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

Executives

Jason Fredette - Director of Investor and Media Relations

Gregory Yurek - Chairman, President and Chief Executive Officer

David Henry - Senior Vice President, Chief Financial Officer and Treasurer

Analysts

Carter Shoop - Deutsche Bank

Jim Ricchiuti - Needham & Company

Corey Tobin - William Blair

Stuart Bush - RBC Capital Markets

Walter Nasdeo - Ardour Capital

Paul Clegg – Jefferies

Michael Carboy - Signal Hill

Brian Yerger - Jesup & Lamont

Robert Smith – Center For Performance Investing

American Superconductor (AMSC) F3Q08 Earnings Call January 31, 2008 11:30 AM ET

Operator

Good day everyone and welcome to American Superconductor’s third quarter conference call. (Operator Instructions). With us on the call this morning are American Superconductor’s Founder and CEO, Greg Yurek; Senior Vice President and CFO, David Henry, and Investor Relations Director Jason Fredette.

For opening remarks, I would like to turn the call over to Mr. Jason Fredette.

Jason Fredette

Thanks Jimmy. I would like to point out that certain remarks we make this morning regarding our financial forecasts and other beliefs, plans and expectations constitute forward-looking statements.

There are number of risks and uncertainties that may cause actual results to differ significantly from these statements. Please refer to our 10-K, which was filed with the SEC on June 14, 2007 and our subsequent 10-Qs for information about these risks and uncertainties.

I would also like to note that we will be referring to EBITDAS this morning for earnings before interest income, other non-operating expense, income taxes, depreciation, amortization and stock compensation.

EBITDAS is a non-GAAP financial metric. A reconciliation of EBITDAS to net loss on a GAAP basis is included in the press release we issued and filed with the SEC this morning on Form 8-K. All of our SEC filings can be accessed in the Investor Section of our website at www.amsc.com.

And now, I’ll turn the call over to Greg.

Gregory Yurek

Thanks Jason. And good morning everyone. I’m very pleased to report that in the third fiscal quarter, we achieved the strongest quarterly results in the history of our company. More specifically, we achieved record revenues with third quarter sales more than tripling over our prior year numbers, and we achieved record gross margins for the quarter, solidly above our year ago performance, based on increasing sales of our AMSC Power Systems business.

We’re also on the cusp of being EBITDAS positive, an important milestone on our path to GAAP profitability. And our current business, as well as our outlook for next fiscal year and beyond, is quite strong.

The fundamental reason for this positive outlook is that we’re addressing two long-term global mega-trends that are resistant to slowdown that may be experienced in other sectors. These two sectors are wind generation of electricity and the build-out of the electric power grid infrastructure here and around the world.

Let me expand a bit on these core market drivers. First, adoption of wind power continues to escalate globally. Earlier this month the Global Wind Energy Council issued a report saying that another 20 gigawatts of wind power was installed worldwide in 2007, increasing global capacity to 94 gigawatts − that’s up 27% from a year ago. And were it not for the industry’s turbine supply constraints, those numbers would’ve been even higher.

Issues like pollution and global warming have prompted virtually every established and emerging country to set long-term incentives and targets for renewable sources of energy. For instance, just last week the European Commission issued a directive for all member states to cut greenhouse gas emissions by 20%, and increase their use of renewable energy to 20% by 2020.

Recent reports out of China estimate that wind power capacity in that country will grow from about 6 gigawatts today to more than 80 gigawatts by 2020 − three or four times higher than the estimates of a year ago. This provides us with great confidence that our addressable market in the wind power sector will continue expanding for many years to come.

The majority of our sales today, about 65% in fact, are coming from three main products and solutions we’re selling into the wind power market. First is our D-VAR solution. In simple terms, these systems enable wind farms to hook up safely and effectively to the grid. To date 33 wind farms worldwide have purchase this solution, making D-VAR the market leading grid interconnection solution for large-scale renewable power sources. We have a healthy pipeline of additional order opportunities for D-VAR, and we expect to be announcing new orders in the months ahead.

We also design entire wind turbines for companies who want to become wind turbine manufacturers. This wind turbine design work is performed by our AMSC Windtec division in Austria, which is putting more and more companies into the business of manufacturing wind turbines, from Canada to the Czech Republic to China and beyond.

We expect to complete new agreements with more licensees and development partners in 2008. Important aspect of this portion of our wind business is that each of these customers then become a potential new source of repeat orders and revenues for our wind turbine electrical components and electrical systems, which is our third offering in the wind power market.

When a customer licenses one of our designs or buys a custom design for a wind turbine, they also agreed to provide us with the right to sell them the core electrical components or electrical systems for each turbine they manufacture.

This resembles the Gillette model, where we’re selling them the razor, and then we get repeat orders for the razor blades; in our case, the electrical components or full electrical systems. The razor won’t work without the razor blades and the wind turbines won’t work without the electrical components.

The sale of core electrical components and full systems has turned into a substantial business for AMSC, with strong growth prospects going forward.

One of our customers, Sinovel Wind in China, has ordered more than a $140 million worth of core electrical components from AMSC over the last two years. That’s over 2,000 sets of electrical components for a single 1.5 megawatt wind turbine design.

And while Sinovel, now the second-largest wind turbine manufacturer in China, continues to ramp-up its production, additional new wind turbine manufacturers are now just starting their production ramps.

Earlier this week, we announced that our first North American customer, Canada’s AAER, placed its initial order with us for full electrical systems. AAER ordered 10 electrical systems for the first 10 1.5 megawatt wind turbine it plans to begin manufacturing later this year.

The 1.5 megawatt wind turbines AAER will be manufacturing is based on a design by Germany’s Fuhrländer AG. So it’s not our razor, but they will be using our razor blades.

That’s a pattern we believe we could see repeated with other wind turbine manufacturers, especially when we introduce our PM3000 wind turbine electrical system near the end of fiscal 2008. You might recall that in October 2007, AAER also purchased two licenses for our proprietary 2 megawatt SuperGEAR wind turbine design.

In addition to the 1.5 megawatt turbines they are initially producing, AAER plans to manufacture, sell and commission the AMSC Windtec 2 megawatt turbine in Canada, United States, Mexico, France and the United Kingdom. We expect to sell the core electrical components and systems to AAER for all of the 2 megawatt wind turbines that they manufacture and sell in these territories.

We also announced on Tuesday that order momentum is building from a second customer in China, CSR-ZELRI. ZELRI, for short, purchased a license in January 2007 for AMSC Windtec’s proprietary 1.65 megawatt wind turbine design. We received our initial order from ZELRI for core electrical components for ten wind turbines in September 2007.

Earlier this month, ZELRI placed an order for an additional 20 sets of core electrical components. ZELRI recently began testing its prototype 1.65 megawatt turbine at a location south of Changsha, China. In fact, you can see photos of the ZELRI prototype wind turbine in construction and in operation on the AMSC home page. Take a look.

We were pleased to see that system successfully pass its trial operation after being connected to the grid in November 2007, just ten months after ZELRI first engaged AMSC Windtec. ZELRI expects to complete prototype testing and begin shipping wind turbines to customers in mid-2008. And it expects to manufacture more than 100 of the 1.65 megawatt wind turbines in 2009. So we expect more orders from ZELRI later this year.

Which leads me to AMSC China. In Q3 we formed AMSC China to help us more effectively and more profitably meet the needs of our current and future customers in China, and throughout the Asia-Pacific region.

We now have more than 40 Chinese citizens on staff at AMSC China in manufacturing, sales, field service and support functions. And we expect to have more than 100 employees in AMSC China by the end of our fiscal 2008. So our sales and operations in China continue to expand.

AMSC China employees operate out of our sales and field service office in Beijing, and our new manufacturing facility in Suzhou, just west of Shanghai. We expect to begin manufacturing our PM1000 PowerModule converters, the heart of our wind turbine electrical systems, in Suzhou in the first half of calendar 2008. We are very much on track to achieve this objective.

By making this product locally we’ll be able, first of all, to serve our current base of three Chinese wind turbine manufacturers more effectively, which is important to generating repeat business.

Second, by having local sales and field service, we expect to be more effective in developing new Chinese customers, an objective we expect to achieve this year. And third, we can lower our manufacturing costs, thereby further enhancing our margins.

We see strong growth potential in China and the Asia-Pacific region, not only for Power Systems, but also for our AMSC Superconductors business unit, which has developed customers for our HTS wire over the last few years in Australia, China, India, Japan, Korea and New Zealand. Our objective in this case of course is to generate orders for our 344 Superconductors in the Asia-Pacific region, and we are confident we will do so over the next year.

Now let’s turn our attention to the power grid infrastructure side of our business. While wind power has been our primary engine of growth over the last year, orders and contracts related to our power grid solutions are now on the upswing.

Electricity demand around the world continues its inexorable rise, and more electricity generation from both traditional and renewable energy sources are being added to fuel the growing global economy. However, more work must be done to enhance the infrastructure carrying that power to homes and businesses.

Here in the United States, electric utilities are now making these investments. For example, shareholder-owned electric utilities are increasing spending from about $4 billion annually to about $8 billion annually this decade.

While the build-out in the U.S. electric power grid is now strong, it pales in comparison with the current and planned build-out in places like China and India. China, for example, expects to spend $1.5 trillion on its electric power grid by 2030.

While we are working hard to address these opportunities in China, for example, through AMSC China and through the Shanghai Electric Cable Research Institute, we’ve also seen very directly a significant increase in bidder proposal activity with U.S. utilities during the last 12 months.

And that doesn’t look like it will abate anytime soon, because electric utilities here in the U.S. plan to continue spending on the grid at an increased rate, even if the general economy slows down. Why? Because they need to catch up in order to effectively provide for the ever increasing demand for electricity.

It’s important to understand that electric utilities are not just adding more power lines and substations these days; they are now in the mode of adopting Smart Grid technology for the 21st century power grid. Smart Grid technologies include advanced testing, communication and control technologies to help generate or distribute electricity more effectively, economically, and securely.

But testing and metering is not sufficient to enable a true Smart Grid. A true Smart Grid requires technology that makes the grid stronger, more resilient, more responsive and more fail safe. AMSC has power electronics and superconductor-based solutions that fit this profile perfectly.

For instance, our D-VAR solution is able to sense fluctuation on the surrounding grid and inject precise amounts of reactive compensation to stabilize voltage and avoid widespread blackouts.

Sited at appropriate locations in the network they also can minimize line losses and increase power transfer capability. D-VAR has also been used to shut down so-called reliability must-run generators, the results being that dumb oil is replaced by smart silicon to increase grid reliability.

We’ve been selling our D-VAR solutions to electric utilities for many years now, and we recently added Static VAR Compensators, or SVCs to our product portfolio through our acquisition of Power Quality Systems, Inc. in April of 2007.

We’re now in the process of manufacturing and installing our first two SVCs based on orders we received from U.S. utilities this past September. You will be hearing about additional orders for our reactive compensation solutions from the electric utility sector in the months following.

Marketed solutions will also be enabled by the 344 Superconductors we are now manufacturing. We turned on our new 344 Superconductors manufacturing line in late November of 2007.

This is the first time we have raw materials enter one end of the operation and go through each step of the manufacturing process, using all new manufacturing equipment, and come out the other end with a finished wire product.

As expected, we did identify some glitches during the first shakedown run. Many of the initial glitches, such as non-uniform temperatures in one step of the operation, a failed component in another step of the process, etcetera, were rapidly corrected.

Others are now being addressed to optimize wire performance and connector throughput. Of course, there are no show stoppers here and we will continue production run as we make the improvements.

And in reality, we must continue to produce wire and improve throughput during the startup phase of the new plant because wire is needed very soon for new superconductor projects that are now underway in Manhattan and Southern California.

Indeed, the amount of wire needed for Project HYDRA in Manhattan was recently increased from 17,000 meters to 25,000 meters for the first prototype cable. That additional wire needs to delivered this quarter and next to meet the project milestone.

Project HYDRA power cable that will be installed in Manhattan in 2010 itself will require an additional 150,000 meters, or about 93 miles, worth of this wire. Right now we have orders for over 200,000 meters of 344 Superconductors that need to be delivered in fiscal 2008.

Factory and manufacturing yield during the first year of operation and the need to run a lot of development wires in the plant in the first year, we estimate that we will use a substantial portion of the plant’s gross capacity in the first year.

The objective in the first year of operation of the new plant is to ensure that we’re ready to ramp up rapidly at high yield when the expected orders start to materialize. As we speak, there are well over one million meters of additional wire order opportunity in the marketplace for well defined projects, such as the Entergy HTS cable project in New Orleans. These wire orders will need to be shipped within the next two years.

Winning our unfair share of those orders has to be a primary objective for us, and it is. We believe we are in a strong position to win these orders, and we expect to continue to strengthen our position as we continue our production ramp up.

Ultimately, as we laid out on November 15 at our Analyst Day meeting, the market for HTS wire seems poised to take off in the 2010 to 2011 timeframe after the Project HYDRA HTS cable system has been up and operating in Manhattan, and additional years of experience operating HTS cable in Columbus, Ohio, Albany, New York and Long Island are in hand.

Prior to that time, based on concrete customer interactions today, we believe we will have our first commercial orders for 344 Superconductors for commercial HTS power cables. Based on current discussions with potential utility customers, the likely first commercial orders are going to be for the use of 344 Superconductors in our proprietary Secure Super Grid Solution.

Secure Super Grids involve the installation of high powered capacity, superconductor cables between electrical substations, and the use of ancillary controls and other proprietary technology to protect grids from wide area blackouts in the event of severe weather, accidents or willful destruction.

Secure Super Grids solutions are able to deliver up to 10 times more power than a conventional network, and also suppress power surges or fault currents on the grid, making this a compelling two-for-one solution for electric utilities. And because the surge suppression occurs automatically and instantly, this is truly a Smart Grid technology.

The first deployment of Secure Super Grids technology will be applied in Manhattan under Project HYDRA, which is partially funded by the Department of Homeland Security. We first announced this project back in May of 2007.

Working with our subcontractors, Con Edison and Southwire Company, we have met all of the project milestones to date, and remain on track with Con Ed’s construction schedule to install the solution in Manhattan by 2010. Last week we announced that we had formalized our contract with Homeland Security. They will provide up to $25 million for the $39 million project.

We’ve also begun work on a project for Southern California Edison on yet another smart grid solution, a stand alone fault current limiter device. Fault current limiters, or FCLs, are essentially surge protectors for the grid. And they are in high demand given that today’s fault currents are surpassing the capacity of circuit breakers. There is no conventional solution on the market to limit or suppress these fault currents from today’s power grids, so that is an unmet need with a $1 billion and market potential.

And then there are plain old high capacity HTS power cables that do not incorporate the surge suppressing capability of a Secure Super Grid solution. We are now working on the final stages of deploying one of these systems in Long Island Power Authority’s grid. This is the world’s first in-grid deployment of a transmission voltage HTS power cable.

In the third quarter we pulled the system down and began testing it. During the process of those tests we detected that some components had shifted due to the thermal contraction the system goes through during the cool down.

We warmed the system back up, and our cable subcontractor, Nexans, identified the source of the problem. Nexans is now repairing that component and we note that there will be no material financial impact of this repair on AMSC.

The system should be up and running during the spring of 2008. This is all part of the learning experience that will help the industry perfect the installation process for future HTS cable deployment.

By the way, LIPA will be the first HTS power cable system to operate in the live grid, here in the U.S. and first in the world of transmission voltages. So, we’re making steady progress in the electric utility market with Superconductors as we ramp up sales of our D-VAR and SVCs solutions to the utilities.

During this fiscal year to date, we have brought in about $57 million in orders for our D-VAR and SVC grid infrastructure solution and contracts for superconductor power cable and fault current limiter development projects. This compares with $3 million for all of fiscal 2006.

And finally, we can go on here about our industrial power quality products such as the PQ-IVR and superconductor wind generators and ship propulsion motors, but time is limited, so we will dig into those markets in our future calls.

In summary, we’re very pleased with our financial results for the third quarter. We have a rock solid balance sheet. We believe we will close out the fiscal year in a strong fashion. And we fully expect to carry that momentum in the fiscal 2008 as we set our sights on GAAP profitability.

With that, let me turn the call over to Dave to go through the numbers.

David Henry

Thanks Craig, and good morning everyone. A transformation has been taking place here at AMSC over the past two years. What had been an R&D company with great ideas and revolutionary technologies has evolved into a business with commercial products and strengthening financials.

Our Q3 numbers clearly reflect this exciting transition. Revenue for the third quarter of fiscal 2007 was a record $32.6 million, up 51% sequentially and 245% from $9.5 million in the year ago quarter.

This was our fourth consecutive quarter of sequential revenue growth. Of this total, AMSC Power Systems generated a record $28.9 million, which is up more than 300% from $7.1 million in the third quarter of fiscal 2006. The major driver of the increase is sales of electrical components and systems for wind turbine.

Our AMSC Superconductor segment generated $3.7 million of Q3 revenue, which is up 58% from $2.3 million in the year ago quarter. This increase is primarily the result of work performed on new development contracts such as the fault current limiter project for Southern California Edison and Project HYDRA in Manhattan.

We entered the fourth quarter of fiscal 2007 with approximately $168 million in backlog. That’s down a bit from $180 million on September 30. However, we’ve added more than $25 million in new orders and contracts in January 2008. We remain on track to achieve our revenue forecast for the current fiscal year and will enter our new fiscal year in April with a substantial fraction of our fiscal 2008 revenues in backlog.

I’ll get to our updated forecast in just a few minutes. Gross profits for the third quarter was $9.4 million, resulting in a record gross margin of 28.7%. This compares to gross margin of 26% in the second quarter of fiscal 2007 and a negative 21.1% for the third quarter of fiscal 2006.

The sequential improvement in gross margin was driven primarily by higher license revenues in Power Systems, which contribute higher gross margin. The year-over-year improvement in gross margin was driven by higher mix of Power Systems sales in Q3 of fiscal 2007. In addition, cost of sales in the year ago quarter were negatively impacted by charges related to two government programs.

In the near-term, as we laid out on our Analyst Day on November 15, 2007, we’re targeting gross margin of 25% to 30%, based on our expectation that approximately 90% of our revenues will be coming from AMSC Power Systems.

R&D expenses for the quarter were $3.2 million or 10% of total revenue. This compares with $4.1 million or 43% of revenue for the third quarter of fiscal 2006. The decrease was driven by lower R&D in our Superconductors segment as a result of previous restructuring actions in that business segment.

As we have noted previously, R&D expenses can fluctuate quarter-to-quarter depending on a level of contract activity at AMSC Superconductors and a level of development work at AMSC Windtec.

In the near-term, as our revenue growth continues to be driven primarily by Power Systems and as work continues to increase our new Superconductors contracts, we would expect R&D to be in the high single-digits to low double-digit as a percent of revenue.

SG&A expenses for the third quarter of fiscal 2007 were approximately $7.7 million or 24% of revenue. This compares with $4.1 million or 44% of revenue for the third quarter of fiscal 2006. This increase in dollar amount is primarily the result of acquisitions we made earlier this year, operating expense growth required for higher revenue levels and higher stock-based compensation expense.

We will need to add SG&A cost in the future quarters to support our growth. But we intend to do so in a carefully managed way to maximize the fall-through from incremental revenues. As a result, we expect SG&A to continue to decline on a percentage basis in future quarters as revenue grows.

We incurred $1.6 million in amortization of acquisition-related intangibles related to our acquisitions of Windtec and PQS earlier this calendar year. We also incurred restructuring and impairment charges in the third quarter related primarily to the consolidation of our Massachusetts operations.

As you may recall from our last call, we had expected this initiative would cost approximately $5.5 to $6 million. We now expect those costs to be in the range of $5 to $5.5 million, primarily due to a lower estimated cost for the relocation of people and equipment.

Of that total, we incurred $2.9 million of charges in the third quarter of fiscal 2007. We expect an additional $1 million or so in charges in Q4, with the remainder being recorded through May 2009, when the lease expires on our Westborough, Massachusetts facility.

Our operating loss was $6.2 million in the third quarter of fiscal 2007, including the restructuring charge. This compares to an operating loss of $7.2 million in the second quarter of fiscal 2007 and $10.2 million in the third quarter of fiscal 2006.

AMSC Power Systems generated operating income of approximately $4.1 million or 14% of revenue in Q3 of fiscal 2007. This compares with an operating profit of $400,000 or 6% of revenue for the year ago quarter.

The improvement in Power Systems’ operating income is due primarily to the fall-through from higher revenues, due in large part to our acquisitions, particularly Windtec. Recall that a sizable portion of Windtec’s revenue growth is basically organic as they were a customer prior to the acquisition.

It’s also important to point out that Power Systems’ operating income was reduced by approximately $1.6 million in intangibles amortization. We’ve had no such charges in the third quarter of fiscal 2006.

AMSC Superconductors generated an operating loss of approximately $5.6 million in the third quarter of fiscal 2007. This is a significant improvement from an operating loss of $9.3 million in the third quarter of fiscal 2006.

Our prior year figures included approximately $3.5 million in charges in the aggregate related to two government contracts. Please note that stock compensation expense is not allocated to our reporting segments.

On a consolidated basis, we reported a net loss of $7.3 million or $0.18 per share for the third quarter of fiscal 2007. This compares to a loss of $6.7 million or $0.17 per share in the second quarter, and $9.5 million or $0.29 per share in the third quarter of fiscal 2006.

In addition to the restructuring charges I mentioned earlier, our net loss also includes non-cash pre-tax charges for amortization of acquisition-related intangibles, stock compensation expense, and mark-to-market adjustments on an outstanding warrant. These charges totaled $4.2 million in the third quarter of fiscal 2007, compared to $4 million in the prior quarter and $800,000 for the third quarter of fiscal 2006.

To paint a clearer picture of the improvement being made here at AMSC, each quarter we provide a breakout of EBITDAS, as well as forecast for EBITDAS. EBITDAS for the third quarter of fiscal 2007 was a loss of $1.9 million compared to a loss of $2.3 million in the second quarter of fiscal 2007, and a loss of $8.3 million in the third quarter of fiscal 2006.

EBITDAS for Q3 of fiscal 2007 includes $2.9 million in restructuring charges, which we did not incur in either the second quarter or the prior year quarter. Excluding the $2.9 million restructuring charge, we would have been EBITDAS positive in the third quarter.

Now, let’s take a look at our year-to-date results. Revenues for the first nine months of fiscal 2007 were up 124% to $74 million compared with $33.1 million a year ago. In the third quarter, our revenues are already 42% higher than they were for all of fiscal 2006.

Our net loss for the first nine months of fiscal 2007 was $23.6 million or $0.61 per share. This compares with a net loss of $23.2 million or $0.71 per share for the first nine months of fiscal 2006.

Net loss for the first nine months of fiscal 2007 includes approximately $11.4 million of non-cash pre-tax charges for amortization of acquisition-related intangibles, stock compensation, and mark-to-market adjustments on an outstanding warrant, compared to $2.6 million of such charges from the first nine months of fiscal 2006.

It is these non-cash charges which are primarily responsible for the lack of fall-through to net income from higher revenues in fiscal 2007.

For the first nine months of fiscal 2007, AMSC generated an EBITDAS loss of $9.5 million. This compares with an EBITDAS loss of $19.3 million for the comparable period in fiscal 2006.

Turning to the balance sheet, cash, cash equivalents and marketable securities on December 31, 2007 were $107.8 million, a decrease of $10.4 million from $118.2 million at September 30, 2007.

Of this decrease, $8.2 million of cash was reclassified as restricted cash in the third quarter, as collateral for new limited term performance bonds related to new AMSC Power Systems orders. Factoring in the restricted cash on the balance sheet, our net cash burn for the third quarter was $2.2 million, our lowest quarterly cash burn in three years.

As we discussed at our Analyst Day, we expect that our cash burn will be in the range of $10 million to $15 million for the full year fiscal 2007. Cash burn is defined as the change in cash, cash equivalents, marketable securities and restricted cash.

And now for our financial guidance, those of you have followed us for a while know that our revenue forecast for fiscal 2007 has increased significantly since our initial forecast in May 2007. What started as a forecast for 50% revenue growth eventually turned into 100%.

We now expect revenues will more than double year-over-year. Our new forecast calls for fiscal 2007 to be in the range of $105 million to $110 million, implying 101% to 111% revenue growth year-over-year.

AMSC Power Systems revenue should represent about 85% of total sales for the year, up from our previous guidance of 80%. We now expect that approximately 70% of our revenues will come from international markets, up from our previous guidance of 50%. And we continue to expect that approximately 65% of sales will come from the wind energy market.

We’re now forecasting a net loss of $27 million to $29 million, or $0.69 to $0.74 per share. This compares with our previously guided range of $27 million to $31 million, or $0.70 to $0.81 per share.

And now we expect that our EBITDAS loss for the year will be in the range of $9 million to $11 million, an improvement from our previously guided range of $10 million to $12 million. We continue to expect to approach EBITDAS positive in the fourth quarter of fiscal 2007.

At our Analyst Day in November we also provided our initial outlook for fiscal 2008. We are reiterating that forecast today. We expect another strong year of growth with revenues exceeding $150 million for the fiscal year.

We also continue to expect that we will be EBITDAS positive for the full fiscal year. We will be providing more insight about our expectations for fiscal 2008 on our next conference call.

With that, we will open the call to questions. Jimmy, would you please provide the instructions?

Question-and-Answer Session

Operator

(Operator Instructions) We’ll go ahead and take our first question from Carter Shoop - Deutsche Bank.

Carter Shoop - Deutsche Bank

For my one question, could you help out a little bit in understanding the upside in the quarter relative to expectations and assuming that Sinovel, could you give us a percentage of revenue for the quarter from Sinovel?

David Henry

This is the revenue upside, correct? And I think where that came from was on the Power System side. I think Sinovel was a contributor and also the exchange rates is also a contributor; the dollar continues to weaken and our Sinovel revenue were denominated in Euro. And that provided maybe about a million dollars of favorable impact this quarter, and also utilities as well.

But then also, you asked a question about Sinovel, Sinovel was around 52% of revenue in the third quarter.

Operator

And we’ll go and take our next question from Jim Ricchiuti - Needham & Company.

Jim Ricchiuti - Needham & Company

Just with respect to gross margins in the current quarter you are coming off a very strong quarter in December, but I was just wondering with the ramp up in the wire business where we see more of the R&D going up into cost of goods and as a result, could we see a gross margin come down this quarter?

David Henry

I would say that the gross margin driver will be more Power Systems I think than it is going to be Superconductors, simply because that during the first year of production, the yields they are not going to be great, when we are just starting to initiate production. So, I would say that the gross margin driver is really going to be on the Power System side.

And the fact that we’re starting up in China, we’ll be producing product in China sometime in the first half of calendar year 2008. So, I would say that’s going to be the primary gross margin driver and not necessarily capacity utilization year for Superconductors.

Gregory Yurek

Jim let me just add to that as well. There will be nothing unusual that we see this quarter while going through the rest of this year, calendar year 2008, in terms of ramping up the expenses in the Superconductor business units. We’re kind of at steady-state until we have to ramp up capacity. And we will let you know when that occurs, beyond our current level, that is.

Operator

We’ll hear next from Corey Tobin - William Blair.

Corey Tobin - William Blair

Very nice quarter. A couple of things Greg, you mentioned on the proposal activity. Just very quickly, can you just give us more details on this? You mentioned it was up dramatically in the last 12 months. Any details in terms of what types of products; what regions; when they would be awarded and delivered? Stuff like that would be helpful.

Gregory Yurek

In our product areas, I’m speaking about the Static VAR Compensators, or SVCs as we call them, as well as the D-VAR, so it is reactive compensation market there have been a slew of new requests for proposals that have come out from the utilities through calendar ‘07.

There are five larger SVC contracts that were let, and we got two out of the five, by the way. And we don’t see anything slowing down there. It is only increasing. We will be addressing those opportunities with both our SVC and D-VAR opportunities.

And more generally speaking, if I look at the need for building out the grid in terms of power lines and cables, cables are underground. Clearly the activity has picked up strongly in terms of the desire to adopt high temperature superconductor power cables, so our activity also on the side of superconductor cables with utilities has ramped quite a bit.

Utilities are fixing up the grid; they are in that mode now, doubling their investment year-over-year from 4 to $8 billion this is decade, which has only two years left in it. So it’s a great opportunity for us, and we’re taking advantage of it.

Operator

Stuart Bush with RBC Capital Markets has our next question.

Stuart Bush - RBC Capital Markets

Can you give us some more color on why the booking level was so weak in the quarter? I calculate a 0.6 book-to-bill, which seems rather low given the macro end market environment. And can you clarify if the $25 million payment from the Department of Homeland Security is a pass-through cost at zero margin?

Gregory Yurek

We had a quite a buildup in backlog through the September quarter. Things slowed down during that third quarter in terms of the bookings. Clearly that picked up strongly again in this quarter, already January having booked over $25 million of new orders. And on the Homeland Security project, $25 million of revenue expected on that, I will let Dave answer that in terms of the amount of pass-through there.

David Henry

We won’t disclose how much of that revenue will come from internally generated costs as opposed to external, but the majority will be external. And so, yes, a lot of that will be pass-through revenue. But not, that’s not all occurring next year; that’s going to occur through 2010.

Operator

We’ll take our next question from Walter Nasdeo - Ardour Capital.

Walter Nasdeo - Ardour Capital

I’d like to jump back over to the wires, if I could. Can you tell what your current capacity is; how many machines you have in place? And what is the lead-time for each new machine that you order?

Gregory Yurek

Walter, I couldn’t give too much detail, that’s competition-sensitive. But in fact our gross capacity is what we said: 720,000 meters per year gross capacity. How many machines? I’m not going to give that information out per se. There are ten steps in the manufacturing process. That’s out there publicly.

But to your question of lead time, the machines have been designed and now in the implementation are being used. We believe we have six months, maybe as long as nine months, but about a six month lead time from put the order in, get it bolted down and commissioned qualified in the overall process.

So it’s a pretty rapid turnaround. That’s been our strategy for some time now: keep the brakes on until you see those orders flowing in; look over the horizon a bit, and then put the orders in and break whatever the bottlenecks might be in the line to increase that capacity.

Another $5 to $7 million of CapEx takes us from a gross capacity of 720,000 meters to about 2.7 million meters per year gross capacity, if that helps you out.

Operator

Next we will take a question from Paul Clegg - Jefferies.

Paul Clegg - Jefferies

Congrats on the quarter also. Your backlog is looking nice here if you include the January numbers. And it sound like 2008 is fairly well covered by the backlog. Can you talk a bit about the components of that backlog and how it breaks up between different products? And maybe how that differs from the current revenue mix in 2007?

David Henry

We won’t provide in this call the components of the backlog and how it breaks down between Power Systems and Superconductors. What I will say though is just reiterate some of the things that we mentioned in the call that we expect roughly 85% of revenue to come from Power Systems this year.

And that when we talked about our model at Analyst Day, when we talked about where our breakeven lines were for EBITDAS and things like that, those were all predicated on a model that said 90% Power Systems, 10% Superconductors revenue. You could probably extrapolate from that that our order patterns are following along those same lines.

Operator

And we’ll hear next from Michael Carboy - Signal Hill.

Michael Carboy - Signal Hill

Given the DSOs inventory turn improvement, which suggests that maybe the quarter closed down a little early, and given the tremendous performance, I am wondering whether a positive, but not as exuberant increase in outlook perhaps reflects concerns that you folks may have with regard to double bookings throughout the wind power industry worldwide. Can I get you to elaborate a little bit on that, Greg?

Gregory Yurek

Michael thanks for that interesting question. Look, we’re very positive about our outlook not only for the rest of this fiscal year but for next year. Previous question related to how much backlog we have toward the $150 million plus in revenue we expect for our next fiscal year. We’ve got a good, strong running start there.

Not quite sure where you’re going with this, but if you look at ZELRI starting to ramp up and AAER Systems starting to ramp up in terms of the core electrical components, as well as the full electrical systems, that’s all in the right direction.

We do think we’re going to sign on more licensees, which will give us some upfront license fees or development costs that come in. But there will be more razor blades we’ll be able to sell there. We’re very positive and upbeat about our outlook for next fiscal year starting on April 1. But I don’t see any need to overdo it either in terms of what we say here.

David Henry

But, Mike, let me add that we’re not seeing any double bookings. And the DSO in terms of growth may not be because per se that the quarter was wrapped up early. As I mentioned at Analyst Day as well, I do have an objective of trying to reduce our usage of working capital so that we can obviously generate more cash. Besides our EBITDAS positive goals and our GAAP profitable goals we want to get to operating, and at the end of the day, net cash flow positive.

So we are cautiously trying to reduce the amount of cash that’s used by working capital. And this is just a start. I’m not claiming victory yet. We’ve got a long way to go. You might be reading in too much to what you’re seeing there.

Operator

We’ll take our next question from Brian Yerger - Jesup & Lamont.

Brian Yerger - Jesup & Lamont

The two issues related to the backlog, which I may have missed, real quickly. The $25 million in bookings for January, that excludes the HYDRA contract?

David Henry

No, it does not. It includes HYDRA. It’s basically the net of what we had already received under letter contracts previously executed with them, and the amount of the final contract that we just initiated with them.

Gregory Yurek

There’s also included in that, of course, are the new orders from ZELRI and AAER Systems.

Operator

(Operator Instructions) We’ll go back to Carter Shoop with Deutsche Bank.

Carter Shoop - Deutsche Bank

Maybe before my question, if you would talk a little bit about the linearity in the quarter from they revenue side, that might help on the balance sheet question.

And then for my question, I wanted to talk a little bit about the strategic transformation that we’re seeing here on American Superconductor that Greg talked about in moving from an R&D company more to a full production and manufacturing company. And what investment in people and personnel are you making for that adjustment in the business model?

Gregory Yurek

Let me address the second one first, and then we’ll turn it back to Dave for the first part of your question. So you’re right. We’re ramping up and have ramped up. We have 350 people now. We were less than 300 at the beginning of the fiscal year. I commented on China, for example. We’re starting up our manufacturing operation there for PowerModule. This is the first half of calendar ‘08. Well on our way there. We’re going to meet that objective.

And we are at 40 Chinese employees there right now. And again, it is not just manufacturing, it’s field service and sales as well. But by this time next year we’ll be over 100 Chinese employees to meet the growth of our business in China; just alone China, so a lot going on there.

In terms of our operations in Austria, the design of wind turbine systems ramped up our people there. We’re adding more people there because in order to take on more licensees and do more development, custom-designed wind turbines for other customers, we need the people there. And we’re adding those people there as well.

By the way, the same is true out in Wisconsin, our North American operations for Power Systems. Here at Superconductors we have added people and we’re continuing to add people. But we had most of those people in place over the summer time, so these are relatively small adds as we now go into production of the 344 Superconductors.

Overall from a people side, that number is going up considerably to support growth. People ask me what’s the biggest challenge? What keeps you up at night? It is managing growth. Good news is I think we’re doing a great job here at AMSC managing that growth. I don’t know if I’m addressing your question there, but that would be my general answer. And I will turn it back to Dave on the first part of your question.

David Henry

With respect to your question on linearity, our sales are not front-end loaded or back-end loaded. And I will give you two reasons why. The first reason is we talked about Sinovel being roughly half of our revenue. We ship and record revenue to Sinovel basically on shipment. We have a fairly linear stream of orders and deliveries, commitments to Sinovel. And so those occur relatively ratably through the quarter. There is no front-end loading or back-end loading to them.

The second reason − and we talked about our SVC projects, some of our D-VAR projects and our superconductors projects − a lot of those are recorded on percentage completion. That screams linearity when you’re talking about percentage of completion, because we don’t have the resources to be doing nothing for 2 1/2 months, and then get everybody to do everything in the last couple weeks of the quarter. I would say that our revenues are fairly linear and there’s not a discernible front-end or back-end loading either way.

Operator

Next from the Center for Performance Investing, we will hear from Robert Smith.

Robert Smith – Center for Performance Investing

My question is centered on a specific project. And I know that one project isn’t key, but I would like to hear your thoughts, Greg, on what’s happening up in Cape Cod and almost in your backyard, so to speak. And how important do you think this is going to be how it plays out?

Gregory Yurek

So I assume you’re talking about the Cape Wind project?

Robert Smith – Center for Performance Investing

Yes.

Gregory Yurek

We love the wind industry and it’s a huge engine for growth for our company. Clearly, the trend in the industry is toward offshore wind. The U.K. right now, I would say, is taking the lead in terms of where the build-out is going. We have 100% of the business (inaudible) to grid interconnection in the U.K. with our D-VAR products, so I expect more growth there.

When you think of offshore, think of superconductor generators. You can get to the 10 megawatt generators. Recall that we are, since last, I think it was October, in a co-development program with TECO-Westinghouse Motor Company to use basically our Navy technology for rotating machines now with superconductor wind generators, because you want more power generated per tower that you construct offshore.

So I don’t know if Cape Wind is going to be the first offshore wind farm in the U.S. More likely, it is going to be off Galveston, Texas, from what I can discern. Offshore is clearly the trend. I think it is only about single digit percentage of the total wind energy generated today is offshore. That’s a big growth area.

By the way, by the end of 2009, China expects to have the first offshore wind farm up and operating off Shanghai. We think we’ll be participating there one way or another. So, let’s not get into the politics or whatever it is about Cape Wind project, but think offshore, that’s the direction where the industry is going. We have multiple plays there and already participating in the U.K. in fact, with our D-VAR grid interconnection product.

Operator

And we will go back to Jim Ricchiuti - Needham & Company.

Jim Ricchiuti - Needham & Company

It looks like Sinovel was about 62% of Power Systems revenue. I wonder how should we think about the customers as we go through the next several quarters? You are adding customers. Can you give us a sense as to where you might see Sinovel as a percentage of Power Systems revenue in the next six to nine months?

Gregory Yurek

We talked about detailed percentages certainly in the Q. But Jim, we said it before, I know we talked about it a lot at Analyst Day. How should we look at Sinovel? Really good customer. We love them. We take care of them. We’ve won the base of operations in China and we’re building that out.

They love that, but so does ZELRI, so does Dongfang Steam Turbine Works, which by the way, is now the third largest wind turbine manufacturer in China behind Sinovel and second largest in China. Dongfang Steam Turbine Works is another one of customers, and they are looking to ramp up production in 2009 as well.

So we love this customer; I think we’re going to see a lot of business from them over a lot of years. By the way, their production schedule says they are going to put 3 megawatt wind turbines that were designed for them right now in 2009. And they’re focused on some of the offshore opportunities with that 3 megawatt design.

So I see a lot of business from Sinovel over a good number of years. But having said that, as a percentage of our total revenues look for them to get diluted, which we think is the right direction to go. Look for growth in sales to these other wind customers moving ahead.

Operator

We will go and take our final question from Paul Clegg - Jefferies.

Paul Clegg - Jefferies

On the AAER win of the electrical system order, just to be clear that order has nothing to do with the Hydra-Quebec bid from TransCanada, right? That RFP is still out there? And if so, do you have any update on that RFP?

Gregory Yurek

You are correct when you just said the 1.5 megawatts are for a separate wind farm project that AAER is supplying the turbines for. And, no, the decisions haven’t been made on the Hydra-Quebec project. And I really don’t have any new information to share with you on that Paul that I am sure that you have heard from the general news. It looks like it is going forward. It’s just not clear exactly when that selection process will be made.

Operator

And with that we are out of time for your questions. I will hand the conference back to management for any final or closing comments.

Gregory Yurek

Thanks for your attention today. We had a great quarter. We are looking for great growth going forward. And I just wanted to add one other thing, in particular for our listeners from New York, Go Patriots! Have great weekend. Bye-bye now.

Operator

And that will conclude our conference. Again thank you all for your participation. We hope you enjoy the rest of your day.

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: American Superconductor F3Q08 (Qtr End 12/31/07) Earnings Call Transcript
This Transcript
All Transcripts