Capstone Turbine (NASDAQ:CPST), whose fiscal year ended March 31st, once again has found a way to disappoint investors, and that's before it has even reported its full year losses. It has not been the first time, and based on the events of the past year, it is unlikely to be the last time. A brief recap of the disappointments over the past year include:
- A dreadful first fiscal quarter. Not only did the revenue decline from the fourth fiscal quarter of 2013, an expected occurrence, but it was also a year over year decline for the first time in nearly 6 years. That broke a string of 23 consecutive quarters of Y-o-Y growth in revenue. The shortfall was attributed to shipments that were held up in the last few days of the quarter.
- Driven by a boost from the shipments held back at the end of Q1, Capstone should have had a blowout second quarter of more than $40 million. This was based on management's prior comments and an assumption that the $8 million of orders held up at the end of Q1 would be shipped and additive to a "normal" Q2. Instead, while Capstone had record revenue of $35.3 million in Q2 and barely beat the Q4 record of $35.1, it was far less than the $42 million I had expected. More importantly, if the company had not benefited from the unshipped orders at the end of Q1, it would have had a revenue decline from the prior year's Q2. One other item of note was the backlog at the end of Q2, which had only increased to $149.8 million, barely up from the $148.9 million at fiscal year end 2013 (more on this later).
- When Q3 revenue came in at $37 million dollars (another record), and brought the year to date total to $96.7 million (up less than 5% from FY 2013), it was just about a guarantee that the company would fall short of its soft guidance of $148.9 million for the year.
- Last week, the company announced it was diluting shareholders by selling 18,825,000 at a price of $1.70 per share, and that it would only realize $30.2 milliom from the sale after fees and discounts.
That news was bad enough. The shares had been closing above $2 (with the exception of one close at $1.99) since March 11th, and the news rapidly brought the price down from the $2.06 close on Wednesday to Thursday's close at $1.78 and Friday's closing price of $1.70. And, the dilution didn't occur until after CEO Darren Jamison and several other insiders sold shares at $2.21 on early April 9th.
The company was supposed to be in a rapid growth stage, and with margin improvements was supposed to begin generating a lot of cash. So, why the need to raise another $30 million and dilute shareholders by increasing the shares outstanding by another 6%? Quite simply, management blew it.
On the Q2 conference call, Jamison said:
Our goal is to end the year with more than $30 million of cash on the balance sheet, and we feel very comfortable that we'll be able to achieve this target.
On the Q3 conference call, everything was supposed to have turned around. Here's how Jamison concluded the conference call:
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 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.
Backlog had increased 7% to $160.4 million on the heels of that strong book-to bill ratio. Cash projections were rising. However, since those statements were made on February 10th, something went wrong and required the need to bring in another $30 million. The cash that was supposed to be a strength had turned to a weakness.
One needs to go beyond the press release about the issuance of new shares and look at the 8K to find some of the problems.
- As of March 31st, the company had drawn $13.2 million against its $15 million line of credit, was in violation of its debt covenants, and needed to be granted a waiver.
- Revenue came in at $133.1 million, an increase of only $5.5 million, or 4%, over the $127.6 million of revenue for fiscal 2013. This was well below the soft guidance of $148.9 million.
- The annual revenue of $133.1 million would put the Q4 revenue at $36.4 million. That $36.4 million is a sequential decline from the $37.0 million in Q3 and an increase of only $1 million (up 2.8%) over the prior year.
- Cash balance finished the year at $27.9 million, compared to $38.8 million the previous year, and well below $33-$36 million Jamison was projecting in February.
There was one "positive" from the backlog perspective, which grew $22.7 million (15%) to $171.6 million. Backlog is very important to investors and analysts looking at Capstone. The company management does not issue formal guidance, but instead states that current backlog is a good indication of revenue for the next four quarters. Here's the way Jamison discusses revenue and backlog:
So the backlog that we entered the year with is a good indicator of what we think we'll do for the year. We don't give specific guidance on a quarterly basis just for this very reason. As you know, we can be lumpy quarter-to-quarter.
This "very reason" was a reference to the "lumpy" shipments when orders were left on the dock at the end of Q1 due to credit issues with the company's distributors. That's why I consider the backlog growth tainted. The backlog of $148.9 million at the end of the previous year delivered $15.8 million (10.6%) less revenue than should have been expected in 2014. The "lumpy" excuse is fine for one quarter, but there should have been plenty of time to recover over the last three quarters. And, if the company had met revenue of $148.9 million and eaten another $15.8 million into the backlog, the year end backlog would only be at $155.8 million.
I have been "long" Capstone since 2008, and like many investors that are always expecting the company to turn the corner, I have been disappointed quite often. More recently I have been actively trading large blocks of the stock, including selling that long term position when I thought the price had risen too high and repurchasing the same number of shares when the price fell. This has been done with varying degrees of success - and failure - as the price has gyrated from a low of $0.82 to a high of $2.60 over the past year. While trading, I have not been lucky enough to buy at prices below $1, and I have been "fortunate" enough to not have purchased at prices above $2.10. I have also not been long at any price above $2.30.
Obviously, I can't begin to accurately project where the price will go over the short or medium term. Management statements clearly indicate that they have difficulty projecting the company's revenue and cash balances. And if they can't get it right, how accurately can an outsider project the revenue or cash burn with far less information?
From a longer term perspective, I believe the company will continue to grow, reduce costs, improve margins and eventually turn a profit. I believe this firmly enough to remain long and I have decided to purchase shares for my daughter's Roth IRA.
I am discussing this because although I follow the company closely, I have tried to refrain from writing articles when my trading has been very active. This article is an exception, mostly because I believe that (NYSE:A) the company left far too much information out of the press release and (NYSE:B) far too few investors delve into many of the SEC filings. I recommend that anyone invested in, or planning to invest in, Capstone read the 8k, including many of the areas that are typically ignored because we consider them boilerplate.
Some of the revelations in the 8K were quite specific. The above revenue, backlog and cash balances as of the end of Fiscal 2014, although preliminary, were all in the 8K, as was the status of the credit line with Wells Fargo. Other items of note, some of which will come as no surprise to knowledgeable investors, deal with geopolitical risks centering on the Ukraine, Russia and the rest of Europe. What is also informative is the extent of business some of the company's individual distributors handle. These excerpts include:
Our sales and results of operations could be materially and adversely impacted by risks inherent in international markets.
As we expand in international markets, customers may have difficulty or be unable to integrate our products into their existing systems or may have difficulty complying with foreign regulatory and commercial requirements. ... Two of our top distributors are located in Russia and Belgium, and therefore we are particularly susceptible to risks associated with doing business in these two countries. ...
...We derived approximately 15% and 11% of our revenue from Russia in the nine months ended December 31, 2013 and the 12 months ended March 31, 2013, respectively. The continuation or escalation of the current geopolitical instability in Russia and Ukraine could negatively impact our operations, sales, and future growth prospects in that region. Recently, the U.S. government imposed sanctions ... the sanctions imposed by the U.S. government may be expanded in the future to restrict us from engaging with them. ...
Loss of a significant customer could have a material adverse effect on our results of operations.
E-Finity Distributed Generation, LLC ("E-Finity"), Horizon Power Systems ("Horizon") and Regatta Solutions, Inc. ("Regatta"), three of the Company's domestic distributors, accounted for 18%, 16% and 11%, respectively, of revenue for the three months ended December 31, 2013. BPC Engineering ("BPC"), one of the Company's Russian distributors, and Horizon accounted for 21%, 14% and 13% of revenue, respectively, for the nine months ended December 31, 2013. Additionally, BPC, E-Finity and ADA Engineering Co., Ltd, the Company's Vietnamese distributor, accounted for 24%, 22% and 11%, respectively, of net accounts receivable as of December 31, 2013.
On Februrary 10th, management held a conference call projecting a cash balance of $33-$36 million by March 31st. In just seven weeks there was a rapid deterioration of the business, resulting in a poor fourth quarter. The poor results - leaving just $27.9 million of cash on the balance sheet - forced the company to dilute current shareholders by once again returning to the equity markets. Rather than choosing to be transparent about the shortfalls and including important details in the press release, it chose to make investors ferret out the information for themselves.
IF, and at this point investors must consider this a very big IF, Capstone is able to translate the $171.6 million of backlog into revenue for fiscal 2015, it should be a very good year for investors. However, the poor performance by management, the geopolitical concerns and the high concentration of its business so dependent on three to four distributors, continues to make this a very speculative investment.
Disclosure: I am long CPST. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I actively trade Capstone and have no positions in any other company mentioned in this article.