Capstone Turbine Management Discusses Q1 2013 Results - Earnings Call Transcript

| About: Capstone Turbine (CPST)

Capstone Turbine (NASDAQ:CPST)

Q1 2013 Earnings Call

August 09, 2012 4:45 pm ET


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


Sanjay Shrestha - Lazard Capital Markets LLC, Research Division

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

Walter Nasdeo - Ardour Capital Investments, LLC, Research Division


Good day, ladies and gentlemen, and welcome to the Capstone Turbine Corporation Earnings Conference Call for First Quarter Fiscal Year 2013 Financial Results ended June 30, 2012. During today's call, Capstone management will be referencing slides that can be located at under the Investor Relations section. I will now turn the call over to Ms. Jayme Brooks, Vice President, Finance and Chief Accounting Officer. Please proceed.

Jayme L. Brooks

Thank you. Good afternoon, and welcome to Capstone Turbine Corporation's conference call for the first quarter of fiscal year 2013. I am Jayme Brooks, your contact for today's conference call.

Capstone filed its quarterly report on the Form 10-Q with the Securities and Exchange Commission today, August 9, 2012. If you do not have access to this document and would like one, please contact Investor Relation via telephone at (818) 407-3628 or email, or you can view all of our public filings on the SEC website at, or on our website at

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 provisions of the Private Securities Litigation Reform Act of 1995. These statements relate to, among other things, market expansion, new product development, growth in the revenue, gross margin and backlog, attaining profitability, helping certain clients meet their power generation goals, improvement in certain key performance indicators and strategic initiatives, low cost of ownership and advantages over competing technologies. Forward-looking statements maybe identified by words such as expects, objective, intend, targeted, plan and similar phrases.

These forward-looking statements are subject to numerous assumptions, risks and uncertainties described in Capstone's Form 10-K, Form 10-Q and other recent filings with the Securities and Exchange Commission that may cause Capstone's actual results to be materially different from the future results expressed or implied in such statements. Because of the 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 obligation 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 the call over to Darren Jamison, our President and Chief Executive Officer.

Darren R. Jamison

Thank you, Jayme. Good afternoon, and welcome, everyone to Capstone's First Quarter Fiscal Year 2013 earnings call. With me today are Ed Reich, our Executive Vice President and Chief Financial Officer; and Mark Gilbreth, our Executive Vice President and Chief Technology Officer.

Today, I will again start the call with a general overview of our first quarter achievements and then turn the call over to Ed, who will review the detailed financial results. During our remarks, we'll be referring to the presentation slides that can be found on Capstone's website under Investor Relations.

Let's go ahead and start with Slide 2. We continued our strong execution during the first quarter on most of our key performance indicators. We are able to increase revenue year-over-year despite the challenging economic conditions worldwide due to 2 key factors: First, we continue growth in broadening of our distribution network; and secondly, the continued market acceptance of our new C200, C1000 Series microturbine products.

Product revenue for the quarter was $23.6 million, up 13% year-over-year. New product orders totaled $24.1 million for the quarter, which, again, gave us a positive book-to-bill ratio. We shipped 25.1 megawatts, which was up 15% from 21.9 megawatts in the first quarter last year.

Most importantly, we again delivered positive gross margins, which we have now done in 7 of the last 8 quarters. Gross margins increased to 8% or nearly 600 basis points year-over-year as we realize strong sales volumes from higher kilowatt products and a 44% higher average revenue per unit while continuing to focus on reducing direct material costs. We also maintained a record level of backlog at $139 million and a strong balance sheet at over $45 million. In market sector penetration, we made great progress during the quarter especially in the oil and gas and other natural resources market.

Now, let's turn to Slide 3. In our last call in June, we secured 4 megawatts of new orders for 17 microturbines ranging from 65 kilowatts to 1 megawatt to generate prime power in 9 remote LUKOIL Russian oilfields. All the microturbines we filled by untreated associated gas from the well sites that otherwise would have been flared. The 9 microturbine power stations will help LUKOIL meet its goal to use 95% of associated gas from its oil wells for power generation activities.

In the U.S., we received an order for 12 microturbine totaling 1.9 megawatts from a large oil and gas producer headquartered in the south. This customer selected Capstone for their higher reliability and low-emission products and benefits of around the clock at the remote power generation sites.

We also received follow-on orders for 2 C1000 power packages to be installed at the remote natural gas facilities here in California. Next, we received a C1000 follow-on order from an oil and gas producer for using the Eagle Ford Shale Play in Texas, along with the second order for 5 C200 microturbines that will provide power, 1 megawatt, at each multiple well site and oil and gas pad in Alberta, Canada.

We have recently penetrated the Colombian natural gas market with multiple orders from 2 natural gas service companies for a total of 2 megawatts of prime power generation. The first of these was for repurchase of the C1000 and the C200 to be used in the CHP application for a large gas treatment plant. The energy generator will provide 100% of the power for the facility, and the heat will be utilized in the gas treatment process. Second order was for Capstone C800 power package by a large natural gas transportation company. This installation is the first of its kind in the Colombian oil and gas industry, and our system was purchase to generate reliable on-site power at the remote compressor stations.

We also made further inroads into the Asia Pacific market. We recently sold 5 low-emission C65 Capstone microturbines to a Fortune 100 oil conglomerate in Thailand. These microturbines will be the prime power source for the remote natural gas pipeline station and nearby village that both are completely isolated from utility grid.

Turning to Slide 4. During the quarter, we continue to gain interest in all 5 of our major vertical markets. Product shipments during the first quarter fiscal 2013 were 70% for using oil and gas and other natural resources, 24% for using energy efficiency applications and 6% for using renewable energy applications, while transportation products were less than 1%. The 19% increase in revenue for the first quarter compared to the same period last year is a result of business developments in North America and the Asian markets. The increase in North American market was primarily related to the increase in the U.S. shale gas market, and the increase in the Asian market was primarily because of our continued efforts to improve and strengthen our distribution channels. We did see modest decreases in revenue in the European and South American markets year-over-year, and we do expect the revenue from Europe will continue to be soft as a result of the economic conditions there.

On Slide 5, you will see a recap of where we stand in each of our key performance indicators or KPIs. All KPIs are demonstrating positive business trends and sound execution by Capstone's team.

I'll stop here and turn the call over to Ed for a review of our specific financial results for the first quarter. Ed?

Edward I. Reich

Thanks, Darren. Good afternoon, everyone. Let's begin on Slide 6. Revenue for the first quarter of fiscal 2013 was $28.8 million, a modest decrease of 4% from $30.1 million for the fourth quarter of fiscal 2012, a substantial increase of 19% from $24.3 million for the first quarter of fiscal 2012. Product revenue was $23.6 million, down 5% quarter-over-quarter, but up 13% year-over-year. Average revenue per unit increased to approximately $176,000 compared to $167,000 for the fourth quarter of fiscal '12 and $122,000 for the same period one year ago. These increases are the result of both higher pricing and a shift in mix for larger capacity products.

For both the first quarter of fiscal 2013 and the fiscal 2012 fourth quarter, revenue from accessories, parts and services was $5.2 million and was $3.5 million for the first quarter of fiscal 2012. This year-over-year increase in higher-margin recurring revenue was the result of higher sales in microturbine parts, microturbine service work and Factory Protection Plan enrollments.

Gross margin for the first quarter was $2.2 million, or 8% of revenue compared to $900,000, or 3% of revenue for the fourth quarter of fiscal '12 and $500,000, or 2% of revenue for the same period 1 year ago. The shift in mix to large capacity products increased pricing and lower material costs continue to drive improved gross margin. Capstone has now posted positive gross margins for 7 of the last 8 quarters.

R&D expenses were $2.2 million for the first quarter of fiscal '13 compared to $2 million for the fourth quarter of fiscal '12 and $2.2 million for the same period a year ago. SG&A expenses were $7.4 million for the first quarter and were flat as compared to the fourth quarter of fiscal 2012 and up $6.6 million -- up from $6.6 million for the same period last year.

Net loss was $7.8 million, or a $0.03 loss per share for the first quarter of fiscal 2013 compared to $8.3 million, or $0.03 loss per share for the fourth quarter of fiscal 2012 and $2.9 million, or a $0.01 loss per share for the first quarter of fiscal 2012. The loss from operations for the first quarter was $7.5 million compared to $8.5 million for the fourth quarter of last fiscal year and $8.3 million for the first quarter of last fiscal year.

Capstone's net loss of $7.8 million, or $0.03 per share for the first quarter of fiscal 2013 is larger than the $2.9 million, or $0.01 loss per share we recorded last year due to the fact that the net loss for both fiscal years was affected by Accounting Standards Codification 815, Derivatives and Hedging, which requires warrants accounted for as liabilities to be adjusted to fair value. We recorded a noncash benefit of $149,000 to change in fair value of warrant liability during the first quarter of fiscal '13. Our net loss for the first quarter of fiscal 2013 before considering the noncash benefits of the change in warrant liability would have been $7.9 million, or $0.03 per share.

Firstly, we recorded a noncash benefit of $5.6 million to change in fair value of warrant liability during the first quarter of fiscal 2012. Our net loss for the first quarter of fiscal '12 before considering the noncash benefit to the change in warrant liability would have been $8.5 million, or a $0.03 loss per share. Please refer to the noncash warrant charges' slide in the Appendix for a reconciliation.

Turning to Slide 7. Here, you can see visual representation of our revenue growth quarter-over-quarter and for the past 5 years.

On Slide 8, you can see our gross margin analysis for the quarter. While our reported gross margin is up 600 basis points year-over-year and nearly 500 basis points sequentially, we believe that the 8% gross margin percentage for the first quarter is still somewhat masking the improvement that we've seen as a result of in higher large average selling prices per unit and lower direct material costs. This slide isolates changes in various line items in our cost of goods sold that have affected the numbers in the last 2 quarters. From these items include higher accruals for future warranty costs, physical inventory adjustments and timing of overhead absorption, freight charges and factory labor. You'd see when you strip these items out, our adjusted gross margins have increased from 8.5% in the third quarter of fiscal '12 to 10.4% on an adjusted basis in the first quarter.

Let me now provide some of the balance sheet and cash flow activity for the quarter. Please turn to Slide 9. Cash and cash equivalents totaled $45.1 million at June 30, 2012, as compared to $50 million at the end of the prior quarter. Receivables were $18.5 million compared to $18.6 million in the quarter before. DSO or days sales outstanding were 59 days compared to 56 days in Q4 and 75 days a year ago.

Inventory was $20.1 million at June 30 with inventory turns of 4.1x similar to the fourth quarter of last year and improved from 3.6x in the same period last year. Overall, we continue to maintain a strong balance sheet with a healthy cash balance and minimal debt.

In terms of cash flows, we used $7 million of cash in operating activities, $300,000 of cash in investing activities and generated $2.5 million in cash for financing activities during the first quarter. Compares to cash use in operating activities of $12.3 million, cash generated from investing activities was $900,000, and cash generated from financing activities are $100,000 during the same period 1 year ago.

Finally, on Slide 10, you can see a visual record of our consistent growth in backlog since the beginning of 2009. Darren mentioned we maintained a record backlog $139.5 million at the end of the first quarter.

That concludes my comment on the first quarter financial results. Now back to Darren for some closing remarks.

Darren R. Jamison

Thanks, Ed. Looking ahead to upcoming marketing events, we have an exciting line of activity the next months, which you can see from Slide 11.

In September, certain of our distributors will represent Capstone at the following events: Shale Gas Insight 2012 at the Philadelphia Convention Center, the 2012 Taipei International Invention Show & Technomart in Taiwan and WEFTEC, the Water Environment Federation’s Annual Technical Exhibition and Conference held this year in New Orleans. And in October, Capstone distributors will be representing at KIOGE 2012, the 20th year of Kazakhstan's largest oil and gas show; Advanced Energy 2012 at the Jacob Javits Convention Center in New York; and finally, the 35th World Energy Engineering Congress in Atlanta.

So in closing remarks, it's clear our distributors have the business experience, capabilities and connection to support our growth plans in our targeted markets and are doing a fine job for us. It's also clear that with our new products and marketing development initiatives, we are continuing to broaden our market penetration geographically, and most specifically, in the oil and gas sector. This is critical as we manage our operating expenses to improve manufacturing efficiencies and by lowering direct material costs. We will continue to work diligently towards achieving profitability as quickly as possible.

With this one, operator, I'd like to open the call up to the analysts' questions.

Question-and-Answer Session


[Operator Instructions] And our first question comes from the line of Sanjay Shrestha with Lazard Capital Markets.

Sanjay Shrestha - Lazard Capital Markets LLC, Research Division

Given the changes we are seeing or we have seen in the U.S. rig count especially in the gas shale plays, is that having any impact on your -- the discussions you're having with your customers? And any sort of change in order momentum that you're seeing? And then I have a follow-up on after that.

Darren R. Jamison

Sanjay, now great question. The reality is, we still got a fairly small market share probably mid- to high single digits in the U.S. shale plays. So even with rig counts softening a little bit in the U.S., we're still seeing a great opportunity for further penetration. So we continue to get repeat orders from customers. The Anadarko, the Chesapeake's, Pioneer Natural Resources and then new customers like Marathon, Shell, all coming in recently. So we've seen no slow down. Also, our activities are both in the liquids and in the natural gas side of the U.S. shale plays.

Sanjay Shrestha - Lazard Capital Markets LLC, Research Division

Got it. The second question was on the international markets. Could you sort of touch a little bit on the momentum you're seeing in the international markets? And especially, I mean your recent orders have come from all the way from Colombia to Thailand, and maybe touch a bit on the near to medium term opportunity you're seeing in some of the key markets there?

Darren R. Jamison

Yes. Definitely, we're seeing continued momentum in the Russian market. That's always been a strong market for us, continues to be a leader. Australia and Asia are picking up nicely. We've seen nice orders, C1000s going into Thailand, into Singapore which is a great opportunity for us. We're seeing Australia start to pick back up Again. We're expecting another follow-on order from Origin Energy, which is something that we've been waiting for, for quite a while. We seem to be very close to getting that done. But Australia, in general,appears to be a good market for us. South America, Venezuela, Peru, Colombia, all very nice recent orders picking up, and Mexico is actually been a very good market for us. So I think internationally, with the exception of Europe, we're seeing very strong trends in all those markets.


Our next question comes from the line of Ajay Kejriwal with FBR.

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

So just maybe on revenues. It's a little bit like at least versus our models, is that just lumpiness and shipments, or is it Europe, or is there anything else going on there?

Darren R. Jamison

Yes, I would say it's 2 things, Ajay. I mean, it's -- we had 2 orders ended up in finished goods at the end of the quarter. You'll see our inventory numbers up about $1.2 million quarter-over-quarter. $1 million of that is products and finished goods. So there was a timing difference. One customer was an oil and gas customer that asked for witness test at the 11th hour, and we couldn't accommodate before quarter end, and the other one was just timing of a payment to release that system. Both those occurred very early in July. So if you look at it that way, the revenue would have been right close to $30 million or $29.8 million, fairly flat quarter-to-quarter. That being said, we probably are $1 million to $2 million light out of Europe this quarter from previous quarters. So I think we are experiencing a little bit of the European slowdown that we're all reading about in the papers.

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

Got it. And based on the backlog, you'd expect things to pick up. I mean, what kind of the visibility, and what was the expectation in terms of the ramp for the rest of the year?

Darren R. Jamison

Yes. We -- obviously, the $1 million that we didn't ship last quarter is going this quarter. We expect a very strong Q2, then obviously, the $139 million leads us to feel pretty strong about the overall year. I think from a growth perspective, then a lot of folks are modeling, 30% to 35% growth for the year, depending on what happens in Europe that maybe a little bit aggressive. It depends if Europe comes back in the back half of the year. If it doesn't, then the number should probably be on a 25% to 28% growth. Regardless very strong and I think you feel very good about the backlog and hopefully some of these other markets like South America and Asia will make up for Europe or even more than make up for Europe.

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

Got it. And maybe clarification on the backlog. So is that all product, or is there any service included in the backlog numbers?

Darren R. Jamison

No, that is products only. And so that product we can anticipate shipping in the next 12 months. Obviously, that can move around a little bit, but that's all what we consider short-term backlog. The service backlog is roughly $34 million. And that moves around from quarter-to-quarter, and that's a -- but that's a separate backlog. Because of the service backlog is mostly 5- to 9-year contracts, we don't mix the 2 backlogs together.

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

Got it. That's helpful. And maybe one last one for me before I pass it on. So this warranty reserve, is that related to the C200, or is there anything else flowing through there, that's $869 million -- $869,000 I see on Slide 8?

Darren R. Jamison

Yes, that is primarily related to the C200, a little bit for the TA100, but mostly for the C200. And so what we try to do on this slide is just try to give more transparency because what we have in changes and warranty accruals, manufacturing variances, overhead and other adjustments, makes it hard for you guys to see the underlying benefit we're getting from cost reduction and average selling prices. So if you strip that away and make it apples-to-apples the third quarter, you're seeing revenue or margin rates go from 8.5% to 8.9% to 10.4%. And that just said that our average selling prices and direct material costs are improving as we've been saying they're going to go.

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

So this warranty -- what's the expectation? Does this go down from here, or what's kind of the way...

Darren R. Jamison

$0.5 million of that was additional accrual, so that increased our reserve. Just to make sure, that we are properly accrued for, for the next 12 months in warranty. Our anticipation is that it will trail down as the year goes on. I think the second quarter will still run pretty high. The Q3 and Q4, we expect to kind of come out the other side. But it's an area we're very focused on. And obviously, we want to make sure, as I've said before, that we take care of all the early C200 adapters, and then they have good experience with the product.


Our next question comes from the line of Walter Nasdeo with Ardour Capital.

Walter Nasdeo - Ardour Capital Investments, LLC, Research Division

Mostly -- a lot of stuff I want to talk about has already been kind of thrown out there. But as far as the backlog goes, is this still kind of skewed to the larger systems?

Darren R. Jamison

Absolutely. I think if you've looked at our average selling prices being up 44% year-over-year, it's really because so many of our customers and our new customers are buying C200, C1000 series products. So the majority of our cost reduction, marketing efforts and growth are C200, C1000-related absolutely.

Walter Nasdeo - Ardour Capital Investments, LLC, Research Division

Got you, okay. Now with what's going on in Europe, how has the distributor network kind of grown over there? Is there still an interest on the distributor side of things to be involved with Capstone, or is that kind of slowed down simply because of the economic conditions over there?

Darren R. Jamison

No. There's no lack of interest. I think our biggest challenge for our distributors is customer project, timing slowing down, customers hesitant to make decisions, third-party financing tightening up, so we've seen no lack of interest from our distributors. That's just the inability or the difficulty of them to execute. So we're watching that very tightly, and as I said, it's definitely having an impact on our business. I think, overall, Europe was 16% of our total revenue last year. So we still see a very good growth year, very strong backlog. The Europe will continue to be a worry item for us, and we'll watch it closely.

Walter Nasdeo - Ardour Capital Investments, LLC, Research Division

Right. Okay, okay. And then, again, back on the distributors side. Has there been any changes? Have you been still calling out the bottom or are your pretty well set in now that -- with the guys that are performing well for you?

Darren R. Jamison

No. We're continuing to weed and feed folks that aren't performing. I think what we're actually seeing is the top-performing distributors are separating themselves even further from the lower performers, so it's getting easier and easier to kind of sort out the A players and the C players. The A players are getting more territory and more support, and the C players are losing territory or losing their contracts. So that will be a major theme for the sales and marketing group this year, is to really make sure that we support the A distributors in the A markets and either train up or force out the lower performing distributors.


We have no further questions at this time, I will now turn the call over to Darren Jamison for any closing remarks.

Darren R. Jamison

Thank you. I guess, as we've kind of the analyst questions, I think were great. There's definitely positive trends that we're seeing. I think the continued oil and gas penetration worldwide is huge for Capstone. These are very strong customers, the strong value -- balance sheet. They value our value statement and understand the complexity in the benefits of our products. I think trends toward associated gas restrictions worldwide are moving in the right direction and will only help us going forward.

The record low natural gas prices in the U.S. are stimulating that market, and we see the CHP market especially in the U.S. to be very robust in the next several quarters.

We're seeing mass upturn in our California business. The SGIP is having an impact in California, which is recently with 2 customers this week both California manufacturers looking to leverage our products. And so I think we're going to see some nice movement in the California market as a result of being included in the SGIP. As I mentioned, the North American, Australian, Asian, South American markets are all looking very good. Europe is our only market that we're concerned about and we'll continue to watch.

The distribution channels are maturing, but we are in a very much a weed-and-feed stage, as we work to support the strong distributors and that are executing and work out the ones that are not.

If you look at our future opportunities, we have the 5 market segments, 3 of which are really generating 99% of the business. But we do see the data center market and the AGV market is great potential. Future markets will continue to work with folks on those markets, whether it's IBM or it's DesignLine. We're going to plant those seeds and get those key initial customers in place, and be able to leverage that for future growth.

I think also important that we didn't talk a lot about in the Q&A session, the cash cycle. We're very focused on DSO. Our DSOs are down at some of the lowest levels since I've been CEO. We're working hard at catching cash disbursements and cash receipts, and our cash burn for the quarter was less than $5 million. I think our range was kind of $3.5 million to $5 million. So a little bit on the upper end of our range. We're definitely within our range, and we see the cash burn trending down as the year goes on.

If I look at the Q1 summary, has a high-level of 30,000 feet. Total revenues is $28.8 million, second-highest in company history, it was $1 million in finished goods that did not get out. I think that's very strong for revenue for the quarter. The oil and gas penetration is phenomenal, and again, highest in company history, 70% from the oil and gas sector, shale gas and associated gas really driving those markets. Gross margins of 8%, up 600 basis points year-over-year, second-highest in company history. That's on a GAAP basis, but as Ed showed you, adjusted gross margins will take out a double-digit range to 10.4% if you get apples-to-apples with Q3.

And more importantly, we're seeing the improvement in a ASPs and DMCs starting to pay some dividends.

Gross margin, on the cash basis, is about 13%. Obviously, that's important cash. It's what we used to pay the bills and to lower our spend. Average selling prices, up 44% year-over-year and the real shift of the C200 to C1000 Series product, which we've been saying is going to happen, you're seeing that now come to fruition.

Direct material costs down 4% year-over-year. We'd like to do better than that. We need to do better than that. We've got 15% still on process. We've hoped to execute that in the next three quarters, worst case 4 quarters, but we should see DMCs come down every quarter from here on out, and we look forward to reporting that.

Inventory turns, no easy task, get to $4.1 million. Our target is to get to $5 million, and Mike and his operation team were very focused on making that a reality to get those inventory turns at the higher revenue rates as we go.

Cash balance, I mentioned, $45 million and book-to-bill slightly over 1:1. With the backlog of $135.9 million, we feel very good about the year and continue to have strong revenue growth especially on the year-over-year bases.

And with that operator, I will end the call and look forward to talking to everybody in the second quarter and the Annual Shareholder Meeting. Thank you.


Thank you for your participation in today's conference. This concludes the presentation. Everyone, may now disconnect, and have a great 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 All other use is prohibited.


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