Good day, ladies and gentlemen, and welcome to Capstone Turbine Corporation earnings conference call for first quarter and fiscal year 2011 financial results ended June 30, 2010. (Operator Instructions)
During today's call, Capstone management will be referencing slides that can be located at www.capstoneturbine.com under the Investor Relations section.
At this time, I would like to now turn the call over to your host for today, Ms. Jayme Brooks, Vice President, Finance and Chief Accounting Officer. Please proceed.
Thank you. Good afternoon and welcome to Capstone Turbine Corporation's conference call for the first quarter ended June 30, 2010. I am Jayme Brooks, your contact for today's conference call.
Capstone filed its Annual Report on Form 10-Q with the Securities and Exchange Commission today, August 9, 2010. If you do not have access to this document and would like one, please contact Investor Relations via telephone at 818-407-3628 or email email@example.com, or you can view all of our public filings on the SEC website at www.sec.gov or on our website at www.capstoneturbine.com.
During the course of this conference call, management may make projections or other forward-looking statements regarding future events or financial performance of the company within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. These statements relate to, among other things, future financial performance in attaining profitability, the ability to reduce costs and improve inventory turns and contribution margins, higher average selling prices, continued growth in current market conditions, the availability of a line of credit, the success of the C200 and C1000 products, new products and technologies, compliance with certain government regulations and increased government awareness and funding of our products, growing market share and market adoption of our products, new applications of our products, growth in the oil and gas, office building, biogas, UPS and hybrid electric vehicle markets, the successful integration of Calnetix Power Solutions MicroTurbine business, revenue growth and increased sales volume, our success in key markets, our ability to enter into new relationships with channel partners and distributors and other third parties, and a successful implementation of those relationships, the energy efficiency, reliability and low cost of ownership of our products, and the expansion of production capacity and manufacturing efficiency.
These forward-looking statements are subject to numerous assumptions, risks and uncertainties, included the following. Our expectations about expansion into key markets may not be realized. Certain strategic business initiatives and relationships may not be sustained and may not lead to increased sales. We may not be able to reduce our manufacturing costs. The growth in our backlog has significantly exceeded our internal forecast. In order to meet this increased demand, we may need to raise additional funds to meet our anticipated cash needs for working capital and capital expenditures. The current economy can make it difficult or impossible for us to raise necessary funds or for our customers to buy our products. We may not be able to utilize our line of credit, for example, as a result of a failure to meet a financial covenant. We may not be able to expand production capacity to meet demand for our products. We may not be able to obtain sufficient materials at reasonable prices. Our release of new products may be delayed or new products may not perform as we expect. We may be unable to increase our sales and sustain or increase our profitability in the future. We may not be able to obtain or maintain customer distributor and other relationships that are expected to result in an increase in volume and revenue. We may not be able to comply with all applicable government regulations. We may not be able to retain or develop distributors in our targeted markets, in which case our sales will not increase as expected. We may not be able to successfully integrate the acquired Calnetix assets and achieve productive relationships with the distributors. And if we do not effectively implement our sales, marketing service and product enhancement plans, our sales will not grow and therefore we may not generate the net revenue we anticipate.
These are among many factors, which may cause Capstone's actual results to be materially different from future results predicted or implied in such statements. We refer you to the company's Form 10-K, Form 10-Q and other recent filings with the Securities and Exchange Commission for a description of these and other risks. Because of these risks and uncertainties, Capstone cautions you not to place undue reliance on these statements which speak only as of today. We undertake no obligation and specifically disclaim any obligation to release any revision to any forward-looking statements to reflect events or circumstances after the date of this conference call or to reflect the occurrence of unanticipated events.
I will now turn over the call to Darren Jamison, our President and Chief Executive Officer.
Thanks, Jayme. Good afternoon and welcome everyone to Capstone's first quarter fiscal 2011 earnings call. With me today are Ed Reich, our Executive Vice President and Chief Financial Officer; Mark Gilbreth, our Executive Vice President of Operations and Chief Technology Officer; and Jim Crouse, our Executive Vice President of Sales and Marketing.
Today again, I will start the call with a general overview of our first quarter results and then turn the call over to Ed who will review our financials. Ed will then turn the call back over to me, and I will discuss what is happening in some of our key markets and update you on our progress towards our strategic objectives of positive gross margin and positive cash flow.
As the operator indicated, we will be using slides today in our presentation today which can be found on the Capstone's website under the Investor Relations section.
The first quarter was another productive quarter at Capstone as the company continues to build positive momentum and executes against our business plan. During the quarter, as you can see on Slide 2, we continued to expand our distribution channels by reaching into territories where we've not had a presence in the past such as Hong Kong, Turkey, Pakistan, Indonesia, Netherlands, Denmark, Slovenia and Croatia.
In addition, we recently announced the sale of our first UL-certified C600 to one of the largest natural gas producers in the United States for installation at the Marcellus Shale play. Capstone recently delivered the C600 and received a follow-on order for five C65s for another compression station at the same shale play.
The substantial end use customer is producing natural gas from six key reserves or plays across the United States and will use electricity produced by the C600 and the C65s to power compression stations at the Marcellus Shale play labeled a super giant oil field that spans Northwest Virginia, Pennsylvania and Southern New York.
Air permitting has become a major concern for gas developers and producers, and Capstone's clean-and-green, low-emission microturbines can serve a key role in ensuring continued development of the natural gas rich shale plays. Because microturbine emissions are considerably lower than internal combustion engines and these are not very based on system or site load, it is much easier for developers to meet and stay within increasingly stringent local and federal emission standards.
Capstone already has experienced in Mid-Atlantic area with Dominion Gas Transmission, an interstate gas transportation company with 46 Capstone MicroTurbines located at the various gas transmission stations.
Dominion recently converted or covered 46 of their fleet with Capstone Factory Protection Plan. Dominion has experienced the U.S. Environmental Agency's Clean Air Act, strict requirements for emission levels on natural gas sites. The EPA reviews stationary equipment at wellheads and compression stations along pipelines to ensure they meet federal requirements.
The six very large shale formations that I mentioned earlier can pave the way for a new century of natural gas abundance and stable natural gas prices that would further drive CHP and CCHP projects around the U.S. This is a great opportunity for sales of our Capstone MicroTurbine technology and new compression stations and along new natural gas pipelines.
Overall, the oil and gas business has been a good market for Capstone, and I view the shale play opportunity to be similar, if not greater than our current oil and gas opportunities in Russia with Gazprom and Australia with coal seam producer, Origin Energy.
As we turn to the Asian market, Asia continues to develop nicely for Capstone. We plan to commission 17 explosion-proof oil and gas C1 Division 2 units between now and December, including nine C65s and three of our new C200 for Petronas in Vietnam and Malaysia and five units for Apache in Western Australia.
Our offshore business is solid and we should continue to see it bode well for our C1 D2 products in the region and around the world.
In other parts of Asia, China continues to promote CHP and the central government has established a four-part policy to encourage the installation of CHP on an energy service company or ESCO model basis. This policy includes no tax for the first three years, followed by a reduced tax obligation after that. Additionally, the government will advocate special loans for ESCOs based on CHP to accelerate depreciation and one-time payment of RMB500 for each ton of coal displaced in the power generation process.
In Shanghai, there is an additional CHP incentive of RMB1000 per kilowatt and a special measured gas price for CHP that is approximately 35% less than the regular standard natural gas price.
Also, in China, the process for grid interconnection is definitely becoming more transparent and more available to Capstone's products. Capstone C200 CHP project for China Southern Grid is now commissioned and is being showcased at several new and prospective customers. In China, Capstone current has three ESCO model projects underway. One is operated by sun energy using a C200 and CHP application, and two are C65 ICHP projects operated by Shanghai Aerospace Energy.
In other oil and gas news, we consolidated distribution for oil and gas in Indonesia and Brunei under our recently acquired Calnetix distributor. Serba has worked for years with key oil and gas companies in Indonesia and Brunei. The natural gas market in the region is extensive, which translates into many opportunities for Capstone to provide power solutions to both onshore and offshore drilling sites.
In Australia, our first C200 digester gas project was successfully commissioned at Surbiton Park, and our C30s and C1000s are performing well in coal seam gas fields. In India, our new distributors, CICB, continues to be very active and we expect to see our first orders from India very soon.
Another area besides oil and gas I expect to see strong future growth is the electric vehicle market, as it continues to expand very rapidly and we continue to position Capstone to be a player in the electric vehicle range extender market. However, range extenders are not just limited to cars and trucks, as we recently commissioned our first hybrid electric boat in the Netherlands, which is now operational and providing customer demonstrations.
Another Marine news, Reagan Equipment, Capstone's partner in the marine market, plans to showcase Kilo-Pak C65 water-cooled marine version of our product at the Fort Lauderdale International Boat Show on October 28 through November 1. We hope to make inroads to marine power generation market that is looking for lower emissions and increased reliability.
If we receive even a fraction of the attention and interest generated at the LA Auto Show last year for the CMT-380, I'll be extremely pleased in the Fort Lauderdale show.
We also recently announced our first electric Class 8 truck microturbine range extender application with US 1 Industries and CalMotors. They're currently integrating the microturbine with an (technical difficulty), which we plan to showcase at our upcoming Annual Stockholder Meeting being held at our headquarters at Chatsworth on August 26.
We also recently announced that Capstone has initiated demonstration projects with a major U.S. manufacturer of Class 5 to Class 8 heavy-duty trucks that will utilize the Capstone C65. The MicroTurbine is a clean efficient range extender in a hybrid electric drive system. This truck will be the first to take advantage of the complete new line of Capstone Drive Solution, which includes the Capstone MicroTurbine along with a liquid cooled power electronics, permanent magnet traction drive motor and vehicle power control system. The Capstone complete Drive Solution will make it easier for vehicle manufacturers to integrate microturbines into a series hybrid electric drivetrain.
As part of our recently announced joint development agreement with CalMotors, the Capstone HEV product offering will now include inverter drives, traction motors and vehicle power control modules, which will seamlessly integrate with C30 and C65 microturbines. These inverters and traction motors are mobile hardened versions of the proven Parker Hannifin industrial motor drive products.
The HEV microturbines are able to operate on traditional liquid fuels such as diesel and biodiesel and can also utilize alternative fuels such as natural gas without sacrificing efficiency or reliability. This makes Capstone Drive Solution suitable for a wide range of electric vehicle applications.
Other hybrid electric demonstrations are ongoing with companies like Grupo Plaza, a bus manufacturer in Argentina, and the LincVolt. The LincVolt is 1959 Lincoln Continental owned by legendary musician Neil Young that is being converted into an HEV by Jonathan Goodwin. LincVolt will inspire generation by creating a clean automobile propulsion technology that serves the needs of the 21st century and delivers performance that is a reflection of the drivers' spirit.
Neil Young intended to tremendous amount of marketing around the LincVolt, and Capstone is proud to be involved in this creative, innovative project.
As you may know, Capstone microturbines are already operating as range extenders in electric busses in New York City, Charlotte, Baltimore and now, as I mentioned, moving the electric boats, trucks and eventually cars.
Capstone continues its product development efforts and product certification activities as we recently completed and released our California Air Resources Board or CARB C200 for digester applications, our C65 CARB product for low (hyd) gas applications and our C30 CARB liquid fuel for transit bus applications.
We also recently competed our independent third-party emission testing and similar C30 natural gas or CNG product to CARB for certification in transit bus applications. This natural gas certification will open up the Californian transit market for our bus OEM partner, DesignLine. DesignLine recently hired a new President and expects to close another round of funding shortly. And I very much look forward to DesignLine ramping production and building a record number of busses for several years to come.
It's important to note that we're not only meeting the world's lowest emission standards without expensive and unreliable exhaust after-treatment, but we are blowing away the current impending emission standards as illustrated in Slide 3.
As shown in Slide 4, we not only have superior emission for piston engines, but we have electrical efficiency similar to Ford and Cummins products that are available in the market today.
As you turn to Slide 5, it highlights the advantages of Capstone products as an electric vehicle range extender. And these advantages include obviously ultra-low emissions, the ability to operate on alternative fuels, very low sound levels, essentially no vibration, very light weight, very low maintenance requirements, easy integration with our full line of drive systems, the ability for the OEM to aerodynamically optimize the design, getting rid of the radiator and competitive overall system efficiency.
It surprises me that many people don't consider the additional emissions that will be generated from the market adoption of electric vehicles. Plug-in electric vehicles are not zero emissions, as the batteries are charged by electric utility grid with much higher emission profile than Capstone's ultra-clean microturbines. Therefore, not only is the Capstone microturbine a reliable range extender, but as shown in Slide 6, a Capstone microturbine emits lower NOx emissions than using typical U.S. utility grids made in California's state-of-the-art very clean grid.
During the quarter, we continued to integrate our strategic acquisition of the Calnetix Power system's TA100 microturbine and the 125 kilowatt waste heat recovery generator system. I'm very pleased to report that we've shipped 10 more TA100s during the quarter and have taken orders for 14 125-kilowatt waste heat recovery generators for a total of $2.9 million in future revenues that is now included in our current product backlog of $84.6 million. We expect to begin shipping heat recovery units during the current quarter for installations in landfills in Europe.
If you remember, Capstone has a worldwide exclusivity on the zero-emission 125-kilowatt waste heat recovery generators for microturbine applications, and access to the similar technology was a critical part of the Calnetix transaction. Slide 7 shows a picture of the Calnetix waste heat recovery generator unit we'll be shipping shortly.
Another key for us is the focus on building our partner service business, and we're aggressively selling our industry-unmatched five-year and nine-year Factory Protection Plans.
As I mentioned earlier in the call, we signed a comprehensive fleet-wide Factory Protection Plan with Dominion Transmission. That FPP alone will cover the entire transmission, microturbine fleet. And that fleet currently includes 46 microturbines providing more than 3 megawatts of onsite electricity at 10 compressor stations throughout the Eastern United States. The addition of the Dominion units represents more than of 5% of our total FPP fleet today. Capstone now has well over 600 units under FPP, with a total long-term service backlog of approximately $21 million.
Capstone continues to work hard to attract and sign new distribution partners, release new microturbine products and features certified for the world's most stringent relevant emission standards, receiver of the most beneficial DoE grants, execute new Factory Protection Plans and successfully integrate our strategic acquisition of the Calnetix Power Systems T100 and 125 kilowatt waste heat generator.
Most importantly, Capstone continues its work to complete the material cost reduction plan while also increasing our average selling prices. And we'll review our progress on this extremely important initiative of increasing our average selling pricing and improving direct material costs and margins in this portion of the presentation.
Unfortunately during the first quarter of fiscal 2011, we continued to experience order shifting to the right and into the quarter again with approximately $3 million of finished goods on the loading dock. We've had approximately $3 million in finish goods for each of the last four quarters. So management must assume that this situation is not a one-time event and will likely not improve until the economy significantly improves. Therefore, we will adjust our production costs down to appropriately reflect this current condition.
If you remember, last quarter, Capstone experienced higher-than-usual product warranty charges as we made product upgrades to C1000s in the field. These upgrades improved operations at extreme high and extreme low temperatures and are placed in undersized break resistor and cable used to take load when the turbine is running at low or no load conditions.
These warranty charges did not reoccur in Q1, and the bulk of our new product issues should be behind us now. However, we will continue to closely monitor all new products in the field and will always take a very aggressive approach to any issues with new products, because each new product in the field is highly visible and will send hundreds of customers' expectations and have a dramatic impact on Capstone's brand.
Overall, when I look at the quarter, I am pleased with the first quarter results for fiscal 2011 as we surpassed first quarter fiscal 2010's revenue of $13.7 million. As shown on Slide 8, we continue over and over to demonstrate a strong revenue growth over the prior year's same period results for 12 consecutive quarters. Remarkably, that is almost three years of same period revenue growth over the prior year during extremely difficult environment.
New bookings for the quarter softened a bit to $11 million, but it still gives us $64 million of new backlog, not including parts, service and accessories, in just the last three quarters. Slide 9 shows the continued momentum of our product backlog and the strength of our new C200 and C1000 series products. Capstone's robust $84.6 million in product-only backlog sets the stage for another year of revenue growth in fiscal 2011.
The gross loss for the first quarter was only 3%, which is a substantial improvement over the same period last year of 21% and much improved over Q4's 15%. This is the evidence that we are continuing our progress towards positive gross margins.
Capstone's overall operating expenses came down nicely in the quarter to $8 million, down from $9.8 million in Q4 and are planned to remain at these levels for the balance of fiscal 2011. Our growing revenue and backlog will drive our company to our near-term goal of positive gross margins and profitability as long as we continue to execute our cost reduction programs.
I will now turn the call over to Ed to review our financial results. More importantly, he will give you transparency to Capstone's progress on our critical cost reduction program, so you can accurately see how we're progressing on lowering our product direct material costs and increasing product average selling prices. He will also explain our changes in working capital for the quarter and what impact it had on our cash balances.
At this point, I'll turn the call over to Ed.
Thanks, Darren. Good afternoon, everyone. I'd like to provide you with our financial results for the first quarter of fiscal 2011 which ended June 30, 2010. Let's begin with the recap of the major items on our balance sheet. The major sequential changes from the Q4 fiscal 2010 balance sheet to the Q1 fiscal 2011 balance sheet were as follows.
Accounts receivable increased in the first quarter to $24.5 million from $18.5 million last quarter. It was the result of the heavy end of quarter's shipments again and the timing of cash collection. In the current economic environment, we've been experiencing a longer cash cycle than in the past. I'd like to mention, however, that as of last Friday, we've collected $6.3 million of the June 30 accounts receivable balance.
Inventories were similar to Q4 levels at $23.3 million with turns at about 2.6 times per year. Going forward, we expect to continue to make progress in reducing our inventories to appropriate carrying levels, benefiting from their conversion to cash with the goal of four turns per year or better.
Accounts payable and accrued expenses were $14.7 million, down slightly from the Q4 balance of $15.3 million, mainly due to payables for legal and accounting fees incurred in the fourth quarter as a result of our Calnetix acquisition.
Cash balances, including restricted cash, were $31.8 million at the end of the first quarter compared to $47.3 million at the end of the fourth quarter of fiscal 2010. This is the change of $15.5 million. The change in cash is reported in our first quarter 10-Q and was broken down in the following categories.
We used $13.4 million in operations, $5.4 million in investing activities and $1.7 million in financing activities. Please note though that of the $5.4 million reported as used in investing activities, $5 million of that was the reclassification from cash to restricted cash on our balance sheet as a new requirement by the amendment of the Wells Fargo credit agreement.
Of the $15.5 million in cash that we used in the quarter, $6.6 million was due to changes in working capital, mainly accounts receivable increased $6 million as I mentioned earlier. We expect the negative impact from working capital to reverse over the next two quarters and return the cash to our bank accounts.
Sequential changes from the Q4 fiscal 2010 to Q1 fiscal 2011 income statement were as follows. Total revenue was $16.1 million, as Darren mentioned, down slightly from Q4's $16.3 million. Product revenue decreased 5% to $12.8 million in the quarter versus $13.5 million in the prior quarter.
Our unit shipments also decreased by $61 million quarter-over-quarter, although with the significantly higher average selling price from Q1 the difference in revenue was only $700,000.
Accessories, parts and service revenue increased by approximately $0.5 million to $3.3 million for the quarter versus $2.8 million the quarter before. The higher revenue was attributable to seasonality and part sales in Q4 and improvements in FPP service revenue during Q1.
We've made significant progress over the last six quarters in reducing product materials cost. As you can see on slide 10, material margins have improved significantly as the average selling price per unit has increased along with a corresponding decrease in average material cost per unit.
As seen on the slide, we've achieved approximately 29% improvement in average product margin per unit from the end of fiscal 2009, an almost 4% in improvement between the fourth quarter of fiscal 2010 and the first quarter of fiscal '11.
Our gross loss for the first quarter was $500,000 or 3% of revenue. This improvement in gross loss from the fourth quarter's $2.4 million or 15% of revenue was due to more favorable revenue mix with a higher average selling price per unit and higher sales of better margin accessories, parts and service.
In addition, production, labor and overhead cost returned to prime levels, and we did not incur the material, inventory and warranty charges that we experienced in Q4.
Moving to R&D, we spent $1.5 million in the first quarter, which was $0.5 million less than what we spent the quarter before. The reduction in R&D was primarily due to lower labor related costs.
Our selling, general and administrative costs were $6.4 million for the first quarter. This is $1.5 million lower than the prior quarter because of reduced travel, professional fees and labor related costs.
We reported net income with $392,000 for the first quarter with $0.00 per share compared to $12.9 million loss or $0.05 per share for the fourth quarter.
This net income was a result of the adoption of Accounting Standards Codification 815 "Derivatives and Hedging" which affects our accounting for warrants with anti-dilution provisions. So we recorded a non-cash benefit of $9.2 million to warrant liability in the income in the first quarter of fiscal 2011.
Capstone would have had a net loss of $8.8 million for the first quarter before considering the non-cash warrant liability charge. Please refer to Slide 11 for a GAAP to non-GAAP reconciliation. Backlog at the end of the first quarter was $84.6 million, which was down slightly from the fourth quarter's $86.3 million.
That concludes my comments on our Q1 fiscal 2011 result, and I'll now turn the call back over to Darren.
Thanks, Ed. We are seeing some encouraging signs in the economic recovery, and we continue to see quotation or activity grow around the world in all four of our market segments with our 95-plus distributors as is reflected on Slide 12.
We continue to be most excited about the activity in the oil and gas, office building, biogas, UPS and hybrid electric vehicle markets. I believe our continued capturing of market share despite poor economic conditions is a good indicator of what will happen after the financial markets fully recover and project financing becomes more readily available, and company's capital budgets are now reinstated.
Over the coming quarters I look to see increased activity in the U.S. market with key partners like UTC Carrier, Office Power, PowerTherm, WESCO and DesignLine.
As it relates to UTC, we again did not have any new orders with UTC Carrier during the quarter. But I'm more encouraged by the fact that we're now seeing activity, working sales leads in New England, New York, and are starting to see activity in Texas because of some recent fluctuation changes.
Carrier was recently specified for a five-unit PureComfort system for a high school in New York State as part of a larger Carrier bid. They are also working on two data centers in New York City, as well as an office building for multiple PureComfort C390 systems and a factory in Connecticut for PureComfort C260 or C325.
I very much look forward to UTC Carrier again returning to one of Capstone's top five strategic customers.
PowerTherm and WESCO recently held another kaizen event with executive joint sales calls over three days. WESCO personnel met with approximately 85 universities and building owners in that three day event, and look forward to seeing them become more of a strategic partner for us again in the coming quarters.
We continue to plant seeds with every installation of our new products, including the C200, the C1000 series, our new HEB products and our new UPS product.
During the quarter, Capstone continued their strategic talks with multiple companies to develop electric trucks with Capstone range extenders for delivery vehicles and refuse trucks. The plug-in electric HEB market continues to be a very small portion of Capstone's revenue, but the revenue should grow as product demonstrations turn into product orders and new low volume OEM agreements are negotiated and executed.
As we turn our attention to the passenger vehicle market, Capstone is targeting the
automotive OEMs via strategic drive train partners as mentioned on last quarter's call.
Capstone is currently collaborating with two Fortune 500 automotive drive train component manufacturers to build a high volume, lower cost, about 10,000 hour automotive version of the C30 and the C65 product. As mentioned earlier, both companies have finalized their cost and design analysis on the new automotive product, and Capstone has executed an MOU with one of the two partners.
Each company is interestingly enough taking different approaches for the Capstone range extender opportunity and Logic Vehicle market. One company is integrating the C30 into a Logic cross-over vehicle to then demonstrate the technology to automotive OEMs worldwide.
When they generate enough interest in the microturbine technologies as a range extender, they will then execute Capstone's proposed MOU and move the negotiations on a manufacturing and license agreement.
The strategy of the second company is to manufacture lower cost microturbine parts for Capstone's current industrial product, while we can currently work together to engineer and develop a new lower cost, shorter life automotive product.
Work with this strategic partner has progressed very quickly after execution of the MOU last quarter, and I anticipate having them online as a strategic part supplier for several of our C30, C65 and possibly C200 hard parts by the end of this fiscal year.
Make no mistake, this would give us further cost reduction over and above our current 30% cost reduction program. It would also add to Capstone's overall manufacturing capacity and integrate automotive quality and reliability into today's industrial products currently being sold.
Cost reduction is obviously critical to our success, and the third round of cost reductions we have planned will come from our new C370 DOE Program. As illustrated on Slide 13, the next generation of Capstone products will increase output of our successful C200 product to 250 kilowatts, and also efficiency to 35%. As a result, it will only take four C200s or the new C250s to make the C1000 product, thus lowering its size, weight and direct material cost.
We'll then further develop the new C370 product by combining the C250 and the C65 as illustrated in Slide 13.
We are proud to make Capstone more first cost competitive with the antiquated internal combustion engines of today and provide Capstone with a first cost similar to that of an engine full of lower CARB certifications, lower lifecycle costs, higher liability, and as good or better overall system efficiency at an incredible 42%.
Capstone is working very hard to being a cutting-edge industrial clean tech company that continues to grow revenues, continues to reduce material costs, maintains operating expenses, all along increasing market share in all four of our vertical markets worldwide, as customers and governments look for more cost effective and energy efficient clean tech solutions.
We will continue to work with the U.S. Department of Energy to be a leader in new clean tech product development, providing low emission solutions and building high efficiency energy systems.
Slide 14 graph B shows what we see is Capstone's clear path for short-term goal of positive gross margins, followed by a near-term goal of profitability. As important as these near-term goals are to Capstone, its stockholders and employees, we must not take our eye off the future and must continue to be technology leaders in our industry worldwide.
Slide 15 illustrates the future Capstone as we release new agricultural SynGas products, HEV complete drive system products, the high efficiency C250 and C370 product, and extremely fired microturbine that was recently successfully integrated and tested in Israel with our partner, HelioFocus.
The demonstration was conducted by with a Capstone C65 microturbine by HelioFocus and Capstone on a fixed optical tower using heliostats at the Weizmann Institute in Israel. This unique, renewable solution offers higher solar conversion efficiencies over traditional solar photovoltaic systems. In addition, the increased power density of this system should reduce the amount of land required by traditional solar photovoltaic systems.
The concept scales to all Capstone microturbine products, from the C30 to C1000 series, generating 30 kilowatt to potential 5 megawatts of electricity. In addition, we believe the commercial, concentrated solar power product should compare favorably in cost to today's photovoltaic systems.
In conclusion, the Capstone management team is as committed as ever to continue to deliver solid year-over-year revenue growth, ever improving operational efficiencies, lower direct material costs, ever increasing average selling prices as we cycle through our older, lower price backlog, and benefit from our recent product price increases and continue our strategy of Just-In-Time and Kanban manufacturing to improve management of our inventory to four turns and beyond.
At this point, I would like to open the call up to questions from our analysts. Operator?
(Operator Instructions) Your first question comes from the line of Sanjay Shrestha with Lazard Capital Markets.
Sanjay Shrestha - Lazard Capital Markets
One of your comments about some of the revenue getting pushed to the right given the environment we're in and then the fully robust backlog of $84 million in product, 30% of service on top of that, which sort of suggests and supports a pretty good visibility. But how should we think about your backlog converting to revenue given the sort of those high level comments that you just made in your prepared remarks.
Sanjay, when you look at it, the current market conditions are making it still slow to get financing and the projects are moving slower than we've seen prior to the economic downturn. If you look at the last two years, the total revenue for the year was similar to the backlog we entered the year with. So based on that, looking forward, I would say total your revenue, your expectations should be that we deliver the backlog we entered the year with. So $85 million to $95 million is kind of a fair number that we should be looking at for the year.
Now, if you look at all that backlog that's all considered current, which is delivered in the next 12 months, we are working very hard to increase our FTPs and our Service and Parts business. But I think from a overall expectation, you should expect us to deliver all of that backlog in the next 12 months.
Sanjay Shrestha - Lazard Capital Markets
That's very helpful. Now, in terms of some of the MOU that you guys talked about, so there's two Fortune 500 automotive type folks that you guys are talking to. Now, can you give us any more detail on how big that opportunity do you expect to be here over the course of the next 12 months or is more of a long term opportunity? Can you talk about that in any more detail, I recognize there might be some sensitivity given the timing of it, but whatever you can tell us would be great?
The biggest sensitivity is obviously we're under NDAs with both companies, but the short term expectation should be demonstration vehicles, smaller OEMs that we can convert. So maybe 50 to 100 pieces a year for the next year; fully integration in an automotive platform. by the time you get to repeat that they have crash testing all the different applications, we're probably looking at three years.
Now that being said, as the design line ramps up, some of these marine opportunities and demonstrations opportunities we could easily do a couple of 100 units year in the HEV space, which for Capstone would be a fairly significant piece. But real big numbers obviously will be tens of thousands, but you're looking two to three years out for those kind of numbers.
Sanjay Shrestha - Lazard Capital Markets
Two last questions, pretty good progress on your gross margin side on a sequential basis. So obviously you guys did talk about it, mix, as one of the factor there. But should we expect that this gross margin is going to trend going forward from this point or could there be a quarter here where you could again see it get below what the Q1 performance was?
I think the answer is we're always subject to mix. The trend line though should be improving. As Ed showed you our direct material costs are going down and our average selling prices are going up, we anticipate positive gross margin in the next one to two quarters. It could drop negative again, but then overall go back positive.
So we feel very good about the progress we're making. Ed, I don't know if you want to mention anything on the cost reduction side. I think last call we said we're at about the fifth inning of that original 30%, still feel very good on that progress. And I'll let Mark make a comment there.
Yes, we've been making good progress on our cost reduction activities. Again, the primary method that we are going after is either volume with a current supplier putting multiple parts into a same qualified supplier or to find suppliers that have improved manufacturing methods that can get a sustained cost out of the product and it's not just a one-time deal we're executing.
So, we've been very positive with that. We still have a number of items on the list. So there is still more room for cost reduction as we move forward and that's pretty exciting.
Sanjay Shrestha - Lazard Capital Markets
So with the Shale gas opportunity, how should we think about that turning into a big bookings opportunity for you guys? And with now backlog being much larger than what it has been for a company in the past, how should we think about your book-to-bill ratios, I mean how much of a lumpiness can we expect? And how should we sort of think about that? Give us some guidance so that there is no concern or over excitement on a lumpiness on a quarter-to-quarter basis?
I hate to keep using the term lumpy, but we're quoting projects and Jim can jump in here. Two years ago, a megawatt was a big project for us. Today, we're quoting 10 megawatts, five megawatts, three megawatts, seven megawatts, everywhere from Asia to South America to even here in the U.S.. So, easily you can see quarters where we range from 10 to 30 in bookings on how many of those big projects hit and the timing of those projects.
So I think overall, if you go out three quarters, we're averaging close to $20 million a quarter in product revenue. Our break-even on EBITDA basis, once we hit our cost targets about $25 million all in for the quarter. So we need to be at about the $20 million to $21 million range of product revenue to achieve that.
So I feel good with the backlog we have and the bookings we're seeing. We had a good first month for the quarter and bookings this quarter so I expect that trend to continue going forward. I think part of it is we are still not hitting on our cylinders not to use a reciprocating engine comment there.
We really need to get the U.S. market going, carrier agency needs to get going, WESCO needs to get going, our leadership here in California needs to get going; design line needs to continue their ramp, office power needs to come up to speed.
If you look at last year, almost 80% of our sales were outside the U.S.; we need to see the U.S. pick up and carry their share. All that being said, you should see average about $20 million a quarter in new product booking is what we're looking for. Jim I don't know if you want to add any more to that.
I think you covered it pretty well, but we are getting the opportunity to look at a lot of bigger projects that we historically hadn't been given an opportunity to look at. We'll continue to see that trend.
The nice thing is we do have some flexibility in our manufacturing capabilities. And with some voters moving to the right with the Shell Gas opportunity we did pull that C600 order out very quickly, which is part of what made us more competitive to get that project. So with every cloud has a silver lining, So if one order moves to the right, it does give us an opportunity for a short cycle sale, especially for new customers and opportunities.
One of the motivations for the C600 for Marcella project was also emissions with all of the diesel engines, both mechanical drive and gensets and other gas engines, they are going into the region. The local air quality district and environmental quality, management group is looking at emissions much harder than they have in the last few years which will favor us considerably.
Your next question comes from line of Eric Stine with Northland Securities.
Eric Stine - Northland Securities
I was wondering if we could just touch on the finished goods sitting on the dock. Just looking at the number of shipments, pretty noticeable decrease in C65 shipments. Should we assume that that's what was on the dock is primarily one order or multiple orders?
Similar last quarter we had two or three offending customers. We had a little bit of old C65 and C1000. And I think our challenge is we need to better match our manufacturing, so out each quarter not to have the kind of goods. We're not happy, obviously with our working capital needs last quarter. And part of that is getting our inventory levels down. So our maturity levels did not come down very much in the quarter and we would like to see that correct itself in the next two quarters.
So we have substantial AR in the balance sheet that we need to turn the cash in the next two quarters as well as inventory that can come down in the several million dollars. If you look at last year, we grew revenue 40%, it took $7 million out of our inventory. We're looking for similar type results again this year.
Eric Stine - Northland Securities
Of that $3 million, can you just provide any color or whether that is shipped or anything along those lines?
I would say all of that will ship this quarter. Again it's not an issue of it being cancelled; it's an issue of just sliding out of the end of one quarter into the beginning of the next.
Eric Stine - Northland Securities
Fair enough. May be we could just turn to data center opportunity. You mentioned UTC working on the two data center projects. Good that there's movement there. Can you just talk about IBM and maybe what their plans are beyond the Syracuse installation?
I'll let Jim handle that, I know he's been working very closely with our distributors as well as IBM on their go forward strategy.
From an IBM Syracuse standpoint, over the last few months we've been working to validate the performance of the system. And are pretty well through this process and the customer is pleased with the performance of the package and how the system operates from a reliability and a power quality stand point. Our distributor BHP has been working very closely with IBM and have several projects in their pipeline that they're hoping to move forward on yet this year. And so I think we'll see a gradual growth in that segment, both with those customers as well as some new customers that are looking at the product.
I think it should be pointed out that IBM Syracuse was a fairly small data center; lot of the applications we're looking at now are four to five megawatts or much larger than the Syracuse item.
Eric Stine - Northland Securities
Can you remind us is BHP exclusive to IBM or how is that relationship setup?
BHP and IBM have some sort of working relationship that I am not sure that they've announced what it is yet. So I don't know that I know specifically or if they are talking about it yet. So we should probably for look something from BHP or from IBM on that relationship.
Eric Stine - Northland Securities
But they are working together on these projects.
It is beyond just micro turbine's BHP as term key supplier provided, designed for the building and all of the infrastructure to stuff the data center into. The building, the chilling, the heating, all of the power quality was all supplied under an agreement between IBM in BHP.
And so it will allow BHP to work at IBM outside their standard territory. So other data centers opportunities would be non-IBM opportunities that other distributors are working on.
Eric Stine - Northland Securities
Maybe just switching gears to Origin Energy, can you just remind us kind of where things stand getting through that initial order and maybe remind us what the size of the next order could be?
The initial order was for approximately 130 C30s. The last two containers will leave this quarter. In fact, the 130 will leave this month. So that will finish that first purchase order. Obviously, not all those were in the field. About two-thirds of those have actually been commissioned. So we should see another order, knock on wood, probably minimum 100 units. Upper end could be 1,000 more. We're guessing it will be somewhere in the several hundred unit range. But it really just depends on pricing and how fast they need the machines.
We also have three C1000s that are in the field and operating very well today. I think there's a fourth slab for that one individual site. Shelby just gave me the sign here, like I said, three more slabs for additional C1000.
So we look at Origin as a key partner. Aquatec was actually a large distributor last year than a lot of other oil and gas opportunities with Apache and obviously other coal seam gas applications. But we're very excited about Australia and that market.
Eric Stine - Northland Securities
Maybe just one last question and then I'll jump back in the line. The FPP agreement with Dominion, given the reliability and very low maintenance, it was a tough thing to get C30 and C65s that were in the field signed up for an FPP. Is this more because of application or what was different in this that allowed you to sign that up?
I would actually give credit to our distributor. The distributor, E-Finity in this case, did a great job selling the customer, and it took them probably nine months to convince them. As we said before, selling FPPs to new customers on new product is much easier. Selling FPP to customers who have not had failures and the product is running great is a much harder sale. But I'd actually give credit to Jeff Beiter and E-Finity for a net op, because as you said it, Eric, it is really hard to sell FPPs to happy customers.
Eric Stine - Northland Securities
For the C200 family of units, can you disclose the percentages that have FPPs with those or is that a number you don't give?
We haven't disclosed it. I would say our target would be to be north of 50%. We're not there yet, but I would say we're pretty good. I would say most of the sites out there, we're in dialogue on or have FPPs already in place.
Your next question comes from the line of Walter Nasdeo with Ardour Capital.
Walter Nasdeo - Ardour Capital
Actually most of my questions have been touched upon as far as the backlog, the stuff sitting on the loading dock, and all the other fun issues of running your business, but I would like to talk about your balance sheet just a little bit. Obviously, cash number is down. I know you put some over in to restricted. What are you going to be looking at as far as the BIRD over the next couple of quarters?
We're looking to reduce the burn, Walter. As you know, we've burned $15.5 million this quarter, but $6 million of that was tied up in receivables, as I mentioned. So we're looking to get our receivable back down, lower the inventories, get the benefit from working capital. And as we did the averaging out the two quarters of burn, the first two quarters is where we wanted to end up in the first place. So I think it's just critical that we get the receivables down and continue to march the inventories down towards slow turns.
Walter Nasdeo - Ardour Capital
How are you going to go about getting the receivables down? I mean you're going to head out there with a baseball bat or what?
That's not too good to be placed, but what we do is we're just tightening up on credit policies on some customers that have had credit before. They're going to be a COD going forward. It's risen to Darren's level where we'll go out and we'll make phone calls to collect cash. So the cash is coming in. It comes in slower these days. It's harder to get people to pay. So it's just a matter of convincing them that they need to and if they want to go forward with us.
And some of this, Walter, is a little misleading. We had a pretty good chunk of payments come in two or three days after the quarter ended. LCs are taking three or four days out of Europe, or the East it will be almost overnight. So a lot of the stuffs are just moving slower. So on quarterly basis, we think four snapshots a year is always difficult. But we expect cash burn to be much better in Q2 and Q3 than they were in Q1 obviously.
Walter Nasdeo - Ardour Capital
With all of the newer markets that you've been focusing on and you've been talking about, what do you consider to be the most near-term largest opportunity, so that you can really kind of plant your flag in a market that's going to give you a consistent recurring revenue stream and then build off of these things at a two, three, five years down the road, so that we can start seeing north of $25 million or $30 million a quarter revenues on a consistent basis as you're building up these other areas?
If you look at the markets in general, oil & gas has been our most consistent market, whether that's onshore pipelines like the shale plays we are talking about or offshore platforms like we continue to do. The coal seam gas application obviously is exciting for us as well that we're doing at Origin.
But I think really, it's not only to market but it's also being diversified from a distributor standpoint. I mentioned the U.S. market continues to delight the rest of world. South America has never been a strong market for us; that's coming on nicely in Venezuela, Columbia, Brazil. Asia has always been a struggle. India, China had not been great markets for us. We're now seeing traction in those markets and some positive legislation moving our way.
So I think more than anything else, it will be a diversified portfolio approach and really hitting on all cylinders and all markets worldwide. And we've added a ton of new distributors with the acquisition of the Calnetix product as well as our own, kind of internal growth. We've really got a lot of folks that are just now starting to hit the ground running.
So I think the good news is, if you'd have told me two years ago UTC would go from your biggest customer to not selling anything for almost a year, that DesignLine would have some manufacturing issues and we're still posting revenue growth without some of our traditional biggest players, it's actually fairly encouraging that when those folks come back online will push up over $20 million and closer to $25 million in revenue.
Your next question comes from the line of Shawn Severson with ThinkEquity.
Shawn Severson - ThinkEquity
Just wanted to clarify. You said R&D should be flattish going forward?
Yes, it should stick around less than $2 million a quarter, between $1.5 and $2 through the rest of the year.
Yes, the real change there will be quarter-to-quarter depending on how much DOE building we do in the quarter. We don't take DOE contracts or revenue like some companies. We offset our R&D spend, so it depends on how much contract offset we have each quarter.
We don't anticipate hiring significantly any levels in the R&D area for the next couple of years.
Shawn Severson - ThinkEquity
Okay, and then it looks to me like the ASPs on the C1000s were a little lower than normal, or maybe that is normal now. Just trying to figure out what should we think of product scene on the 1000s going forward?
So that depends on the market its sold into and the features and benefits. So I wouldn't read too much in the one quarter.
Or for the age of the order.
Exactly. So if it's older backlog coming off, it probably does not have the price increases. If it's a strip-down base model version, it'll be lower ASPs and one that's got all the bells and whistles.
So overall, you should see the ASPs on all the product lines going up. Also, this quarter you'll notice we have some C200 unit we're selling as individuals as part of integrating a C600 to an 800 or an 800; unit upgrade kits.
When we originally planned the C1000 series product, one of our sales and marketing design concepts was sell a customer a C600 today and if their load increases overtime they can add a 200 and make it an 800 or two units and make it a 1000.
We're now starting to realize those applications where customers originally bought 600 or 800 are now getting orders to staff additional base. So they're not additional unit sales per say, but their additional C200s going to the field.
So we're actually encouraged by that. It means customers like the product, they're increasing their loads and they're upsizing their machines. Obviously selling that as an add on is better margin than selling it upfront.
Shawn Severson - ThinkEquity
Okay, and on the backlog, I just have a question. I know it's hard to tell the timing of some of this stuff, but is there anything odd in the backlog where you're going to have a big chink of it in six months or nine months or is there any way to think of this in a kind of linear fashion?
Just trying to get a better understanding on how it will come out in sequence?
Yes, I mean I'd say that the majority of it will come out in nine months. We're trying to, in order to optimize our inventory returns, field and production slots. So as I mentioned before we're going to try to get away from having product on the dock at the end of the quarter.
So the fairest thing to do is to take that number and probably divide it by four will be the simplest. But in reality most of that should come out in 9 months.
Shawn Severson - ThinkEquity
Okay, so it's not like you're expecting a pig in the pipeline, like in nine months down the road or anything?
No, we'd like to see obviously the perfect world in revenue growth every quarter, but I think it should be. We definitely do not have a hockey stick at our plant, we'd like to see 16, 19, 22, 25 kind of $2 million or $3 million a quarter in the perfect world. We'll do our best to manage those shipments accordingly.
Shawn Severson - ThinkEquity
Okay, and then you said on the C200 with the automotive partner that there's a possibility they could be doing components for those as well, I mean what would possibly stop you from wanting to do that or trying to do that, I mean it would seem to be a very effective contract manufacturing relationship for you. And I assume they can do it at significantly lower cost than you can even on the 200s as far as part sourcing and manufacturing.
No, you absolutely hit the nail in the head, we're thrilled with the concept they're taking. In fact they have two Fortune 500 companies taking two very different approaches is actually wonderful. One is taking a very marketing centric, let's put it in a car and take it around and show it off to people and get a buzz and excitement going.
The other one is taking a more old school approach of, "Hey, let us become one of your most key vendors, let us build products for you; for today's industrial product at a low price. Let's get to know each other and work on an automotive version."
But we're thrilled to have them on board, thrilled to have them as a supplier. As you said, the cost reduction should be significant. And their ability to ramp production really just makes our ability to produce more products even that much better. So Mark is going to jump in and give us some components. Mark is leading that charge for us. They've been to our factory several times working on pricing those components, sourcing those components. And it's something that we think, like to have it here by December, but probably the end of the fiscal year is a more conservative expectation.
We've had a very good relationship with this partner as Darren said in his earlier dialogue. We have, since the MoU, things have been moving very, very rapidly. They already have all of our drawings, they've been out quoting with their suppliers and we're meeting on a weekly basis with them to make sure that the information exchange is flowing well. And so we should have a meeting here with them shortly to look at some of the parts that we begin to convert and move forward. So I think the timing that mentioned, Darren, is pretty accurate.
The nice thing is, if we get them online, as an origin energy or a New York MTA comes in and somebody wants to place 3,000 or 4,000 unit order on us, it gives us that much more capacity to handle an order like that. And obviously it legitimizes us to be able to pull something like that to the table to negotiate those kind of orders.
So lots of flexibility, additional cost reduction. I know all of our shareholders are looking for positive gross margin, which were on a (inaudible) even positive EBITDA, but that's not the end. That's just another step up the mantle. We need to get profitable and then put good numbers on the bottomline after that.
So I really look at our three cost reduction activities going forwards over the next couple of years being critical to our success.
Shawn Severson - ThinkEquity
And can you give any idea, are you talking like, can they do it 30% cheaper, 40% cheaper, or 10%, just trying to get an idea of the scope of what they're initially coming back with their first look at everything?
Obviously, our product, engine components and electrical components as well as the packaging components, the partner that we're working with is primarily focused in the engine area right now. So I think that that'll be able to drive some significant cost out of the engine portion of the building material as we move forward, maybe similar to some of the cost reductions that we're looking at on the overall product.
I would say a 30% number is a fair number. Some components maybe better, some may be worse. Obviously, volume will drive that as well. But just their volumes being the automotive manufacturers, drive train manufacturer really leverages what they can do for us. And the good news is, the automotive business is off a little bit, so they've got some additional capacity they can fill.
And at this time, I would like to turn the presentation back over to Mr. Darren Jamison for closing remark.
Great. Thank you everybody for tuning into the call. I think we had a good first quarter, good start to the year. The whole management team as I mentioned, is very committed, very excited about the business and we're looking forward to delivering another tremendous year with some significant achievements for the company. Very happy with the revenue number for the quarter, and we look to continue to grow revenue each quarter this year going forward and deliver a nice revenue growth like we had the last two years.
Obviously, we are very focused on margin and margin improvement, direct material cost improvement, average selling price improvement. We'll continue to focus on that and drive our margins as high as possible, as fast as possible with the only limiting factor being our quality. We cannot put a inferior part in our units and risk any kind of quality issue. So we're moving as fast as we can without having some sort of a quality issue.
Our overall manufacturing cost and efficiencies, if you look at our number of employees, we have today, when I joined the company, we were around 250 employees, we're down about 185 today. That's dramatically higher revenues. Our sales per employee revenue per employee, overall efficiency has improved dramatically. But we're not done; we'll keep working at getting more revenue out of the same number of employees.
Cash for the quarter, working capital was a disappointment to us, but we know that most of that is in our balance sheet, we'll get that back. We will focus on it or acquire some baseball bats, some airline tickets we'll do that as well. But we'll get the accounts receivable down and continue to work the inventories down.
From a sales and marketing standpoint, Jim and his team have done a great job, continue to do a good for us going forward. We look at continuing to grow our revenue and adding new distributors, new markets, really weeding and feeding the distribution channel. As you see from the slides in the presentation, besides Africa most of the world is pretty well saturated and covered. That doesn't mean we're done, we need to manage the distributors, make sure they're performing, help them perform if they aren't performing or upgrade distribution if necessary. And obviously paying your bill in the time and manner is one of the metrics we use for judging distributors, and if they can't achieve that, we look at upgrading where necessary.
I can't mention the U.S. market as been key performance from Office Power from Carrier UTC, from WESCO, from PowerTherm to our new distributor in California, performance in the Shale play here in the U.S. also drive for a stronger U.S. market, and we need the U.S. market to be stronger.
We'll be meeting with U.S. politicians as often as possible. In fact, we're meeting with Mr. Waxman here shortly. We need to make sure that the U.S. market is focused and becomes one of our key markets is where a U.S. company providing green jobs.
The new product and development side, as I mentioned, we are very focused on short term goals of gross margins positive and profitability, but we can't take our eye off being a industry leader with new exciting products and continuing to move forward. We cannot rest on our laurels and must continue to be a leader in this industry.
We look forward to a great second quarter and hopefully people can come out to our stockholder meeting here at the end of August. Hopefully we'll have not only the US 1 truck, but maybe the LincVolt out here as well. We'll also have tours of our stack facility where the recuperators are manufactured and the C1000 C200 product goes together.
So even if you came out last year, you will get to see some different products in a different facility. So look forward to meeting any shareholders who can come out.
With that we'll end the call, thank you, operator.
We thank you for your participation in today's conference, this does conclude your presentation, you may now disconnect and have a great day.
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