SatCon Technology Corp., Q2 2008 Earnings Call Transcript

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 |  About: SatCon Technology Corp. (SATCQ)
by: SA Transcripts

SatCon Technology Corp. (SATC) Q2 2008 Earnings Call Transcript August 12, 2008 5:00 PM ET

Executives

Leah Gibson - Manager, IR

Steve Rhoades - President and CEO

John Peacock - Corporate Controller

Analysts

Adam Krop - Ardour Capital

Vaughn Banks - Barrett & Company

Operator

Good day, everyone, and welcome to the SatCon’s Second Quarter Fiscal 2008 Conference Call. Today's call is being recorded. You may listen to the webcast on SatCon 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, Mr. Steve Rhoades, Investor Relations Manager, Ms. Leah Gibson, and Corporate Controller, Mr. John Peacock.

At this time for opening remarks, I would like to turn the call over to Ms. Gibson. Please go ahead.

Leah Gibson

Thank you, Dana. The comments made on this conference call today may include forward-looking statements that involve a number of risks and uncertainties. For this purpose any statement contained herein that are not statements of historical fact maybe deemed to be forward-looking statements and may include the words: believes, anticipates, plans, expects, intends and similar expressions which are intended to identify forward-looking statements. Important factors that could cause actual results to differ materially from those inferred by such forward-looking statements are set forth under the caption risk factors in SatCon's quarterly report on form 10Q for the quarter ended June 28, 2008, which will be filed today. These factors are included here for reference. Copies of the 10Q will be available from SatCon upon request and will posted to the Company's website at www.satcon.com.

Today's call is being recorded and a webcast replay will be available on the SatCon's website for a period of two months. This conference call and associated recordings belong to SatCon and are prepared for the benefit of our investors. No unauthorized recording of this call or preparation of transcript is permitted without the written permission from SatCon's management.

I would now like to turn the call over to our President and Chief Executive Officer, Mr. Steve Rhoades. Steve?

Steve Rhoades

Thanks Leah, and thank you, everyone, for joining us today. The second quarter was an exciting one here at SatCon. Our revenue for the quarter grew 45% over Q2 of 2007, driven by continued strong sales of our solar PV and fuel cell solutions. We experienced increased net losses due to a number of factors as we worked through structural operations. But despite our increased net loss for the quarter, cash used in operations improved approximately 16% over the first quarter of 2008, and John will provide further information on our financial results in a moment. While the improvement on our top line performance is encouraging, there are a number of strategic steps that we need to take in order to position SatCon for growth and profitability in the future. Let me spend a few moments discussing the most critical.

The increasing global adoption of large scale renewable energy production has uniquely positioned SatCon as a provider of power conversion solutions for this industry. Since 2006 SatCon has shipped over 175 megawatts of renewable energy inverters to the world largest and most demanding installations.

Over the past three years we have seen a compound annual growth rate of over 126% across our PV inverter lines, with the fastest growth coming from our largest power units. SatCon is well positioned to continue to grow in the large scale commercial and utility market segment as we offer the industry's largest selection of commercial and utility grade inverters.

We continue to focus our engineering, sales and marketing efforts on large scale advanced solutions to be used in the most extreme climate conditions in the renewable energy market. SatCon comes from a long history of innovation including introducing the world's first one box 100 kilowatt PV inverter, the first 500 kilowatt PV inverter, as well as the first 2.4 megawatt fuel cell inverter.

We remain committed to developing products that establish the next generation of industry standards in both capacity and capability. Recently our innovation has been recognized by Sandia Laboratories, who has invited us to participate as a best in class solar inverter provider in their SEGIS project. The focus of SEGIS is to develop the next generation of advanced clean energy technologies required to increase the usage of photovoltaics systems in the energy network, while at the same time improving the power quality and reliability of the overall utility group.

The combination of our best in class solutions, our intellectual property and our in-house industry expertise give us the unique ability to deliver the most flexible and efficient systems solutions for commercial and utility scale renewable energy applications and to drive the next generation of power conversion solutions.

We are expanding our global reach. In 2008 we have seen increased demand for SatCon solutions in both Europe and Asia. This was highlighted by the shipment of our first large European order of SatCon's 500 kilowatt PowerGate Plus CE rated inverters, which were delivered to Saragossa, Spain, to be installed as part of the world's largest roof-mount solar PV system. In addition, we made significant penetration in Asia shipping more than four megawatts to that region in the second quarter. To execute our global growth strategies we have added several industry experts from the renewal energy and high growth technology industries to our management team. These individuals bring the leadership and expertise that will enable us to provide greater overall value to our customers and help create and deliver the solutions that will drive the company forward.

In addition to our traditional focus within the North American market, we are committed to accelerating international growth and are actively pursuing direct sales and channel partnerships in strategic markets. These new regions will be supported by international service networks to ensure ongoing high service quality and support. Together these measures are assembling a global organization that will work closely with our customers and partners to deliver the next generation of SatCon solutions that are tightly in line with future demand. We are also committed to building a sustainable business model that will position SatCon to achieve profitable growth. This includes implementing specific cost reduction strategies and focusing on our core business, while rationalizing other segments of the business that are not aligned with our vision. At the same time we are increasing our production capabilities to address the demand for renewable energy solutions.

In Q2, we announced the expansion of manufacturing capacity by 50% in the second half of the year. This was in response to the growing demand for renewal energy as a primary power generation source. In the US alone, renewable portfolio standards have put a hard deadline on utility providers to obtain a minimum percentage of their power from renewable energy. Currently there are 24 states that have RPS policies in place, combined these states account for more than half of the utility sales in the United States. This growing opportunity in the US coupled with our industry leading product set, greater penetration overseas, and increased manufacturing capability positions us well for continued growth. All of these elements come together and provide SatCon with a clear strategic focus.

First and foremost, we are focused on SatCon's position as a leading worldwide innovator of utility scale, distributor power solutions for the renewable energy markets. Second, we plan to significantly expand our global presence in Europe and Asia, while continuing our leadership in providing commercial and utility scale solutions in North America. Third, we have expanded our executive and management teams with seasoned professionals that will provide the leadership required to execute our strategic initiatives and we expect to finalize our executive team in Q3. And finally, we are establishing a solid operating model that will help us to execute profitable growth.

With that, I will now turn the call over to John Peacock, our Corporate Controller, who will review our second quarter financial results. John?

John Peacock

Thanks, Steve. Revenue for the quarter ended June 28, 2008, was $16.9 million, an increase of 45% or $5.2 million over the same period in 2007. For the first six months of 2008, revenue was $31.8 million, an increase of 59% over the same period in 2007. Fueling that growth was an increase in our solar PV product revenue of approximately 37% and 575% year-over-year increase in our fuel cell inverter product revenue. Revenue in our hybrid electronics and thin film product lines increased by 4% while product revenues in our motor group remained in line with those for 2007.

Our gross margins continue to improve to 11% and 10% for the three and six month periods, an increase of 8% and 5%, respectively, over those in 2007. Driving the improvements in our margin was a revenue mix during the period and lack of one-time charges that we incurred in 2007. We anticipate this trend to continue for the remainder of 2008 and into 2009, as we continue to focus on reducing the cost to manufacture our products and enhancing our manufacturing capabilities to meet ongoing demand for our key product domestically and overseas.

Our operating loss for the three and six month period was approximately $5.5 million and $8.5 million, an increase of approximately 58% and 31% over the same period in 2007. The main drivers for this increased loss in Q2 2008, were cost associated with restructuring charges related to recent management changes, continued increase research and development investment, increased employee stock-based compensation cost and general increases in sales and marketing over the same period of 2007.

Net loss for the quarter was $8 million compared with that net loss of $3.7 million in the second quarter of 2007. During the quarter we incurred non-cash charges related to the valuation of our warrant liabilities of $2.4 million, restructuring cost of approximately $600,000, and stock-based compensation charges of approximately $900,000. Net loss for the six months was $11.4 million compared with net loss of $7.1 million for the same period in 2007. During the six months period ended June, we recorded a charge related to the change in fair value of our warrant liability of $2.9 million.

Our net loss attributable to common shareholders was $9.1 million or $0.18 per share. Our net loss attributable to common shareholders in the first six months of 2008 was $13.5 million or $0.27 per share.

Turning to the balance sheet. We ended the quarter with approximately $9.8 million in cash, down from $11.7 million at the end of the first quarter. During the second quarter we used $2.7 million in operating activities, a reduction of 16% over the first quarter of 2008. We were able to reduce our cash usage during the quarter by aggressively managing our working capital.

During the second quarter net cash used in financing activities for the purchase of fixed assets was approximately $300,000. Cash provided by financing activity during the period was approximately $1.3 million, which includes $1.1 million from the exercise of employee stock options and $200,000 from the exercise of warrants to purchase common stock.

Accounts receivable remained consistent at approximately $10 million and our reserve of doubtful accounts decreases slightly to approximately $100,000 or 1% of total growth receivables. Our days sales outstanding 47 days at the end of the period, and we continue to have little or no collection issues in 2008. Now back to Steve.

Steve Rhoades

Thanks John. Our outlook for the remainder of the year is positive. On the top line we continue to expect revenue growth both on a year-over-year and sequential basis. From a margin perspective, we expect growth in operating margins to improve over previous levels as we focus on a new direction that will build profitability. We appreciate your continued support while we execute our strategy to become a worldwide leader in commercial and utility scale power solutions for the renewable energy market.

With that, I will ask the operator to open the call for questions. Operator?

Questions-and-Answer Session

Operator

Thank you, sir. Today's question and answer session will be conducted electronically. (Operator Instructions). And we'll take our first question from Adam Krop of Ardour Capital.

Adam Krop - Ardour Capital

Good afternoon, guys. I know you provided the inverter sales number in the past. Can you help me out with this -- that for 2Q?

Steve Rhoades

The inverter sales numbers?

Adam Krop - Ardour Capital

Yes. As far as total revenues from inverters in the quarter.

Steve Rhoades

What's this on here, John? Go ahead.

John Peacock

$5.2 million for solar.

Steve Rhoades

$5.2 million for solar and for the fuel cell?

John Peacock

$2.78 million.

Steve Rhoades

$2.78 million for the fuel cell.

Adam Krop - Ardour Capital

Okay. Now how should we be thinking about the inverter business trending in 3Q and 4Q? Just given some of the uncertainty in the US ITC market, how should we be looking at that?

Steve Rhoades

Our focus has been on the larger scale installation and those have been less affected by the ITC. So as we said, we expect revenue growth sequentially quarter-over-quarter.

Adam Krop - Ardour Capital

Okay. So you haven't seen much slowdown as far as order flow for the back end of the year?

Steve Rhoades

Depends on which types of applications, but for the utility scale, large scale commercial, we've seen continued growth.

Adam Krop - Ardour Capital

Okay, that's helpful. Thanks. Now on the cost side for the inverter business, if you have to list two or three areas where you see significant cost coming out of that business, can you just maybe comment on that for us?

Steve Rhoades

Well, as our volumes are increasing, we are getting much more of a flow manufacturing line set up in our Arcadian operation. This is reducing our labor cost. And we are also very focused on our material cost going forward, reducing those inside of those lines.

Adam Krop - Ardour Capital

Okay. Then moving over to just some of the restructuring that we saw in the quarter, how should we be looking at that for the back half of the year? Should we see more restructuring charges there?

Steve Rhoades

There's a potential there.

Adam Krop - Ardour Capital

Okay. And then one final question on I guess the Xantrex acquisition by Schneider. Can you just comment on how you see that changing the competitive landscape, maybe especially in Europe?

Steve Rhoades

In Europe?

Adam Krop - Ardour Capital

Yes.

Steve Rhoades

There's a lot of competitors already in Europe. It may help them, it may not. I think day-to-day we are not overly concerned about that change. It's going to take them a long time to figure out how those two companies are going to work together. We are going to stick to our own knitting and focus on the growth in the places where we see growth opportunities and focus on cost so that we can drive this company closer to profitability.

Adam Krop - Ardour Capital

Okay. That's all I have for now. Thanks, guys.

Operator

And we'll take our next question from Vaughn Banks with Barrett & Company.

Vaughn Banks - Barrett & Company

Yes, just a simple question. Do you have any idea or estimate of when you might become profitable?

Steve Rhoades

We are working aggressively to improve our profitability, but right now I am not going to give a time projection on that, but we are working aggressively to try --

Vaughn Banks - Barrett & Company

You wouldn't like to say a year from now?

Steve Rhoades

I just am not going to predict right now, but we are working very aggressively.

Vaughn Banks - Barrett & Company

But we are looking forward to profitability probably the next year or two, I would guess?

Steve Rhoades

If you put it out to two years, I am good -- I'm not going to project a time right now, we are working aggressively to get the company to profitability.

Vaughn Banks - Barrett & Company

Okay. That was my only question. Thank you very much.

Operator

(Operator Instructions). And Mr. Rhoades, it appears we have no further questions, sir. I'll turn the call back over to you for any additional or closing remarks.

Steve Rhoades

Alright. Thanks, operator. Well, thank you, everyone, and we will look forward to speaking with you on our third quarter fiscal 2008 conference call. This concludes today's call.

Operator

And thank you for your participation. You may disconnect at this time.

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