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

Executives

Steve Rhoades – President and CEO

Aaron Gomolak – EVP and CFO

Leah Gibson – Head of Investor Relations

Analysts

Dale Pfau – Cantor Fitzgerald

Joe Maxa – Dougherty & Company

Francesco Citro – Ardour Capital Investments

Pavel Molchanov – Raymond James

Sean – Piper Jaffray

Colin Rusch – ThinkEquity

Jeff Osborne – Stifel Nicolaus

Carter Driscoll – Capstone Investments

John Hardy – Gleacher & Company

Satcon Technology Corporation. (SATC) Q2 2011 Earnings Call August 9, 2011 5:00 PM ET

Operator

Good afternoon and welcome everyone to Satcon’s Second 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; Executive Vice President and Chief Financial Officer, Mr. Aaron Gomolak; and Head of Investor Relations, 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

Thanks 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 Quarterly Report on Form 10-Q for the quarter ended June 30th, 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. I’ll begin today by providing a brief overview of our topline results before discussing our current operational efforts. Then our CFO, Aaron Gomolak will take you through the financials before we turn the call over to your questions.

As everyone on this call is already aware, ongoing policy uncertainty across Europe and Asia in the second quarter of 2011 continued to present challenges for the industry. The compounding effects of prolonged policy restructuring in two of the world’s three largest markets as well as an increase in panel supply and reduction in panel and other balance of system cost has led to an environment while project development has slowed considerably in those markets.

Project developers and investors remained on the side line awaiting the anticipated continuation of price reduction along with the finalization of local Feed-In tariff regulation. These forces have directly affected Satcon’s ability to meet our initial revenue and cost targets for the second quarter.

Despite this challenging environment, we’ve achieved a 65% increase in sales growth over the same period last year. Primarily, due to the increased growth in the utility scale PV market in the US, where we continue to be the leading inverter system provider.

Sales for Satcon in the second quarter were $45.5 million with shipments totaling 195 megawatts compared with Q2 2010 sales of $27.6 million and a 105 megawatt shipped.

Our leadership position is supported by two recently published IMS reports which recognize Satcon as both the number two utility scale inverter supplier in the world as well as the number one supplier in North America, in the 100 kilowatt and above market segment. We build upon this strength to begin in the first quarter of 2011 by attaining the number one position in North America across all power rating.

In the second quarter we continued to see our strongest performing solutions within large scale commercial and utility segments greater than 250 kilowatts. In Q2, we shipped over a 167 megawatts of our large scale commercial and utility scale inverter systems representing 86% of our total megawatt shipped during the quarter.

Gross margin for the quarter was 8%. This was inline with our preannouncement in July, but below our initial projected range as a result of lower than expected Q2 revenue and other factors including one-time charges relating to the revaluation of material due to lower component costs, excess inventory provisions, and a non-recurring expense associated with a strategic decision to accelerate the development of our utility scale medium voltage Prism platform solutions.

As we announced in July, we’ve taken a number of actions to mitigate the challenges we experienced in the first half of the year. We initiated a restructuring plan to resize the company to align to our projected revenues for the second half. This resulted in a reduction of our global workforce of approximately 15%. These measures are always difficult, and we were diligent to structure them in a way that will not impede our ability to continue to develop our product line going forward, nor our ability to strengthen our global commercial operations and support our customers in each of our core markets.

In addition, during the quarter, we closed a $16 million convertible note offering with the proceeds providing greater balance sheet flexibility.

The market environment has challenged the industry and Satcon, but we have taken the actions to ensure that we continue to build on the success of last year. Our focus on continued product development and material cost reduction strategies across all of our product lines will allow us to improve our margin profile in the second half of the year, while we maintain our leadership in North America and improve our revenues in both Europe and Asia.

Despite the slower than expected first half of the year, as the global market for utility skills solar has began to show improvement. The effects of the slow down has delayed the timing of the several high demand period, pushing the increased bookings trend, we normally see in North America in late May and June out to July and August.

However, we see strength in bookings and backlogs for the North America market for the remainder of the year. Step function changes and Feed-In tariffs in several European countries are expected to drive increased demand in commercial rooftop and ground mounted installations in several key markets including Germany and Italy.

In addition, Greece continues to be the bright spot in European market for Satcon, we’re well positioned to build up on the successes we’ve achieved there over the past two years. Second half of the year also appear stronger in Asia, while we see progress and policy in China that is expected to generate increased activity this year and into 2012.

India is also showing increased momentum and supported by our previously announced partnership with Wipro EcoEnergy for the largest tribally developed solar projects in India today.

While the significant slowdown in worldwide demand for commercial solar equipment caused the first half of the year to come in well below our expectations, we remain optimistic about the future.

You see strength throughout the year in North America and positive indication that the markets in Europe and Asia will improve. We have taken structural, financial and operational measures that will enable us to obtain our financial targets and compete successfully through a combination of our technology leadership and on our ongoing focus to deliver the industry’s highest performing solutions.

We are executing on our strategy, which will give us the flexibility to adapt to current market volatility, position us to achieve our guidance and put us on a path to a sustainable business. We will increase our volume of products built and sourced in low cost regions and tightly control expenses.

We expect that as our new solutions go to full production and we fully implement cost reductions on current products, we will see margins increase in the second half of the year.

For Q3, we expect revenue to be between $45 million and $52 million. From a margin perspective, we expect gross margins to be in the mid teens in Q3 and reach the low to mid 20s in the fourth quarter.

With that, I will now turn the call over to our CFO, Aaron Gomolak, who will review our financial results and outline the tasks we’re taking to improve our margin and operational performance. Aaron?

Aaron Gomolak

Thanks Steve. As discussed, our performance during the quarter was lower then our expectations, the growing uncertainty around government incentives for solar, a slowdown in project construction in anticipation of lower modular pricing and declining ASPs hindered the market more than we expected.

Revenue for the second quarter ending June 30th, 2011, was $45.5 million, an increase of approximately 64.7% from $27.6 million in the second quarter of 2010 and inline with the revised guidance the company provided on July 5th.

During the quarter, we sold 195 megawatts of our inverter solutions as compared to a 105 megawatts during the same quarter last year. Our revenue per watt has remained consistent over the past few quarters. Our overall revenue per watt for Q2, 2011, was $0.23 compared with Q1 revenue per watt of $0.22, which reflects the industry’s adoption of our new integrated medium voltage prism platform solutions.

While the industry continues to experience pricing pressure, we believe we can maintain our competitive position through the introduction of this high efficiency and high performance solutions and the continued progress we make on our cost reduction initiatives.

Our backlog, which consists of firm fixed purchase orders from our renewable energy customers was $55.2 million as of June 30th, 2011. Bookings for the quarter were $33.9 million or 148 megawatts. Our bookings performance in the first half of 2011, in North America demonstrated year-over-year growth of 8% and represented 81% of our overall bookings.

Gross margin for the second quarter of 2011 was 8% inline with our updated guidance of 7% to 11%. ASP declines and the effects of the slowdown in the European market negatively impacted our gross margin for the quarter. In addition, we experienced lower gross margins due to a combination of a one-time excess inventory charge of $1.6 million and the strategic decision to accelerate product developments on our medium voltage Prism platforms.

This resulted in a one-time loss above the line of $1.1 million associated with this large project in North America for our strategic customer. Excluding this two one-time charges, gross margin for the quarter would have been 15% to 16%.

Our operating expenses for the quarter were $23.8 million compared to operating expenses of $11 million for the same period in 2010 and $16.4 million in the first quarter of 2011. Operating expenses in Q2 increased due primarily to research and development expenditures which totaled $9.7 million compared with R&D expenses of $2.7 million in the same period last year.

The increase in R&D during Q2 of 2011 was primarily attributable to a $4 million one-time expense for the acceleration of development programs mentioned earlier on our call, on our new integrated medium voltage Prism platform solutions. This strategic acceleration in our development efforts is critical to both our current and future growth in the global utility scale PV market and has directly resulted in shipments of over 21 megawatts of these platform solutions in the month of June alone.

SG&A during the quarter was $12.9 million an increase from $8.3 million in the same period last year. The primary increase in SG&A expense during the quarter was due to higher corporate and sales expenses and a one-time bad debt provision of $700,000.

During the second quarter of 2011, the company recorded an operating loss of $20.1 million compared to an operating loss for the same period last year of $5.3 million.

Our net loss for the second quarter of 2011 was $21.2 million or negative $0.18 per share compared with a net loss of $8.5 million or negative $0.12 per share in the second quarter of 2010. This includes the one-time charge of $1.1 million for deal related costs associated with our subordinated convertible note.

The company has elected to treat this note as a hybrid instrument, thereby requiring us to take these costs as an expense in the current period, this note will be recorded at fair value each reporting period moving forward until settled.

Now turning to the balance sheet, we ended the quarter with $28.4 million in cash. Accounts receivable at the end of the quarter was approximately $77.7 million, of this approximately $10 million represents pre-bills on orders to be delivered and recognized as revenue in future quarters. Inventory at quarter end was $96.2 million.

During the first half of 2011, we built up both raw materials and finished goods inventories in anticipation of much higher sales volumes and to get ahead of previous supply shortages that we experienced last year throughout the industry.

We have been actively working with our suppliers on rescheduling or canceling out semi-purchase orders and anticipate this work will result in substantial inventory reductions over the second half of 2011. As Steve mentioned earlier, at the end of the second quarter we raised $16 million through the issuance of subordinated convertible notes with a net proceeds of $15 million to be used for general corporate purposes.

This enhances our balance sheet flexibility and ensures adequate capital to fund our growth and operations. As we look forward to the next 6-12 months, our strategy will be to execute a sustainable operating model. Our first corporate initiative is to manage and reduce the amount of working capital tied up on our balance sheet. Our target will be to reduce inventory and accounts receivable to below Q1, 2011, ending levels by the end of this fiscal year.

Our second corporate initiative is to generate operating income in Q4 at revenue levels above $55 million. We will see gross margin expansion to the mid teens in Q3 and expect low to mid 20s in Q4 by executing on new product introductions, product engineering qualifications and supply chain price negotiations, which will lower our future costs, but also dragged our margins by approximately 2% for the rest of 2011 as we burn through the higher cost material currently in inventory.

And also through manufacturing optimization including the previously announced reduction in force in July, we believe operating expenses will return to Q3 2010 levels by Q4 of this year. That concludes our prepared remarks for today. With that I’ll ask the operator to open up the call for questions. Operator.

Question-And-Answer Session

Operator

Thank you. We will now be conduction a question and answer session. (Operator Instructions) Our first question is from the line of Jesse Pichel with Jefferies. Please go ahead.

Unidentified Analyst

Hi, Steve and Aaron, this is Ming Zhu (ph) for Jesse Pichel. Thanks for taking my question. It seems like there is a $4 million order cancellation, can you give us some color on that and also what kind of booking trend are we seeing in July and August in different regions?

Aaron Gomolak

Yeah, sure. We didn’t have any order cancellations per say in the second quarter. So, I’m not sure where you’re getting the numbers from. In terms of bookings for the first part of Q3, I think as Steve alluded in his scripts, typically we see an increase in bookings in the May to June timeframe and I think, we’ve seen that push back to July, August timeframe. So, we have seen an uptick.

Unidentified Analyst

Okay. So, the optic is mainly in the US?

Aaron Gomolak

Yes, it is.

Unidentified Analyst

Okay. And a quick question, quick follow up. How many megawatts did you ship to the US this quarter?

Aaron Gomolak

One second, Ming.

Steve Rhoades

Might have to do a calculation there, Ming.

Unidentified Analyst

Okay. So, while you’re looking for that, just want to ask when the China recently announced its first Feed-In program, and it seems like the market should see some boost in 2011 and 2012. So, can you give us some color on your business opportunities there?

Steve Rhoades

We’ve definitely seen an increase in coding activity in China. I think that the Feed-In tariffs not as high as we would all like to see, it’s maybe half a level I think what would draw the big market in China. But, it is a positive feature and China was a bit slow in the first six months as we mentioned earlier in the call, but this should free our projects and that we are seeing a increase in coding activity right now.

Unidentified Analyst

So, if GCL, do you expect GCL to win, what kind of market share they’re going to win in China?

Steve Rhoades

I think, they’re going to be a significant developer, I don’t have a number for what share, I think GCL is going to win, but they’re going to be a significant developer and they continue to be a distributor for our products in China. So, we are looking forward to working with them and with others in China, with the new opportunity that this Feed-In tariff provides.

Did you get that number for him?

Aaron Gomolak

Yeah, we shipped 104 megawatts in the US and a 148 megawatts in North America during this year.

Unidentified Analyst

So, it’s a 104 in US and 148 in North America. Good, thanks a lot, I appreciate it.

Aaron Gomolak

No problem

Operator

Thank you. Our next question is from the line of Dale Pfau with Cantor Fitzgerald, please go ahead.

Dale Pfau – Cantor Fitzgerald

Good afternoon, gentlemen. Could you talk about competitive landscape and the pricing that you are seeing out there, I know it hasn’t changed that much, but with excessive panel people are probably living on balances system, could you talk about that a little please?

Steve Rhoades

We see the same players we have seen, although it’s certainly a competitive market in North America and around the world right now. If we look at our smaller systems Dale, in the 30 to 250 kilowatt, we have seen since the beginning of last year between 5% and 10% price reductions. In our bigger systems at 500 kilowatt and above, we have seen prices down since the beginning of last year about 20%, as you know our strategy is to hold up our price per watt by offering a more comprehensive system solution and that allowed us to held up our revenue per watt across this time period. But, if you look at just a straight central inverter system since the first quarter of 2010 seen a little over 20% price declines on that.

Dale Pfau – Cantor Fitzgerald

And are you seeing a bigger push on term of the bigger system some of these 100 megawatt plus utility scale, is there more pricing pressure there then on 20 megawatt?

Steve Rhoades

The larger scale systems are definitely have volume discount associated with them. Most of the activity in the US market and particularly at the moment is between 5 and 30 megawatt. There is recently coding activity for the large systems and they have a lot of competition for the few that are out there. But, if you look day-in and day-out, what were booked in and what we’re anticipating for the second half, lots of activity in the 5 to 30 megawatt range.

Dale Pfau – Cantor Fitzgerald

Great, thank you very much.

Steve Rhoades

Thank you, Dale.

Operator

Thank you, our next question is from the line of Joe Maxa with Dougherty & Company, please go ahead.

Joe Maxa – Dougherty & Company

Hi, thank you. I was just wondering on the gross margin line, could you walk through the Q3 expectation mid teens versus your prior expectation of 25% or 24%, you gave on the pre-announcement and what was the big change?

Aaron Gomolak

Okay. Joe, sure this is Aaron. I think it’s really a combination of two or three different things. First of all, we are certainly taking a more conservative approach to the topline guiding $45 million to $52 million will naturally bring our gross margins down a little bit compared where we thought that would be. What’s important to note here is that we talked about the acceleration of our R&D efforts and the accrued contract losses that we had to recognize on a major project in North America. We’re going to finish out shipping the balance of that contract in Q3, so what you’re going to see from our revenue and gross margin perspective as you’re going to see another $3.5, $4 million of revenue at zero margin, flow through our P&L in Q3, which is dragging down GM by another point and a half versus what we previously expected.

Joe Maxa – Dougherty & Company

You were not expecting to ship in the third quarter?

Aaron Gomolak

We were not expecting to, yes, to have this contract expand Q2 and Q3. Correct.

Joe Maxa – Dougherty & Company

All right. And I wanted to just look at the operating expense line, are you anticipating your SG&A to maintain near current level, even though, revenues going to be down a bit from prior levels?

Aaron Gomolak

Well again, as part of the sustainable operating model that I talked about, we expect our total OpEx to get back to Q3 of 2010 levels, which was around $14 million.

Joe Maxa – Dougherty & Company

Got it. And inventory, can you just walk through your thoughts and how you’re going to reduce your inventory again?

Aaron Gomolak

Yes, so I think it’s a combination of demand and supply. So our, Steve and I have our sales force aggressively focused on selling, what we have in inventory right now. We have a lot of PowerGate inventory, which is the most readily deployed solution in the world and we have a lot of opportunities throughout the world to sell these products. So, that’s the first and foremost strategy.

Secondly, as I mentioned in my comments, we’ve been actively working with our suppliers over the last two to three months to reschedule and cancel when possible outstanding POs, so by shutting off kind of the incoming material stream and trying to sell what we have out of inventory, we feel we can get inventory back down to below Q1 levels.

Joe Maxa – Dougherty & Company

What was that Aaron?

Aaron Gomolak

$72.6 or $72.8 million, I’m sorry I don’t have the exact number, roughly $72 million, Steve.

Joe Maxa – Dougherty & Company

Okay. And lastly, just on the GCL agreement that was expected to ramp up through this year maybe reaching the go-over, the contracted amount in third quarter or fourth quarter. Where do we stand right now, I think it’s been a little bit slower to ramp up, just more color on your expectations now?

Aaron Gomolak

Yeah, we were, go ahead Steve. Please.

Steve Rhoades

Yeah, we delayed the start up of that factory into next year and we are not expecting contribution from that factory in 2011. GCL continues to be representative and a distributor for our product in China, we are working with them on opportunities in China right now. But, we’ve delayed the start up of that factory in China out into next year.

Joe Maxa – Dougherty & Company

Is that just because demand is lower than expected?

Steve Rhoades

Demand are lower, and they are also looking at their strategy internally, so we will continue to have conversations with the GCL about that, but they continue to be a partner of ours and we are working with them in China today.

Joe Maxa – Dougherty & Company

So, what’s the chance of that just going away and not happening?

Steve Rhoades

We’re continuing to have our conversations with GCL right now, and right now it’s definitely pushed into next year and we’re continuing to talk with them.

Joe Maxa – Dougherty & Company

All right, thank you very much.

Operator

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

Francesco Citro – Ardour Capital Investments

Good evening, this is Francesco Citro for Adam Krop and thanks for taking my question. I have a couple of follow up. First, in your prepared remarks you mentioned about the demand in Europe picking up in the back-end of the year and you also talked about Greece. So, I was wondering if you could tell us a little bit more where the most upside is coming from and if you could comment on Italy, where you had a very strong fourth quarter in 2010?

Steve Rhoades

We’ve seen code activity in both Italy and Germany increase over the last month, we’re not expecting it to be as big as last year. We’re not counting on that in our financials, but we do think that the Feed-In tariff step function changes at the end of the year will drive demand for ground mounted and large commercial projects in Europe. Greece has been a good market for us this year, we’ve announced wins in Greece, well with our partner Survey Digital over there and we think we’re going to continue to see wins in that portion of the world.

Francesco Citro – Ardour Capital Investments

Thanks that helps a lot. Next is on the average selling price, I believe the last quarter your new bookings were at an average selling price of $0.27 per watt, while this quarter should be around $0.23. So, how do you see your average selling price trend in for the next couple of quarters?

Steve Rhoades

We are seeing the competition in the market place and we think that there will continued to be some price pressure on our central inverters, however, we are selling a higher fraction of our units through our prism platforms. One of the main reasons that we spend as much on R&D as we did in the first half of the year was to bring the integrated medium-voltage platforms solution to market and have it ready for the second half of the year.

Our price per watt on that system since it’s a integrated medium voltage platform that includes central inverters and transformers, and switch gears, all integrated platform, our prices are higher on those units.

So, we expect continued competitiveness in this market, bur our strategy is to hold up our total value delivered to a project by delivering a higher fraction of our revenue from our platform solutions.

Francesco Citro – Ardour Capital Investments

All right. And if I may, last question on the lawsuit, if you could give us some color on the legal proceeding phase that you will incur, both in terms of timing and dollar amount?

Steve Rhoades

Well, first a statement, as a matter of corporate practice, we do not comment on pending litigation. Nevertheless, we do not believe that these allegations have any merit and we intend to defend these actions vigorously. These are covered by our directors and officers insurance, and we have a relatively low deductible on that. So, it’s a relatively small amount of money that we would phase in the near future and it’s limited in total amount.

Francesco Citro – Ardour Capital Investments

Thank you, very much.

Operator

Thank you. Our next question is from the line of Pavel Molchanov with Raymond James. Please go ahead.

Pavel Molchanov – Raymond James

Thanks for taking my question. Let me ask about cash flow, obviously cash burn in both Q1 and Q2. When do you think you can get to positive cash flow from operations?

Aaron Gomolak

Well, Pavel, with the two initiatives that I highlighted around working capital management and getting to profitability at revenue levels above $55 million in Q4. We anticipate positive cash flow from operations for the second half of the year. I think paramount to those initiatives is managing the balance sheet right in and doing what we say around inventory reduction and around the cost reduction. So, we feel we will be cash flow positive for the second half of the year.

Pavel Molchanov – Raymond James

So, presumably you’ll have a small cash burn in Q3 and then the positive cash flow from operations in Q4 will more than offset Q3, is that correct?

Aaron Gomolak

Yeah, that would be a logical assumption.

Pavel Molchanov – Raymond James

Okay. And then, turning to the balance sheet specifically, debt to caps looks like 65% as of June 30th. Are you looking to, are you concerned about that and I guess, perhaps more importantly or any of your customers asking any or offering you pushback relating to the current amount of leverage?

Aaron Gomolak

No, we haven’t received any customer concerns. I think it’s more or less as an opportunity for us, I think we have a bank of money sitting on our balance sheet, in terms of inventory in AR and it’s the best source of money because it’s free. All we have to do is, you know, as Steve and I alluded to, manage it better and we can get those ratios back down to what we would feel to be a more normal level.

Pavel Molchanov – Raymond James

Okay, would you expect to begin to pay down some of your current debt perhaps in 2012?

Aaron Gomolak

Yeah and actually we are making principle payments right on our subject debt and with the subordinated convertible note, we begin making principle payments on that in November. So, we will see debt go down in Q3 and Q4 as we repay principle and then obviously yes throughout 2012 and 2013.

Steve Rhoades

And it is our intention Pavel, to repay both of those, the subject has to be repaid in cash and even though we have the option to pay in stock, it is our intention to manage the business in such a way that we can repay the subordinated notes in cash as well.

Pavel Molchanov – Raymond James

Understood, thanks.

Operator

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

Sean – Piper Jaffray

Hi, good evening, this is Sean for Ahmar. And I believe you talked about hitting gross margin levels in sort of the low to mid 20s I think by 4Q. Can you guys walk us through a little bit about what is giving you the confidence that you can get back into the 20 levels on gross margins?

Aaron Gomolak

Yeah, absolutely Sean. So, it’s the combination of three to four things, right it’s – the new product introductions that we are doing around 625 kilowatts central inverters at a 1.25 megawatts platforms. Those products that we accelerated development on in Q2 and took this one-time charge will be much more competitive and have a much better cost structure as they rollout and hit general availability in Q3 and Q4. I mentioned in my prepared comments around the manufacturing optimization, so we took a $1.1 million charge in Q2 for restructuring. We feel that our manufacturing operations going forward now are much more flexible and can respond quicker to customer demand and should give us another point to gross margin in the back half of the year.

And thirdly, I think we’ve been talking about for quite sometime now, but we are executing on cost reduction programs so although ASPs are declining, as Steve mentioned around 20% on our platform of kilowatt, we are actively working on cost reduction programs that are both supply chain led, in terms of price negotiations and also product engineering led in terms of better more reliable and cheaper sources of supply, coming out the Southeast Asia. So, I think, the combination of those three things, gives us confidence that we can hit the low to mid 20s at revenue levels of 55 million.

Sean – Piper Jaffray

Do you think – and I know in the past you guys have talked about, sort of hitting a goal of getting it to sort of the 30s gross margin, it would certainly put you in a competitive position with some of your, some of the other folks in the competitive landscape. I should say, but I mean, what is it going to take to get to those levels especially in an environment that we’re seeing now where there is some ongoing price erosion?

Aaron Gomolak

I think, what I try to lay out here for you is 6 to 12 month plan. So, you’ve seen the first six months right, in terms of our guidance for Q3 and Q4. As we enter next year, as we burn through the $96.2 million of inventory sitting on our books, Steve and I feel confident that the 30% number is still achievable.

I just think, its likely three to four quarters out, we’re quarter-over-quarter looking at price concessions, we’re looking at new product introductions and we’re looking at product engineering programs that really affected the cost of our products.

So, I think it’s really the same three or four thing, Sean that I mentioned in terms of how we get to the low to mid 20s, but it’s more extrapolating those out for Q1 and Q2 in next year.

Steve Rhoades

And the focus of our product development is really on the larger systems, higher power levels, where we can more effectively deliver a more value for the cost that we incur for the system. So, I think we can drive our product development to its phase where we can command a higher margin and then realize that as we burn through some of the material that we’ve already got on our books.

Sean – Piper Jaffray

Great. Thank you, gentlemen.

Operator

(Operator Instructions) And our next question is from the line of Colin Rusch with ThinkEquity. Please go ahead.

Colin Rusch – ThinkEquity

Hi, guys. Can you give us an update on lead times right now for the commercial stuff and then utility scale systems?

Steve Rhoades

Sorry, we are at separate locations here if we trip on each other.

Colin Rusch – ThinkEquity

So, you both decided to answer the question, I hope it’s a phenomenal response.

Aaron Gomolak

Yeah, go ahead Steve, please.

Steve Rhoades

We’re at 6 to 8 weeks for standard solutions and for platform solutions we’re at 12 to 14 weeks.

Colin Rusch – ThinkEquity

Great. And have you started working with Ex-Im Bank on any geography in terms of expert finance in the specialty projects in geographies.

Aaron Gomolak

I’ve had a couple of conversations with them, Colin, it was in my prior tenure here in finance at Satcon, couple of years ago. It’s one of my priorities here as we get through today and earnings season, in terms of exploring opportunities. We get questions from our customers quite often about our ability to build products here in Boston, and take advantage of Ex-Im financing. So, I think it’s something that looks promising but we’re still kind of in the initial phase of assessment.

Colin Rusch – ThinkEquity

Okay, perfect. And the contribution to gross margin in 3Q from inventory write downs, is there any contribution there that you guys are trying to workout some of the materials going into the new products?

Aaron Gomolak

I wouldn’t look at that way, I think, the excess inventory charge that we took to $1.6 million was related to product that we flat out to have much of and it’s our policy to reserve portion of that inventory.

So, I think, we’ll continue to burn through material, we are committed to working on a cost reduction and that’s what going to lead to gross margin expansion here for the next three or four quarters.

Steve Rhoades

Okay. It will have some revaluation charge as we continue to drive cost reduction, Colin.

Colin Rusch – ThinkEquity

Okay. And then, the last question is, can you just give us update on any ability to design our components or reduced component count within the products over the next few quarters?

Aaron Gomolak

Yeah, we have our product engineering team globally which is primarily Boston and in China, has about 30 to 35 active programs right now, Colin that are specifically geared toward those things. So, it’s working hand-in-hand with suppliers, a lot of time suppliers come to us and they have ideas on how to reduce costs, but it involve certification of electrical components which can take you know, three to four months.

So, we are tracking those programs every week and that’s really the basis for lot of the margin expansion that we’re going to see here in the next three to four quarters.

Colin Rusch – ThinkEquity

Okay, great, thanks guys.

Steve Rhoades

Thank you, Colin.

Operator

Thank you. Our next question is from line of Jeff Osborne with Stifel Nicolaus. Please go ahead.

Jeff Osborne – Stifel Nicolaus

Hi, thank you. Most of my questions have been answered. But on the line of charges for Q3, will there be any restructuring charges as is it relates the 15% headcount cut next quarter or is that been fully allocated in 2Q?

Aaron Gomolak

We believe, Jeff it has been fully allocated in Q2, there could be a little bit of spill over but it would be immaterial in terms of modeling.

Jeff Osborne – Stifel Nicolaus

Got you. And then, your response on prior question on GCL didn’t give me a 100% confidence, but understand it’s a sensitive situation. Can you just talk about the older contract that you had signed with them, maybe a year ago, I forgot the specific, so it was a very large deal that I believe into that going longer in the Houston, you had expected, but has that contract been fulfilled and you are now in negotiations for a new contract or you are still shipping against a legacy contract just given China has been a bit of a slower market in 2011?

Steve Rhoades

We still got about 60 units left on that old contract with them.

Jeff Osborne – Stifel Nicolaus

Now, it would be at half a megawatt a piece?

Steve Rhoades

That’s right.

Aaron Gomolak

Correct.

Steve Rhoades

No, we’re almost done with that.

Jeff Osborne – Stifel Nicolaus

Did you ship to them this quarter?

Steve Rhoades

I don’t think we shipped any product –

Aaron Gomolak

We did not, you know, we shipped them product in Q1, but not in Q2 and obviously with the Feed-In tariff now, you know, hopefully we’ll get through the balance of that contract. As Steve mentioned, we do have 30 megawatts remaining.

Jeff Osborne – Stifel Nicolaus

Would there be at that facility, we’re not to be billed, would there be any charges associated with that or with all the CapEx dollars on their books?

Aaron Gomolak

There would be no significant charges related to the facility.

Jeff Osborne – Stifel Nicolaus

It’s physically complete at this point, right?

Steve Rhoades

The building, yeah.

Jeff Osborne – Stifel Nicolaus

Building, okay.

Steve Rhoades

Yeah.

Jeff Osborne – Stifel Nicolaus

And just a last question, can you talk about the transition of Prism and Solstice and Equinox to your contract manufacture in China, I think originally you were kind of targeting late this year of Q1 next year for some of that technology transfer to be brought over and actually I had two part question. The second part, on those advanced products, just have you kind of figured out the transformers, I think, in the past you were talking about buying third party gearing, not being able to mark that up, we kind of structured that that you can still kind of answer this 30% gross margin despite the balance of components from third parties as part of these more complex solutions?

Aaron Gomolak

Yeah. So, let me take the first part of the question Jeff, with regards to the product transfer. At the end of Q2 we’ve already transferred our Solstice to 500 kilowatt products, we have transferred our Equinox 500 both CE and UL and we’ve also transferred our Equinox 625 kilowatt products to our contract manufacturer already. A lot of those transfers occurred late in Q2, but we didn’t really see the benefit. But as those products hit general availability now, we are very excited about the cost profile and the margin structure associated with those.

On the platform side, as we look at integrated medium voltage Prism platforms, we are getting a lot of our components to go on to the system from our contract manufacturer, more like sub assemblies if you will, but that’s been working pretty well here for the quarter in Q2.

Jeff Osborne – Stifel Nicolaus

So, the nature of the Prism charges this quarter had nothing to do with that it was just, you had a poor design or you needed to expedite shipment, I was a bit confused on why the charge on that particular product for Q2 and Q3?

Steve Rhoades

The development cost on a large order that essentially a better system for a Solstice dispersion of our Prism ran over what we would have wanted for that product and so the disadvantage obviously as we took the large charge associated with the development and higher material cost expedite. But, it greatly accelerated when we would have our both Equinox and Solstice Prism platform available for general availability Jeff. And so, it’s not what we would have wanted, but we now have product that’s ready for general availability on Prism platforms here on the second half of the year. And those, to your other question on the medium voltage transformers, we’ve made good progress on identifying suppliers for OEM medium voltage transformers and that’s some of our programs that I expect to have benefit for us within 6 to 9 months.

Jeff Osborne – Stifel Nicolaus

Got it. Thanks much.

Operator

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

Carter Driscoll – Capstone Investments

Good afternoon. I was hoping if you could talk about maybe the components of the inventory right now, maybe help to shape or frame, the potential drawdown of the finished product and it’s contribution maybe to gross margins going forward, you mentioned particular PowerGate and then I have a couple of follow ups?

Aaron Gomolak

Yeah, so if you look at the native classification of our inventory, we’re about 45% is, in terms of raw material and 35% in finished goods. Of that finished goods and raw material as I mentioned before Carter, a lot of it is PowerGate, which is good for us because we sell a lot of PowerGate, right we’re selling those every day of the week, and we got our sales team really focused now on selling that inventory. So, where I see, I guess, as I see this coming down, I see those ratios remaining relatively consistent. And I would hope that we’re drawing down both raw material by converting it to finished products in Boston and Canada and we are also drawing down finished goods by selling what we have in inventory.

Carter Driscoll – Capstone Investments

Okay. And then maybe, could you just, give your view of where distributor inventory situation is in Europe, particularly in Italy and Germany, here is some conflicting reports from different competitors maybe it can give you little sense?

Steve Rhoades

We don’t sell product through channel and you’re up to any larger extent Carter, we almost, all of our product is direct sale. We do have a manufacturing representative in Greece, but they don’t carry inventory for us, so we work at the larger into the scale particular in Europe, we don’t sell much products below 500 kilowatts, 500 kilowatts is higher, well over 90% of our product there, so not a lot of inventory carried in those channel.

Carter Driscoll – Capstone Investments

No, I just asked, just looking anecdotal way, if you guys had a sense?

Steve Rhoades

Yes, I don’t know a ton about what’s happening with our competitors on smaller inverter inventories and what’s in the channel. We just – because we don’t participate in those markets, you know we don’t have a ton of information about that in here.

Carter Driscoll – Capstone Investments

How about in North America, do you see any build up there as it is really more of a people looking for marginal prices decline and some push outs or maybe some financing issues, do you see in North America?

Steve Rhoades

We don’t see – we do work with the distributors here that represents maybe 15% to 20% of our total revenues. We are not seeing a lot of our product build up in the channel and as we mentioned earlier, the North American market has been good and we’ve seen good bookings here in the beginning of the third quarter and we are up 8% year-over-year for the North American markets.

So, I think we’re not seeing build up in channel inventory, at least at the end of the market that we work on, we don’t work on residential and single phase borders at all.

Carter Driscoll – Capstone Investments

And then just on the cost reduction, if you take away the 15% headcount reduction, I think you said on the last call, excuse me, on the revision to your revenue earlier this quarter that you would be complete by the end of third quarter, is that still on track, it will be completely finished by the end of September?

Aaron Gomolak

I guess it is.

Carter Driscoll – Capstone Investments

Okay. And then, just a last question maybe, the couple of wins you had in the quarter with Wipro and Constellation, could you talk about the timing of those orders of those both going to be kind of third quarter, fourth quarter?

Aaron Gomolak

Wipro has been, that’s shipped. Constellation we’re continuing to book and ship Constellation and we expect it throughout the year as they turn into really one of our best customers.

Carter Driscoll – Capstone Investments

Okay, that’s all. Thanks gentlemen.

Operator

Thank you. Our next question is from the line of John Hardy with Gleacher. Please go ahead.

John Hardy – Gleacher & Company

Hi, thanks.

Steve Rhoades

Hi. John.

John Hardy – Gleacher & Company

I think I really have one question left after all that, you mentioned that you think you can continue to expand gross margins in the first half of 2012, which is good to hear, but typically we’ll see a revenue down, first half from second half prior. Are you seeing something in your bookings that makes you think next year you are not going to see that type of seasonality or is that all you know, continuing costs reductions?

Aaron Gomolak

I think we have to expect that we’re going to see seasonality in our revenue, I mean it wasn’t a big this year as it was in previous years but, I think we will expect to see revenue down from Q4 to Q1. That being said, we’re aggressively working on material cost reduction and then manufacturing optimization and it’s our goal to continue to expand margins as we go work through the first half of next year.

John Hardy – Gleacher & Company

Thank you.

Operator

Thank you. Our final question comes from the line of Steve Bauman (ph) with (inaudible) Capital, please go ahead.

Unidentified Analyst

Hi guys, thanks very much for taking the question. I just have one question on a clarification on the guidance you gave around working capital. If I heard you correctly, I think, you suggested that, accounts receivable and inventory should be below the March levels by the end of December. Do I have that correctly?

Aaron Gomolak

Yeah.

Unidentified Analyst

Okay. And I assume that’s on a dollar basis?

Aaron Gomolak

On an absolute dollar basis, yes.

Unidentified Analyst

Okay. And then what happens to the other side of the balance sheet, so payables are obviously up $30 million sequentially as well, are those going to decline or you going to be able to keep those kind of a little bit higher to be able to generate some cash?

Aaron Gomolak

Yeah, I think that’s our intent. We keep payables a little bit higher, but on an absolute basis, Steve we would expect them to come down as well.

Unidentified Analyst

Yeah.

Aaron Gomolak

Throughout the second half of the year.

Unidentified Analyst

Okay, but not necessarily down to the level that they were at on March 31st?

Aaron Gomolak

Correct.

Unidentified Analyst

Okay. Great, thanks very much.

Operator

Thank you. I’ll now turn the floor back over to management for closing comments.

Steve Rhoades

Well, thanks everyone that concludes today’s call, and we will look forward to speaking with you on our third quarter 2011 conference call in early November, take care.

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's CEO Discusses Q2 2011 Results Earnings Call Transcript
This Transcript
All Transcripts