SatCon Technology's CEO Discusses Q2 2012 Results - Earnings Call Transcript

| About: SatCon Technology (SATCQ)

SatCon Technology Corporation (SATC) Q2 2012 Earnings Call August 8, 2012 5:00 PM ET

Executives

Steve Rhoades - President & CEO

Aaron Gomolak - CFO

Analysts

Dale Pfau - Cantor Fitzgerald

Carter Driscoll - CapStone Investments

Jeff Osborne - Stifel Nicolaus

Joe Maxa - Dougherty & Company

Operator

Good afternoon and welcome everyone to Satcon’s second quarter 2012 conference call. Today’s call is being recorded. You may listen to the webcast on Satcon’s website located at www.satcon.com. In addition, today’s news release is posted on the site for those of you who did not receive it by email.

With us today are Satcon’s President and Chief Executive Officer Steve Rhoades and Executive Vice President and Chief Financial Officer, Aaron Gomolak.

At this time for opening remarks, I would like to turn the call over to Mr. Gomolak. Please go ahead sir.

Aaron Gomolak

Thank you and welcome to the call everyone.

Before we begin, please note that the comments made on this conference call today may include statements that are not historical facts or that apply prospectively. These forward-looking statements are identified by the use of terms and phrases such as will, intends, beliefs, expects, plans, anticipate and similar expressions.

Investors should not rely on forward-looking statements because they are subject to a variety of risks and uncertainties and other factors that could cause actual results to differ materially from the company's expectation. These risks and uncertainties include the company's history of operating losses, its ability to maintain compliance with the NASDAQ marketplace rules for continued listing, its ability to meet demand for its products, its ability to meet required covenants under its existing loan agreements, the availability of third-party financing arrangements for its customers, its ability to maintain it’s technological expertise, the availability of sufficient funds for our corporate needs as well as other risk factors contained in the company's SEC filings including its annual report on Form 10-K for the year ended December 31, 2011 and other periodic reports subsequently filed with the SEC.

Forward-looking statements contained in this press release speak only as of the date of this release. Subsequent events or circumstances occurring after such date may render these statements incomplete or out of date. The company expressly disclaims any obligation to update the information provided in this conference call.

With that, I will turn the call over to our President and CEO Steve Rhoades. Steve?

Steve Rhoades

Thanks Aaron, good afternoon everyone. Let me begin by providing an overview of our performance and then Aaron will take you through the financials before we turn the call over to the operator for your questions.

Overall I am satisfied with our second quarter topline results and our consistent progress in lowering our overall cost structure. Q2 revenues were $23.7 million which was just below our guidance of $24 to $28 million. The shortfall in revenue was directly attributed to our decision late in the quarter to be more conservative on revenue recognition for one deal which was worth a little over $4 million; a portion of that revenue was recorded in the quarter with the rest moving to Q3. Without that deferral, revenue would have been $26.3 million in the middle of our guidance.

The majority of our revenues continue to come from domestic sales with Europe continuing to show weakness in the large scale central and go-to-market segment and the Asian market experiencing typical seasonal slowdown in the first half of the year. While we are seeing growing demand in the second half in the U.S. Canada and Asia, we don’t expect to see much change in the European market in the back half of the year.

We achieved significant improvements in our gross margin, attaining 20% in Q2, up from 1% in the first quarter of 2012, and without a revenue referral I mentioned before, gross margin would have been 22%. These gains resulted from the major efforts we have put in place to size our company to the new market environment, including the reduction of quarterly operating expenses from $13.5 million in Q1 to $11.2 million in Q2.

In addition, we begun to realize the benefits of over a year of efforts by our engineering and operations organizations to lower the cost of our core products. In the second half of this year, we anticipate further cost reductions to be achieved in our newer products such as the second generation of our Equinox central inverters, Equinox LC line of light commercial inverters and our flagship medium voltage solutions, the Equinox Prism Platform.

Bookings for the quarter were $25.1 million and award letters received totaled an additional $15 million. Total bookings plus awards totaled $40.1 million, just short of our Q1 total of $46 million.

Our confidence in the second half of the year is founded in both our backlog and the significant awards that received in the quarter that will be recognized in bookings in Q3. Satcon has been selected to provide 34 of our new 1.5 megawatt Equinox Prism Platform medium voltage solutions totaling 51 megawatt. This Southern California installation will be interconnected to the San Diego Gas and Electric Grid as a qualified facility for a large generator interconnection agreement under California’s Independent System Operator Corporation and will be one of the largest solar power plants in the state. Construction for this site is expected to begin in Q4 of this year.

In addition we received an order for 20 megawatts of our Equinox Prism Platforms that are now reflected in the quarter’s bookings for a project in New Jersey that is scheduled to start construction in late Q4 of this year. Our commitment to developing and delivering the industry’s highest performing and most cost efficient solar inverter systems has positioned us well in North America’s strong utility scale market where demand for our next-generation 1.5 megawatt and 1.25 megawatt Equinox Prism Platform solutions has been robust. We have already received orders for a 101 megawatt for the 1.5 megawatt product in the first half of this year and we’ll start delivery of the solution for a 20 megawatt marquee project with one of the industry’s largest EPCs in the US Southeast beginning this month.

Our 1.5 megawatt platform will be the only 1000 volt rated medium voltage solution for solar PV of its kind to be both UL and CEC listed. Even with strong sales of our utility scale products and successful cost cutting efforts on our core products, we realized the need to continue to reduce overall operating expenses to come in line with the realities of the current solar PV market with three phase inverters.

Satcon remained the leading supplier for inverters to the North America market in commercial and utility scale segments as recognized by IMS Research in their recently published 2012 World Inverter Report. However, increasing competition, price pressure, market swings and traditional seasonality create a fluid and an evolving market dynamic, but Satcon must remain flexible in order to achieve consistent profitability.

In Q2 and Q3 we've made significant moves to reduce costs and lower our breakeven net EBITDA to approximately $30 million exiting the year. Given current pipeline and expected bookings, we anticipate these efforts to allow us to be EBITDA positive in Q4.

Overall, Satcon’s management team and I remain very positive regarding the near and long-term opportunity for the solar PV market and the company. We've made great strides in the last 12 months to greatly reduce overall OpEx, lower the cost structure on key products, increase margins and introduce some of the most advanced inverter solutions in the industry. To augment these efforts Satcon has retained Lazard Frères & Company LLC as its financial advisor to assist in the consideration of additional strategic alternatives.

Although the solar market is certainly challenged at this time, we believe we are making the necessary moves to adapt to evolving market conditions, be a strong competitor now and into the future and remain a world leader.

Now, I'll turn the presentation over to Aaron to cover our financials and then we will go to questions.

Aaron Gomolak

Thanks Steve. Revenue for the second quarter of 2012 was $23.7 million compared with $24.3 million in the first quarter of 2012. During Q2, the company elected to defer $2.6 million of product shipments and its associated cost due to past payment history with a specific customer. Without this revenue deferral, total revenue would have been $26.3 million. The company did received full payment for this shipment in early August and will recognize revenue during it’s third quarter ending September 30, 2012.

During the quarter, we sold 91 megawatts of our inverter solutions as compared to 98 megawatts in the prior quarter. We increased our overall revenue per watt to $0.26 due to strong sales of service and accessories including (inaudible).

Net bookings for the second quarter of 2012 were $25.1 million including $3.5 million in service and extended warranty. Approximately 80% of these Q2 bookings came from North America. Our backlog, which consist of fixed purchase orders from our customers plus our deferred revenue to be recognized in Q3 of 2012 from the item I previously mentioned, was $39.2 million as of June 30th. In addition, the company has received award letters of $15 million that are not included in this backlog, nor in the Q2 2012 bookings number.

Gross margin for the second quarter of 2012 was 20% compared with 1% in Q1 of 2012. Without the revenue deferral mentioned before the second quarter gross margins would have been 22%. The company’s gross margins increased substantially due to the continued material reductions and the closure of the company's Canadian manufacturing facility and favorable product mix which included approximately $2 million of sales of a previously reserved inventory

Operating expenses for the third quarter were $11.2 million compared to operating expense of $13.5 million in the first quarter of the year. A 17% reduction quarter-over-quarter, this include approximately $8 million in SG&A expense, approximately $2.6 million in R&D and $600,000 in restructuring charges.

The overall decrease in operating expenses and the restructuring chares are due to the company wide reorganization plant that we previously announced. Stock option expense for the quarter was $993,000; depreciation was $766,000 and CapEx was $838,000 and during the second quarter of 2012. During Q2, the company recorded an operating loss of $6.5 million compared to an operating loss of $13.3 million in Q1 of 2012.

Consistent with our previous conference calls, management made significant progress to lowering our EBITDA breakeven during the second quarter of 2012. First, we significantly lowered our fixed expense structure: Operating expenses of $11.2 million or 17 % lower than a prior quarter and 53 % lower than the Q2 2011 number of $23.8 million. This is due to our extensive corporate reorganization which focused our design team, our commercial sales team and our marketing team on our best performing markets in North America and Asia, along with the closure of our manufacturing facility in Canada.

Next, our cost reduction programs and our central invertors and our medium voltage prism platforms are on track. This combined with the Canadian facility closure mentioned before resulted in an overall 1,900 basis points improvement in gross margins compared to our prior quarter. We continue to optimize the design of our Prism Platform for higher power levels and we will be delivering our first 1.5 megawatt Equinox Prism Platforms during the upcoming third quarter of 2012.

And finally we move to an outsourced manufacturing model for a strong and capable partners like Sanmina in Canada and Greatwall Energy in China which provides Satcon with variable cost structure that is much more capable of managing large ships in our top line. These cost cutting milestones have reset the expense structure of the company, so that their EBITDA breakeven is currently approximately $32.5 million per quarter.

Turning to the balance sheet, we continue to make progress bringing down our working capital. Accounts receivables at the end of the second quarter were approximately $30.4 million down from $34.1 million in Q1. Inventory at quarter end was $43.1 million down from $46 million in the prior quarter.

The combination of accounts receivables and inventory are down by over $20 million from the beginning of the year. And we have an opportunity for an additional $15 million to $20 million reduction in our gross inventory value through an aggressive commercial strategy to sell through existing inventory throughout the balanced 2012 and into early 2013.

In addition, principal amounts owed in both our subordinated debt and our convertible note continued to decrease. When combined with trade payables and our bank line of credit, we have reduced this outstanding debt by $72 million in the past 12 months including a reduction of $17 million in the second quarter of 2012 alone. The company is currently in a process of amending its senior credit facility with Silicon Valley Bank. The new amendment to the loan agreement calls for a maximum $25 million revolving credit facility, the elimination of the inventory borrowing base component and the elimination of the $15 million liquidity covenant until September 15, 2012.

The company expects to have loan documents executed and on file in the next two to three business days.

Looking forward for the third quarter of 2012, we expect revenue to be in the $25 million to $30 million range, with gross margins in the mid to high teens. This slightly lower margin guidance is attributable to a shift back to a more traditional product mix along with our commercial efforts to move existing finished goods inventory. Q3 operating expenses will be in the $9 million to $9.5 million range.

As we look ahead in the fourth quarter of 2012, we expect revenue to grow sequentially, gross margins to expand and at EBITDA breakeven at approximately $30 million exiting the year.

With that, I'll turn the call back over to the operator for questions and answers. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Jesse Pichel with Jefferies. Please proceed with your question.

Unidentified Analyst

Hi, Steve and Aaron this is (inaudible) for Jesse Pichel, thanks for taking my question. So, is there any reason you pay down your line of credit by $5 million and long-term debt by $1 million during the quarter and if the $25 million revolving credit gets through, would you expect the cash balance will be in the next two quarters?

Aaron Gomolak

So I think obviously the long-term debt we have to pay down right it’s we have a monthly principal interest payment on that so that was the reason. I think the focus of the company is obviously trying to conserve cash and one of the things that we did last year is we tended to run the company with much higher cash balance and a much bigger bank line of credit which resulted in a fairly hefty interest expense for the company.

So as we transition into the New Year 2012, I think we are over trying to run the company with a lot less debt to make the interest expense number go down sequentially quarter-over-quarter. So that’s kind of the rationale there with having the lot lower cash balance but having a lot lower debt on the balance sheet as well.

The second part of your question with regards to SCB and the new facility, we are very excited, the SCB continue to be a great partner to Satcon and I think as we look forward to the second half of the year, I wouldn’t expect much to change we will be operating the company with sufficient liquidity, sufficient cash and obviously focusing on selling through inventory and generating that $15 million to $20 million out of the balance sheet.

Unidentified Analyst

Okay, got it. So a quick follow-up, you mentioned that the margin is helped up by 2 million sales of previous reserved inventory, can you give us some more color on the nature of the sales and also the margin excluding the impact what would have been the margin for the quarter?

Aaron Gomolak

It’s a hard question to answer and I kind of explain why so yes, there were $2 million in our top line that were for sales of previously reserved material mainly the large inventory reserves that we took in 2011. So one can argue that the margin on that $2 million that was near 100% obviously there is warehousing cost, the straight cost to get that inventory to customers and there are warranty obligations for that we have to reserve for so I think rule of thumb is the margin on that $2 million was between 80% and 85%

Operator

Our next question comes from line of Dale Pfau with Cantor Fitzgerald. Please proceed with your question

Dale Pfau - Cantor Fitzgerald

Yes congratulation guys you done a masterful job of bringing some cash out of the balance sheet.

Steve Rhoades

Thanks a lot Dale very appreciative thank you.

Dale Pfau - Cantor Fitzgerald

Take a look of year over year it is exactly pretty phenomenal and then we are going to see a drop in gross margins I understand that the reserves though that may be, may be that -- official it looks like you are selling off some finished goods there at either low price or low margins in the third quarter is that what is going on?

Steve Rhoades

Yes we have talked about this a little bit in the past Dale but we had a high inventory level that peaked out at over a $100 million at the beginning of 2011 and lot of that product was targeted for the European market, we have shifted to selling that in primarily in Asia and in the Asian markets.

The prices are lower but the focus for the company as we look at that inventory is two fold one is to generate cash to continue to fund our way through our structuring efforts and get the company back to profitability and also to bridge between the time when we had a higher cost products in the world that you used to have higher prices to our new lower cost products or Equinox Gen 2 and Prism Gen 2 products that have dramatically lower material cost numbers, and we are beginning to ship those products in this quarter.

So we are going to be selling through that inventory to continue to generate additional cash to fund our operations and as we exit the year, we should be in a position to be EBITDA positive at numbers below $30 million which I think we can generate as we look out into the markets next year.

Dale Pfau - Cantor Fitzgerald

And then on your 1.5 megawatt product line, I'm trying to look at my notes here. You see you have -- you are going to be in shipping that you've got a 51 order for 51 megawatt, is that included in the $39 million backlog or not.

Aaron Gomolak

The 51 megawatts order Dale that Steve alluded to is not included in the $39.2 million of backlog. It's an award letter at this point and typically the company's policy is that until we have a purchase order from the customer that's fixed to determinable, we don't treat it as backlog or booking and right now we have an award letter and we are expecting to get the formal purchase order here in the next –

Steve Rhoades

But we mentioned it because that product’s going to start shipping in Q4. The company that we are working with is just closing their financing and it’s a very large utility. I think they are going to get through their financing closure, but we just wanted to point out the difference in award letter versus the purchase order.

Dale Pfau - Cantor Fitzgerald

And on this new product how is the pricing per watt compared with your traditional product?

Steve Rhoades

I think that it's going to be in that mid 20s range for most of our customers. You know some of these very large orders will approach the low 20s per watt Dale, but for most of our customers for the orders in the 10 to 30 megawatt range that we have been generating they will be in that mid 20s range.

Dale Pfau - Cantor Fitzgerald

And what about your introduction of your other commercial products, Steve, where was that.

Steve Rhoades

The basis of the design is a 375 kilowatt inverter stack. We use four of them for the 1.5 megawatt product. We’re going to be introducing in the fall of this year a 750 kilowatt standalone version of that product, that will be built from two of those inverter stacks and there are a variety of options that – both the 600 volt DC input and 1000 volt DC input.

They’re going to be introduced using that same inverter stack for products ranging from 250 kilowatt upto the 1.5 megawatt that we’re introducing this quarter. So our goal is to have a base inverter stack, a base unit, that we can then expand out to a variety of power levels. It gets a lot of efficiency in our supply chain, lot of efficiency in the manufacturing, a lot of efficiency in service and even in our design teams. So real excited about this next generation of products that are coming on.

Dale Pfau - Cantor Fitzgerald

And one last question, how do you see the market out there, I mean we continue to hear about fairly strong demand, sometimes pending financing, are we starting to see some of these things loosen up now?

Steve Rhoades

I think it's reasonable demand in the US right now. I mean there is a little bit of impact of 1603 expiration, but on the utility side, we’re getting large orders in and we’re seeing good expansion. And our pipeline in Asia is growing very quickly. The first half of the year was pretty slow in Asia, but we’re seeing pipeline grow in China, in Thailand, in Taiwan. So I think that’s a good sign for us as we look out in the second half of the year.

Operator

Thank you. Our next question comes from the line Carter Driscoll with CapStone Investments. Please proceed with your question.

Carter Driscoll - CapStone Investments

Just following up on the last comment, can you talk about if anything has changed with your relationship with Greatwall and whether you are -- you get a little deeper into the China market in terms of feasibility. Obviously it’s been pretty challenging on the wind side, may be things picking up in the solar bid, could you just talk about what you learned from them and how that relationship is evolved since it was initiated?

Steve Rhoades

Great Wall has been a good partner for us for three years as our manufacturing partner and they have helped us to scale up in size to reduce our overall operating costs and to deliver high quality products. So we have been working with them for some time. We entered into an agreement with them in February for them to act as our sales marketing and distribution arm in China.

They have been helping us to redesign the products and obtain certification for products that are suitable for the Chinese market. I have actually a team in the testing facilities in Nanjing today that will be getting our final certifications for our 500 kilowatt and 625 kilowatt indoor rated inverters in China within the next couple of weeks here.

And the pipeline that they have been able to develop in the second half in China is good. It’s not incredible, but it’s good and I think that we are excited about the connections that they have. They are a Chinese state owned entity, one of only 53 and that gives an access to deals that we would never see as an American company.

So we are feeling very positive about our partnership with Great Wall and we are looking for them to increase the amount of the business that they do in the second half. They did just recently closed their -- about a four megawatt order, the largest one they've closed so far for us.

And we are very interested to see how that’s going to evolve here over the next few quarters.

Carter Driscoll - CapStone Investments

Could you talk about just back me a bit, the barging question for 3Q and then maybe compare with 2Q. I guess the first question would be the impact from the outsourcing you know roughly obviously not with a firm number, but roughly the benefit you received by removing that in 2Q and whether that will continue to flow through in 3Q and then maybe talk a little bit more about the mix shift and selling the older products versus some of the inventory just drilling down a little bit to the components of the change in your gross margin forecast on a sequential basis.

Aaron Gomolak

So the first question around outsourcing, you know the Canadian facility I think we've talked about this before, it was about $1.5 million a quarter in expense. That's fully gone now as of June 30. So we didn't have some ancillary expenses up there in Q2. We had a couple of people that we retained to transition manufacturing either the Great Wall or to Sanmina up in Ottawa. That work has been completed now. We actually shipped our first products out of the Sanmina facility this week.

Steve Rhoades

I think it's an interesting number not to interrupt Aaron, but at our current revenue levels, our fixed DLOH direct labor and overhead now after all this outsourcing is running at about 3% of revenues. It’s a relatively low number.

Aaron Gomolak

Yeah, so you know that will continue obviously. We are not expecting to incur those costs going forward. The keys have been handed over to the landlord. And all remaining expenses there with regard to facilities is included in our Q2 restructuring number of the $600,000.

When it comes down to the other question around mix, I think we did have a slightly favorable product mix in Q2, not just because of the $2 million of sales of reserve material, but we also had a very good quarter for our services business, something that's Steve and I are both very excited about as we look forward for the next few years and I think even on the sale of reserve material, we have an additional $15 million of inventory, that’s reserved for that doesn’t show up our balance sheet.

So the $43 million is closer to 60 and it's Steve and I's intention to sell through every last penny of that to generate cash and bring it into the company. So, as we look quarter-over-quarter, there is a little bit of mix shift. We do have to get rid of some of the older products to make way for the new designs, that have a much, much lower material content that Steve spoke to a few minutes ago. And I'd say other than that, there is not much more materially different as we look at Q2 compared to balance of the year.

Carter Driscoll - CapStone Investments

Now, as we sell through that the roughly 60 million, do you have flexibility, I mean is there enough of a mix of the two different buckets that you can time or maybe [massage] the margin depending on how you wanted to flow out?

Steve Rhoades

We’re public company, we’re not in the business of massaging a margin, but I think that there will definitely be a mixture of our new products and our core products and some of the older products that have reserves tied to them that will allow us to at a minimum maintain margins in the mid to high teens.

There may be opportunities to be above that depending on mix shift, but I think that we’re trying to be a bit conservative in the way that we talk about this because mix is difficult to control, you know, the deals come in as they come in. We’re aggressively marketing this older material because we want to sell it to both generate cash and to get it off our balance sheet. But we’re also marketing and selling our newer products because in many cases, that’s what our customer need in order to meet their requirements for the projects they are trying to do.

Carter Driscoll - CapStone Investments

And then my last question is, there has obviously been a large focus on India and it’s issues with basic power generation and pretty throwing everything they can; as you talk about your initiatives maybe potentially targeting India whether do you see it as an opportunity or whether you raise your focus more in North America and some of the other countries in APAC or whether you see an opportunity in the longer tern or whether that could play out in the intermediate for you?

Steve Rhoades

I think India is an interesting opportunity; not one, we’re counting on for a large amount of revenue in here in the near term. Last year we did a decent business in India we had about 25% of their central inverter business overall at about 40 megawatts relatively small number. And the market is going to expand; we’ve got decent pipeline as we look at India. The challenge of India is two-fold; it’s always been a price sensitive market and recent shifts in currency have made foreign imports for Satcon products more expensive to our Indian customers.

So those things combined may make the pricing in that challenging and probably more interested and focused on our opportunities with Great Wall in China, through our royalty agreement with them. In the Taiwan market where we’re having very solid success and the pipeline we have generated in Thailand we’ve got good partners in Thailand and that market seems lit its poised to do well and a place where I think we can do well looking out here over the next two-three quarters.

Operator

Thank you. Our next question comes from the line of Jeff Osborne with Stifel Nicolaus. Please proceed with your question.

Jeff Osborne - Stifel Nicolaus

Aaron, I just want to follow-up on the inventory; the $15 million that you mentioned in the prior question that's been previously written down, how do we think about kind of the fire-sale or discount that you are putting on that for the Asian market versus the 85% gross margins that flow through this quarter. I'm just trying to get a sense of why the margins wouldn't actually be better over 3Q and 4Q if you truly intend to actually flow out that $15 million to $20 million worth of capital?

Aaron Gomolak

Yeah, good question Jeff, so I think kind of following on Steve’s comments that he just made with Carter, we will be a little bit conservative in terms of how we forecast that inventory coming out. Those deals, its mainly Asian markets that that product is targeted for, those deals typically come quickly. We typically have days not weeks to respond with RFPs and things of that nature. So as we look at our revenue forecast and for the balance of the year we don't have a lot of that built in. So its kind of, if the opportunities materialize quicker then we will burn through a lot of that inventory faster. But even if the inventory is 25% reserved for let's say we are still selling it up positive gross margin.

Steve Rhoades

One thing I think Jeff also just I want to be plain in the numbers, most of the remaining inventory that has reserves is reserved at down 25%, but a big chunk of the material that was moved in Q2 was also inventory that was reserved at 100%.

Jeff Osborne - Stifel Nicolaus

And just then 500 kilowatt target at European spec?

Steve Rhoades

500, 250s and 100s, and see some combiners.

Jeff Osborne - Stifel Nicolaus

Okay. Is there any cost to then retrofit that so that's acceptable to an Asian grid versus European?

Steve Rhoades

The most of the product is IP44, but some of the projects that we are working on needs to be IP54 and so there are some costs associated with that. Then there is some LVRT requirements that had to be added for some of the markets. So there are small amounts of cost that are necessary to get these products into those markets but its still going to be profitable business and certainly cash generating business for us in the second half.

Jeff Osborne - Stifel Nicolaus

It makes sense and then I think a knock on the story of the stock for quite sometime has been the balance sheet with the dramatic improvement of working capital with the drop in reported cash. You know, how you think about the dynamics if I am EPC looking at your balance sheet and trying if I want to deal with you. You know, are people going in to the debt numbers first, or the cash number first, or both and how’re you managing that process? Do you feel is that competitive dynamics because of the balance sheet changes or status quo or I think better or worse?

Aaron Gomolak

It hasn’t really changed much Jeff from like maybe a year ago. You know, we do have, you know, I personally get involved with a lot of these customer conversations. I think they like at efforts in terms of proactive steps that we've taken there to get our cost structure in line and then significantly reduce our losses and generate cash going forward. So, you know, they do focus a little bit on cash but I think they are quick studies and they take a look at the balance sheet. The debt concerns them just as much as cash does. So I think we can illustrate the progress that we made on the liability side of the balance sheet there. For the most part they are happy.

Jeff Osborne - Stifel Nicolaus

Two quick ones from me. Steve, in prior calls you mentioned you thought in both quarters in the back half if I heard you right, again Q1 call, you would be above that $32.5 million kind of breakeven rate, now with you guiding 25 to 30. I am just trying to get a sense of did something change in Q3 with the push outs, I mean you got this extra 2.5 or 2.6 that float from Q2 to Q3. You know, I guess I was expecting to maybe a little bit strong stronger of the quarter for Q3 but maybe I misunderstood you.

Aaron Gomolak

No we have had a lot of business in the Puerto Rican market and there have been some delays in the Puerto Rican market due to changes in the requirements in that market for backup power, battery backup and some of the projects that we have in our backlog have been pushed out in time from Q3 to Q4 and may be little bit into Q1, so that’s caused us to move a few million dollars worth of the projects a little bit further down the line in terms of when those are going to be delivered and so that we pulled down our revenue guidance a bit because of that.

Jeff Osborne - Stifel Nicolaus

That was about 60 megawatts I think is the order that you are referencing.

Aaron Gomolak

Right and it’s just caused the delay as people figure out, it actually is an opportunity for us we are actually going to sell more inverters into that opportunity because the battery backup does require inverters as well. But as people have been working through how that’s going to be done to move that project out a bit in time.

Jeff Osborne - Stifel Nicolaus

Are they using lead acid marine batteries for that or something else?

Aaron Gomolak

There is a mix of solutions proposed, we proposed one built more around lithium batteries but it’s not a 100% decided which one we are going to go with that one and whether couple of other opportunities that we are working on down in that market.

Jeff Osborne - Stifel Nicolaus

Got you. And then the last question for me Steve is just again going back six months ago I think one of the deliverables you are hoping to solve over problems for the second half of the year was finding a cheaper source of low voltage medium, medium voltage combiners is that something that you found a source in China or Taiwan to impact margins?

Steve Rhoades

Its transformers I think it’s what you meant.

Jeff Osborne - Stifel Nicolaus

Yeah, sorry.

Steve Rhoades

And yes we have made progress in that direction.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Joe Maxa with Dougherty & Company.

Joe Maxa - Dougherty & Company

I missed part of the call, but I did came in when you were talking about exploring strategic alternatives. Can you review what you are looking at there?

Steve Rhoades

We have been working with a group, Lazard Frères for quite a while. And I think that it's their advisory practice. We are looking at alternatives for strategic partnerships that bring additional equity in the company, pretty much all options are on the table. And they are helping us to try to identify the best things to do for all of our constituencies, for our shareholders, our creditors, suppliers, customers, employees. So we've been working with for a while and we are going to continue to do so. So that we can make sure that we can be a player there in the long term for all of our customers and for our shareholders and the people that work with SatCon everyday.

Joe Maxa - Dougherty & Company

And on the revenue you are talking a little bit unless I caught that and also the margins, I think you were expecting it to be higher previously in the back half of this year then you are currently guiding. Is that more just of volume?

Aaron Gomolak

Yeah Joe, I think that does have an impact. Obviously if revenues do hit the top end of the guidance, then we are going to be higher than the teens. So that definitely plays in as well.

Steve Rhoades

But it is important, we are going to sell through our existing inventory. It's cash generating, even if it's not as high margin, Joe. We don't have to put as much cash into deliver that. So it's an important trade off. Our gross margin because of the inventory write-downs and because of that we have already paid for a lot of this product with our suppliers and it's sitting in inventory. For us its important to sell through because that's what's going to rely the cash as we get to the mid 20s margins that I think we can with our next generation of products.

Joe Maxa - Dougherty & Company

And lastly on the Great Wall, when does the royalty piece kick in.

Steve Rhoades

It already has. The sales that they've made this quarter will be, when they sell them will be paid to us through that royalty.

Aaron Gomolak

Yeah, they just closed their first four megawatt deal Joe and as Steve mentioned before we have an engineering team over in Nanjing right now at the lab trying to get the last sort of certifications that we need on our 500 kilowatt and 625 kilowatt.

Steve Rhoades

To shift that product this quarter.

Operator

Thank you. At this time I would like to turn the floor back to Mr. Rhoades for closing comments.

Charles Rhoades

Well, thanks everyone. I appreciate you joining us today. That will conclude today's call and we'll look forward to speaking with all of you again in our third quarter 2012 conference call in early November. Have a great day.

Operator

Thank you. Ladies and gentlemen this concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time.

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