- Capstone releases a flurry or press releases.
- Are these more hype than substance?
- How significant are the records?
Capstone Turbine (NASDAQ:CPST) released first quarter results on August 7th, results that can generously be described as disappointing. Since then, the company has been working the PR department overtime, pushing out 6 press releases between August 11 and August 19th. One particular press release caught my attention, Capstone Receives 9MW Factory Protection Plan Contract -- FPP Contract Backlog at Record of Over $55 Million. Not only had I not seen a press release regarding the FPP program in several years, but the emphasis of the headline was somewhat surprising.
To put things in perspective, the company's product backlog at the end of its fiscal Q1 (ending June 30th) was $175.2 million, and its total parts, accessories and service revenue (including FPP revenue) for all of last year was $24.3 million. Digging deeper into the 10Q's and 10K one can find a lot more detail about the FPP, including annual revenue and length of the contracts.
The FPP program is described as follows:
Capstone has a factory direct service offering for commissioning and post-commissioning service. Through our global distribution network, we offer a comprehensive FPP for a fixed annual fee to perform regularly scheduled and unscheduled maintenance as needed. Capstone provides factory and on-site training to certify all personnel that are allowed to perform service on our microturbines. Individuals who are certified are called Authorized Service Providers or, ASPs, and must be employed by a distributor in order to perform work pursuant to a Capstone FPP. The majority of our distributors provide these services.
The FPP offers four basic tiers of coverage. although it can be customized to suit the requirements of the customer. The FPP backlog has been growing as the installed base and value of the Capstone hardware at end user sites grows. At the end of the last fiscal year the backlog was listed at $47.2 million. At the end of the first quarter it had climbed to $49.3 million. The $6 million dollar jump in the seven weeks since the end of the first quarter was a pleasant surprise.
However, before getting too excited, investors should understand that this is a backlog that takes a long time to become revenue. While we don't know precisely how long it will take, the recent 10Q shows the following:
... FPPs are generally paid quarterly in advance. Our FPP backlog at the end of the first quarter of Fiscal 2015 was $49.3 million, which represents the value of the contractual agreement for FPP services that has not been earned and extends through Fiscal 2028.
So, the $49.3 million in backlog - which is now more than $55 million - will become revenue over the next 13 years! (Note that Fiscal 2028 ends March 31, 2028.) We can also look at the 10Q and 10K to find out how much FPP revenue has been recognized over the past two fiscal years and the most recent quarter. This information can be found in the calculation of the deferred revenue, which shows the amount of FPP Revenue recognized as $5.6 million in Fiscal 2013, $7.0 million in Fiscal 2014 and $2.0 million in the most recent quarter.
I currently hold some Capstone as a long term investment in the speculative portion of my portfolio. However, because of the lumpy nature of the sales on a quarter by quarter basis - a description often used by management - I also routinely trade positions on a regular basis to take advantage of the resultant price swings. I would expect a strong Q2 report following a very weak Q1, but history gives me no insight into the relative performance of Q3 or Q4.
Longer term, the $175 million of current product backlog should become revenue, but the lumpiness is almost certain to provide positive and negative surprises, with the share prices taking some wild swings.
This is only the second press release headline in the past five years that mentions the Factory Protection Plan, and to hype the amount as a record is puzzling. Investors should expect to see Capstone set new records for its FPP backlog since it makes sense that the growth of new sales and the number of systems operating on customer sites should regularly drive the backlog and the revenue to new highs. It is, however, surprising that the company would choose to issue a press release focusing on this particular record.
Capstone FPP revenue and backlog are both long term positives for the company, and while there will be some small near-term - as in the current year - benefit, the delivery of this backlog stretches out through Fiscal 2028. In Fiscal 2013 FPP revenue was just under 4.4% of total revenue, and in 2014 it had grown to just under 5.3% of revenue and it is far too early to anticipate the percentage for Fiscal 2015. Nevertheless, while this is good news, it's not great news, and certainly not worthy of a headline.