Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Leah Gibson – Investor Relations

Steve Rhoades – President and Chief Executive Officer

Donald R. Peck – Chief Financial Officer and Treasurer

Analysts

Colin Rusch – Thinkequity LLC

Ahmar Zaman – Piper Jaffray

John Hardy – Gleacher & Company

Dale Pfau – Cantor Fitzgerald

Carter Driscoll – Capstone Investments

Joe Maxa – Dougherty & Company LLC

Adam Krop – Ardour Capital Investments

Pavel Molchanov – Raymond James

Jeff Osborne – Stifel Nicolaus & Company, Inc.

Satcon Technology Corporation. (SATC) Q1 2011 Earnings Call April 26, 2011 5:00 PM ET

Operator

Good afternoon and welcome everyone to Satcon’s first quarter 2011 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 did not receive it by email.

With us today, are Satcon’s President and Chief Executive Officer, Mr. Steve Rhoades; Chief Financial Officer, Mr. Don Peck; and Investor Relations Manager, Ms. Leah Gibson.

At this time for opening remarks, I’d like to turn the call over to Ms. Gibson. Please go ahead.

Leah Gibson

Thank you, Manley 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 statements contained herein, that are not statements of historical facts, may be deemed to be forward-looking statements and may include the words, believes, anticipates, plans, expects, 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 and Quarterly Report on Form 10-Q for the quarter ended December 31st, 2011. 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 Relations website at satcon.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 recordings belong to Satcon and are prepared for the benefit of our investors.

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

Steve Rhoades

Thanks, Leah and good afternoon everyone. Satcon recognized another strong quarter with revenue of $62 million, our largest first quarter in the company's history and an increase of over 320% from the first quarter of 2010. While, we are pleased with our first quarter growth over Q1 of last year as we announced on April 7, our revenue for the quarter was below our initial projections of $65 million to $70 million. These lower than expected revenues with a result of the much weaker market in Europe than anticipated as well as some shipments postponed to later in the year by our customers.

Our gross margin for the quarter 24%, below our initial projected range of 25% to 27% as the result of the lower than expected shipments we experienced in Q1. We ended the first quarter with the backlog of approximately $72.2 million, up 28% over our backlog of $56 million at March 31, 2010.

Bookings for the quarter were $35.5 million and equaled the 132 megawatt of our Inverter Solutions. Our bookings performance in North America and Asia this quarter was consistent with our expectations. But Europe under performed due to the combination of seasonality and the current uncertainty related to the feed interrupts in the key markets of Germany and Italy.

Although the market situation in Europe remains unclear, our diversified market approach positions us to expand our leadership positions in both North America and Asia. While we continue to be very competitive through a combination of our technology leadership and our ongoing focus to deliver the industry’s highest performing solutions with the lowest levelized cost of energy.

We expect our Q2 revenues to be between $50 million and $60 million, which will be roughly double the revenues in Q2 2010. We believe the negative effects of the European markets will reduce our revenue and gross margin through Q2, both due to the impact of lower revenues and the impact of a mix shift as a higher percentage of volume of sales are generated from Asia relative to Europe.

In addition we expect to incur higher material costs for our new products Solstice, Equinox, and Prism platform, which are being launched at our Boston Design Center. As we implement cost reductions on these products throughout the quarter, we expect to write down existing on hand inventories to their new lower cost.

These four factors will have a short-term effect on our gross margins resulting in a guidance of 17% to 20% of sales. We are still targeting to be at 30% in gross margin by the end of 2011 with aggressive cost reduction initiatives already underway and anticipated higher volumes in the second half of the year.

As we look to the second half of the year, we expect that the market conditions we experienced in Q1 will be offset by strong demand from utility scale solutions. As many of these historically strong market pose to define their next phases of incentive structures and regulation, we are seeing market driven factors contributing to the growth of the utility scale sector in North America and Asia.

With the combined effects of continuing pricing declines in the panel industry overall improvements in the technologies utilized in these installations and the expertise developed the first wave of major utility deployments well underway, these markets are poised for growth.

For the first quarter of 2011, we shipped 276 megawatts of Satcon’s industry-leading solutions as compared with 55 megawatts shipped in Q1 of 2010. The large scale industrial and utility segments greater than 100 kilowatts continue to be our strongest performing solutions. We shipped over 240 megawatts of our Utility Scale inverter systems in Q1, which represented 87% of our total megawatts shipped during the quarter.

North America represented 76% of our total revenue in Q1 and 77% of our bookings through March. The predicted expansion in the U.S. PV markets (inaudible) and has been fueled by the increasing adoption of solar power by large U.S. utilities. This coupled with our dominant market share in the other 100 kilowatt inverter market has resulted in a robust pipeline in this market for the balance of 2011.

During the quarter, we received orders for several key utility projects, including 15 megawatts of our PowerGate 500 kilowatt solutions to Southern California Edison, under the SPVP project, 15 megawatts of our Equinox Prism platform to SOLON for projects under development for Pacific Gas and Electric in Central California, and an additional 9 megawatts of orders for our Equinox Prism platform for the projects throughout the U.S. Construction is also underway for the 30 megawatt Sault Ste. Marie project, where we are delivering 24 of our 1.25 megawatt sold to Prism platform solutions to Q-Cell. These projects are indicators of how the market is maturing with respectable technology and adoption.

Asia remains a strong market for us, representing 22% of our revenue during the first quarter. Our investment in the development of the direct commercial and service organization in China has enabled Satcon to be a part of many of the regions largest and most advanced utility scale solutions, including both phases of the (inaudible) PV plant in Sichuan, Asia’s largest thin film power plant.

We are also seeing growing demand in Asia outside of China in the quarter, we were selected by Wipro EcoEnergy to supply 40 megawatt of our PowerGate 500 kilowatt solution to be deployed at India’s largest independently developed solar plants. This marks the first major step in what we believe to be a strong new market for our utility scale solutions.

One bright stop in Europe is Greece, where we continue to see strong demand for our solutions as reflected in the recently announced 20.5 megawatt award by Solar Cells Hellas. The combination of Greece has attractive feed-in tariff policy in high solar radiation levels have them emerging as one of the fastest growing market for advanced large scale solar installations.

Each of these key markets continues to expand the demand for larger more sophisticated utility scale solutions also expands. Over the past three years, we have focused our engineering efforts on the development of the industries most advanced edition and reliable inverter systems. The result is the solution portfolio that includes the industries highest performing central inverters in PowerGate and Equinox and the industries most complete architecture for utility skills solar production Solstice.

The recently launched Prism platform solution are utility ready medium voltage building block from multi megawatt instillations as proven to be one of the key drivers of growth within the utility market segment. Prism is a fully integrated utility platform that comes complete with factory integrated medium voltage transformers, switch gear, and electronics, and combined with our best-in-class inverter technology.

Prism platform can be configured to leverage PowerGate Plus, Equinox, all source of converters and delivers turnkey value by removing integrations in the field and putting it in the battery. This allows for a significant reduction in time and expense of system construction and also enables us to extend the performance value of our technologies through factory optimized design. The resulting value is higher performance and the industry’s lowest levelized cost of energy. With over 110 megawatt sold to-date Prism is becoming one of the most demanded solutions in our portfolio.

The first quarter of 2011 was successful quarter for Satcon in which we demonstrate a strong year-over-year growth and strengthened our leadership positions in North America and Asia. Q2 will be challenging as we transitioned to volume manufacturing our new products set and as Europe continues to underperform.

As we look to the remainder of the year, we expect the environments in each of our core markets to improve. We also expect that as our new solutions go to full production and we fully implement cost reduction on current technologies, we will see both revenue and margins increase significantly in the second half of the year.

We continue to be confident that 2011 will be a strong year for Satcon. We have developed the product portfolio of highly valuable and differentiated solutions, build the team of the industry experts, and are focused on rapidly growing markets.

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

Donald R. Peck

Thanks Steve. Revenue for the first quarter ended March 31, 2011 was $62 million, an increase of approximately 321% from the $14.7 million for the first quarter of 2010 and directly in line with the updated guidance the company provided our first quarter 2011 revenue between $61 million and $63 million. During the quarter it shows 276.5 megawatts of product as compared to 55.3 megawatts during the same quarter last year.

As we have reported previously, on a product by product basis, our revenue per watt has remained generally consistent over the past few quarters. A decrease in our overall revenue per watt to $0.22 per Q1 2011 reflect the expected geographic shift in the mix of our revenue. As our sales into Asia were a higher percentage of our sales in Q1 than in prior quarters.

Bookings for the first quarter of 2011 were $35.5 million, representing 132 megawatt of addition demand for our products. 77% of our bookings originated in North America with 20% from Asia Pacific and 3% from Europe.

Our backlog, which consist of firm fixed purchase orders from our renewable energy customers was $72.2 million as of March 31st, 2011. This compared to backlog at the March 31st, 2010 of $56.4 million, an increase of 28%. About 80% of the quarter-end backlog is currently scheduled to ship by the end of the third quarter.

Our gross margins grows year-over-year, our gross margins were 24% in Q1 up for 13.8% in Q1 of 2010 and directly inline with our updated guidance of margins for the quarter of 23% to 25%.

Our operating expenses for the quarter were $16.4 million compared to operating expenses of $9.1 million for the same period in 2010 and down from $16.9 million for the fourth quarter ended December 31st, 2010.

The main drivers of our operating expenses were research and development expenditures as we continued to fund product innovations and selling and general administrative expenses as we leverage our global sales and services footprint. In particular comparing this quarter to last quarter, in Q1 2011 we had a 4% increase in our research and development expenses from Q4 as we had headcount engineering, it incurred product certification cost related to some of our new products. A 7% decrease in our sales general and administrative expenses as we leveraged our prior investments in these areas.

During the first quarter of 2011, the company generated an operating loss of $1.5 million compared to an operating loss for the same period last year of $7.1 million. With respect to non-operating items during the first quarter of 2011 a change in the fair value of our outstanding warrants generated a credit of $124,000 compared to a credit during the first quarter of last year of $1.1 million.

This non-cash credit relates to the mark-to-market valuation of a subset of our outstanding warrants. Our warrant As and warrant Cs. Other non-operating expenses for the first quarter of this year consisted a interest expense on our subordinated debt and SATC deadlines of $575,000 and miscellaneous charges were about $200,000 including franchise taxes and foreign exchange.

Our net loss for the first quarter of 2011 was $2.1 million or $0.02 per share for the same period last year, our net loss attributable to common shareholders was $77.2 million or $0.10 per share, which included gains from the sale of discontinued operations as well as non-cash dividends and accretion related to the Series C Preferred Stock of $1.6 million. As a result of the conversion of the Series C Preferred Stock in October 2010 as part of our recent equity offerings there will be no further non-cash charges related to dividends, deemed dividends or accretion related to the Series C preferred shares going forward.

Turning to the balance sheet, we ended the quarter with $33.6 million in cash. Accounts receivable at the end of the fourth quarter were approximately $69.4 million, down from $73.7 million at December 31st, 2010. For the quarter ended accounts receivable balance, approximately $10 million represents pre-bills on orders to be delivered and recognized this revenue in future quarters, which is also driving the increase in our current deferred revenues.

Inventory at quarter-end was $72.9 million, up from $40.5 million at December 31st, 2010. During the quarter, we built up our both our raw materials and finished goods inventories in anticipation of higher sales volumes and to get ahead of certain supply shortages in the industry.

As Steve mentioned in his remarks, during the second quarter we will be continuing our cost reduction efforts. As we achieved those cost reductions, we will be revaluing existing inventory to after new lower stated costs which we expect will cost us about 4% to 5% of margin in the second quarter, but should put us in a good position to improve on margins moving into the second half of the year.

At the end of the first quarter we increased our senior debt facility from $15 million to $30 million. Last week we further enhanced our access to liquidity by entering it to an expanded senior debt facility with Silicon Valley Bank that allows us to borrow $35 million on our accounts receivable and inventory balances and upon execution of an accordion feature in the debt agreement will allow us to borrow up to $50 million in the future. By enhancing our balance sheet flexibility, we are achieving our goal of assuring access to adequate capital to fund our growth and operations. We have filed a Form 8-K after market today providing some further details of this new senior debt facility.

Our common shares outstanding as of March 31, 2011 were 119 million shares. In addition, using the treasury stock method and the closing price on March 31st, we had an equivalent of 5.2 million shares of common stock options outstanding and 7 million shares of common stock warrants outstanding.

With that I will turn the call back to Steve.

Steve Rhoades

Thanks, Don and with that I will ask the operator to open the call for questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is from the line of Colin Rusch with Thinkequity. Please go ahead.

Colin Rusch – Thinkequity LLC

Hi, gentlemen, how are you? You simply had pretty long lead times for, with a number of your clients and strong relationships with those folks, can you talk a little bit about what you're seeing into the third and fourth quarter right now and what we might expect in terms of beyond, can you just give us a bit more detail beyond the 4 to 5 points of gross margin that you expect to make up in the third and fourth quarter and what kind of revenue levels you need to hit through the deals to achieve those target?

Steve Rhoades

So I think that U.S. as we look at where bookings of revenue are for Q1 and looking into Q2 is actually at our level of expectation for what we thought we’re going to have for the year and pipeline looking into the second half of the year looks pretty strong. So I think that the U.S. is where we expect the things to be. Europe as we said several times during the opening remarks was slower but a lot of uncertainty there on ground-off systems around, we believe is going to be clear about here in the next few weeks or couple of months.

So I think that as we look at the second half we are looking for strong growth on revenue, our pipeline bad debt experience we have with our customers would appear to back up. We are not going to get guidance for the full year, we are not giving revenue levels beyond but I think that relative to where we are, we are on our last call we haven’t really changed our view on what we expect out of the U.S. and Asian market but we have seen that Europe was slower than what we expect.

Colin Rusch – Thinkequity LLC

And I’m assuming that some of the revenue drop off here in the second quarter is due to some inventory working through the (journal) in Europe. Can you just talk about your expectation for how long it takes to work that inventory through and then if you could comment on any markets that are potentially surprising you at this point to the outside.

Steve Rhoades

Yeah, I think that there maybe a bit of inventory. Although I think the biggest impact for us as I looked through our opportunities has been uncertainty around ground mount systems in Italy and Germany where we think we have good opportunities but where there has been a wait and see while policy sort of there. But there probably is a bit of the impact story for inventory part of smaller units, the 100 Kilowatt systems that we sell Europe. On the flip side, we were very pleased to book a large order, our first larger order in India. India is an exciting market and the government policy does seem to be strongly behind building unlike some of the other markets in the world.

India really does need the power. They’ve got a growing population; they’ve got a great need to add to the infrastructure in their country and their banking on solar as one of the ways in which they are going to build that infrastructure. So we’re excited to give business there, we’re certainly excited about working with Wipro. It’s a great company that has big plans for the Indian market.

Colin Rusch – Thinkequity LLC

Thanks a lot guys.

Operator

Thank you. Our next question is from the line of Ahmar Zaman with Piper Jaffray. Please go ahead.

Ahmar Zaman – Piper Jaffray

Hi this Ahmar. Thanks for taking my question. Just a couple of questions on the U.S. markets, historically it’s been one of your strongest market. What do you think in U.S. market in terms of competition and in terms of your share?

Steve Rhoades

We think that we’re holding our own on share as I said to the last caller. Our performance in the U.S. on both revenue and bookings is in line with what we expect it for the year. Competition is certainly always there in every deal that we are in. But we don’t feel like we’re losing share here in the U.S. at all. So I think it’s been about in our level of expectations.

Ahmar Zaman – Piper Jaffray

So your focus on China, you shipped in China and you have increased your books in European markets is what’s slowing you down in the near term. You think you can ship some of your focus back to the U.S. market which is growing and try to diversify away from the slower markets?

Steve Rhoades

I’m not sure we need to shift away. I think we have solid coverage with the major accounts here in the U.S. and we’re aggressively pursuing deals here in North America and we’ll continue to do so, but we will also continue to work with our clients in Europe and in China and in other areas where we see opportunity because we, there is a little bit policy uncertainty in Europe right now maybe some inventory in the channel but we think that will clear up as we look into the second half of the year.

Ahmar Zaman – Piper Jaffray

The final question, on your pre-announcement few weeks ago you mentioned that the cause for that was mostly slow down in the North American market especially in the North Asia and also in China. How was the trending since you, since your last pre-announcement?

Steve Rhoades

Actually I believe what we said was that we had some push out construction delays primarily for U.S. customers and for those most of those projects are scheduled to ship here in the second quarter here in North America. We were about 5% below the bottom end of our range for guidance, certainly not something we would want to repeat but we expect to ship those systems here in the second quarter.

Ahmar Zaman – Piper Jaffray

Thank you.

Operator

Thank you our next question is from John Hardy with Gleacher & Company. Please go ahead.

John Hardy – Gleacher & Company

Yeah, thanks actually wanted to follow up on one of the first questions that was asked if I could. Could you just tell us what you think your geographical mix will be at that 30% gross margin target? I know you don’t want to give a revenue run rate but I’m curious where you think the contributions will come from to get to that number?

Steve Rhoades

I think that we continue to count on the North American market as our primary market, the number between 50% and 60% much like what we did last year for North America. And I think as we look toward the mix between Europe and Asia we would probably see a larger traction of our orders coming from Asia than they would from Europe, but not a complete shift away from Europe. We do think policy will clear up and we will be selling in Europe as we look into the back half of the year. Bu I think we will – the markets in China and other markets in Asia are looking to be stronger as we look into the second of the year and we are well positioned in those markets.

John Hardy – Gleacher & Company

Okay. And when you mention Asia I was wondering if you could give us an update on the GCL arrangement and also perhaps if you could let us know relative to your method of looking at backlog, how much of the number you disclosed today, how much of that is GCL in your current backlog? That would be great vision of

Steve Rhoades

I’m probably no going to give backlog on a specific customer, but I will say on the GCL arrangement we’re continuing to work with GCL on the manufacturing plant (Manjung). We said during our last call that that was beginning to ramp up in April and we are starting that and we were looking to have a significant activity with them as we closed out the third quarter of this year. So we will continue to work with GCL that are partnership with them remains strong and we expect that to continue really strong as we look at the back half of the year.

John Hardy – Gleacher & Company

Okay. Maybe I can ask the backlog question a little bit differently, so you have a, I guess per annum delivery schedule with them or commitment?

Steve Rhoades

No, none of that.

John Hardy – Gleacher & Company

Okay, understood. Got it.

Steve Rhoades

To some of that, I’m sorry I didn’t understand your question earlier, so we don’t, we only record backlog for those items where we have firm fixed purchase owners. Right now, we are working to ramp up the manufacturing activity in the (inaudible) plant.

John Hardy – Gleacher & Company

Got it. Thanks.

Operator

And to our next question Dale Pfau with Cantor Fitzgerald. Please go ahead.

Dale Pfau – Cantor Fitzgerald

Good afternoon gentlemen.

Steve Rhoades

Hi Dale.

Dale Pfau – Cantor Fitzgerald

Several questions. The first is just a housekeeping to make sure I heard you right. When you were talking earlier you said of the unit shift in the quarter, 276 megawatt, 240 megawatts of that was greater than 100 kilowatt is that correct?

Steve Rhoades

Yes.

Donald R. Peck

Yes.

Dale Pfau – Cantor Fitzgerald

Could you tell us how much of that were 500 kilowatt units or give us some number of how many 500 kilowatt units?

Steve Rhoades

You have that number handy Don?

Donald R. Peck

Let me see if got it in front of it.

Dale Pfau – Cantor Fitzgerald

Okay while he is searching for that, on to the next question. In spite of having weakness in Europe which is no great surprise your bookings for first quarter were a little lower than I expect to be in with weakness in Europe. Were there any particular reason for that? Any push out, anything that didn’t come through as you expected? I know you keep saying that North America is about where you expected it. You normally see some weaknesses, it is a little weaker than I expected in the first quarter.

Donald R. Peck

Yeah. I think that we didn’t get almost any contribution from Europe, right. So that’s certainly was a disappointment for us and impacts where we are on the bookings for the quarter. North America itself looks to be good and I think that that is a very bright sport for us. If you look in China, you look at some of the big projects in China right now. We are also seeing some latency on the China fit, where they’re coming for their policy driven installation and also with a little bit of pause as they’re looking at enterprises that are a little bit higher than they’d like to see for the majority of their projects. So Europe, very slow; North America, about where we expected; and China maybe not quite as fast as we expected, but still looking like a strong market for this year.

Dale Pfau – Cantor Fitzgerald

Okay. And could you maybe give us a little bit of thought about how much your GCL contract and that needs checking in the second half where you shipped components may do assembly, how much accretive could that be to total margins for the company due to modeling purposes?

Steve Rhoades

Don, I think you’ve provided those models in the past. I mean, you could comment on that.

Donald R. Peck

Sorry, I was on mute there for a second. Could you repeat the question, I’m sorry, I was looking up to your other question, which at the end was 220 megawatts was 500 and above.

Dale Pfau – Cantor Fitzgerald

Great, thank you for that. The question is in the second half of the year when your contract with GCL kicks in where you’re shipping compound complete invertors, how much margin accretion could we expect from that contribution?

Donald R. Peck

Certainly. As I mentioned in the past, if you, to model it out, if you compare it to what we were selling fully formed inverter to GCL from March, and in fact currently, it is roughly half the revenue dollars and the same margin dollars. So the revenue – the margin impact is about double what we’re currently enjoying when we sell them a fully configured inverter.

Dale Pfau – Cantor Fitzgerald

Okay. And then, one final question and I’ll pass the floor. How much do you think you’re going to burn down inventory in the second quarter, Don, as you take this right down hidden as you continue to ship?

Donald R. Peck

Well, again, that’s an issue that we’re going to be managing throughout the quarter, we’d like to get it down obviously as far as it like, but we don’t have, not here to give you guidance of where we think the inventory numbers will be at the end of Q2. But our efforts will be focused on working that down over the course of the quarter as best we can.

Dale Pfau – Cantor Fitzgerald

Okay. Thank you very much. Good luck.

Steve Rhoades

Thanks.

Donald R. Peck

Thank you.

Operator

Our next question is from Jesse Pichel with Jefferies& Company. Please go ahead.

Unidentified Analyst

Hi Steve, hi Don, this is (inaudible) for Jeese. Thanks for taking my question. Your North America booking declined from a 195 megawatts to a 102 megawatts if I calculate it correctly. Can you give us some more color why the booking kind of halved? And also where will the growth in the second half come from?

Steve Rhoades

So I think in all of the markets throughout solar, you wanted a slower quarter than Q4 and…

Unidentified Analyst

However, we’re looking at booking, the booking is also seasonally slow. Is that correct?

Steve Rhoades

Yeah, I think we’re, I mean, we tend to see bookings turn out in this market in the middle of the second quarter, that’s been our pattern for several years. So I would have expected both revenue and bookings to be slower in the first quarter than they are in the fourth quarter of the year where we had a lot of book and ship business for the fourth quarter in 2010 and also in 2009. So as we look at where we expect growth in the second half of the year, we expect the U.S. to be strong, our pipeline is very good there. We are looking for the Asian markets to continue to perform for us and particularly if we see the final notes on China, [FIT] and then we all know that we’ve got a lot of policy uncertainty in Europe that everyone in the industry is looking to clear up here in the second quarter.

Unidentified Analyst

Okay. That’s really helpful. And also your inventory doubled during the quarter. Do you plan to lower your utilization in order to clear those inventory and how will that impact your margin going forward? And also, with the 4% to 5% margin impact from potential inventory write down, how much will Q2 margin decline from Q1 level?

Steve Rhoades

Yeah, I think it’s a good question. So we’re primarily a contract manufacturing organization. And we get about 80% to 85% of our product from our contract manufacturer. So there is a fixed overhead in the business, which I think you guys have very well modeled. And we are forecasting quarter-over-quarter, a reduction in revenue from $62 million in Q1 down to $50 million to $60 million range for Q2.

So to the extend that we have a fixed overhead for our worldwide operations, the facilities we have worldwide and the factory we have in Burlington, there will be some reduction, I don’t know the exact number. But it’s not as great as if we were, if we had a factory that we own that produce the bulk of our material. So there is a significant impact because we do have a pretty variable structure with respect to our above the line expenses. I don’t know, Don, if you want to elaborate on that any further.

Donald R. Peck

No, I think that is all, it says it.

Unidentified Analyst

Yeah, so any color on the trends for the Q2 margins?

Steve Rhoades

Well, we forecasted 17% to 20% here in the note and I think that the biggest impact in there is, not the biggest, but a large impact in there is revaluation of inventory. And that’s never great when you’ve got more inventory than you want. But the good news there is that it kind of flips directly the other way as you look into the follow-on quarter. You’ve reset your inventory to your new standard cost, we do have very aggressive and we’re executing on material cost reductions for all of our product lines and especially for our new products. And that we're going to benefit from that significantly as we look into Q3 and Q4.

Unidentified Analyst

Okay. And last question, your booking ASP was about $0.0269, 20% higher you’re your $0.0222 ASP during the quarter. Can you help us understand why is that and how should we think about ASP trend going forward?

Steve Rhoades

As we had also noted in our call and I think it is bright spot for Satcon, we’re getting very good traction on our platform solution. And so the platforms are integrated, (inaudible) platforms are present platforms, either Equinox or Solstice platforms have a significantly higher (inaudible) for sales. This has been our strategy for quite some time and I think it's been a good demonstration that even in a little bit tougher environment here in Q1 than we saw in Q4, we’re getting traction on our strategy of selling more capital into each solar installation by grabbing a bigger chunk of the total available balance system in each of those installations.

Unidentified Analyst

Great. Thanks a lot, Steve and Don.

Operator

Thank you. Our next question is from the line of Carter Driscoll with Capstone Investments. Please go ahead.

Carter Driscoll – Capstone Investments

Thanks, gentlemen. The first question, just following up on the last question. Platform solution, are you getting the same type of incremental boost in different geographies, different platform versus standalone solution? Are there any notable variances by region?

Steve Rhoades

That’s a good question. Today, platform solutions for us are North American solution. So all of the bookings that we have today for platforms are for North America. We have on our product roadmap and we’re executing aggressively to have platform solutions available for Europe in the second half of the year. But right now all of our backlog and all of our deliveries today have been for platforms in U.S. and Canada.

Carter Driscoll – Capstone Investments

Is the selling cycle of a similar timeframe using the platform solution, is it a little bit more longer than we’re having?

Steve Rhoades

It is a little bit longer, we are primarily selling the platform solutions in the present platform into multi-megawatt installations module utility scale type installations. And so we do tend to see a little bit longer sales cycle for those than we do for our 30s to 135 or even a lot of our [PowerGate] solution.

Carter Driscoll – Capstone Investments

And shifting gears a little bit, back to Europe which generally is a decrease in percentage of your sales, but maybe to drill down a little bit, obviously Italy and Germany and the consternation over the territory is well known. Could you maybe highlight outside of what you already did with Greece, maybe some of the other more traditional contributors like Czechoslovakia, France or maybe talk about some of the trends there they’re facing, issues they’re just seeing from an inventory perspective, maybe just a little color on what’s going on in Europe, does it really seem to be the real weak spot?

Steve Rhoades

Yeah, well the Czech market is no more. I mean, that’s a tough thing, we did good business there. There are other markets outside of Germany, Italy, Greece, looks strong for us this year. There is a potential for, we have pipeline in Bulgaria and Slovakia. But if you look at the three main markets, France, Italy and Germany, they’ve been very slow for ground-mounted systems here at the beginning of the year. Most of it are polythene-related.

Carter Driscoll – Capstone Investments

And if you just, not to dig yourself too much, but when you talk after the fourth quarter, you were somewhat comfortable with what the street out there, north of $300 million in sales and you’re going to have to talk about specifically, but if you’re really pessimistic, take a very pessimistic view of Europe, I’m imagining Europe potentially extending the third quarter of inventories slow to work up than expected, would it be fair to say you could see a large snap back in the second half of the year, but maybe not, at the same level that you saw maybe just a couple of months ago?

Steve Rhoades

I think I will certainly say that Europe is slower than I expected it to be. And if it continues to be that way as we look into Q2 as the policy and certainly impacts our business, and I don’t know that will make up all of what we had thought we were going to get in the second half that we’re not getting here in the first half.

So, but I don’t expect the number to be anything like as low as it was in Q1 for the balance of the year. So we’re looking for less contribution for Europe this year. But North America is on plan and Asia looks strong and we didn’t plan on business in India coming into the year. We’re very pleasantly surprised to find large opportunities there to close a big one there in Q1 with Wipro for 40 megawatts.

Carter Driscoll – Capstone Investments

And just my last question, on the cost reduction efforts, I know it’s been an ongoing process to reduce your supply chain and move some of your component sourcing to lower cost areas. You talked maybe previously about having not done sometimes back in third quarter, you’re still on track to do so, is that where you’re going to structure the balance of this year?

Steve Rhoades

Well, I think we’re in a good position to finish the second and third quarter. What we’re undergoing is not just a move to low cost areas, but a changeover in the primary products that we’re offering. The target plus line has been a big performer for us for several years and is an industry standard. We introduced our Equinox platform late last year and our present version of Equinox and Solistice. And the big task in front of us as we look through the next three to six months, those products are developed, but we need to move those new products into our high volume manufacturing facility. So I think that’s something we can accomplish over the next three to six months and I think that we will accomplish that and we’re going to see benefits from that as we enter the third quarter.

Carter Driscoll – Capstone Investments

Sure and best of luck.

Operator

Thank you. Our next question is from Joe Maxa with Dougherty & Company. Please go ahead.

Joe Maxa – Dougherty & Company LLC

Thank you. As far as looking at the revenue growth, I know like the last caller indicated, I’m not sure you don’t want to get your guidance, but do you expect the second half of 2011 to be up meaningfully or maybe up at all over the first half or the second half of 2010?

Steve Rhoades

No, that would be giving revenue guidance.

Joe Maxa – Dougherty & Company LLC

Give us an idea of what your expectations are.

Steve Rhoades

Yeah, I understand. So we believe that we gave an indication last time, Joe, that the analysts that are covering us had a good view of the market and our position in it. I think the main change from the last call is Europe is weaker than we thought. And so I think that’s as we look at the rest of our business, it’s actually in line with what we had expected and what we commented on last time. So I think that’s the main change that we’re looking at here.

Joe Maxa – Dougherty & Company LLC

It does seem that Europe wasn’t going to be a huge piece of your business although it was going to be obviously a solid piece suggesting that the decline won’t be drastic from your previous loss, if everything else is in line.

Steve Rhoades

If everything else is in line and I think that’s the indication we have right now. I don’t want to overstate. I mean, it is, there is a lot of uncertainty out there. But I think that our pipeline, what we’re seeing in the U.S. market, what we’re seeing in the Asian market still looks to be solid as we look into the second half of the year. We have been surprised by what’s happened for us at least in European market.

Joe Maxa – Dougherty & Company LLC

Can you help us out on the operating expense line, what we should expect going forward from, in your R&D and SG&A level?

Steve Rhoades

Don, I’ll let you take that.

Donald R. Peck

Sure. Again, we’re going to continue to invest in the business on research and development, we’re continuing to increase headcount, but it’s really not the rate that we did last year. As you saw, SG&A actually came down from Q4 as we had some fair expenses in the prior quarter that can repeat. So, but we’re going to continue to invest in people and the infrastructure we need to continue to grow. So again as I said before, we should expect them to, in the whole to continue to go up into the right, but it’s really not the slope that we saw during 2010.

Joe Maxa – Dougherty & Company LLC

Don, what was the headcount at the end of the quarter?

Donald R. Peck

440, 469.

Joe Maxa – Dougherty & Company LLC

469.

Donald R. Peck

Which is up from 430 at the end of 2010.

Joe Maxa – Dougherty & Company LLC

Got it. And your capital expenditures expected for this year?

Donald R. Peck

Still in that $6 million to $7 million range.

Joe Maxa – Dougherty & Company LLC

Got it. All right, thank you.

Donald R. Peck

Thank you.

Steve Rhoades

Thank you.

Operator

Our next question is from line of Adam Krop with Ardour Capital Investments. Please go ahead.

Adam Krop – Ardour Capital Investments

Hi, guys. Thanks for taking my questions. Just a few follow-ups really number one on the GCL agreement, when do you expect to get up to the 25 megawatts per month I mean, our 75 megawatts a quarter run rate, I know it’s sounds like you are ramping now, but when should we really expect that to come into play?

Steve Rhoades

Our plan is to have a significant portion of that in Q4 of this year. We are ramping through the next six months now.

Adam Krop – Ardour Capital Investments

So is that when we should be modeling in the revenue to be coming from there or should we expect a little bit there show up in 3Q?

Steve Rhoades

I think that we will see some in third quarter and we will give an update on that in the next call, but that’s to get to the higher volumes we talk about, we’re looking at the fourth quarter.

Adam Krop – Ardour Capital Investments

Okay, great. And then if you drill down a little bit more into your cost per watt it was flat or even slightly up in the quarter, I mean can you talk about just some of the drivers there, was that mostly kind of underutilization or where there other things in terms of maybe some of your raw material costs that were higher in the quarter, if you can comment on that will be helpful?

Steve Rhoades

Material costs were not up quarter-over-quarter, its utilization. We were at 7, at a higher revenue levels in Q4 and we do have some fixed costs associated with those. We have seen some commodity increases Adam

Adam Krop – Ardour Capital Investments

Yep

Steve Rhoades

And that have hit us from some of our vendors although we done a good job I think of managing our suppliers and minimizing the impact of those increases and we’ve more than kept pace the LIBOR in CapEx with those commodity increases with our own design led cost reductions and our volume led cost reduction negotiations with our suppliers.

Adam Krop – Ardour Capital Investments

And I think at one point you procured at least 50% plus of your components from the European market, can you just provide an update on that and how you expect that to trend as maybe China ramps up over the course of the year?

Steve Rhoades

Yeah, it’s a great question, I think that number would be more 50% between Europe and North America, then just the Europe but it’s an excellent point and when we talk about our cost reductions and the aggressive work that we are doing right now and it’s the impact on revaluation of our existing inventory a lot of that is the shift from North American and European suppliers to more Asian base suppliers. And so we are working that aggressively the head we are taking in this quarter and 4% to 5% is gets that back on the other side as you look it at the all quarters Q3 and Q4.

Adam Krop – Ardour Capital Investments

Okay. And then just one quick last question may be for Don, on the subordinated debt, I think when 2Q ’11 is the quarter that you are going to start have to pay down that the principle, if I am not mistaken. How you are modeling or how should we expect the pay downs to affect your cash levels and it’s going forward to do as the year?

Donald R. Peck

Sure, it is just starting on this quarter; it is in 33 installments between now and end of the term. So I can just model that ratably from here to be end of the term.

Adam Krop – Ardour Capital Investments

Okay, great thanks.

Steve Rhoades

Thanks Adam.

Operator

Our next question is from Pavel Molchanov with Raymond James. Please go ahead.

Pavel Molchanov – Raymond James

Thanks guys. Most of my questions have been answered, but I wanted to just ask what is the current production capacity in total and kind of what kind of run rate, that’s your second quarter guidance represents on that or utilization?

Steve Rhoades

Well, the total capacity across all of our facilities is at 2.5 gigawatts a year, and so I don’t actually know the megawatts or that we’re projecting for the quarter. Do you know Don? I don’t want to say wrong number.

Donald R. Peck

Yeah, I don’t have the number in front of me.

Steve Rhoades

We’ll get that for you and we’ll publish that to everyone else.

Pavel Molchanov – Raymond James

Okay. I understood. And then, I wanted to ask a little more about Q2. Given that Europe was just 2% of Q1, even if that went to zero and everything else held constant you would still get to about 60 million of revenue, so is it North America that’s down or is it China that is down?

Steve Rhoades

Help me with your question Don.

Donald R. Peck

You mean the $2 million difference?

Pavel Molchanov – Raymond James

Right. In other words, if Europe completely went away relative to your Q1 revenue number?

Donald R. Peck

Yeah.

Pavel Molchanov – Raymond James

You would get to about $60 million of sales. So, with Q2 guidance of between 50 to 60, I’m trying to find out is it North America that’s down half of Q1 levels or China down or both?

Steve Rhoades

Yeah. I think that we are putting our number out there that we’re confident that we’re going to hit.

Pavel Molchanov – Raymond James

Okay. All right Very good.

Operator

Thank you. Your next question is from Jeff Osborne with Stifel Nicolaus. Please go ahead.

Jeff Osborne – Stifel Nicolaus & Company, Inc.

Great, thank you. Most of the questions have been answered. Just a couple of other things could you Steve maybe mentioned, how you progress against that legacy GCL contract, my sense is when you sign that as a pretty low gross margins can you just talk about, has that been fulfilled or there is that kind of flowing through here over the next quarter or to and kind of having an adverse impact as well the underutilization any material charges that you mentioned

Steve Rhoades

There is a small amount of that contract remaining Jeff

Jeff Osborne – Stifel Nicolaus & Company, Inc.

Okay.

Steve Rhoades

The small amount.

Jeff Osborne – Stifel Nicolaus & Company, Inc.

Fair to say that, while the Indian markets represent a tremendous growth opportunity in terms of units the pricing would be pretty similar to the Chinese market for you folks.

Steve Rhoades

Very similar to the China market, but I still think it can be a solid opportunity given that we are selling products in there that we’ve fully transferred to low cost manufacturing.

Jeff Osborne – Stifel Nicolaus & Company, Inc.

Okay. And then just a couple of more here, I think when you gave the guidance on the February 22nd call for the year, you are kind of thinking North America would be around 60% revenue, Asia 20% and Europe 20% if I recall. Obviously, Europe a bit weaker but are those the right numbers, I am just trying to do similar method that (inaudible) was doing “If Europe goes away what kind of left”

Steve Rhoades

I think that Europe would be a smaller fraction as we look into Q2..

Jeff Osborne – Stifel Nicolaus & Company, Inc.

I understand for Q2 but I am just trying to get a sense of where you head with that on February 22nd when you gave that the guidance for the year about feeling comfortable with where the analysts where at.

Steve Rhoades

Yeah, no that’s about right.

Jeff Osborne – Stifel Nicolaus & Company, Inc.

Okay that’s what I thought.

Steve Rhoades

Yeah, that’s about, thanks for your question.

Jeff Osborne – Stifel Nicolaus & Company, Inc.

No problem, and then just few more quick ones one for Don you mentioned the percentage impact on the inventory right down do you up in have the dollar number just give in the there is a $10 million delta on your revenue guidance.

Donald R. Peck

I'd like to keep it is percentage because it will partially depending on that

Jeff Osborne – Stifel Nicolaus & Company, Inc.

Okay it’s fair to say that percentages based as midpoint Don.

Donald R. Peck

Yes.

Jeff Osborne – Stifel Nicolaus & Company, Inc.

All right, and then one last one just my understand as you are producing the Equinox and sells this product to Boston, do you often have particular month a quarter where you would expect that’s the transition into the China and you know perhaps maybe throughout what the margin impact would be on the positive side once that ramps up?

Donald R. Peck

So we are already we are beginning to make the module, that are associated with our, we’re mostly selling at a positive platform solution. We are selling we are already transferring the central inverter versions that those Equinox. We are producing those beginning in May and June of this year for the central inverters and what we are doing right now out of Boston is primarily taking the inverter sections that we are still manufacturing China and integrating in the Boston, but there is still a fair amount of material that we are buying from North American manufacturers for the last stages of the integration of the platform products it is a significant impact for our margin. So we believe we will be transitioned for the all of the central inverter by Q3 and for the platforms, we will begin that transition in Q3 for a fraction and that’s why we still think we are going to be head into our 30 plus margins in the second half of the year.

Jeff Osborne – Stifel Nicolaus & Company, Inc.

There should be not as much of a ramp period given as a contract manufacturing relationship in terms of as our transition happens for we did the gross margins.

Steve Rhoades

We trained those guys on transitioning products that we have developed in North America we’ve began that relationship about 2.5 years ago there was a lot of training and a lot of work to do on our side and what it takes to transfer product, I do think we are better at that now then we were at 2.5 years ago.

Jeff Osborne – Stifel Nicolaus & Company, Inc.

Okay. And then one last quick one any update on the size of Puerto Rico contract that you signed a couple of months ago when should that go through or is there any delays there. We are

Steve Rhoades

We are beginning to shift product on that.

Jeff Osborne – Stifel Nicolaus & Company, Inc.

Perfect, thank you.

Operator

There is no further questions at this time. I would like to turn the floor back over to management for closing comments.

Steve Rhoades

Thank you everyone. And this will conclude today’s call. We look forward to speaking to you on our second quarter conference call in late July.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Satcon Technology Corporation CEO Discusses Q1 2011 Results - Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts