capital

Could you talk about a little bit about – the current capacity is about 1 gigawatt. Could you talk about how much it’s coming from Ontario versus Shenzhen, how you plan to expand that by the end of 2011 up to 1.75 total?

Steve Rhoades

Yes, we – as I said earlier, we shipped 85% of the product that we shipped out of China. And about 600 megawatts of that capacity is currently in China. We have about 400 megawatts per year of capacity in Canada. But all of the expansion that we’re doing will be in China.

Dragos Georgescu – Cambria Capital

Okay, that’s great. And the expansion, is there going to be in this similar percentage range working up to 1.75?

Steve Rhoades

That’s correct.

Dragos Georgescu – Cambria Capital

Okay, that’s great. And one other quick question I guess on the financing environment. Could you talk about that? And how you see the environments [inaudible] versus China versus specifically Europe and North America?

Steve Rhoades

We’ve seen through the year that the market for project finance has improved dramatically over what it was a year-ago, that’s true in both the US and in Europe. Questions around bankability in Europe have really largely gone away. We’ve not seen a lot of that this year. It’s been a little bit looser in the – in that market.

But China is very different, because most of the financing in China is tied to the government itself and the government – the Chinese Government is really committed to expanding renewable energy. And so it was never a weak project. Finance market over there is really just have been an undeveloped market, that’s brand new. And so, it’ll take a while for that to come onboard.

And, China hasn’t yet figured out what they’re going to do for their feed-in tariff program, so that it’s kept the pace of projects down a bit this year. Hopefully, they’ll figure that out by the end of this year, and we’ll see an uptick as we move into 2011.

Dragos Georgescu – Cambria Capital

Okay, great. Thank you.

Steve Rhoades

Thanks Dragos.

Operator

We have no further questions at this time. I’d like to turn the floor back over to Mr. Rhoades for closing comments.

Steve Rhoades

Well, thanks everyone for joining today’s call. And I’d also like to thank the employees of Satcon for their incredible hard work and commitment to the company. We look forward to speaking with you on our third quarter 2010 conference call, and that’s it for today.

Operator

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Source: Satcon Technology Corporation Q2 2010 Earnings Call Transcript
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