Capstone Turbine Corporation (CPST) CEO Darren Jamison on Q4 2018 Results - Earnings Call Transcript

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

Capstone Turbine Corporation (NASDAQ:CPST) Q4 2018 Earnings Conference Call June 7, 2018 4:45 PM ET


Darren Jamison - President and Chief Executive Officer

Jayme Brooks - Chief Financial Officer and Chief Accounting Officer


Colin Rusch - Oppenheimer & Co. Inc.

Craig Irwin - ROTH Capital Partners

Sameer Joshi - H.C. Wainwright & Co., LLC

Aaron Spychalla - Craig-Hallum Capital Group LLC


Good day, ladies and gentlemen, and welcome to the Capstone Turbine Corporation Earnings Conference Call for the Fourth Quarter and Fiscal Year 2018 Financial Results ended on March 31, 2018. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to introduce your host for today’s conference, Ms. Jayme Brooks, Chief Financial Officer and Chief Accounting Officer. You may begin.

Jayme Brooks

Thank you. Good afternoon and thank you for joining today’s fiscal 2018 fourth quarter and fiscal year 2018 conference call. On the call with me today is Darren Jamison, our President and Chief Executive Officer. Today, Capstone issued its earnings release for the fourth quarter of fiscal 2018 and filed its annual 10-K report with the Securities and Exchange Commission.

During the call, we will be referring to slides that can be found on our website under the Investor Relations section. I would like to remind everyone that this conference call contains estimates and forward-looking statements that represent the Company’s views as of today, June 7, 2018.

Capstone disclaims any obligation to update or revise these statements to reflect future events or circumstances. You should not place undue reliance on these forward-looking statements because they involve known and unknown risks, uncertainties and other factors that are in some cases beyond our control.

Please refer to the Safe Harbor provision set forth on Slide 2 in today’s earnings release and Capstone’s filings with the Securities and Exchange Commission for information concerning factors that could cause actual results to differ materially from those expressed or implied by such statements.

Please note, that as Darren and I go through the discussion today, keep in mind when we mention EBITDA, we are referring to adjusted EBITDA and the reconciliation can be located in the appendix of our presentation.

I would now like to turn the call over to Darren Jamison, President and Chief Executive Officer.

Darren Jamison

Thank you, Jayme. And apologize everybody for the delay. We had some technical difficulties, but thank you for attending the call. I am extremely proud to say that we continue to have very strong execution of our profitability plans and the positive momentum continued in the fourth quarter as we set multiple records and achieved several new company milestones.

When you look at the full year-over-year results at the very highest levels, you can easily see the transformation taking place in our business here at Capstone. We’ve made solid progress in topline revenue growth for the first time in several years and we made significant progress in our targeted gross margin expansion as highlighted in Slide 3.

Moving on to Slide 4, you can see the improvements in both adjusted EBITDA and the overall net loss year-over-year as we successfully executed against our key strategic opportunities. However, I would like to start the call by specifically mentioning some of our key operating highlights in the most recently finished fourth quarter.

Therefore let’s turn to Slide 5. During the fourth quarter, we continued to deliver on our strategy by achieving record gross margins of 23%, which is the highest in the Company's history together with the strongest book-to-bill ratio of 1.4:1 since Q2 all the way back in fiscal 2014. The fourth quarter was also the second consecutive positive adjusted EBITDA quarter in a row with a positive quarterly cash flow of $500,000 from operations and a record quarterly aftermarket accessories, parts and service revenue of $9.6 million.

We also saw a record quarterly aftermarket accessories, parts and service gross margin of 45% which helps us cover 77% of Capstone’s operating expenses, excluding the one-time incentive program compensation. Details of this compensation is located in the appendix on Slide 25. And while you’re in the appendix also look at Slide 22, which illustrates the continued progress towards our stated goal of 100% absorption which is key to empowering higher levels of accelerated future product growth.

In summary, this is another successful quarter for the Company with positive adjusted EBITDA, positive cash flow from operating activities, record gross margins, record service revenue all of which when you add this together is a significant accomplishment for the entire Capstone team. Now I’d like to speak about some of the key highlights for the full fiscal year of 2018.

Let’s quickly move on to Slide 6. We are also happy to share that during the fiscal year of 2018, we returned to annual revenue growth of 7% for the year and improved the Company gross margin performance by considerable 16 basis points year-over-year. Our accessories, parts and service revenue increased to 11% to a record high of $32 million or 39% of our total revenue. Adjusted EBITDA improved 76% year-over-year and we saw our net loss drop 60% from $25 million to $10 million year-over-year.

So let me repeat that, I think that bears repeating. Our revenue increased 7% year-over-year, but our adjusted EBITDA dropped 76% or improved 76%, and our net loss improved 60%. Difference between the last year's net loss and this year’s net loss is $15 million under 7% revenue growth.

Our R&D expenses held 26% year-over-year as our Signature Series products continue to mature and cash used in operations improved 54% year-over-year. The new distributors [core] payment programs estimated to generate an additional $1.3 million in cash for the calendar year of 2018 to support our annual marketing spend and customer acquisition efforts.

It is important to point out that we saw annual revenue growth in all global regions except Europe, due to the fact that Europe still has Russia and Russia continues to be a challenging market for us. Our new bundled solutions program that we introduced during the third quarter increased FPP attachment rates in the fourth quarter and contributed the positive working capital as a result of the prepayment for the entire bundled solution, including the long-term service component.

And just yesterday, we renewed and expanded our current bridge bank revolving credit facility from a $12 million facility to a $15 million facility and with improved payment terms and terms of the deal. This year’s been a major team effort and the entire company and I would like to thank all of our Capstone employees, our Capstone distributors, most of our Capstone vendors, and most specifically the Board of Directors for enabling the management team to hit our strategic goals and targets and our shareholders for their continued support of Capstone and our clean and green energy solutions.

Now I’d like to review fiscal 2018 strategic goals and objectives. So what was our plan going into the year. So let’s turn to Slide 7. As a reminder for everyone, we began the fiscal year with four key strategic objectives at the highest levels. First was to reach adjusted EBITDA breakeven and achieve our stated operating expense reduction target, which at the time was 40% to our war on costs program.

The second was to significantly expand our margin in revenue for the aftermarket service business. Our third objective was to lower our macroeconomic business risk profile by diversifying Capstone into new market verticals and new geographies.

And last, we were working hard, reducing our quarterly cash burn by improving our accessories, parts and service gross margin and OpEx absorption percentage by driving toward ultimate goal of 100% aftermarket absorption to allow the Company to employ a more aggressive market based pricing strategy to accelerate future product growth.

So now I’d like to provide you with a progress report on how we did now with the year’s over. First half during December, first quarter – the December quarter ended, we achieved EBITDA positive goal and Capstone was nearly net loss neutral for the quarter.

As already mentioned, this is the significant major milestone for Capstone and it represents a launching point for the next stage of our business evolution. We set a goal to reduce our operating expenses back at the end of fiscal 2015 to our war on costs program and in general our operating expenses excluding the one-time leadership incentive program are down approximately $5 million per quarter or 52% since we launch this program.

Again this is important to note that our original target was to reduce our operating expenses by a minimum 40% in order to support the new $25 million quarterly adjusted EBITDA breakeven plan. Not only did we exceed this – meet this goal, we exceeded it and allowed us to have positive EBITDA breakeven at the less than $25 million revenue level.

During the second half of fiscal 2018, we consolidate our two manufacturing facilities into one plant, while simultaneously restructuring our R&D department and additionally during the fourth quarter, we launched our new Distributor Support Payment program to increase our global marketing and customer acquisition efforts. We accomplish all of this while still focusing on maintaining our costs and keeping our costs low.

Our second major milestone for fiscal 2018 was to drive revenue growth by expanding our aftermarket accessories, parts and service business, which includes our industry leading Factory Protection Plan or FPP program. This is critical on a number of levels and will continue to play a major role in our long-term gross margin expansion.

In fiscal 2018, we work hard to improve our FPP and warranty programs, our special spare parts pricing programs and increase our distributor minimum stocking guidelines. Also introduced was a new C200S and C1000S Series Heat Recovery Module or HRM. This is reintroduced to the market to the new lineup of state-of-the-art MicroTurbine control panels.

Our third strategic milestone diversified Capstone into the new market verticals and new geographies with a key focus on specifically growing to CHP, Critical Power and Microgrid verticals. We've also been focused on new markets in Latin America, Africa and the Middle East.

And last year, I'm proud to say, we shipped products in many places we never shipped them before, everywhere from Colombia, Brazil, Venezuela, South Africa, Mali in Africa, Israel, Saudi Arabia, Kuwait, Oman and Qatar.

The heavy listing continues as we worked to rebuild our Russian business and CIS business and during the quarter, we recently received both product and spare parts orders from some of our new distributors including Hispania International and Electrosystems. I will talk more about the specific verticals later in the call.

Lastly, our four strategic goals for FY 2018 and what is really the culmination of all of our efforts was reduce the quarterly cash burn by improving the accessories, parts and service gross margin, OpEx absorption percentage and continue to drive toward that targeted 100% absorption, which really unlocks our future business.

At this point, I’ll let Jayme discuss the detailed financial results for the fourth quarter and full fiscal year and I'll come back after that and talk more about some of our verticals. Jayme?

Jayme Brooks

Thanks, Darren. I will now review more detail, our financial results for the fourth quarter fiscal 2018, followed by the year-end results. The highlights can be found starting on Slide 8. Overall, we are very pleased with our fourth quarter results as we continue to see the positive benefit of our efforts to achieve our financial milestones.

Total revenue for the fourth quarter of fiscal 2018 decreased $1.8 million to $21.1 million compared with $22.9 million in the year-ago fourth quarter. Product revenue for the fourth quarter of fiscal 2018 was $11.5 million compared to $15.2 million in the fourth quarter of fiscal 2017, a decrease of $3.7 million. Accessories, parts and service revenue increased $1.9 million or 25% to $9.6 million for the fourth quarter of fiscal 2018, compared to $7.7 million for last year's fourth quarter.

Gross margin for the fourth quarter of fiscal 2018 was $4.8 million or a 23% of revenue, compared to $2.1 million or 9% of revenue for last year’s fourth quarter. R&D expense for the fourth quarter of fiscal 2018 decreased $0.3 million or 27% to $0.8 million from $1.1 million in the year-ago fourth quarter.

SG&A expenses in the fourth quarter of fiscal 2018 increased $0.8 million to $5.8 million from $5 million in the year-ago fourth quarter. However, SG&A expense in the fourth quarter of fiscal 2018, excluding the one-time leadership incentive program compensation decreased $0.1 million to $4.9 million from $5 million in the year-ago fourth quarter.

During the fourth quarter of fiscal 2018, we recorded $0.3 million in bad debt recovery in SG&A from our new Russian distributor, Turbine International or TI. Under the agreement, TI had a balance due of $1.5 million by February 1, 2018. This payment was not received as of March 31, 2018. Subsequent to the year end, we executed an amendment to the original agreement that required five remaining payments totaling $1.5 million to be received by September 20, 2019.

It is critical to note that TI is making payments against the Russian receivable from BPC that had been previously fully reserved. All cash payments for the $1.5 million from TI will be classified as bad debt recovery and is positive to our future earnings and working capital requirements.

Total operating expenses for the fourth quarter of fiscal 2018 increased 7% to $6.6 million from $6.2 million in the year ago quarter. However, the total operating expenses for the fourth quarter of fiscal 2018 excluding the one-time leadership incentive program compensation decreased 10% to $5.6 million from $6.2 million in the year-ago quarter.

Net loss for the fourth quarter of fiscal 2018 improved to $1.9 million compared with a net loss of $4.2 million for last year’s fourth quarter and improvement of 55% year-over-year, when you remove the one-time leadership charge for the leadership incentive program.

Net loss per share was $0.04 for the fourth quarter of fiscal 2018 compared with a net loss of $0.12 per share in the same period last year. Weighted average shares outstanding at the end of the fourth quarter of fiscal 2018 were $51.4 million compared with $34.9 million in the year-ago quarter.

The adjusted EBITDA for the fourth quarter of fiscal 2018 was positive $0.1 million or a $0.00 per share compared to an adjusted EBITDA of negative $3.5 million or a loss of $0.10 per share for the fourth quarter of fiscal 2017.

As a reminder, EBITDA and adjusted EBITDA are non-GAAP financial metrics. Please refer to Slide 25 in the appendix, titled Reconciliation of Non-GAAP Financial Measure for more information regarding these non-GAAP financial metrics.

Now please turn to Slide 9, as I will provide some comments on our balance sheet and cash flow. At March 31, 2018, we had cash, cash equivalents and restricted cash of $19.4 million compared to cash, cash equivalents and restricted cash of $16.5 million as of December 31, 2017. Cash provided by operating activities for the fourth quarter of fiscal 2018 was $0.5 million as compared to cash used of $3.3 million for the third quarter of fiscal 2018.

Our accounts receivable balance as of March 31, 2018, net of allowances was $16 million compared to $16.1 million as of December 31, 2017. Inventories increased to $16.7 million or 9% as of March 31, 2018 from $15.3 million as of December 31, 2017, primarily due to an increase in finished goods. Our accounts payable and accrued expenses were $13.5 million as of March 31, 2018, a 5% increase compared to $12.8 million as of December 31, 2017.

Now I’d like to turn our attention to our year-to-end results for fiscal 2018 versus the year-to-end results for fiscal 2017. These results can be found on Slide 10. Total revenue for fiscal 2018 increased by $5.6 million or 7% to $82.8 million compared with $77.2 million in the fiscal 2017.

Product revenue for fiscal 2018 is $50.8 million compared to $48.3 million for fiscal 2017, an increase of $2.5 million or 5%. Accessories, parts and service revenue increased $3.1 million or 11% to $32 million for fiscal 2018 compared to $28.9 million for fiscal 2017.

Gross margin for fiscal 2018 is $15 million or 18% of revenue compared to gross margin of $1.8 million or 2% of revenue for fiscal 2017. R&D expenses for fiscal 2018 decreased $1.4 million or 26% to $4 million from $5.4 million for fiscal 2017.

SG&A expense for fiscal 2018 decreased $1.1 million or 5% to $19.6 million from $20.7 million for fiscal 2017. However, SG&A expenses for fiscal 2018 excluding the one-time leadership incentive program compensation, decreased $2 million or 10% to $18.7 million from $20.7 million for fiscal 2017.

Total operating expenses for fiscal 2018 declined 10% to $23.6 million from $26.1 million for fiscal 2017. Total operating expenses for fiscal 2018 excluding the one-time leadership incentive program compensation, decreased $3.4 million or 13% to $22.7 million from $26.1 million for fiscal 2017.

The adjusted EBITDA for fiscal 2018 is negative $5.2 million or a loss of $0.10 per share compared to adjusted EBITDA of negative $21.9 million or a loss of $0.68 per share for fiscal 2017.

Net loss per share is $0.20 for fiscal 2018 compared with a net loss of $0.79 per share in the same period last year. Net loss for fiscal 2018 improved to $10 million compared with a net loss of $25.2 million for fiscal 2017. This is a significant improvement of 60% year-over-year. I also want to provide you with an update on our financing and capital market activities.

As Darren mentioned earlier, we amended and expanded our bridge bank facility from $12 million to $15 million. With this amendment, we extended the agreement for an additional two years to June 2021, decrease the interest rate, facility fee and cash collateral ratio as well as eliminated the early termination fee. On the capital market side, today we filed an S-3 with the SEC for a new $100 million universal shelf to replace our existing $100 million shelf that expires on June 15.

Additionally, we set up a new $25 million management control equity offering program. We believe this aftermarket program is in the best interest of the Company and all its shareholders. It will provide Capstone’s ability to access additional capital in current market price with [indiscernible] coverage.

We also believe that this type of offering when utilized will have a more favorable impact on Capstone’s critical shareholder ownership shift as it relates to our valuable NOLs and it will ultimately drive lower dilution than in more traditional offerings with [indiscernible] coverage.

At this point, I will turn the call back to Darren.

Darren Jamison

Thank you, Jayme. We have made significant progress in our operating expenses and margins in fiscal 2018. And although we turn to positive revenue growth in 2017 there is clearly a lot more to do. And I am extremely excited about our prospects of making that happen.

I would just turn your attention to Slide 11 and spend a moment discussing our milestone objectives for the new fiscal year, so you can have a clear understanding of our focus and our management activities going forward. First and foremost, it is to continue to improve our quarterly working capital cash flow and our balance sheet.

Obviously there are a number of factors will drive these metrics, including the continuation of our sales growth objectives, continuing our focus on our expenses with our warrant costs and continued focus on our aftermarket accessories, parts and service business growth in both revenue and gross margins.

Lastly, we will continue to work on collection of the fully reserved $5.3 million Russian receivable Jayme spoke off and returning the Russian market to more historic levels of revenue. The second key element is to achieve double-digit revenue growth. As I mentioned earlier, return to single-digit revenue growth in fiscal 2018 which is excellent, but this is only the first step and we need to accelerate growth in fiscal 2019 and beyond.

We'll need to make some investments to grow revenue, but we’ll maintain the utmost diligence in doing this. Our revenue growth will be driven by a combination of internal activities as well as what we believe are favorable end market macroeconomic tailwinds, which are highlighted in Slide 12.

Turning to Slide 12. It lists the multiple positive business catalysts that will help to grow our business in fiscal 2018 and beyond. Many of these catalysts were headwinds in prior years. The third business goal for this upcoming year is to continue to diversify Capstone into new markets verticals and new geographies and build on what we’ve established during fiscal 2018.

Some of the more normal drivers are expect to help to this objective are, the new product modifications for growth in the microgrid and transportation markets, a continued focus on Africa, Latin America and the Middle East. And finally a continued rebuild and focus on our Russia market and CIS Region as we bringing that – that region back online.

The fourth goal is to continue to increase the accessories, parts and service OpEx absorption percentage continued to drive towards that target 100% absorption as referenced in Slide 22 in the appendix and we talked about multiple times in this presentation.

Again we will continue to build on the excellent progress we have made in fiscal 2018 and a reminder of these key factors include items like increased manufacturing verse spare parts, remanufacturing spare parts in UK and USA, higher FPP attachment rates in the oil and gas verticals, new air bearing program, selling air bearing into adjacent products and technologies as references like 23 with Praxair in our appendix.

Now I'd like to address our specific market verticals. So let’s then turn to Slide 13. The energy efficiency vertical again this year was our largest vertical of 47% of our total product revenue. It's important to note these percentages are product, not total revenue for the quarter and for the year.

It's also important to note that we have expanded our penetration with large North American Real Estate Investment Trusts or REITs, now long ago, related properties was really the only major REIT utilizing Capstone technology for CHP. But today, we have ongoing projects with Tishman Speyer, Brandywine Realty Trust and multiple Capreit building in Canada.

In Philadelphia, the new FMC Tower is one of the newest skyscrapers in the city and has several standout features. This beautiful state-of-the-art building is adjacent to the former U.S. Post Office at 30th Street in University City and a Capstone equipped building is a proud, lead, silver certified building.

However, I'm most excited about the new One Vanderbilt Tower in New York that is scheduled to become the tallest office tower in New York City's midtown. One Vanderbilt was skillfully meet the market demands of Midtown East as it transformed specific experience of the Grand Central District and as it follows a layered architecture language of the neighboring New York City icons.

One Vanderbilt will join the Chrysler Building and the Empire State Building as one of the three point towers to define the city's guideline. The tower will have 1.4 megawatts on the 59 floor.

Turning to Slide 14, the oil and gas vertical currently accounts for approximately 38% of our product revenue. This sector has faced significant headwinds over the past three years with declining oil prices and gas prices, but today we are seeing a significant recovery that we believe we are well positioned to leverage in 2019 and beyond. We have seen significant new quotation order activity with customers like Anadarko, EQT, California Resource Corporation, Williams and Pacific Coast Resources, just to name a few.

Moving on to Slide 15 and the renewable energy vertical, this market accounts for approximately 9% of our total products revenue, in the past year our distributor partners have installed Capstone units and Wastewater Treatment Plants around the globe, including the City of Durango, Oneida County, City of Dallas, Carmel, Tuscany, just to name a few. Also we did several biogas to energy projects in Taiwan to Malaysia and if you haven't been to a pig farm or swine – or a chicken farmer, you think you really haven't lived.

Slide 16 addresses the critical power supply vertical, which is 4% of our total product revenue with the economic issues around Obamacare, we are seeing an increase in our hostile activity with new installations going on in Kaiser facility here in Downey, Memorial Sloan Kettering facility in New York, Kings County Hospital also New York, but also Dryden Hospital, Auburn Hospital and Pertimina Hospital, just to name a few. However, the data center market continues to be slow to adopt our technology, but we recently installed the unit at data center for Intel and we're excited about that opportunity.

Let’s turn to Slide 17. Slide 17 addresses the microgrid vertical. This is a new sector, which represents 2% of our product revenue, but should provide nice growth opportunities in fiscal 2019 and beyond. We recently installed several high profile marquee installations with microgrids at OATI in Minnesota, Sierra Nevada Brewery in Chico in California, and Goldwind in Beijing, China.

Last, we’ll move to Slide 18. Slide 18 addresses the transportation vertical. This sector is still not fully commercial, but we're excited to continue our work with Kenworth on our Class 7 vehicle, which recently completed successful performance testing at the Paccar test track up in Washington and it’s getting ready to start a customer demonstration of validation program with Costco this fall. Information on the Class 7 vehicle is highlighted in Slide 19 in the appendix.

With that operator, I will now open the call up to questions from our analysts.

Question-and-Answer Session


[Operator Instructions] Our first question comes from the line of Colin Rusch from Oppenheimer. Your question please.

Colin Rusch

Thanks so much guys. Can you talk a little bit about the use of proceeds for this [ATM rows] and how you expect that to come through? Obviously, you never turn around the business here, I’d like to understand where the business maybe [indiscernible] at this point?

Darren Jamison

Yes, sure. No problem. If you look at the last quarter, we actually generated cash for the quarter, paid down the bank line. And so I think we had a very good working capital quarter. The ATM expired about a week here and so that our shelf and so we look to the fact that we want to have a active shelf in place and that it's always good to have an ATM in place, really just if in case you need it. I would say besides general working capital opportunities probably the other thing we're really focused on is the UTC royalty.

We're on process of reengaging with UTC and we will be making them an offer hopefully by our way out of that royalty and so that could be a potential use of proceeds. But obviously as the business expands and we see increased order rates, managing our working capital will be very critical. I’m going to make sure that we can fulfill those orders and have the property inventory to do so. So we will manage it very tightly and obviously only get the ATM if absolutely necessary.

Colin Rusch

Okay. And then the oil and gas, so can you talk a little bit about the sales funnel and the velocity of activity there? Obviously that historically been a very good market for you guys and with the recovery in the commodity prices, [indiscernible] surprise you have pickup a fair amount as we go into the back half of this year and into next year?

Darren Jamison

Yes. If you look at the [indiscernible] probably had in the last year, you saw a shift in our verticals a little bit oil and gas is picking up momentum. But to your point, there is a very good chance that oil and gas will catch up with CHP this year and that will be neck and neck for largest verticals. We're seeing activities especially in the U.S., the Permian is very high right now, but we're putting product out all over the place. So that's a very, very good for us – for our U.S. distributors.

Colin Rusch

Okay. Thanks so much guys.

Darren Jamison

Thank you, Colin.


Thank you. Our next question comes from the line of Craig Irwin from ROTH Capital Partners. Your question please.

Craig Irwin

Hi, good evening and thanks for taking my questions. So I wanted to clarify and just confirm what I think I heard about your TI bad debt collection agreement. So can you confirm that you received $300,000 in the quarter and the remaining $1.5 million is going to be collected in five payments through the end of September 2019, and can you maybe share with us the schedule at which you expect to collect these payments?

Darren Jamison

Okay. I’ll let Jayme go and answer that Craig.

Jayme Brooks

Yes. Craig your numbers are correct that we did received that payment in the fourth quarter, and then the payments will start next quarter that’s Q2 for us and they're different amounts, but there will be quarterly payments through that expiration time of September 2019.

Darren Jamison

Yes. I think it’s important to note that that receivable is fully reserved. I think we actually reserved it initially was about $10.5 million, we've worked it down to almost half of that with TI helping to pay about $1 million recently. So it's definitely been a labor of love to get that money collected, but it's fully reserved. There won’t be positive impact to our bad debt recovery [appeal] now as we go forward.

Craig Irwin

Okay. And then second question is really a housekeeping question. So after the last several quarters, you’ve reported the FPP backlog at the end of the quarter. Can you share with us the backlog number exiting 2018?

Jayme Brooks

Yes. The backlog on the FPP was $76 million.

Craig Irwin

Thank you. I’ll hop back in the queue.

Darren Jamison

Thank you.


Thank you. Our next question comes from the line of Sameer Joshi from H.C. Wainwright. Your question please.

Sameer Joshi

Hey, Darren. Hey, Jayme.

Darren Jamison

How are you doing?

Jayme Brooks


Sameer Joshi

Good. Just a question on how the distributor DSS program is progressing? Are you seeing distributors participate in whatever training with the other services that you are offering?

Darren Jamison

Yes. It's a new program, so obviously, it took up some effort to convince distributors of its merits, but I think it is moving forward well, and I think we're going to see a higher level of training, especially with our distributors that are newer and don't have the capability and the deal flow and the cash flow to train their people and do the marketing efforts they want.

So the real goal of the program is essentially doubles our marketing and training, and customer acquisition budget for the year and so allows us to use our distributor network to really leverage and turbocharge that activity, again to try to get the product revenue growth from high single-digit into double-digits next year.

And especially for distributors that are newer to the Capstone family and need some help getting at that torque curve. So we think it's a very critical, very unique and create a program to really help the business in the next couple of years. The nice thing about that program as well, it’s 2% of the prior calendar year revenue is how much of the fees per distributors. So as the business grows that pool of money in that marketing fund will continue to grow with it.

Sameer Joshi

Understood. Thanks for that. I was quite excited to see the air bearing sales and I realized [indiscernible] Praxair. What is your estimate of the scale of this opportunity with Praxair and then with the overall market in general?

Darren Jamison

Yes. That’s really hard to forecast. I mean we’ve spent eight years working with this with Praxair. We haven’t talked about it publicly until just now, so no, that caught people by surprise. There's a lot of things, strategically we work on that we don't publicly talk about until it comes to fruition. This is obviously one of them. So we're just in the initial production with one of their turbo expanders and so as that product moves out into the field, we will get some better information on number and level.

The nice thing is it really validates the air bearing technology. It builds a relationship with an incredible company like Praxair, which there's a lots of synergies and potential chemistry with them that we've got several of the folks that we're looking at which as you all know, in sales, getting the first customers, the hardest, everybody wants to be a seller, nobody wants to be a pioneer.

So I think we can leverage that business into more. It's very high margin, recurring revenue business, it will help support our push toward our 100% absorption, which is so critical for our business because when we get to the point where our aftermarket parts, service and accessories revenue covers our entire OpEx, we can then be very strategic in our product pricing and really drive topline revenue growth.

Sameer Joshi

Understood. Just one last one from me, as far as [indiscernible] previous answer about the air bearing R&D, you're also looking on the transportation and I expected some additional R&D dollars to go there, but R&D for the fourth quarter was actually sequentially lower from previous quarters. Should we expect to see these levels that we saw in the fourth quarter or do you expect some increase in R&D going forward?

Darren Jamison

So we saw increase in R&D, but it's really around certification. There's some new UL-certifications. We have to get specific around the inverters in California, smart inverters here in California, so that can drive up our expenses. UL is a great program. Well in order to certify, you need to pay them to come out and witness your test, so there will be some testing once conducted here at the factory.

As far as it relates to the Kenworth truck, that truck is built, we have it here at the factory today. It just came back from Washington State from Paccar from the performance testing track. The testing went very well. The results are preliminary, but it looks like it met all of our drive cycle, emissions and performance metrics that we're looking to hit, especially in miles per gallon and other things. So we’re going to put some miles on it, beat it up, make sure it's good and robust, and then we’ll be giving it to Costco here in the fall.

Sameer Joshi

Great. Thanks for that and congrats for all the progress.

Jayme Brooks

Thank you.

Darren Jamison

Thank you.


Thank you. [Operator Instructions] Our next question comes from the line of Eric Stine from Craig-Hallum. Your question please.

Aaron Spychalla

Yes. Hi, it’s Aaron Spychalla on for Eric. Thanks for taking the questions. Maybe first on the order front, congrats on the strong book-to-bill. Can you just kind of talk about whether that is sustainable and then maybe just an early read on the first quarter kind of looking at the orders you've announced to date that seems like it might be down just a little bit year-over-year, but could you just provide some color on that please?

Darren Jamison

I think I mean Q4 was a very good book-to-bill. I think we've had a good start to Q1. I wouldn't –I know you guys track was probably closer than what I do when it’s down year-over-year, but definitely I'm happy with the order flow. We've got a lot of pending orders, we should hopefully announce here in the next four to six weeks. So look for continued order flow. I think the nice thing is we're seeing in multiple geographies and multiple verticals, so that's very positive for us.

We should see some orders coming out of the Middle East, more orders coming out of Latin America, Africa it's still a little bit slow, but we continue to make work there. The U.S. market is very strong. Canada is picking up. Germany has been a down market for two years, but they have a new Energy Minister who is much more amenable to energy efficiency in CHPs. So we’re expecting to have a rebound in our German business very, very soon.

The UK market, I am extremely excited about. We have Pure World who is a new distributor for us, who's put about 50 units so far into leisure centers. There's thousands of leisure centers in the UK, Ireland and Scotland, they are very focused on that market and done a good job. They've just ordered their first big boxes from the first C1000 and the first C200 and so they're really getting some traction in the UK.

The Russian market was our largest market for 10 years and it went to zero. We now just got our first orders from Hispania and Electrosystems and we're starting to get that market off the ground.

So if you look at how many markets haven't performed well recently and we're seeing an uptick and positive outlook for the new fiscal year, I'm very excited about growing revenue double-digits this year.

So as I mentioned in our prepared comments, the amount of benefits to the business, a little bit of revenue growth did for us this year and we really managed the heck out of our operating expenses and other parts of the Company, so we saw a huge improvements in our bottom line, but just small improvements in our topline. So very excited to get back to higher growth rates and really see continued success on our lower cost structure.

Aaron Spychalla

Right. Thanks for the color. And then maybe second on margins, I know in the past you talked about getting all your suppliers under long-term agreements. I think that was last quarter there's maybe five or so that were left, but some of the bigger ones that you needed. Can you just give us an update on where you stand with those suppliers?

Darren Jamison

Yes. We probably got one of the five done last quarter. It's not an easy process. The President's not helping us with tariffs and other things he's talking about. So that adds more confusion to the marketplace. But in general that’s high in our list of things to do. Kirk Petty, our VP of Operations have been tasked to get that done here in the next couple quarters. Fortunately, he has spent a lot of time consolidating two facilities, while still building product over the last couple quarters.

So that is directly in our gun sights for this upcoming couple quarters and we'll get that done, but definitely getting costs out of the supply chain is key. We have seen some increases in metals like I referred to, we have aluminum especially. Cobalt has gone up last couple years.

And so another key to our revenue growth as we need to arm our purchasing folks and our strategic sourcing folks with some increasing revenues to help push back on price increases and frankly drive additional cost reductions. So that's something that again helps the business overall.

Aaron Spychalla

Understood. Okay. And then maybe just on kind of your view of the first quarter versus the fourth quarter, I'm not looking for guidance, but traditionally you've seen that down in the first quarter following the price increase in the fourth quarter. Are you expecting the similar dynamic this year and then maybe just anything on the linearity of revs based on the current backlog for the full-year?

Darren Jamison

Yes. Great point. Traditionally Q3 is our best quarter followed by Q4 than Q2 than Q1 and it's hard to explain why that is, but that seems to be the way our business works out. So we're looking for Q1 to be better than Q1 last year, but I wouldn't give guidance that will be better than Q4 and Q3.

That being said, I think as long as we still see strong bookings and we started lining up the years then I'll be excited about that, but definitely Q1 you’ve got – the hangover from Q4 as well as we have a lot of expenses from our annual audit and lawyer fees and this all sorts of things that seem to hit in that quarter on the operating expense side.

So I think again when I look at the year we've mentioned kind of the four goals, if I want to get even higher than that, obviously the two real things I want to get done this year is double-digit revenue growth and improve our balance sheet, more cash on the balance sheet and generate cash every quarter.

Hitting the record margins was great, but really I want to see that topline revenue growth and penetrate more customers get more big REITs, get oil and gas customers buying again, start penetrating more of the renewable space, and microgrids are an exciting new area.

We need to make some changes to our products. We need to offer DC version of our product which we can relatively easily do. We we'll get multiple certifications and some product modifications, but I think we can position our product better in the microgrids space, which will also dovetail over nicely to potentially transportation as well. So I think there's some areas from a product development standpoint. We can improve our competitiveness in the next year or two.

Aaron Spychalla

All right. Sounds good. Thanks for taking the question.

Darren Jamison

Thank you.


Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Darren Jamison for any further remarks.

Darren Jamison

I appreciate the analysts sticking with us. I know it's a busy time and we had some technical difficulties and started late, but overall some great questions. Again, as I look at Q4 in total year, I really just come away with strong execution. I couldn't be prouder of my Capstone team and the Capstone employees. We've really done an amazing job to move facilities, cut operating expenses into half, grow revenue, improved margins, grow the aftermarket, work on the maturation of our distributors.

So it's really been a team effort and great work by a bunch of really dedicated people that love the technology. As I look at the momentum, definitely Q3 and Q4 build momentum, we want to keep that going in Q1, understanding the Q1 is usually not our best quarter, but I still want to see signs of that positive momentum continuing especially in book-to-bill ratio for the quarter.

And then the other, if I did a word cloud, I believe they call it for the quarter and on our prepared remarks, I think the two things you would see the most would be records and milestones. It was really a quarter. We set all sorts of records as far as margins and revenues and all sorts of exciting stuff, and obviously, the second quarter of positive EBITDA which is very exciting and then just different milestones.

And so the business continues to hit new highs, new levels, and improve performance and again it's all around the execution of the Capstone leadership team. So please, I hope – keep following the Company. We will get as many press releases out as we can. Look forward to the next earnings call. We have got more active on Twitter recently both on the corporate level and on my account. So we'll try to keep you informed of new projects as they get installed or what's going on here at the factories are doing good things for Capstone employees.

Also I promised last year, we do an open house after we got the facility merged on. We are working on that and we don't have a date yet, but my guess, it'll probably be October, November, but we'll try to get the Costco truck here at that time as well as give a nice plant tour, so people see what's going on. And so that's really a good time to get a feel for what's going on with the new year and then see all the great things. Kirk and his team has done here at the factory. And with that, I think we’ll go ahead and call it a wrap and look forward to talking to everybody on the next call. Take care.


Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.