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Capstone Turbine (NASDAQ:CPST)

Q2 2012 Earnings Call

November 09, 2011 4:45 pm ET

Executives

Mark G. Gilbreth - Chief Technology officer and Executive Vice President of Operations

James D. Crouse - Executive Vice President of Sales & Marketing

Jayme L. Brooks - Chief Accounting Officer and Vice President of Finance

Darren R. Jamison - Chief Executive Officer, President and Director

Edward I. Reich - Chief Financial Officer, Executive Vice President and Secretary

Analysts

Eric Stine - Northland Securities Inc., Research Division

Ajay Kejriwal - FBR Capital Markets & Co., Research Division

Shawn M. Severson - JMP Securities LLC, Research Division

Sanjay Shrestha - Lazard Capital Markets LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Capstone Turbine Corporation Earnings Conference Call for Second Quarter Fiscal Year 2012 Financial Results ended September 30, 2011. During today's call, Capstone management will be referencing slides that can be located at www.capstoneturbine.com under the Investor Relations section. [Operator Instructions] I would now like to turn the conference over to your host for today, Miss Jayme Brooks, Vice President, Finance and Chief Accounting Officer. Please proceed, ma'am.

Jayme L. Brooks

Thank you. Good afternoon, and welcome to Capstone Turbine Corporation's Conference Call for the second quarter ended September 30, 2011. I am Jayme Brooks, your contact for today's conference call.

Capstone filed its quarterly report on Form 10-Q with the Securities and Exchange Commission today, November 9, 2011. If you do not have access to this document and would like one, please contact Investor Relations via telephone at (818) 407-3628 or e-mail ir@capstoneturbine.com, or you can view all public filings on the SEC website at www.sec.gov or on our website at www.capstoneturbine.com.

During the course of this conference call, management may make projections or other forward-looking statements regarding future events or financial performance of the company within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. These statements relate to, among other things, future financial performance in attaining profitability, the ability to continue to reduce cost and improve inventory turns and contribution margins, the ability to reduce cash usage, higher average selling prices, continued growth in current markets; the continued availability of a line of credit, our ability to raise funds through warrant exercises, the success of the C200 and C1000 products; new products and technologies; compliance with certain government regulations and increased government awareness and spending of our products; growing market share and market adoption of our products; new applications for our products; growth in the energy efficiency, renewable energy, oil and gas, critical power supply and mobile product markets, increased opportunities in Japan, revenue growth and increased sales volume, our success in key market segments, our ability to enter into new relationships with channel partners and distributors and other third-parties; the energy efficiency, reliability and low cost of ownership of our products; and the expansion of production capacity, manufacturing efficiency and improved relationships with suppliers.

These forward-looking statements are subject to numerous assumptions, risks and uncertainties including the following: Our expectations about expansion into key markets may not be realized; certain strategic business initiatives and relationships may not be sustained and may not lead to increased sales; we may not be able to continue to reduce our manufacturing costs; the growth in our backlog has significantly exceeded our internal forecast; in order to meet this increased demand, we may need to raise additional funds to meet our anticipated cash needs for working capital and capital expenditures; the current economy can make it difficult or impossible for us to raise necessary funds and for a customer to buy our products; we may not be able to utilize our line of credit, for example, as the result of the failure to meet a financial covenant; we may not be able to expand production capacity to meet demand for our products; we may not be able to obtain sufficient materials at reasonable prices; if we fail to meet all applicable NASDAQ global market requirements and NASDAQ determines to delist our common stock, the delisting could adversely affect the market liquidity of our common stock, impair the value of your investment and adversely affect our ability to raise needed funds; we have substantial accounts receivable, and increased bad debt expense or delays in collecting accounts receivable could have a material adverse effect on our cash flows and results of operations; our release of new products may be delayed or our new products may not perform as we expect; we may be unable to increase our sales and sustain or increase our profitability in the future; we may not be able to obtain or maintain customer, distributor and other relationships that are expected to result in an increase in volume in revenue; we may not be able to comply with all applicable government regulations; we may not be able to retain or develop distributors in our targeted markets, in which case our sales would not increase as expected; we may not be able to successfully integrate the acquired Calnetix assets and achieve productive relationships with distributors; and if we do not effectively implement our sales and marketing service and product enhancement plans, our sales will not grow and therefore we may not generate the net revenue we anticipate.

These are among many factors which may cause Capstone's actual results to be materially different from future results predicted or implied in such statements. We refer you to the company's Form 10-K, Form 10-Q and other recent filings with the Securities and Exchange Commission for a description of these and other risk factors. Because of these risks and uncertainties, Capstone cautions you not to place undue reliance on these statements, which speak only as of today. We undertake no obligation and specifically disclaim any obligations to release any revision to any forward-looking statements to reflect events or circumstances after the date of this conference call or to reflect the occurrence of unanticipated events.

I will now turn over the call to Darren Jamison, our President and Chief Executive Officer.

Darren R. Jamison

Thanks, Jayme. Good afternoon and welcome, everyone, to Capstone's second quarter fiscal year 2012 earnings call. With me today are Ed Reich, our Executive Vice President and Chief Financial Officer; Mark Gilbreth, our Executive Vice President and Chief Technology Officer; and Jim Crouse, our Executive Vice President of Sales and Marketing.

Today, as most calls, I'll start with a general overview of the second quarter and then turn the call over to Ed who will review our detailed financial results. Ed will then turn the call back over to me and I'll go over and discuss what is happening in some of our key markets and update you on the progress towards our strategic objectives of improving positive gross margins and generating positive cash flow. We again will be using slides in our presentation today that can be found in our Capstone website under Investor Relations.

During the second quarter, Capstone again built and shipped a record amount of product and had another solid bookings quarter. In the second quarter, we shipped a record $22.4 million in new product, up 7% from last quarter's then record of $20.8 million. In addition, Capstone built 76 C200 engines that's shipped in our C200 and C1000 series products during the second quarter. This makes a 117% increase for the 35 engines built in the second quarter last year as we continue to ramp our C200 manufacturing output without adding any additional or significant touch labor for operating expenses.

Product shipments could have been marginally higher in the quarter if not for some lingering build constraints on the new TA100 acquired product line. The TA100 manufacturing line was relocated as previously planned from Calnetix in Florida to Capstone in California during both the first and second quarters.

The approximately $21 million in new product orders during the quarter were a result of the continued strength of the developing U.S. shale gas market but did not include any significant new orders from BPC in Russia, the company's largest distribution partner. Therefore, as you can see from Slide 2, our total product backlog is essentially flat coming in at $114 million from $115 million a quarter before. This very robust backlog puts Capstone in a strong position to again deliver year-over-year revenue growth in fiscal 2012.

Based on the second quarter year-over-year results and the continued improvement in our key performance indicators, I am very encouraged with Capstone's progress. Slide 3 highlights the results of our KPIs or key performance indicators. The key performance indicators are the best measure of the underlying foundation of our business and are critical to reaching our goal to improve positive gross margins and cash flow. The key metrics to Capstone's success are product production rates, average selling prices, direct material costs, new orders and, of course, cash. These metrics continue to show improvement in the second quarter with the exception of new orders which dropped only slightly from the robust Q1 levels. Cash used for the quarter improved significantly from Q1 and our current internal projections it indicates that we should ease up to $3 million during the third quarter.

Revenue for the second quarter of fiscal 2012 increased 46% year-over-year to a record $27.5 million versus just $18.9 million 12 months ago. Slide 4 illustrates how Capstone's year-over-year quarterly revenue account increased an amazing 18 straight quarters, an achievement unmatched by the vast majority of today's public or even private companies. More importantly, as you can see Slide 5, Capstone received its tremendous top line revenue growth without substantially increasing its production labor and overhead over the past 5 years. This is a tribute to our team of leading manufacturing engineers that continue to make progress in improving our production efficiencies which allows us to build more products without adding significant costs or additional direct labor.

During the second quarter fiscal 2012, Capstone achieved the highest positive gross margin in company history of 6% on a GAAP basis and 8.5% on a non-GAAP or cash basis as shown on Slide 6. Capstone has now posted positive gross margins 4 of the last 5 quarters.

During the quarter, we continued our strategic program to upgrade approximately 180 early vintage C200s to today's more robust design. Because we're selling a premium product and because every C200 and C1000 seated in the market is a potential customer testimonial, it is imperative that all of our product meet or exceed our customers' expectations. Management has taken remedial steps to more cost-effectively upgrade these older units and lower the warranty rates to targeted levels. The results of these efficiency actions are reflected in the quarter-over-quarter improvement in warranty expense.

As you can see from Slide 7, the path to continued improvement in our gross margin from today's 6% to our targeted 35% is higher average selling prices while lowering our direct material costs and reducing the C200 warranty expenses. Continued margin growth has been and will be the key area of focus for our board, our management team and myself as we look for approximately 15% out of direct material costs and manufacturing costs, improve our average selling prices of approximately another 7% and reduce warranty expenses of approximately 4%.

When we accomplish these strategic objectives, we will see overall gross margin of 35% of our top line revenue and generate approximately $9.6 million in margin at today's revenue levels which would obviously provide positive earnings. At this point, I'll turn the call over to Ed to review the specific financial results. Ed?

Edward I. Reich

Thanks, Darren. Good afternoon, everyone. I'd like to provide you with our financial results for the second quarter of fiscal 2012 which ended September 30, 2011.

Let's begin with the recap of the major items on our balance sheet. Significant sequential changes from the Q1 fiscal 2012 to Q2 fiscal 2012 balance sheet were as follows: Inventory increased $800,000 in Q2 to $24.7 million from $23.9 million in Q1, with inventory turns of approximately 3.8x. Primary reasons for the increase were the timing of in transit inventory required for Q3 production and purchases of GE Clean Cycle ORC units. The accounts receivable balance was $23.2 million at the end of the second quarter compared to $19.9 million in Q1. Our days sales outstanding increased slightly due to higher end-of-quarter shipments compared to the prior quarter. Cash collected during the quarter was approximately $24 million.

Accounts payable and accrued expenses were $21.3 million at the end of Q2 compared to $18.9 million at the end of the first quarter. The increase was primarily due to higher inventory levels. Our cash balance was $20.3 million at the end of the second quarter. We consumed $1.8 million in cash in the second quarter using $7.4 million in operating activities, of which $4.5 million was used in operations and $2.9 million was related to changes in working capital accounts.

Our goal for the second quarter was to offset the working capital of $6.8 million used in the first quarter. However, we had slower-than-anticipated payments from customers on their receivables balances. The effect of this was approximately $3 million which would have offset the working capital usage.

We successfully amended our line of credit with Wells Fargo during the quarter, increasing the line to $15 million with a new 3-year term. I'm pleased that the bank has expressed confidence in our business as reflected in this amended agreement.

Sequential changes from the Q1 fiscal 2012 to the Q2 fiscal 2012 income statement were as follows: Total revenue increased 13% sequentially to $27.5 million. Product revenue grew 7% to $22.4 million in Q2. Units shipped during the second quarter were comparable to the first. We shipped 170 units in the first quarter compared to 172 in the second. Average selling price per unit increased 7% to $130,000 per unit from $122,000 per unit last quarter.

Accessories, parts, and service revenue increased 47% to $5.1 million from $3.5 million in the prior quarter. Gross margins were positive again for the second quarter, coming in at $1.7 million or 6% of revenue compared to $500,000 or 2% of revenue in the first quarter. This improvement in gross margin from the first quarter was the result of increased average selling prices and higher volume.

Note that product margins have improved over the last 2 quarters. We continue to make progress against our 30% materials cost reduction target, and we're targeting to complete the remaining approximate 15% of reduction over the next 3 quarters. Margins were again affected by incremental warranty cost during the quarter, primarily related to field upgrades on C200 and C1000 series products in an effort to bring certain fielded units up to current factory specs.

We spent $2.2 million during the second quarter on research and development, which was flat when compared to the prior quarter, and in selling, general and administrative costs, we also spent $6.6 million in the second quarter which was basically the same as compared to the first quarter.

We had net income of $1.3 million or $0.00 per share for the second quarter compared to a $2.9 million loss or $0.01 cent per share for the first quarter. The net income and net loss for both the second and first quarters of fiscal 2012 were affected by the adoption of Accounting Standards Codification 815, "Derivatives and Hedging", which affects our accounting for warrants with anti-dilution provisions. We recorded a non-cash benefit of $8.6 million to warrant liability in the second quarter compared to a non-cash benefit of $5.6 million during the first quarter. For the second quarter of fiscal 2012, the net loss and the corresponding loss per share before the effect of the warrant accounting was $7.3 million and $0.03 per share, respectively. Please refer to Slide 8 for a reconciliation.

Backlog at the end of the second quarter was $113.7 million, down $1.6 million from the first quarter. This quarter's results continued to be encouraging as we experienced another significant improvement in revenue and margin. We need to continue in the positive direction that we've established and remain focused on completing our cost reduction program to attain profitability. That concludes my comments on the second quarter results, and now back to Darren.

Darren R. Jamison

Thank you, Ed. Capstone continues to gain market share in all five of its major markets as shown on Slide 9. In energy efficiency, we continue to penetrate hotels, office buildings, retail and industrial applications around the world. Oil, gas and other natural resources continues to have a major impact in our business as we further penetrate the U.S. shale gas markets and Russian oil fields.

During the quarter, Capstone announced that the Tatarstan President declared Tatarstan's oil companies and specifically Tatneft will be deploying Capstone's microturbines and Capstone's Clean Cycle 125-kilowatt waste heat recovery generators for most of the associated gas to energy projects. Tatarstan is one of the most economically developed regions of Russia. The republic is highly industrialized and ranks second only to Samara Oblast in terms of industrial production per square kilometer. The region's main source of wealth is oil and gas, and Tatarstan produces 32 million tons of crude oil per year and has an estimated oil reserve of more than 1 billion tons. Industrial production constitute 45% of the republic's gross regional domestic product.

The U.S. shale gas market continues to represent an excellent opportunity for Capstone's highly reliable low-emission products as energy producers like Anadarko, Pioneer Natural Resources and Chesapeake are utilizing Capstone's products as better ways to supply cleaner, reliable electricity to the remote drilling operations in the U.S. shale plays.

The critical power supply data center product is performing extremely well, and data center installations ranging from Syracuse University data center to United Technologies' corporate data center to Homeland Security locations. Also during the second quarter, we shipped several C65 Hybrid UPS systems to the University of Ohio for another new data center application. As a result of these successful first installations, we are seeing increased interest from larger data centers and have begun to market a C1000 hybrid UPS solution. Management believes that our data center solution has the potential to drive significant revenue growth as product gains market acceptance.

Renewable energy continues to be a significant portion of our business as we ship products for applications in landfill gas, digester gas, cow or pig manure and biodiesel applications around the globe. Specifically we are seeing increased businesses from key distributors like Greenvironment, Verdesis and Cogenco in Europe and Aquatec-Maxcon in Australia.

In Japan, Capstone's continuing its discussions with potential distributors and hopes to have one or more online during this third quarter to address the potential increased market demand. In addition, we received 2 follow-on orders from telecom leader NTT DoCoMo as our units performed exceptionally well after the earthquake and subsequent tsunami.

We're also looking to increase our focus and effort in Germany and Italy as they look to move away from dependence on nuclear power and use more renewable power or distributed generation combined heat and power solutions.

Capstone's mobile products market, utilizing turbines in electric vehicles, is gaining increasing interest for our use of products as range extenders in electric buses, electric trucks and the marine industry.

We recently announced that we are working with domestic heavy-duty truck manufacturers Kenworth and Peterbilt to demonstrate Class 7 and Class 8 microturbine range-extended series hybrid trucks using Capstone's CARB-certified C65 microturbines. Both vehicles are series hybrid concept trucks intended to quantify the performance, efficiency and economic benefits of a microturbine-based series hybrid solution. As I stated on the last call, the Class 7 refrigerated Kenworth truck is operating and is currently running on the company's test track in Washington state, while the Peterbilt truck is still currently being assembled. The Kenworth truck program is chartered to validate the Capstone/Parker Hannifin drive system, with Costco being the first demonstration partner, giving real drive cycles and operating conditions. The goal of the Costco demonstration is to collect performance and compliance data for Kenworth to make product and engineering improvements to support our production and tent design. The project team also will evaluate utilizing or upsizing or downsizing the system for Class 8 and Class 6 applications. Obviously, Capstone is very excited about partnering with two premier US-based heavy-duty truck companies on exploring ways to integrate fuel-efficient microturbine technology in the medium and heavy-duty trucks.

As a company, we are committed to provide cost-effective business solutions for operators in the trucking industry while also helping to reduce vehicle emissions. These 2 programs are an important first of many steps to potentially develop a commercially available microturbine based on hybrid, heavy-duty truck in the next several years.

On the transit front, the mobile products business, we continue to look forward for DesignLine to ramp production rates after its recent equity infusion. Our Russian bus manufacturer Trolsa [ph] Bus has recently secured new orders in the Black Sea Region and anticipates building approximately 50 C65 CNG buses over the next 6 to 9 months.

On the policy front, Capstone continues to work diligently to increase the federal tax credit for microturbines from 10% to 30%. The bill first introduces H.R. 6515 in the 2010 session would raise the microturbine tax credit from 10% to 30% and remove the $200 per kilowatt cap. Recently, Congresswoman Sanchez again introduced the bill entitled the American Microturbine Manufacturing and Clean Energy Act. This new bill is H.R. 3394 and she introduced the bill last week and yesterday visited Capstone's headquarters here in Chatsworth, California. I'd like to thank Congresswoman Sanchez for being a consistent and steadfast supporter of clean energy. Her bill, if passed, would stimulate the domestic market for clean power systems that are manufactured nearly exclusively in America. She is an excellent supporter of California business and I was honored to have her visit yesterday. I'd also like to thank the bill's 7 cosponsors, Representatives [Charles] Rangel, [Joe] Baca, [Marcy] Kaptur, [James] Moran, [Paul] Tonko, [Michael] Honda and [Mazie] Hirono.

Back here on the home state, we have been working on the California Self-Generation Incentive Program which is also very encouraging and should be a beneficial state program. Remember, Capstone lobbied heavily to restore the CHP program for several years and was finally successful with the passage of SB 412 back in 2009. Since then, Capstone and other CHP stakeholders have been engaged with the California Public Utilities Commission to form a new program and provide incentives for CHP projects in California. I was very proud to announce during the quarter, the microturbines are now eligible for the California Self-Generation Incentive Program.

Under the new SGIP program, microturbines' user renewable projects are eligible for up to $3,000 per kilowatt. Natural gas-fired microturbines used in combined heat and power or CHP are eligible for up to $600 per kilowatt. Incentives will be paid 50% initially, with the balance of the incentive paid over a 5-year period. Capstone products are eligible for an additional premium of 20% as a California manufactured product.

Natural gas-powered systems will need to demonstrate greenhouse gas reductions over a 10-year period. The PUC requires a strict and ongoing monitoring measuring and verification process in order to improve emission performance. Not all Capstone natural gas CHP systems will be able to qualify for the program, but we work closely with our 2 California distributors to maximize this great potential new opportunity.

Additionally, waste heat recovery generators are also available for incentives under the SGIP, qualifying for up to $1,250 per kilowatt. Capstone is the exclusive OEM manufacturing partner, with General Electric to sell zero-emission Clean Cycle waste heat recovery generators for all microturbine applications and for landfill applications below 500 kilowatts. In an effort to further strengthen the Capstone-GE partnership for the Clean Cycle waste heat recovery OEM relationship, we recently reached an agreement to lengthen the term of our OEM agreement to January 2016.

The SGIP will require projects to have a 10-year factory warranty in place in order to be eligible for incentives. Capstone's Factory Protection Plan allows customers to fix their maintenance costs over a customized time frame and provide optimal performance over the life of the system. Under the SGIP program, Capstone will increase its 9-year Factory Protection Plan to a 10-year Factory Protection Plan on both the microturbine and Clean Cycle waste heat recovery generator.

In conclusion, during the second quarter of fiscal 2012, Capstone again set a record for top line revenue, with revenue soaring 46% year-over-year. In the second quarter, on a year-over-year basis, Capstone improved gross margins from a small positive $119,000 to a positive $1.7 million on a GAAP basis and $2.3 million on a non-GAAP or cash basis, again as shown on Slide 6. This is far and away the best revenue and margin in the company's 20-plus year history and we now have had positive margins 4 of the last 5 quarters. The company continues to closely manage operational expenses, improve manufacturing efficiencies, all while simultaneously working to lower direct material costs and increasing average selling prices.

New orders for the quarter were solid, leaving the company with $114 million in backlog to execute against over the next 12 months. Cash used for the quarter dropped to $1.8 million and the company still has over $20 million on its balance sheet, still has use of the new $15 million Wells Fargo credit facility and hopes to receive approximately $9 million additional cash, the $1.17 warrants set to mature in January 2012. Under management's current operating plan, we currently see no need to raise additional capital, assuming the January $1.17 warrants are exercised or induced prior to reaching EBITDA breakeven.

With 2 quarters in the books, fiscal 2012 is off to a tremendous start and looks like another record-breaking year for Capstone, its employees, directors and shareholders. I look forward to continuing to execute against our strategic business plans and again deliver tremendous top line growth and ever-improving gross margins and overall strengthening and improving financial results. At this point, operator, I'd like to open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Sanjay Shrestha with Lazard Capital Markets.

Sanjay Shrestha - Lazard Capital Markets LLC, Research Division

First on the new bookings in the quarter. Darren, you touched on it a little bit, but can you sort of go through the mix of which end market, how much of that was from the shale gas opportunity? And if I heard you correctly, I don't -- and there was any opportunity that materialized from your Russian distributor, so how should we think about that bookings number for the remainder of the fiscal year?

Darren R. Jamison

Yes, I think -- let's take the bookings for the quarter. About $20 million was a little lighter than we've seen in the first quarter, but we take out the fact or account for the fact that we had virtually no new orders from our Russian distributor. That's actually a pretty healthy number. They tend to be our biggest customer on a quarter-to-quarter basis. Nothing to worry about there. Just a typical lumpiness. We expect several large orders from them this quarter and they're continuing to take a lot of product out of backlogs from this quarter and the previous quarter. So just a little bit of a lumpiness in the quarter there. Overall, we feel very good about bookings. This quarter seems to be on track with similar to Q2 levels. I think the shale gas, the oil and gas in Russia, Australia is picking up. We really feel like most of our markets, albeit short of grease [ph] or something like that are extremely strong and will continue to improve results. We just finished our global 18-month distributor meeting, and virtually all 95 distributors are showing increased numbers for next year, very strong business environments and feel very good about the product. So again I look to see 1:1 book-to-bill. We're pretty close to that this quarter and I'd feel very good about where we are going forward.

Sanjay Shrestha - Lazard Capital Markets LLC, Research Division

Okay. So a few quick follow-up. So in terms of the gross margin target you guys talk about, right, and one of the issues in the past has been that sort of the limitation from the supply chain standpoint and product mix and things like that. So one of the biggest buckets here, right, that talks about a tremendous improvement in the gross margin and is really cost reduction, so can you guys talk about that a bit more as to this 35% target, how do we sort of get to that and what is the embedded margin in your current backlog right now?

Darren R. Jamison

Yes, so the margin in the backlog depends on how old the backlog is. The newer backlog has better pricing, the older backlog obviously has older pricing. If you look at when we embarked from going from negative gross margins to positive gross margins, it was a 30% cost reduction program and a 21% price increase program. So you can see pricing of the 21% we've realized, all but 7%, and on the cost reduction program, we've realized about half of that, about 15% of the 30%. That's how we've gone from negative gross margins to positive gross margins. We expect both the pricing and the cost reductions to be complete within the next 3 to 4 quarters and [indiscernible] you should see continue to be lumpy but quarter-over-quarter improvement as we go forward.

Sanjay Shrestha - Lazard Capital Markets LLC, Research Division

Okay, that's very helpful. So one final question from me then, guys. So what is the life of this existing backlog here right now? And since you guys don't include the service component in the backlog, what would that number be including that, and how do I think about sort of the revenue run rate in the second half of the year? And is there anything you need to still do to sort of re-tweak and adjust the supply chain for us to get the incremental benefit of rolling the backlog much faster so it turns into a more of a 6 months backlog and a lot more of returns business?

Darren R. Jamison

Well, 2 issues on the backlog. Number 1, we try to go just in time with our customers so we make sure that we ship the product directly to their end-use customer, to the job site. Air bearings are a fantastic invention, but they're not wine and they don't sit very well over time, so we do not want the product to sit in the field or sit in somebody's shop. So we're trying to match our product manufacturing to the requirements of the customer, which makes us a little susceptible to construction schedules and construction delays, but the issue we had a couple of quarters ago was we were ramping faster than our supply chain can handle. We brought our key suppliers in, I think 2 quarters ago in Q4 and got them on board. I think they're matching our heartbeat pretty well right now. I think they're able to keep up with us and have good visibility on where we're going. So that's always something we're going to watch when we're doing 30% to 40% growth into [ph] our products and we have to make sure they can keep up with us. But that's an area we've got a lot of focus on that. I don't see, knock on wood, any vendor slowing us down in the next year. So the backlog as you mentioned, Sanjay is product only. You can see each quarter, we have $4 million to $5 million in other revenue. Our FPP backlog is up to 780 units and $30 million. So you should see 15% to 18% of other revenue in every quarter besides the product shipments.

Sanjay Shrestha - Lazard Capital Markets LLC, Research Division

Okay. And how do we think about the revenue for the second half of the year?

Darren R. Jamison

So, I mean, it's hard to look at exactly quarter-to-quarter. We'd anticipate Q3 to be up slightly from Q2, and obviously Q4 we'd like to do the same thing, but again, it can move around a little bit depending on shipments. But I think most analysts have us $106 million, $110 million of revenue. We've done $51 million in 2 quarters. If we continue to grow the back half of the year, those numbers feel reasonable.

Operator

And your next question comes from Eric Stine with Northland Capital Markets.

Eric Stine - Northland Securities Inc., Research Division

I'm just wondering if we can touch on the cash balance, I guess first question is an idea of where the cash balance stands today or how collections have been to this point in the quarter?

Darren R. Jamison

Yes, we really can't give you details on the collections. I think that -- nothing abnormal, either positively or negatively, but overall, our DSOs slipped 2 days last quarter which was disappointing. We hope to get that back this quarter and pick up 3 or 4 days to the positive. Nothing real earthshaking that several orders or several payments came in right after the end of the quarter. Again, of our 95 distributors, I think 93 are not public companies, so for them, paying 3 days later doesn't mean a whole bunch for us. Obviously when we take 4 snapshots a year, it seals the deal [ph]. So we continue to manage collections very closely. We're trying to manage everybody's credit terms and support the distributors' growth, but on the other side, not to open the subject to too much risk which is always a challenging thing to pull off. But in general, we would expect DSOs to come back again in Q3 and working capital swing back our way in Q3.

Edward I. Reich

Eric, it's Ed. I can also add that we simply collected $24 million last -- in the second quarter. We can say that we expect to do better than that in the third quarter and that we're looking for a similar cash burn in the third quarter of somewhere between $0 million and $3 million.

Darren R. Jamison

Yes, I said in my prepared remark $3 million. We'd hope to do better than that obviously, but I think using a range is the best way to look at it, $0 million to $3 million again.

Eric Stine - Northland Securities Inc., Research Division

Okay. I mean, just looking at this another way. I mean, the cash burn from operations is greater than anticipated and another draw on [ph] the line. Is this -- I mean, is it heavy shipments at the end of the quarter? Is it slow payers? Is it a combination of both? And just wondering, what can be done or what you are doing to kind of smooth out business throughout the quarter so that heavy shipments doesn't have such an impact?

Darren R. Jamison

Yes, as again, we're kind of a little bit beholden to construction schedules. 70% of our product goes overseas, so we're trying to meet ship sailings. Our biggest distributor, BPC has 90-day payment terms, so obviously it's great to see their business grow without an impact [ph] just from a DSO standpoint. So I would say we're building on a day-to-day weekly basis but we're still somewhat back loaded for shipments. We're working hard to improve that. I think on a cash collection cycle, this quarter was a little weaker than we thought, but I think we'll -- maybe bet [ph] $3 million, I think we'll get that back and then some this quarter. So we'll keep watching, we'll keep monitoring and obviously we're concerned about it, but not overly concerned.

Eric Stine - Northland Securities Inc., Research Division

Okay. And just last one for me. Just wanted to clarify on one of the last questions. So orders to this quarter, I believe you said at this point you think similar to the second quarter. Did you mean -- so you do think that orders this quarter are kind of in the low 20s or are you saying the second calendar quarter...?

Darren R. Jamison

I would say somewhere -- at this point, it's really too early to tell, but north of $20 million, south of probably $28 million, somewhere in that range. It's hard because the new C1000 Series gets us into a lot of 3- and 4-megawatt projects; where one of those goes, it obviously moves the needle. Origin Energy is still talking about a 100 units order. We've got several 3-megawatt to 10-megawatt orders pending, so it's always difficult. None of those could happen or 2 of them could happen and those will move the numbers. But I think in general, as I said, all of our distributors are putting up positive growth numbers for next year. Several new distributors are coming online whether it's in India, in China, South America, we're seeing even Mexico, some folks getting their first and second orders in. So again, if I look for at least 1:1 book-to-bill and if we can be a little better than that, then we'll be happy.

Operator

And our next question comes from Shawn Severson with JMP Securities.

Shawn M. Severson - JMP Securities LLC, Research Division

During the quarter, could you just break out how much the services revenue contributed to the gross margin?

Edward I. Reich

Accessories, parts and service was $5.1 million, which is 19%.

Shawn M. Severson - JMP Securities LLC, Research Division

Okay. And I just have another question kind of on your longer-term technology roadmap and how it might impact the profitability. So when you look at the 250 which is coming up here, I believe very soon, and then further out to the 370, how was that going to impact either the gross margin for you guys and the mix? And then secondly, the competitiveness particularly with the 370 of a microturbine versus other alternative technologies?

Darren R. Jamison

Yes, let me -- I'll talk about the cost piece and the margin piece and I'll throw over with the competitiveness over to Jim, let him say a couple of words. Obviously, this goal that we've shown in this profitability model slide has us going from 6% to 35%. That is not including the C250. The C250 will be margin improvement above and beyond what we're looking at right here. So we really see our current pricing exercises, our current cost reduction measures, and the warranty settling down is getting us to cash flow breakeven or even slightly positive, and then the C250 obviously would lower our C1000 20% from a DMC perspective. So that's really to take us to the next level of profitability. The product itself has some features and benefits and higher efficiencies, some other things that will also help the market, and I'll flip it over to Jim to let him talk about that.

Shawn M. Severson - JMP Securities LLC, Research Division

Just a quick question first, Darren, if I could on the -- so when you go to manufacture the 250 and even the 370, are you basically looking at the same -- exact same cost structure that you have in place today, right? I mean, there isn't a whole lot of incremental cost that we should think of as those 2 products roll out other than maybe warranty?

Darren R. Jamison

Yes, correct. I think from a manufacturing cost standpoint, you see the slide in the deck, our manufacturing cost hasn't changed, even moved sort of building the 200 and the 1000s. The 250 and 370 will be the same. Our bricks and sticks and machine will not change. Obviously, the direct material cost on the bill of material will be slightly higher just because some of the components change, but it's very nominal. So yes, from an overall profitability of the company, those 2 products are going to have a tremendous leveraging factor on our business that's already improving. So definitely you're spot-on, Shawn, that these are going to be additional game changers for the business.

James D. Crouse

From a competitive standpoint, the 250 puts us in a position not just of having a more efficient product as Darren mentioned, but we can do with 4 engines what it would have taken 5 engines to do. So our footprint, our weight is down. The product becomes overall more competitive against the engine guys that we're competing with every day. We're also working to design new features into it from an installation flexibility to allow our customers to ship it more cost-effectively, to use it in a wider range of applications. So I think there's a lot of different areas as product comes together and goes through its validation testing that will identify its competitive advantages.

Darren R. Jamison

Yes, I think Shawn, you've mentioned warranty, and again, it's something we probably should spend more time talking about. But typically a new product will have kind of a bell-shaped warranty curve. If you get the product in the market, you start building up some hours of operation, you start finding where you have weaknesses or improvements required for the product then you go out and fix the product. So you kind of peak at a certain point and then you start coming down the side of that curve, and we believe we are on the backside of that bell curve with the C200 product. We've increased our field expertise so we can actually do more warranty work out in the field in our U.K. office or our Singapore office which is cutting down dramatically on our freight costs. Almost half of the warranty expense we see every quarter is actually shipping costs of moving units around and parts around, so as we can truck stuff as opposed to air freighting or shipping stuff overseas, that's reducing our warranty expenses. So both improving the product, getting rid of the fixed population that needs to be fixed and lowering the credit expense. Obviously, when we launch the 250 and the 370, we'll see some similar elevated warranty rates for periods of time, and again, that's just part of the new product development process.

Shawn M. Severson - JMP Securities LLC, Research Division

And I know the 370 is a little way out there in terms of commercialization, but I believe the electrical efficiency on that is up to 40%, 42%, something like that according to the roadmap, and that's a real game changer, isn't it, for the competitiveness of the turbine versus traditional technologies?

Mark G. Gilbreth

Yes, this is Mark Gilbreth here. The 370, that definitely is a building block from the 250 as a low-pressure spool and then we combine a high-pressure spool to get higher-pressure ratios. So that not only helps us on the efficiency side, it helps us to be much more competitive with the larger recips that are out there in the marketplace, but it also improves the power density which helps drive additional costs or margin for our business as well. So a very exciting opportunity.

Shawn M. Severson - JMP Securities LLC, Research Division

And the timing for commercial availability on the 250?

Darren R. Jamison

Yes, we haven't come out and officially told our distributor base that. We just want to make sure they're selling the current product, but I think it's definitely something less than 2 years away and obviously we will release it as fast as we can. We're being comfortable with the robustness of the product.

Operator

Our next question comes from Ajay Kejriwal with FBR Capital Markets.

Ajay Kejriwal - FBR Capital Markets & Co., Research Division

Nice to see the gross margin improvement and I wanted to follow up on that pricing discussion. So the 7% improvement in selling prices, is that all pricing or there is a mix effect in there?

Darren R. Jamison

That's all pricing, so if you took our backlog and repriced it at today's price book, that's how much our backlog would increase. So we've gone through. If you remember, we used a different slide for the last several quarters trying to explain how we get home from a margin standpoint, and this may be a little simpler for folks. Yes, if you look to the current pricing that the last price increase that we did as the backlog completely turns over, then we'll see our ASPs increase completely 7%. On the cost reduction side, all of the cost reductions we're going after have been identified. In some cases, we have parts that are in First Article testing. In some cases, we still have some design work to do for cost reduction, but we're very comfortable. We know where it's coming from, which vendors we're working from, and really it's just how quickly we can get the cost reductions in place. We are seeing some pricing pressure from HR-120 from some of the materials we use, and so this is net of that pressure. And so I think we're fairly comfortable with the price increases, the limited ones where we've seen from commodity prices going up over the last year.

Ajay Kejriwal - FBR Capital Markets & Co., Research Division

Got it. So when I think about pricing, the 7% that you have in your model, when you look at the orders that you've booked last quarter, are you there in terms of pricing that gets you to that model or do you need to put in more price increases?

Darren R. Jamison

No. The only way we wouldn't be there with an order rebook this last quarter or this quarter would be if we discounted for some reason. In some cases, from a competitive standpoint, we will offer a discount. Occasionally, we offer a bit of a discount for cash payment or better payments from the distributor. For the most part, if it's a straight, no-discount, out-of-the-price book, then yes, it's got the 7% built into it.

Ajay Kejriwal - FBR Capital Markets & Co., Research Division

Got it. And then on that cost reduction comment you had, so what are the milestones between now and the next 3 or 4 quarters that you are monitoring or that would be key for you to get to that 15%? Is it any 1 or 2 suppliers or any 1 or 2 key products where there's some wood that needs to be chopped, or is it a lot of different things that need to happen?

Darren R. Jamison

Yes, it's about 12 different parts numbers, specifically, maybe 15, so it's really a matter of some rotating equipment parts, some printed circuit boards, even our display panel. The C200 enclosure, we've got that cost reduction cut in, so our C200 product is pretty much at our target. Our C1000 enclosure, we're still going through another revision of cost reduction on the C1000 enclosure. But for the most part, it's part and parcel rotating machinery, the C1000 enclosure, some printed circuit boards and the like. But again, I think we've -- as I mentioned in previous calls, it's more complicated than just you buy a part from a new vendor at a lower price. These are obviously in a lot of cases custom parts, heavily machined parts, very tight tolerances, and the last thing we can afford to do is to accept the vendor or part that's not first back [ph]. And we have had some vendors come in on the first or second try and not be able to manufacture our part within the tolerances we require. So I don't want to say it's overly complicated, but it's also not a real short putt. It takes some work, takes some effort, with the program management group and Rob's group helping that effort to make sure that we cut the product in. And as I say, the Tarzan effect: We don't let go of one vine til we grab the next vine. The last thing we want to do is cut off an old vendor and then have a problem with a new vendor. So working all those issues, and again I think each quarter should have improvements and in 3 to 4 quarters, we should be done.

Ajay Kejriwal - FBR Capital Markets & Co., Research Division

Got it, that's helpful. And then maybe one question on the shale opportunity, any color on some of the bigger opportunities that you've been pursuing, what's the progress and your update there? And then any color on what -- how much is in the backlog from shale that you're carrying today?

Darren R. Jamison

Yes. I mean, we've mentioned in the last -- I think Q4, we had a really big bump, and that was significantly impacted by shale gas. This quarter, I think we'll probably ship 4 C1000s to Pioneer, maybe some another couple units here and there to Anadarko and Chesapeake. But for the most part, it's a 4-to-5-megawatt-a-quarter impact on our business. Obviously, there's lots of room to grow there. Both our distributors, Pumps & Service and E-Finity are adding more personnel and more aggressively chasing that market as they are 2 distributors that have most of the shale gas in the area. We announced obviously an associated gas order of 3 megawatts during the quarter in Canada, and there's lots of associated gas we're expecting new orders out of Tatarstan, as I mentioned in Russia. I mean that could be -- Tatneft alone could do 30 to 40 megawatts next year, so a big opportunity. I think the other thing that -- maybe Jim can jump in here, the Clean Cycle waste heat recovery generators, we have not seen a lot of early adoptions of our product. We have some on the field, but I think the pipeline of orders and opportunities of that product is growing and I would not be surprised to see us sell 40 to 60 next year and see a very nice increase on the waste heat recovery generator side.

James D. Crouse

I would just add to Darren's comments. One of the exciting things is as we deploy to our existing shale customers, it gives us excellent opportunities. And we've got a lot of visitors from other oil and gas customers, both domestically and internationally that go to Pioneer, they go to El Paso, they go to Chesapeake. So our goal is obviously to keep all of our existing customers, see repeat orders, but as the awareness in the marketplace grows, we're quite anxious to see new customers come on board and start taking their 3 to 4 megawatts a quarter from us.

Ajay Kejriwal - FBR Capital Markets & Co., Research Division

Thanks for the color. And Tatneft sounds like a very interesting opportunity. Maybe any update on what the expectation is in terms of the orders playing out? You just said 30 to 40 megawatts and any sense of the timeline there?

Darren R. Jamison

Yes. Really, it's hard to tell with oil and gas customers, they tend to talk a good game about how quick they move and then move much slower, but they gave us some color over the next 2 years what they want to do. So we're pretty comfortable. We've already seen a few orders from them. Our distributor is setting up a regional office closer to their headquarters and I think we'll see a nice deal flow. Gazprom I know is picking up speed and doing a lot of new activities. There's several other oil companies, LUKOIL and other folks in Russia we're very happy about. We're doing very large projects in Sochi in Russia; it's part of the Olympics powering a shopping mall there. And so I think again, the Russian market continues to be one of our strongest -- I mentioned in the call, Aquatec-Maxcon, they've got several deals flowing today. They're still working with Origin Energy, that deal is still live. So we see Australia's still being a key market, South America and Mexico continues to grow, and the U.S. market, we've seen nice rebound of that business. The California Self-Generation Incentive Program should help. Obviously, we have a lot of work to do to try to get the American Microturbine Act passed, but I think, having 7 co-sponsors to the bill and have a bill that in theory both Republican and Democrat should be able to support, is something that we at least can take a good shot at and work heavily up on the Hill.

Operator

And at this time, there are no questions. I'd like to hand it back to Mr. Darren Jamison.

Darren R. Jamison

Great. It's my closing remarks. December 17 will be my 5-year anniversary at Capstone, and in today's world of daily headlines and quarterly earnings calls and what-have-you-done-for-me-latelys, sometimes it's nice to kind of step back and have a unique opportunity to kind of reflect over the last 5 years. So when I joined Capstone 5 years ago, the industry told me the company was dead and forgot to lie down. A lot of folks were saying that I was crazy; the company will be bankrupt within a year; the product was too small and too expensive to compete with the likes of GE and Caterpillar; the morale of the company was terrible; distribution channels in shambles; and people say the company never had a positive gross margin and never will. Some folks in the industry went so far as to even call the company Crapstone. When I reflect back in the last 5 years, it's definitely not the easiest road I've ever gone down, not achieved every goal we've set or kept every promise the team's made, but the global economy has been brutal and financial markets have been unkind. But if you think about it, the hard work and the combination of solid planning and dogged determination is starting to pay off.

Five years ago, they said you couldn't sell Caterpillar against Cap, you couldn't sell Capstone against Caterpillar and GE. Our revenues have fallen to $21 million from $24 million in the prior year. Fast-forward 5 years and today we're announcing quarterly revenue of $27.5 million, more than what we did in an annual basis back then, and the trailing 12 months if you add it up is $99 million to $100 million in revenue. So an incredible growth from the last 5 years for the product that people said would struggle to compete.

If you look at -- they said the morale was terrible, the distribution channel was in shambles. Today, we've posted our 18th consecutive quarter of year-over-year revenue on a quarterly basis. Great employee turnover is down to 4%. I mentioned in our distributor meeting, we have 95 distributors today; we had 20 distributors 5 years ago. Virtually all of them are seeing their businesses grow. They're reinvesting into Capstone. We probably had 100 folks representing the product worldwide outside of Capstone 5 years ago; that number is probably closer to 900 today. If you look at our pipeline that we see in the market continues to grow every quarter, and we've got a lot of very talented and entrepreneurial folks that are representing the product.

Five years ago, they said the products were too small to compete in the megawatt world, and yet today, 75% of our $114 million backlog is our 200-kilowatt-based product. I think we've done a great job in marketing it as a C1000 and putting it into a single box, having it act like a single machine. We are definitely playing in the megawatt space, and as Shawn had said, your 250 is only going to make you more competitive in that space and the 370 even further.

Five years ago, they said we'd be unable to build the product to a positive gross margin, but today, we've posted our fourth positive gross margin in the last 5 quarters. So it wasn't that long ago around these calls talking about can we even get a positive gross margin? Now we're talking about how do we get to 35% positive margin? So what a difference 5 years makes.

Five years ago, they said you couldn't survive another year. Yet today, Capstone not only survived the last 5 years, but I'd argue we're thriving in a world where more mature companies and established companies are struggling.

We're growing while other companies are shrinking. We are increasing prices while others are slashing prices. We're hiring while others are laying off. We're developing new products, whether it's a 250 to 370 or the C1000 hybrid UPS, while other folks are slashing their R&D budgets and stopping producing new products. We're working with the DOE. We're embracing political leaders, whether it's from the House or the Senate or here locally in California, and we're pushing for new policies while others are turning away from government and are frustrated with the government.

Simply put, Capstone is thriving while the customers are just trying to survive. And I think I'm very proud of the progress of the company. I'm proud of the progress of our leadership team. I'm proud of our board and all of our Capstone employees that have made this incredible turnaround for the last 5 years. But I'm more proud of the future of our company and with the next several years we're going to bring as we hit our next set of goals, which include positive cash flow, profitability. I'm excited for the launch of our next round of new products, new innovative technologies, new markets, new distributors, new partners. If you've heard us [ph] talk about during the quarter, we went from a Wells Fargo $10 million bank line to a $15 million bank line. Well, Wells Fargo obviously believes in our product, in our company, our people, our leadership team to increase the size of that line. GE, agreeing to an extension of our relationship on the ORC product for another 3 years. Obviously GE agrees and understands that our technology, I think is very valuable and is happy with what we're doing with it.

So I think overall, I look forward to the next several years, getting even more traction in this market. If you look at the overall market drivers, whether it's reduced emission bubbles, higher energy efficiency, more total efficiency of products, distributed generation, SmartGrids, for the most part, everything is going our way. I know the overall market conditions on a day-to-day are lumpy. It can be a little bit frightening. But in general, we see all of our markets, all of our efforts improving. The automotive market, with our truck suppliers, both Peterbilt and Kenworth is very exciting. We also look a lot from the transit side. We see more out of the DesignLine, more out of Trolsa [ph] Bus and some other bus manufacturers we have around the world. So I think all 5 of our market areas are growing, all 95 of our distributors are growing, and we'll just keep working our plan to reduce the costs and improve our warranty expenses and improve our average selling prices and get the company stronger and more profitable for the next several years.

So with that, thanks everybody for listening and taking the time today and look forward to talking to everybody at the next earnings call. Thank you.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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