Capstone Turbine Corporation F4Q08 (Qtr End 03/31/08) Earnings Call Transcript

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 |  About: Capstone Turbine Corporation (CPST)
by: SA Transcripts

Capstone Turbine Corporation (NASDAQ:CPST)

F4Q08 Earnings Call

June 12, 2008 4:45 pm ET

Executives

Darren R. Jamison - President and Chief Executive Officer

Ed Reich - Executive Vice-President and Chief Financial Officer

Mark Gilbreth - Executive Vice President and Chief Technology Officer

James D. Crouse - Executive Vice President of Sales

Libby Reynolds – Vice President, Chief Accounting Officer

Analysts

Sanjay Shrestha – Lazard Capital Markets

Walter Nasdeo – Ardour Capital Investments

Jesse Herrick – Merriman Curhan Ford & Co.

Eric Stine – Northland Securities

Abhi Kanitkar – RHO Venture Capital

Jeff Osher – JMP Capital Management

Peter Castellanos – Glacier Partners

Operator

Welcome to the fourth quarter and fiscal year 2008 Capstone Turbine earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Libby Reynolds, VP and Chief Accounting Officer.

Libby Reynolds

Welcome to Capstone Turbine Corporation’s conference call for the fourth quarter and fiscal year ended March 31, 2008. I am Libby Reynolds, your contact for today’s conference call.

Capstone filed its annual report on form 10K with the Securities and Exchange Commission today, June 12, 2008. If you don’t have access to this document and would like one please contact Alice Barsoomian at (818) 407-3628 or you can view all of our public filings on the SEC website at www.SEC.gov.

During the course of this conference call management may make projections or other forward-looking statements regarding future events or the 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, future financial performance and attaining profitability, the ability to reduce cost and improve operational efficiencies, achieving positive gross margin and operating margin, compliance with certain government regulations and increased government awareness of our product, opening new markets for our products and attracting large customers to our product, the performance of our product compared to other technologies, new applications for our products including the hybrid bus, oil and gas, class A office building and biogas markets, revenue growth and increased sales volume, our success in key markets, our ability to enter into new relationships with channel partners and distributors and other third parties, the energy efficiency, reliability and low cost of ownership of our products, the expansion of production capacity and improved inventory turn, value to our customers of our new low-emissions product, future applications for our product and the environmental advantages of our product.

These forward-looking statements are subject to numerous assumptions, risks and uncertainties including the following; our expectations about expansion into key markets may not be realized, certain strategic business initiatives and relationships may not be sustained and may not lead to increased sales, we may not be able to reduce cost or improve customer satisfaction, we may not be able to secure future financing, we may not be able to expand production capacity to meet demand for our products, we may not be able to obtain sufficient materials at reasonable prices, our release of new products may be delayed or new products may not perform as we expect, we may be unable to increase our sales or sustain or increase our profitability in the future, we may not be able to obtain or maintain customer, distributor and other relationships that result in an increase in volume and revenue, we may not be able to comply with all physical government regulations, we may not be able to retain or develop distributors in our targeted markets in which case our sales would not increase as expected and if we do not effectively implement our sales, marketing, service and product enhancement plans our sales will not grow and therefore we may not generate the net revenue we anticipate.

These are among many factors which may cause Capstone’s actual results to be materially different from future results predicted or implied in such statements. We refer you to the company’s Form 10-K, Form 10-Q and other recent filings with the Securities and Exchange Commission for a description of these and other risk factors.

Because of 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 revisions to any forward-looking statements to reflect events or circumstances after the date of this conference call or to reflect the occurrence of unanticipated mix.

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

Darren Jamison

Welcome to Capstone’s fiscal 2008 and fourth quarter earnings conference call. With me today are Ed Reich our Executive Vice-President and Chief Financial Officer, Mark Gilbreth our Executive Vice President and Chief Technology Officer and joining us on the phone is James D. Crouse our Executive Vice President of Sales and Marketing.

Today I’d like to start the call with a quick review of the significant events of fiscal 2008 and then have Ed walk us through the financial results for Q4 and the total fiscal year. Ed will then turn the call back over to me and I will discuss our progress towards our strategic initiatives and I will review developments in each of our key market segments and finally talk about what we hope to achieve in the new fiscal year before I open the call up to your questions.

During fiscal 2008 we began to see the impact of our new management team and our new marketing and branding strategies. We also dramatically improved our relationships with our business partners. During the year we added 15 new distributors, improved relationships with our old distributors and our key vendors. In addition in the last year we have reduced employee turnover from an unacceptable 38% to currently 10%. 38% turnover is the equivalent of replacing your most important asset approximately every 2.5 to 3 years.

These improvements have led to Capstone increasing revenue to $31.3 million or 49% from the prior fiscal year. Unit sales of our products increased from 277 units in fiscal 2007 to 434 units in fiscal 2008. Our backlog entering fiscal 2009 is a record $27.9 million or 428 units, an increase of 458% from the prior fiscal year. To help put this backlog in perspective we entered fiscal 2008 with only $5 million in backlog and achieved $31.3 million in revenue. This year we entered the year with essentially as many units in backlog as we shipped in all of fiscal 2008. The combined backlog and stronger than anticipated demand for our new C200 and C1000 products makes me believe that fiscal 2009 bodes very well for Capstone.

I want to take a minute to review some of our fiscal 2008 highlights. In September we announced the signing of a strategic agreement with UTC Power Corporation, part of United Technologies or UTX, for $12.8 million for the development and launch of the 200 kW product.

This agreement was critical to our success in several ways as it afforded not only the cash to commercially launch the C200 product but also gave us access to tremendous engineering resources from UTC’s Pratt & Whitney and Hamilton Sundstrand Divisions. These engineers are providing a broad range of expertise in assisting in the development of the C200 product. The $800,000 in engineering support has been invaluable to Capstone to ensure the C200 product is a world class product the first day we start deliveries later in September.

In October we received an initial $3.8 million order for our new C200 product only one month following the announcement of its initial launch. The new 200 kW product allows us to penetrate markets that were not available to us with our current C30 and C60 series product line. As you can see from our 10-K today we have almost tripled our C30 sales in fiscal 2008. Obviously this is a tremendous C30 sales effort but if you look at the revenue generated from our C30 business in the last two years combined it is less than the revenue of our C200 pre-sales.

The C200 not only gets us into markets we can not penetrate with our C30 or C65 products but it also improves and provides tremendous leverage, scale to our business as we move forward that we have not enjoyed in the past. Also in October we announced the release our ultra low emissions product which meets the stringent California Air Resources Board of car emissions standards.

Installing six of these CARB certified C65 micro turbines operating 24 hours a day reduces nitrogen oxide emissions approximately 5 tons per year which equates to the same environmental impact of taking 258 cars off of the road based on EPA emissions and efficiency data for the average U.S. power plant and average passenger vehicle.

In December Capstone announced the new C1000 product, on the C200 product line it can be configured into 1 megawatt or 1,000 kW, 800 kW or 600 kW solutions. This product allows further penetration into the 1-10 megawatt market. We plan to package it in a standard ISO container which has a small, 8 ft x 30 ft footprint. It will have competitive pricing, built in redundancy, ultra low emissions, be stackable and can be deployed in configurations up to 10 megawatts.

We recently announced our first C1000 order and while I was in Milan last week at Power Gen International we received orders for our first C100 and a follow-on C1000 order. In addition, this afternoon we are pleased to announce an order from Office Power for four more C1000s to be deployed in three Manhattan high rises. Management believes that this new product will be well positioned in the marketplace offering piston engine pricing, fuel cell emissions and gas engine reliability.

Also in December we announced the release of our liquid fuel C65 product and an initial from NTT DoCoMo in Japan. We developed this product not only to serve traditional diesel applications but also for the growing green applications utilizing biodiesel and ethanol. In March our efforts in the hydroelectric bus market were rewarded with orders in excess of $5 million.

Transit properties worldwide are seeking cleaner, cost effective, reliable transportation solutions. When you combine the high reliability of our micro turbines and low total cost of ownership it is a natural fit for transit properties around the world looking to cut emissions, improve bus pullout rates, lower operating expenses and improve overall rider satisfaction.

During fiscal 2008 we saw significant growth in the oil and gas market. The oil and gas market will continue to be a major focus for us in fiscal 2009 as it leverages our value proposition of high reliability, long maintenance intervals and low total cost of ownership. I believe this fiscal year’s significant accomplishments illustrate that Capstone has taken the necessary steps towards achieving our strategic goals of near-term profitability and building long-term shareholder value.

At this point I’d like to turn the call over to Ed to review our specific fiscal 2008 and fourth quarter results.

Ed Reich

I’d like to provide you with our results for the fiscal year ended March 31, 2008 and the fourth quarter.

Revenue for the year ended March 31, 2008 was $31.3 million, an increase of 49% from the $21 million reported in the prior year. The gross loss for the year was approximately $3.8 million or 12% of revenue compared to $5 million or 24% of revenue from last year which represents an improvement in gross loss of 12 points.

Year-over-year improvement in the gross loss was primarily due to increased volume on both our C30 and C65 products and lower warranty expense. The improvements were offset by increased manufacturing costs and lower overhead costs in the inventory due to our reduction of finished goods at the end of fiscal 2008.

R&D expenses for the year were $8.9 million improving $500,000 or 5% from the prior year. R&D expenses declined as the result of increased benefits from the cost-sharing program with UTC offset by increased engineering expenses related to the C200.

SG&A expenses for the year were $25.6 million, an increase of $1 million or 4% from the prior year. The increase is primarily due to increased travel related customer site visits and trade show activity and higher facility costs offset by lower administrative costs. Net loss for fiscal 2008 was $36.1 million which improved $600,000 or 2% from the prior year.

Loss per share for the year was $0.25 or $0.07 better than last year on higher shares outstanding. As of March 31, 2008 cash and cash equivalents were $42.6 million. Cash balance at the end of the year decreased by $17.7 million.

Backlog at the end of the quarter was $27.9 million increased 113% from Q3 and 458% from the prior year. Our revenue for the fourth quarter was $9.3 million increasing approximately 60% from the same period last year. Revenue for the fourth quarter was marginally higher than the third quarter.

The gross loss for the quarter was approximately $500,000 or 6% of revenue compared to $1 million or 17% of revenue from the same period last year. The gross loss from the third quarter was $40,000. Quarter-over-quarter improvement in the gross loss percentage was primarily due to increased sales volume for the 30 and 65 products and lower warranty expenses. These improvements were offset by higher manufacturing and overhead costs.

R&D costs were $2 million for both the fourth quarter and for the same period last year. R&D costs were up approximately $200,000 or 11% from the third quarter. R&D expenses were higher in the fourth quarter of 2008 compared to the same period last year but were offset by increased funding received from UTC.

SG&A expenses were $7.4 million for the fourth quarter, an increase of $1.1 million or 17% over the same period last year and increased $900,000 or 14% from the third quarter. The increase in the fourth quarter of 2008 over prior year quarter was primarily due to increased labor and consulting costs, an increase in accounting fees, facilities and increased travel and trade show costs, reduced by lower bad debt.

Our fourth quarter net loss was $9.5 million, an increase of $1 million or 12% from the prior year comparable quarter and was up approximately $1.9 million or 24% from the third quarter.

Cash used in operations during the quarter was $2.5 million down from $3.3 million in the third quarter and was our lowest cash performance since June of 2000. Loss per share for the quarter was $0.07 per share compared with $0.06 per share for the same period last year.

In an effort to provide our shareholders a better understanding of our operating model we have added additional information to our 10K on backlog, unit sales, estimated cash flow positive in terms of units, and overall plant capacity. We hope you find this additional transparency into Capstone’s business helpful in charting our path to profitability.

Let me turn the call back over to Darren.

Darren Jamison

As I look at the fourth quarter I see another solid revenue quarter but I am most encouraged by our tremendous backlog growth as we enter fiscal 2009 with a record $27.9 million in backlog. In addition we began to manage lower inventory levels approximately $2 million while achieving over $9 million in revenue. Inventory decreased $7.6 million during fiscal 2008 on substantially increased revenue.

However, expenses did increase during the quarter as sales and R&D increased spending related to the new C200 and C1000 product launch. I look forward to seeing the results of that spending when we launch the C200 and C1000 later this fiscal year.

Our market research indicates that these two products will allow us to more than triple our addressable market and should enable continued strong revenue growth. The ability to sell C200 and C1000 products utilizing the same sales and distribution channels and production facilities will help Capstone provide much needed leverage of our fixed overhead costs.

In fiscal 2009 I look forward to not only the launch of the C200 and C1000 products but also the continued growth in several of our key markets including oil and gas, hybrid electric busses, class A office buildings and multiple biogas applications.

In the coming year Capstone will work to better position our products as a green solution for a global market and work with state and federal governments to increase the awareness of our commercially priced clean and green products. As they say in politics, you are either at the table or you are on the menu. Capstone has recently recruited an experienced government contracting expert to help us get a seat at the table and improve our awareness and support of our technology.

I view Capstone as an excellent power generation solution for a changing world because unlike solar and wind technologies our efficient combined heat and power systems reduce greenhouse gas and criteria pollutant emissions 24 hours a day, 365 days a year with or without a sun or wind resource and even without the benefit of an electric grid.

Now we’ll take a minute to update you on the progress of some of our key markets and discuss what you should expect to see from Capstone in the coming quarters.

The European and Russian markets continue to show tremendous growth from last year and have been enthusiastic, early adopters of our new C200 and C1000 products. In addition, incentives in markets like Germany, France, Spain and Italy continue to drive Capstone products into biogas, landfill and wastewater treatment plants. The spark spread in the U.K. and Russia is the best it has been in recent years and is driving combined heat and power opportunities in those countries. Therefore you should expect to see the European and Russian markets continue to grow as the new liquid fuel 65, C200 and C1000 products continue to gain traction in these key markets.

The market in New York continues to be a prime opportunity for Capstone’s products because of its need for clean, reliable power solutions and the fact that buildings make up 79% of the city’s greenhouse gas emissions. We are in the process this week of a major sales and marketing blitz with our distributor RSP Systems and Wesco, a Fortune 500 listed company. The CEO of Wesco and I were in New York last Monday to personally kick off the sales event of our combined sales teams which made up over 100 joint presentations to specific, targeted potential customers in the New York and New Jersey area. I look for continued slow but steady growth in the New York market as our partners increase marketing efforts to achieve improved results.

Also in Europe the hybrid electric bus market continues to generate opportunities as represented by a recent order from our OEM Design International. In this application the micro turbine acts as a giant battery charger for the all electric bus. Electric busses powered by our micro turbine provide lower emissions, less noise, less vibration and much improved fuel mileage.

California remains a good potential market opportunity which was limited last year absent a CARB 2007 certified product. With our official certification from the Air Resources Board in September we are able to once again re-engage this key market. I would look for this market to again start producing in fiscal 2009.

As I said in the oil and gas sector we had a strong quarter with significant orders from three large oil and gas producers. Today Capstone’s largest oil and gas customers are Gastrom in Russia, TMex in Mexico and Petrobras in Brazil. Capstone should be successful in the oil and gas market as petroleum exploration, production and transportation companies are more focused on reliability, maintainability and total cost of ownership than they are on first cost. Because of this I look for fiscal 2009 as an opportunity to continue to strengthen and broaden our global outreach efforts as we attempt to gain additional market share in this key market.

During the quarter we announced Reagan Equipment as a new distributor in the U.S. to handle oil and gas opportunities in the Gulf Coast area. Reagan has been in business over 60 years, has been heavily involved in the oil field sales and service business. We will continue to work hard in Asia with a focus on markets in China, Korea, Japan and India.

You will see slow but deliberate growth in these markets as Capstone brings on additional distribution and leverages our current partners such as Samsung in Korea who will increase its market penetration in the combined heating market for new high rise apartments.

As we look to the future of Capstone beyond the current fiscal year we are seeing other markets of interest beyond what we serve today. These markets include military applications where our long maintenance cycles and high reliability could prove to be beneficial in remote military theaters. When you consider the fact our product has six scheduled maintenance events over five years, and a typical internal combustion engine has over 150 scheduled maintenance events over five years you can see how military applications could be very interesting.

We are also looking at potential marine applications in both the yacht market as well as commercial boat market where emission pressures are forcing boat builders to look at alternative energy solutions for onboard power, generation, cooling and heating needs.

However, I must say the two most interesting potential markets for Capstone are the class A truck market and the solar potable tank market. The class A truck market is interesting because of the current high diesel fuel prices combined with pending stringent EPA 2010 emission requirements. Those two facts are putting tremendous pressure on diesel engines and truck manufacturers. We are currently looking at the economic and design viability of commercializing our ICR engine product to play a role in this large but competitive on-highway truck market.

Capstone’s ICR turbine engine design could potentially feature higher efficiencies across a wide power range while meeting pending EPA emission requirements without costly, heavy after treatment. This product could potentially be lighter weight and have a lower hood profile than today’s heavy duty diesel engines used in the market.

The second most interesting potential market is the solar market. Capstone is evaluating product development opportunities to combine the benefits of micro turbine and solar concentrator technologies. The Capstone micro turbine uses natural gas or liquid fuel to decombustion air.

Solar concentrator technologies produce enough heat to provide combustion air at the required temperatures for our turbine. This combined system would be capable of operating on sunlight during the day and traditional fuels at night. The resulting system provides the benefit of operating 24 hours a day at higher energy conversion efficiencies that we estimate to be between 26-30%.

We are currently working in the company on both the truck and solar markets to evaluate these opportunities and evaluate a possible commercial design.

In conclusion when I look back at fiscal 2008 I am proud of my management team, I am proud of the entire Capstone organization, I am proud of our valuable employees, key vendors but I am most proud of our tremendous distributors delivering what we feel is the best year in company history.

At this point operator I’d like to open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Sanjay Shrestha – Lazard Capital Markets.

Sanjay Shrestha – Lazard Capital Markets

How should we really think about the backlog number for the year and the revenue potential over the next twelve months? Darren you mentioned that in your prepared comments about $5.5 million in backlog going into 2008 and about $31 million in revenue. That is booking more than $26 million in revenue and you have almost $30 million in backlog right now and I don’t think that includes C1000 products. How should we think about how revenue tracks for fiscal 2009?

Darren Jamison

First of all realize that backlog is only product. It does not include parts, accessories or service. That is only restricted to backlog. So obviously there is more on top of that. The reason the orders after March 31 and specifically the C1000 are not in that backlog we anticipate we will deliver the majority of the backlog we have stated at the end of March 31 in the fiscal year by March 31 next year. We continue to heavily market the product, both the C200 and the C1000 as well as our traditional products, and hope to continue to build that backlog as we move forward.

I think I have told you many times as we run the company today we are focused on revenue and backlog development. In fact we like to look at those two together and chart those going forward to take the lumps out of the business and get a true picture of how we move forward. Cash is the other driver. We want to make sure we manage our cash very effectively. I think we have done that last year by reducing our inventory and getting UTC payments and we had a very nice cash quarter this quarter.

The third obvious driver is product development, bringing new products to markets specifically the liquid 65, the C200, the C1000 and HEV improvements. Those are the three key areas as we focus on but specifically to your question the C200 and the C1000 the vast majority should all ship in the next fiscal year.

Sanjay Shrestha – Lazard Capital Markets

So then Darren what was the number for the service backlog?

Ed Reich

Service, accessories and parts generally are 30% of the product revenue.

Sanjay Shrestha – Lazard Capital Markets

Another question here, obviously we are essentially doubling our addressable market with the C200 and C1000. You mentioned something in passing here obviously the CoGen market, the hybrid bus opportunity and the oil and gas but it also sounds like the opportunity for the military. Is that something we could see near-term or is that just discussion that could turn into something tangible over 3 months, 12 months or how should we think about that? How much of a near-term opportunity is that?

Darren Jamison

I would say the opportunities I spoke to at the end, the on-highway truck market, the military, marine and the solar market are all things are looking for future development. I would say those are 2-3 years out before they provide any revenue. But I wanted to give a flavor as we look forward in the new year of what we are seeing on the horizon. We are at the point now where I think we can start raising the headlights a little bit on the car and seeing what is on the horizon and look where we take the company after the C200.

Sanjay Shrestha – Lazard Capital Markets

In terms of the traction you are getting on the C200 and C1000 what do you expect your total capEx number to be with this anticipated growth here for fiscal 2009?

Ed Reich

In fiscal 2009 we are planning $5 million in capEx to build out the C200 and C1000 lines at our stack facility.

Sanjay Shrestha – Lazard Capital Markets

With your customers on the C200 and C1000 and if you could also share with us some of the feedback you got at the Power Gen in Milan and what profit margin are you seeing even before thinking about the volume, just related to C30 and C65 versus C200 and C1000?

Darren Jamison

Let me say if you remember, Sanjay, when we originally launched the C200 we planned on building 28 in calendar 2008 and 110 in calendar 2009. We were surprised by the initial orders we received and so quickly we raised those expectations to 48 in 2008 and 160 in 2009.

If you look at that approximately 208 over about a 16 month period we see significant orders through March and significant follow-on orders for both 200’s and C1000 so we will continue to monitor that and if necessary we will raise that production volume going forward.

Obviously cash management and inventory management is crucial so we’ll look very carefully before we change our manufacturing run rates on those products.

Again I would say we are very pleasantly surprised by the reception from the marketplace. Not having commercial units running, either C200 or C1000 to receive the type of orders we have gotten really in the industrial sector, which we are not talking about pre-selling iPhones or WII. To pre-sell a product like this in the industrial sector in my 20 years is somewhat remarkable.

So we are very excited about it. It puts a lot of pressure on the company to deliver this product on time and flawless the first time so we are very excited about it. Specifically in Milan we had a great booth, great traffic. We did an actual press event for the Italian market. We had over 150 people show up and unfortunately we only had 80 chairs. So the interest level again is extremely high.

People like the concept of cheap, piston engine pricing with the reliability of a turbine and our emission rates are besides fuel cells second to none.

Operator

Your next question comes from Walter Nasdeo – Ardour Capital Investments.

Walter Nasdeo – Ardour Capital Investments

I’d like to get a little bit of understanding on a comparative basis the efficiency that you see in the C200 versus the efficiencies you are expecting to see in the 1000. Electrical but more than that even systematic or systems efficiencies.

Darren Jamison

The C200, Walter, is the highest efficiency product we have. It is about 33% electrical efficiency at the generated terminals. The real advantage we have compared to other products when you look at other gas turbines that is the most electrically efficient product below 400 mw below the solar mercury 50. So over other turbines we have the most electrically efficient product.

When you look at reciprocating engines there are engines that have higher electrical efficiencies but their challenge is part load applications. So with the C1000 obviously part load application versus a 1 mw engine we cycle engines on and off to maintain that 33% virtually across the load range. As you look at the total system efficiency it depends on how much of the thermal you can use.

Obviously having all of our heat going to the exhaust and not going to lube, oil and antifreeze is very easy for us to maximize that energy coming from the exhaust or from the thermal. We have seen numbers anywhere from 75% to the highest reported efficiency I have seen on this product is about 93%. That was calculated on one of our partners. It is very, very high total system efficiency with the product.

Obviously the reliability and the maintenance intervals are also the key drivers in selling this product.

Walter Nasdeo – Ardour Capital Investments

Also, you are mentioning numbers, production numbers for the rest of this year on into next year that are starting to get pretty significant. What is your ceiling? You said if the orders kept coming we would consider raising that number. Where would you find the brake off as far as what you would be able to produce on the 200’s next year?

Darren Jamison

Walter, our forefathers had big visions so we are blessed and cursed with a lot of capacity. The 160 units we are talking about in 2009 is nowhere near our capacity. We are still running single shifts. Our real challenge is materials and just scheduling those materials. We have done a great job of lowering inventories this year. Obviously as the C200 material begins to roll in this quarter the cost impacts from R&D and sales and marketing on the C200 next quarter you will see inventories go up as we begin to receive those materials.

So that is our biggest challenge. The nice thing is with our pre-sales we have these in to an order board and we can start to see our production spots today were quoting customers out in March of 2009 as we are filling up the September to December range. We are starting to fill up the first quarter of 2009.

Walter Nasdeo – Ardour Capital Investments

So what do you foresee your mix going out into next year as far as 30’s versus the 200 and the 60’s? How is that shaping up?

Darren Jamison

As you noticed we tripled our C30 business this year and that was really on the back of the HEV market and oil and gas. I see both HEV and oil and gas markets as continuing to grow. The C30 could catch the C60 in total volume this year. Obviously the C200 we are sharing pretty much real time with the world how fast we sell these products and your guess is as good as mine at how much we can ramp it.

The 1-5 mw space is the largest space in the power generation market. The total market is a $4 billion market so there is lots of opportunities to grow this product. All of our distributors are extremely excited and are embracing this product so we are very excited with the C200, the C600, C800 and C1000.

Walter Nasdeo – Ardour Capital Investments

What is the footprint of the C1000?

Ed Reich

8 ft x 30 ft and it is stackable so you could put 2 mw into that same footprint.

Unidentified

You could parallel up to 10 of them to get 10 mw.

Darren Jamison

If you wanted to put the absorption chiller on the roof you could do that as well. So if you look at the order we got today for Office Power when you are putting product on a roof set back in Manhattan footprint is very, very key. So being able to put 2 mw in a 30 ft x 8 ft space on a Manhattan rooftop it is extremely valuable.

That is another one of the key reasons besides obviously the efficiency of the product and the reliability, the uptime we mentioned in that press release was 99.4%. Compare that to internal combustion engines you are lucky to get 88% up time, maybe 90 if you are lucky. So the C65 product is performing very well in the field.

Walter Nasdeo – Ardour Capital Investments

What is the weight on that you are putting on the building?

Darren Jamison

About 45,000 pounds.

Walter Nasdeo – Ardour Capital Investments

How do you get it up there? We have things going on with cranes here in the city.

Unidentified

Hopefully you can keep the cranes standing for awhile. If the issue is you can’t get a crane in then we’d have to go with a C65. The 65 fits in a freight elevator. But the C600, 800 or 1000 would have to be craned.

Operator

The next question comes from the line of Jesse Herrick – Merriman Curhan Ford & Co.

Jesse Herrick – Merriman Curhan Ford & Co.

Just going back to Power Gen in Europe and how things went over there. You had the C200 on display, the first commercial one, is that right?

Darren Jamison

It was a pre-commercial unit, sold to Green Environment going to a biogas plant in Germany that is correct.

Jesse Herrick – Merriman Curhan Ford & Co.

Is that on its way to Germany now?

Darren Jamison

Correct, it left from the show over to Germany.

Jesse Herrick – Merriman Curhan Ford & Co.

Do you plan on letting people know when the first pre-production one is up and running?

Darren Jamison

I’m sure it will be on our website. I don’t know if that will be a press releasable event but it will definitely be on our website that it is in commercial operation.

Jesse Herrick – Merriman Curhan Ford & Co.

Switching over to the other press release you had today with Office Power, I’m not too familiar with these people. How much have these guys deployed in the past?

Darren Jamison

They have done about 3 mw in the past I believe, maybe 4. A relatively new company. Their first installation was with twelve of our C60’s about three years ago. Unfortunately we go sideways with them as a company prior to my coming on board and their next 2-3 installations were Elliott micro turbines. Each one about a megawatt a piece. We have now successfully returned that relationship and gotten Joel Wilson over at Office Power to sign the national account agreement. So basically the next 20 mw of power he installs in New York will be Capstone product.

Jesse Herrick – Merriman Curhan Ford & Co.

So that precludes him from using Elliott Products?

Darren Jamison

The next 20 mw has to be Capstone. After that he would be open to look into other products. I don’t see that happening, frankly Jesse. The C1000 on a competitive standpoint is very competitive against the Elliott. It is going to be cheaper to install. He is very happy obviously with the reliability at 99.4%. Our engineers are working with his engineers on ways to cut installation costs, improve construction schedules.

I would say we have a very close relationship on a relationship that turned the wrong way. Overall efficiency we are higher than the Elliott and we are also much cleaner than the Elliott. So I think you are looking at Mayor Bloomberg and what he wants to do with the city our product is a very nice fit.

We can have C1000’s on the rooftops, C30’s on the busses and C65’s in every hotel.

Jesse Herrick – Merriman Curhan Ford & Co.

Now for those three buildings you mentioned in the press release what timeframe are you looking at for those?

Darren Jamison

Those are C1000’s so those will all be after January of this year.

Unidentified

So they probably wouldn’t be installed until summer time at best.

Darren Jamison

We’d probably ship in what would be our fourth quarter this year.

Unidentified

Construction schedules in New York can bounce around and I don’t want to quote out of school.

Jesse Herrick – Merriman Curhan Ford & Co.

To switch gears again the unit break down is very helpful. Are you planning on doing that on the K every year or are you planning on doing that every quarter?

Darren Jamison

We are committed to it now so it will be in every quarter. We really want to get our institutional ownership up. Obviously we’ve got some additional folks like yourself following the stock with great models and great coverage but getting a little more transparency to our shareholders we think is positive and we’ll continue to do it going forward.

Jesse Herrick – Merriman Curhan Ford & Co.

I haven’t had time to pour through the whole K but you said you had unit break-even?

Ed Reich

Yes we did.

Jesse Herrick – Merriman Curhan Ford & Co.

Where did that fall?

Ed Reich

It is dependent on mix. Approximately 250 units per quarter.

Darren Jamison

1,000 units a year.

Jesse Herrick – Merriman Curhan Ford & Co.

About 250 per quarter you said?

Ed Reich

Yes.

Darren Jamison

In simple math we have got approaching 60 distributors but say we had 50. Each distributor does 20 units a year. Simple math that gets you 1,000 units. If our distributors are all actively engaged and doing a good job with our products 20 units is a project to quarter so we don’t see these numbers as Herculean. Obviously from where we have been in the past they look very big but we have seen very nice growth this last quarter and we are very well positioned, I believe, with the backlog coming into this quarter.

Operator

Your next question comes from Eric Stine – Northland Securities.

Eric Stine – Northland Securities

A lot of my questions have already been covered. But I would assume given with the unit break down you just gave you are well on your way to your goal of being cash flow break even by December 2008?

Darren Jamison

That would be a fair statement.

Eric Stine – Northland Securities

Switching gears here to the C200. You have talked about that these would going forward all be offered with a service contract. Is that still the plan? Or it may depend?

Darren Jamison

No, absolutely that is the plan with the C200. Obviously trying to get all of our products to have service agreements but specifically we told our distributors all new C200, C600, C800 and C1000 require a service contract. We’re not getting a lot of push back on that.

Eric Stine – Northland Securities

I know you have said you are blessed with a facility that you can definitely grow into but how flexible is your production there as far as the C200? I know you have said that for next calendar year 160, is that something that is pretty flexible and you can change that to meet demand as it comes?

Darren Jamison

Absolutely, that 160 is not working three shifts. We’ve got enough production capacity and space that we can increase that 160 significantly. So we’re not concerned about that. We do have some capital expenditures to get the line up and running this year. We will manufacture them over at our Stag facility in Van Nuys. The 30 and 65 are on one assembly line. The C200 is on a separate and the C1000 is on a separate line. So lots of room to grow still. We’re very excited about getting to the 1,000 unit a year capacity though with a nice mix of all three products.

Really the key is we want to have a complete product range from 30 kw to 10 mw. We want to have solutions for our customers in oil and gas, biogas, land flow gas, CHP, whatever the market may be.

Eric Stine – Northland Securities

You have talked in the past that you have got C200 orders that call for I believe 29 to be delivered in calendar year 2008. Is that still a good number to think about?

Darren Jamison

We’re looking at 48 in calendar year 2008 and 160 in calendar year 2009.

Eric Stine – Northland Securities

So production, the 48 is not production it is delivery in calendar year 2008?

Darren Jamison

When we talk about those numbers we are talking about shipments. Obviously we will start building machines prior to September. We need to start building before you deliver them. When we talk about commercial launch that is shipments off the dock in September. 48 off the dock before the end of the calendar year and 160 off the dock by the end of 2009.

Operator

Your next question comes from Abhi Kanitkar – RHO Venture Capital.

Abhi Kanitkar – RHO Venture Capital

Orders really showed explosive growth this quarter up 100% sequentially, up kind of the crazy March number year-over-year. Last quarter you talked about new markets developing in hybrid electric busses. This quarter you are talking about New York office buildings getting traction and your order rate has really exploded higher.

I just wanted to get your perspective because it looks like based on your C200, C1000 orders that you have really hit a gigantic inflection point upward. I just wanted to get your perspective on is it improving your visibility to build what trajectory should we expect for the revenue ramp? Just any further color you can give us.

Darren Jamison

Obviously we grew our traditional standard 30-60 business almost 50% this year of organic growth. We hope to continue that organic growth. That is a pretty steep level but we’re going to push as hard as we can to continue the 30 and the 65 growth. The C200 if you assume $1,000 a kw as an average selling price you start doing 160 a year that is $32 million in revenue. So the C200 alone would double our revenue over last year’s numbers.

So organic growth and C200 growth we should look for very explosive revenue going forward. Frankly, I know we had a little miss on the EPS on the quarter. That is not our concern. Our concern is cash management. Obviously additional orders and backlog. Managing customer orders and expectations and getting the C200 to market on time, on budget and working on the cost side.

Obviously Capstone has been challenged for really its whole life getting traction in the market, getting used in the field and getting sales and marketing up. As we are now, getting to the top of this revenue mountain we really have to focus then on margins.

Abhi Kanitkar – RHO Venture Capital

Any further complexion you can give us on the near-term revenue build up? The analyst models assume a fairly flat revenue going forward. Very little revenue build up. Based on these kinds of explosive order rates clearly it sounds like there is a great opportunity for a much faster revenue build up.

Darren Jamison

The challenge we have Abhi is that by taking over $7 million out of our inventory we have gone from a just in case inventory method to a just in time inventory method. So ramping our short-term revenues is a little more difficult for us today than it would have been in the past. In fact actually this quarter we are looking at having parts coming in the same month units are going out. So that cash management strategy has limited our ability to short-term ramp the business extremely quickly.

But having units in backlog, having a more stable production schedule and better parts turns frankly when I got here we had $20 million in revenue and $20 million in parts. One turn is not a good business model. So we’d like to see a little bit more of a stable growth, feather in the C200, C1000, get our parts turns up to four and manage our cash to the best of our ability.

We are very excited for the quarter from a cash perspective. We still have over $42 million left in the bank with what we have coming up in front of us on a working capital requirement is very important.

Abhi Kanitkar – RHO Venture Capital

Also as you start putting in place the elements for manufacturing of the C200, C1000 line, have you now begun looking for bodies to add a second shift at the manufacturing plant?

Darren Jamison

We are staffing up this year. I think we will add probably 40-50 people mostly on the manufacturing side. The one challenge we have is the C200 is at a separate facility than here on Nordoff so we are already looking at three years out at a new manufacturing plant for higher volumes and everybody under one roof. But definitely we are hand building pre-production units today and then moving in and setting up the manufacturing line for robotic welders and higher manufacturing capacity going forward.

Operator

Your next question comes from Jeff Osher – JMP Capital Management.

Jeff Osher – JMP Capital Management

With regard to as the previous callers were pointing out the likelihood of a big revenue ramp plan, looking at working capital how should we think about that inventory and if you can just give us some color on the lead times because inventory came down again this quarter a reflection of very good cash management on your part.

But at some point given the fact I may be looking at a different street model than the previous caller but I’m showing about a 75% jump in the models for revenue, which would be great, but don’t we at some point need to see inventories, in other words what are the lead times we need to build product, number one, and number two source components or raw materials? Then I have one follow-up.

Darren Jamison

Our lead times vary depending on the product. Obviously our stainless steel materials tend to be longer lead items and with what is going on in the materials markets they are getting longer every day. But you will see this is the low watermark for inventory this quarter. That was something we also did on purpose. We knew we had C200 inventory materials coming in which will start in this current quarter we are in as we build up for the September launch. So we’re concerned about that obviously.

We are very happy to have $42 million in the bank for working capital issues but there is a risk that if this business ramps too quickly we could be challenged for working capital. Now I think that is like good cholesterol versus bad cholesterol but it is still something we would have to deal with.

Jeff Osher – JMP Capital Management

Along those lines is that one of the reasons payables doubled sequentially?

Ed Reich

Payables are up as the result of timing on the quarter end check run and increased inventory receipts but as Darren was talking about we are starting to see those inventories come in.

Unidentified

If you look at the numbers we are talking about building over 200 C200’s at $200,000 a piece. You overlay that with our traditional business and you have to expect it to look a little different than we have historically.

Jeff Osher – JMP Capital Management

Wouldn’t that show up in inventories though if you are taking on product and you are stretching your suppliers?

Unidentified

The inventory would have been lower if we weren’t purchasing for the C200.

Jeff Osher – JMP Capital Management

With regard to your goal of cash flow break even by December is that on a PNL x working capital changes or is that cash flow break even from a cash flow from ops standpoint including working capital?

Ed Reich

Including working capital.

Darren Jamison

Obviously if we blow the plan out working capital could impact that.

Jeff Osher – JMP Capital Management

I don’t think anyone will be disappointed if that occurs. Then just looking at the K, I am skimming it as the call has gone on, who is Banking Production Center? Is that a distributor for you that is 18% of revs?

Darren Jamison

That is our distributor in Russia who is doing a great job for us. They continue to grow. The Russian market is a tremendous market. They have been on board I think about three years with us. They have a great reputation. They have hired a lot of engineers out of the nuclear area and so they are delivering products everywhere from Gasprom which as I mentioned is our largest oil and gas customer, Trolley Bus applications, they are doing chip plants, hotels, ski resorts. The grid in Russia is extremely weak and very hard to get interconnect permits and additional capacity width and with the price of natural gas over there they have been extremely successful for us.

Jeff Osher – JMP Capital Management

I just wanted to make sure that was a distributor and that is a perfect answer. Just one more. I know you don’t want to give revenue guidance and you’ve had a bunch of questions hinting at this but the backlog up sequentially over 100% and revenues flat sequentially that would suggest at some point you need to have a true up through the income statement with a big jump.

If the backlog, and I looked at your K and it looks like the majority of the backlog growth is actually the C30 and C60’s. So presumably if those products are readily available, the analysts have you modeled for your third straight flattish quarter. Shouldn’t we see a Q1 significant up tick given the backlog growth and at some point that has to flush through?

Darren Jamison

It does have to flush through. I’ll let Ed comment here in a second. The issue is we drained our inventory down. A year ago we had 100 units in finished goods which gave us great overhead absorption and looked good on the gross profit line. Today that number is closer to 20 units in finished goods. So we could have built additional finished goods. We could have kept inventory levels higher at the expense of cash burn to frankly make the PNL look better. We are managing this business on a cash basis and to get revenue growth when the customers want the product.

So we have done a great job moving from tongue-in-cheek just in case inventory models to just in time. So frankly if somebody wanted 100 units this month we couldn’t produce it. We wouldn’t have all of the parts. So we are managing that part flow and scheduling absorbers in a work in like manner.

Jeff Osher – JMP Capital Management

But the $28 million backlog you expect to flush through in fiscal 2009?

Ed Reich

As we have announced yes we are going to release the C200 in September of this year.

Jeff Osher – JMP Capital Management

What percentage of the backlog, I thought you said, there is no C1000’s and in the K the C200’s were a pretty small part of the backlog I think? Or are they not?

Ed Reich

Unit wise but not dollar wise. Those are expected to flow through in the next twelve months and we are going to release in September.

Darren Jamison

Again, the best rule of thumb for an average selling price is $1,000 per kw, so a C30 is $30,000, a C65 is $65,000 and a C200 is $200,000 and even though the numbers may be small the dollars are big. Realize these numbers are March 31 backlog numbers. We have had significant orders received after the quarter including the one we just announced today. The C1000 and C800 we have a Power Gen last week was not announced in the press release. We don’t announce every order we get especially if they are one-off orders or less than $1 million.

Jeff Osher – JMP Capital Management

What is the fully diluted share count when you do turn profit?

Ed Reich

It depends on if we add anything between now and then. We ended the quarter at a little over 150 million shares outstanding. Then you’d want to add we issued 20 million warrants which 18.5 million are still outstanding.

Darren Jamison

Those warrants are in the $1.30 strike price so obviously they are in the money.

Ed Reich

Then approximately another 10 million in auctions.

Jeff Osher – JMP Capital Management

So roughly, 180 on a fully diluted basis?

Darren Jamison

That is assuming all those warrants would come across by the time we get profitable. That is the worst case.

Operator

Your final question comes from Peter Castellanos – Glacier Partners.

Peter Castellanos – Glacier Partners

On the hybrid busses, is the easiest marketing side for you to go to the battery companies or the battery company?

Darren Jamison

No. We have really gone with the bus OEM’s. Our challenge on this case is a lot of the biggest bus OEMs are also engine OEM’s so they make their own engines. We’ve got our most success with independent bus companies that are a little more open minded to other products. We are very happy with the job that Design Line is doing. They are increasing their manufacturing capacity both here in the United States as well as in New Zealand.

So they’ll do left hand drive at one plant and right hand drive at the other plant. They are also looking at potential other joint ventures in other parts of the world obviously so they can ramp their production faster. Everywhere the demo bus goes it gets great reception. I think it is currently in Chicago. We are very excited about the product.

We are also doing product enhancements to it. We are coming out with a water cooled power electronics package. So it will be smaller. Essentially it allows Design Line to add a row of seats to the bus. So obviously a row of seats on a 12-year bus is a pretty good economic pay back for this product enhancement.

Peter Castellanos – Glacier Partners

I can’t help but ask you about Northern Power. I noticed the distributor filed chapter a week or so ago. Is there anything in Northern Power that interests you?

Darren Jamison

I’d probably be out of school to comment on that. Obviously they have some great employees and some great products. We are not in the position right now I think to look at acquisitions. We have a lot on our plate I think with the C200 and C1000. I look frankly am more interested in the truck markets where Caterpillar may not have an EPA 2010 engine. If Cummins has an engine it will probably have urea injection on board the truck as well as decreasing performance. So I see the truck market if I can get the right partner as being a huge opportunity. That is 100,000 unit a year opportunity.

The solar market with the solar collectors using our product in that market I think the real weakness to solar is the ability to spot it and then obviously the ability to run 24/7 and without the grid and those are two things we could help improve those weaknesses with our product. So those are the two areas.

Marine is really coming to us. We are getting mega yacht builders and tug boat builders coming to us asking for marine version of our product and military the same thing. We are getting military integrators coming to us saying look doing engine maintenance in the field especially in harsh environments is extremely difficult and your product looks very good.

So those are the four areas we are looking at and that is where we would spend most of our time.

Peter Castellanos – Glacier Partners

Do you think we might see a deal for your air bearing technology in a parallel market or in another vertical going forward this year?

Darren Jamison

I would say the answer is yet but I’m not sure on the timing. We are in conversations with probably a half dozen companies. Unfortunately we are under NDA with all of them. But we see lots of opportunities for our air bearing. It is the only bearing that works in a hot section of a jet engine. So we are seeing large turbine applications, helicopter engine applications, airline APU applications, compressors, all the way down to the turbo chargers.

So we have a team within Capstone that is out there actively demonstrating our product and working on developments with other companies. We are very open to that. I think the company in the past was a little more restrictive on sharing our technology but I think the best way to keep somebody from stealing it is to sell it to them at a reasonable price. That will not be our core business though. That will be an ancillary product line for us.

Operator

I would now like to turn the call back over to Darren Jamison for closing remarks.

Darren Jamison

Again I’m very excited about this quarter. I’m very happy with our employees. I mentioned our turnover during the quarter getting that down from 38% when I came to Capstone to 10% today. With the new products we are bringing to market and building long-term relationships with vendors and our distributors it is extremely important to have great employees like we have and to keep them happy and part of the program.

All of the employees today are shareholders in the company which is another thing I changed if they came on board. They are all pulling in the right direction. Obviously we have a lot on our plate to get the C200 launched and the C1000 launched as well as our other initiatives. We need those great employees working a lot of hours this summer to get that done.

Thank you very much for your time. We look forward to talking to you next quarter.

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