American Superconductor Corp (AMSC) CEO Daniel McGahn on Q1 2018 Results - Earnings Call Transcript
American Superconductor Corp (NASDAQ:AMSC) Q1 2018 Earnings Conference Call August 1, 2018 10:00 AM ET
Brion Tanous - Principal, CleanTech IR, Inc.
Daniel McGahn - CEO, President & Director
John Kosiba - CFO, SVP & Treasurer
Colin Rusch - Oppenheimer & Co.
Carter Driscoll - B. Riley FBR, Inc.
Good day, everyone, and welcome to AMSC's First Quarter 2018 Earnings Conference Call. This call is being recorded. [Operator Instructions]. With us on the call this morning are AMSC's President and CEO, Daniel McGahn; Senior Vice President and CFO, John Kosiba; and Manager of AMSC Investor Relations, Brion Tanous.
For opening remarks, I would like to turn the call over to Brion Tanous. Please go ahead, sir.
Thank you, Todd, and welcome to our call to discuss our first quarter fiscal 2018 results. Before we begin, I'd like to note that various remarks management may make on this conference call about AMSC's future expectations, plans and prospects constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, including those discussed in the Risk Factors section of our annual report on Form 10-K for the year ended March 31, 2018, which we filed with the SEC on June 6, 2018, and our quarterly report on Form 10-Q for the quarter ended June 30, 2018, which we filed with the SEC last night and other reports that we have filed with the SEC. These forward-looking statements represent our expectations only as of today and should not be relied upon as representing our views as of any date subsequent to today.
While AMSC anticipates its subsequent events and developments may cause the company's views to change, we specifically disclaim any obligation to update these forward-looking statements. I also would like to note that we will be referring on today's call to non-GAAP net loss or net income, or loss before stock-based compensation, amortization of acquisition related intangibles, consumption of zero cost basis inventory, change in fair value of warrants, noncash interest expense, Sinovel settlement, net of legal fees, expenses and other noncash adjustments, tax effective adjustments, and other unusual charges or items and non-GAAP operating cash flow or operating cash flow before Sinovel settlement, net of legal fees and expenses, tax effects of adjustments and other unusual cash flow items. Non-GAAP net loss and non-GAAP operating cash flow are non-GAAP financial metrics. A reconciliation of our GAAP net loss to non-GAAP net loss and GAAP operating cash flow to non-GAAP operating cash flow can be found in the press release we issued and furnished to the SEC last night on Form 8-K.
All of our press releases and SEC filings can be accessed from the Investors Page of our website at www.amsc.com. And now I will turn the call over to CEO, Dan McGahn. Dan?
Thanks, Brion, and good morning, everybody. I'll begin today by providing information on the Sinovel settlement and then for provide an update of our Wind and Grid business. John Kosiba will then provide a detailed review of our financial results for the first fiscal quarter, which ended June 30, 2018, and provide guidance for the second fiscal quarter, which will end September 30, 2018. Following our comments, we'll open up the line to questions from our analysts.
On July 3, 2018, AMSC and Sinovel Wind Group entered into a settlement agreement to resolve all existing disputes between the parties. Under the terms of the settlement agreement, Sinovel has agreed to pay AMSC a cash amount in RMB equivalent to $57.5 million. Sinovel paid AMSC China the first installment of $32.5 million on the 4th of July. We believe that we've taken care of all taxes in China in previous periods. We owed approximately $3 million of contingent legal fees to our attorney's in connection with the first installment. This will be paid out of China. I'm happy to say we transferred just under $31 million to AMSC Austria. The money is in the bank in Austria.
We anticipate taxes in Austria of $2 million to $3 million. John will be talking later about a net number of over $27 million. The second installment of $25 million is to be paid within 10 months, after the date the U.S. District Court delivered the sentence against Sinovel, which occurred on the 6th of July. The second installment has also been guaranteed by a second party, this is Mr. Wenyuan Wei. Let me talk a little bit about who he is. Mr. Wei is the founder of the stock exchange in China. Mr. Wei was formerly the Chairman of Sinovel and according to public records, owns more than 5% of Sinovel shares. He is a wealthy, well-known Chinese businessman, who really was the catalyst for this settlement. Thanks to him for enabling this deal to happen. If we do not receive the second installment by the 6th of May, 2019, then the settlement will be revoked and we keep the $30 million.
At the sentencing hearing on the 6th of July, Judge Peterson of the U.S. District Court for the Western District of Wisconsin sentenced Sinovel Wind Group to a maximum fine of $1.5 million, and one-year of probation during which Sinovel must pay the unpaid balance that Sinovel agreed to pay AMSC pursuant to the terms of the settlement agreement. The court also ordered Sinovel to pay nearly an additional $1 million to two wind turbine operators. The settlement combined with the fines imposed by the DOJ amounted to $60 million. This is a very large percentage of their cash. Considering these facts, it is clear to us that we made the best decision for AMSC shareholders. This settlement strengthens our balance sheet. This settlement supports our growth initiatives and our ongoing business. This settlement enables us to move on with our business. This closes a challenging chapter for AMSC. Turning to our business results, revenue for the June quarter, which is our first quarter of fiscal year 2018, came in at the top of our guidance range. The quantities of ECS shipped to Inox in the June quarter were greater than in the March quarter, which is the previous quarter. And in the September quarter, which is next quarter, we expect quantities of ECS to be shipped to Inox to be greater than the June quarter. Our forecast for ECS shipments relies primarily on the timing of the letters of credit received to us from Inox. We continue to monitor Inox' business and credit status. We are carefully monitoring Inox execution on the SECI-1 and SECI-2 projects. We believe the new auction process for the Wind industry, introduced by the government of India, is helping the market gain momentum and delivering transparency on the auctions and the bidders. Inox has been consistently winning in key wind auctions and now reports a backlog of 950 megawatts. This is nearly 1 gigawatt of backlog. We are seeing signs of our market recovery and continue to be optimistic about the Indian Wind market. We are encouraged by the fact that Inox has asked AMSC for engineering and design support to facilitate lowering their levelized cost of energy for certain Wind projects. We are also encouraged by Inox stated desire to lower the levelized cost of energy even further by way of a new wind turbine design. I want to be clear though. We have not yet signed a new turbine agreement with Inox; however, Inox has indicated a new turbine is an integral part of its long-term strategy to deploy Wind power in India. We believe we are well-positioned to support Inox' requirements and look forward to doing so.
We are diversifying our Wind business. We are well-positioned to support our South Korean customer, Doosan Heavy Industries. Doosan has a license to manufacture our 3-megawatt and 5.5-megawatt turbines. Our wind team is working closely with Doosan, and we look forward to potentially penetrating the global offshore Wind market with Doosan. We are anticipating growth from our Wind business in fiscal 2018. We are diversifying our business by growth through Grid. The first quarter was yet another strong Grid quarter. Our D-VAR business was supported by a strong base of projects in the Renewable and Industrial segments, very similar to our third and fourth quarter performance last fiscal year. The catalyst of our recent D-VAR Industrial segment growth comes from mines, mills and semiconductor fabs, which require clean, reliable power. This has been an area of focus for us and we are seeing the benefits of this focus. And as you know, D-VAR is a power transmission level product where as our new volt for optimization, or VVO product, addresses the power distribution market.
Our sales team has done an excellent job of educating utilities about our VVO product and we are encouraged by the utilities positive reaction to our solution. We have announced orders with Alliant Energy in Iowa, and we are working with other utilities on many other opportunities to deploy VVO, to be clear its orders plural. We expect to grow our Grid business again in fiscal 2018. Our funnel of opportunities for our Resilient Electric Grid product is quite significant and we are aggressively going after those opportunities. We continue to work with major utilities on specific projects, which we believe show a lot of promise. In fact, some utilities that we had initial discussions with over the last several years have come back to us with new, additional opportunities to review and evaluate. The real challenge here is helping utilities understand that the solutions that REG provides solves problems that are a priority today. And turning to REG in Chicago. I can really say all of them about to say Brion.
Yes, you can.
So we have approval for all of this?
Yes, we do, Dan.
I'm very happy to ComEd is comfortable with us giving you this update. We believe that AMSC and ComEd have mutual agreement on the terms and conditions of a contract between the parties. We are now working with prospective subcontractors to the project to flow terms and conditions down to them. To be clear, we do not have a signed contract yet, and any contract agreed upon by AMSC and ComEd will be subject to approval by the Department of Homeland Security in order for AMSC to collect revenue. I cannot comment any further about this at this time. I won't be able to answer any questions on this topic on this call.
Turning to the Navy. In September of 2017, we announced we were designed into the San Antonio class amphibious ship platform. We also announced we have been awarded a contract from the U.S. Navy for the long lead materials for an HTS-based Ship Protection System to be deployed on U.S.S. Fort Lauderdale, also known as LPD 28. LPD 28 will be the 12th amphibious transport dock ship of the U.S. San Antonio Class. The SPS scope, between AMSC as the Navy, is expected to include integration and commissioning of the system on LPD 28. LPD 29 has been fully funded by Congress. LPD 30 has had long lead time items funded by Congress. LPD 30 is expected to be the first of the upgraded San Antonio Class vessels. Ultimately, the Navy plans to create a class of 26 San Antonio hulls. Thirteen flight 1 vessels and 13 flight 2 vessels. LPD 28 will be the 12th San Antonio class flight 1 vessel; LPD 29 will be the 13th San Antonio Class flight 1 vessel; and LPD 30 is expected to be the first San Antonio Class flight 2 vessel.
We anticipate the SPS that is designed into those San Antonio class ships has the potential for a total of 15 ships for deployment using our SPS. We are planning to have AMSC's SPS installed on 2 LPD flight 1 vessels and 13 LPD flight 2 vessels. We believe our SPS for the San Antonio class should represent approximately $10 million in revenue per vessel. This would then be expected to equate to a revenue stream of $150 million over the remaining life of the San Antonio Class. The San Antonio class is our first design win with the Navy. We are pursuing additional classes of vessels with the Navy. I couldn't be more excited about our team success to date with the U.S. Navy. AMSC Ship Protection Systems such as the degaussing systems are designed to reduce the magnetic signature of a ship, which can interfere with undersea mines ability to detect and damage the ship. AMSC has worked with the U.S. Navy to develop a lighter weight, more power efficient HTS version on this degaussing systems.
HTS is an enabling technology for advanced degaussing systems on platforms with weight and power limitations. These HTS-based systems can reduce the electrical power required to operate by up to 60% and can reduce the overall degaussing systems weight by up to 90%. We are working hard to penetrate other Navy vessel platforms with our HTS-based SPS. Other platforms include but are not limited to destroyers, aircraft carriers, frigates, and littoral combat ships.
Now John Kosiba will discuss our financial results for the first quarter of fiscal 2018 as well as provide financial guidance for our second fiscal quarter ending September 30, 2018. John?
Thanks, Dan, and good morning, everyone. AMSC generated revenues of $12.6 million for the first quarter of fiscal 2018 compared to $8.9 million in the year ago quarter. Our Grid business unit accounted for 71% of total revenues for the first quarter while our Wind business unit accounted for 29%. The Grid business unit revenues increased by 34% in the first quarter versus the year ago quarter, due primarily to higher D-VAR systems revenues. Wind business in unit revenues increased by 61% in the first quarter versus the year ago quarter as a result of increased ECS shipments to Inox.
Looking at the P&L in more detail. Gross margin for the first quarter of fiscal 2018 was 31%, which compares with negative 15% in the year-ago quarter and 22% in the previous quarter. The year-over-year increase in gross margin for the first quarter was primarily due to the increased revenue versus the year ago quarter in addition to a favorable product mix in both Grid and Wind business units as well as reduced fixed factory overhead as a result of the factory move to our newly leased air facility. Additionally, in the year-ago quarter, we had approximately $2.5 million of accelerated depreciation included in cost of revenues.
R&D and SG&A expenses for the first quarter of fiscal 2018 were $8.6 million. This was down from $8.9 million for the same period a year ago, primarily driven by lower overall compensation expense due to decreased headcount. Approximately 15% of our R&D and SG&A expenses in the first quarter of fiscal 2018 were noncash. Our net loss in the first quarter of fiscal 2018 was $4.7 million or $0.23 per share. This compares with $15.3 million or $0.91 per share in the year ago quarter. Our non-GAAP net loss for the first quarter of fiscal 2018 was $3.6 million or $0.18 per share compared with $15.4 million or $0.92 per share in the year ago quarter. Please see our press release issued last night for a reconciliation of GAAP to non-GAAP results.
We ended the first quarter of fiscal 2018 with $26.9 million in cash, cash equivalents and restricted cash. This compares with $34.2 million as of March 31, 2018. Our operating cash burn was $6.9 million. This was in line with our previous guidance.
Turning to our financial guidance for the second quarter of 2018. We expect that our revenues will be in the range of $13 million to $15 million. Our non-GAAP net loss is expected not to exceed $6 million or $0.29 per share. The company expects operating cash flow, exclusive of any net proceeds received by the company from the Sinovel settlement, to be from breakeven to a cash burn of $2 million. The company is also expecting $27 million in net proceeds after expenses and taxes from the Sinovel settlement. After you add the net proceeds from the Sinovel settlement to the operating cash flow forecast, we anticipate our second quarter ending cash balance should be no less than $53 million.
Our net income for the second quarter of 2018 is expected to be no less than $21 million or $1.01 per share. Included in our net income guidance is approximately an expected $31 million net gain, associated with our settlement with Sinovel, partially offset by approximately $3 million of taxes associated with this settlement. Please see the reconciliation of our GAAP net loss and our GAAP operating cash flow to non-GAAP net loss and non-GAAP operating cash flow, respectively, provided in the press release we issued nest night.
Now let's take a moment to walk you through the contract of the Sinovel settlement. During the second quarter of fiscal 2018, AMSC's wholly-owned Chinese subsidiary received $32.5 million USD equivalent in RMB. The settlement is expected to be reported as other operating income in the income statement. And as a result, there is not expected to be any revenue associated with this settlement. As Dan mentioned in his opening remarks, we believe we have taken care of all taxes in China in prior periods. In July, following the settlement with Sinovel, AMSC China transferred approximately USD 31 million to our wholly-owned Austrian subsidiary to settle outstanding intercompany balances. The money transferred into our Austrian subsidiary's bank account is now denominated in USD. This is expected to limit any foreign exchange risk for movements of cash between AMSC Austria and AMSC USA.
We expect most of the cash paid to AMSC Austria to be reflected on our consolidated balance sheet for the second quarter of fiscal 2018. We expect that amounts received by AMSC Austria will be taxable income. AMSC Austria does have loss carryforwards that we expect can be applied to offset the majority of the gain associated with the money received from AMSC China. As a reminder, the business taxable rate in Austria is 25%. After we factor in the expected loss carryforwards, we see a likely scenario where we are paying $2 million to $3 million in taxes. All our portion of those taxes will be paid in Q2 of fiscal 2018. AMSC expects to manage its global cash position to maintain adequate cash in all its jurisdictions to run its operations. As a result from time to time, AMSC Austria may dividend cash back to AMSC USA. There is a 5% dividend withholding tax on any declared dividend, which is payable when the money is transferred from Austria to the USA. With that I'll turn the call back over to Dan.
Thanks, John. Based on Inox' public comments, Inox tends - intends to support commitments from the SECI-1 auction during our second quarter. Our understanding is they have shipped and are shipping turbines to the site. Additionally, Inox has stated that they must commission 300 megawatts of wind turbines during our third quarter. Inox is planning to deliver another 300 megawatts to support their SECI-2 wins in the second half of this fiscal year. We are comforted by the fact that Inox has reestablished a healthy backlog of wind turbine business. As I mentioned, Inox has almost 1 gigawatt of backlog. We are well-positioned to support Inox' requirements.
We had a strong first quarter for Grid. We expect to grow Grid revenue again in fiscal 2018. Our D-VAR business is strong. We are delivering VVO to the market and our pipeline is developing very nicely, and we are delivering long lead time items for LPD 28. We are pursuing additional opportunities with the Navy. We are executing against our goals and that is to the credit of our employees, due to their hard work and dedication. We are significantly improving our balance sheet and, as John said, we see scenarios where we potentially breakeven on an operating cash flow basis next quarter. I look forward to reporting back to you at the completion of our second fiscal quarter of 2018. Todd, we will now take questions from our analysts.
[Operator Instructions]. We'll take our first question from Philip Shen with Roth Capital Partners.
This is Jeff [indiscernible] on for Phil today. So congratulations on the progress you're making with ComEd. That's great to hear. And the first question here, I wanted to start off with the Navy. So you mentioned the potential for $150 million in revenue for 15 naval ships that could use your SPS solution. I was wondering if you could just talk about the timing of when those ships could be built so we can get a sense of when revenue could be recognized, if you were to win all of those contracts?
Sure. So I can walk through 28 because we have clarity on that, at least for the long lead parts of it. So we began recognizing revenue on LPD 28 long lead elements at the end of last year. That was about was, let's called it, $1 million, about 10% of the contract. We are anticipating delivering the remainder of the long lead elements this year, which when we originally announced it we said the long lead was about 20% of the total contract. We are in discussions with the Navy about the release for, we'll say the regularly scheduled balance of planned components, and we look forward to being able to give an update when we've been given that release with the Navy. My understanding is LPD 28 is really a ship that's in construction. Most of the delivery occurs in 2019 and into 2020, and I believe the ship gets handed over to the Navy in 2021.
Every subsequent ship basically has about a year offset from ship to ship, and the reason is that this LPD 28 and 29 are important ships for the shipyard in Mississippi where they are being built. It was important to make sure that they keep the labor engaged, it's important for that shipyard from a national interest standpoint, which is why Congress really has made sure that this platform, it continues to go funded. I think the other derisking element for our business has been the announcement of LPD 30. So what was once considered as potentially a new - completely new hull is now a modified variant of the current San Antonio class, and will be consistent with the current San Antonio class. So in Navy speak they call that a flight 2 of the same hull design. We tried to go through so people would understand that we are able to get design into new ships, we want to then be able to expand the business in the current ships. And we're trying to telegraph that we been able to have that success specifically with LPD.
So from a revenue basis, I think the challenge we have is, and I want to call attention to it in the prepared remarks, our scope at least initially is, were going to manage the installation of the hardware into the ship. That happens at a point in the build cycle that, let's say, is in the latter half of the build cycle. At some point in the future, we hope, that our ability to help manage the shipyard has gotten them to the point where they can do it earlier in the ship build cycle. It doesn't mean we won't necessarily have additional service revenue associated with LPD 28, 29 and beyond, but we want to make sure that the learning that we've been able to establish to date, what we will confirm with LPD 28 that, that knowledge is transferred to the shipyard. At a basic level, we're talking about a hardware system that is relatively expensive compared to the incumbent solution. Where we really save the Navy money is the installation cost are insignificant for our system relative to the hardware cost. The installation cost for the incumbent technology are very high, and really all of the costs comes from labor. So in order for the Navy to be able to realize the value that we've seen and that we've sold, we need to make sure that, that installation goes well. And that's why we're really trying to have a heightened interest to make sure that we have our team fully on board with being able to help make sure that the installation in LPD 28 happens on time and we're successful. At some point in the future however, we will look to find ways to be earlier in the build cycle and what that means is, at some point you'll start to see a discontinuity in revenue where revenue is potentially pulled forward. Does that make sense, Justin?
Yes, that make sense. And just a follow on with the Navy. Has this win accelerated discussions that you may be having about other classes of ships? And how many other classes of ships could you be potentially designed into, and any sense for the timing of when that could happen would be helpful?
I think the simple answer to your first question is yes. Getting the design win, getting the technology fully qualified and getting the technology deployed on the first ship, really highlights what the Navy - what they've invested in. As they want to make a change to more advanced technology to solve the known problem. The intent of this and even the design and the qualification of the technology has happened not just on LPD, but it has happened on some other ships. We want to use those facts to be able to facilitate acceleration of deployment throughout the fleet. We kind of hinted at some of the other ships that I went through in the prepared remarks from frigates and destroyers and carriers and such. All in all, in the long-term plan, that's public from the Navy, depending upon the year they are building 8, 10, 12 ships a year.
We've gone through in the past the math and I won't rehash that today. I know Phil understands it pretty well, but kind of the net average value is about $10 million per ship. If they're building 10 per year, now you have a potential annual market just for those ships all $100 million a year. In our 10-K, we talk about a market in a year, next decade, which is in the 70 to 120 range. So that's kind of do that math out loud for you. So we're talking about $150 million potential future stream, which is kind of like base load at roughly ten per year, and I mentioned, there may be some dislocation forward of some of that revenue once we get more normal in the production cycle. But then the hope is that to staff these additional ships and we've talked about the value equations before for those ships, so I don't want to reiterate that for everybody. So we're also trying to find ways where we can ostensibly double the market by thinking about export.
And we hope to at some point be able to come back to the market and explain positively where we are on the ability to export. It's commonplace group for suppliers to the Navy to be able to export to allies, there's a procedure to go through, and you can only imagine part of the technology isn't just in the design but it's in the operation of a ship with these kinds of systems. And we want to make sure we do everything in accordance with the requirements that are placed on us by the Department of Defense as a supplier. But we look forward to this becoming for lack of a better term, more and more of our base business. And I think that should be refreshing to current shareholders and future shareholders that you're building a whole new business inside of this business that maybe people will fully appreciate as we build a bigger order book.
Great. Okay, great. And then I'd like to shift to your Grid business. Just by going through your 10-Q, it looks like Vestas is becoming a more meaningful customer of yours, representing 36% of Grid revenue in SECI-1. I was wondering if you can just give us a sense of opportunity you see ahead with Vestas the product solutions that you supply and kind of what you see ahead from that relationship?
Sure. So I think for clarity for the audience and we said this a few times before, but our Wind business is inside the turbine and our Grid business really stars at the substation, that connects power generation to the transmission Grid or the distribution grid. So when we sell a D-VAR, we sell it as a Grid solution because, ultimately, it's the Grid interconnection, it's the gateway for green power to come onto the Grid. We have a historical relationship with Vestas, you can go back over time in certain periods and you can see that this isn't the first time that they have been a significant customer. Vestas is actively out trying to promote business in some developing geographies and in these geographies, there seems to be a specific need for our solution. You're trying to enter into a weak Grid and there becomes a more dramatic need for reactive compensation at voltage support. So we have sold product in the past to Vestas. We hope in the future to be a good supplier on a go forward basis and continue to be able to deliver content to them. That for some people on the call they may not fully appreciate that, even though we've said this for the past 2 to 3 years, that we want to find pathways to have content to help really deliver smarter, cleaner, better energy through whatever means or channels to market are afforded to us.
Okay, great. And then maybe just one last question from me. There seems to be more discussions in India about the offshore Wind market, they're considering offshore target of 30 gigawatts for 2030. Do you see an opportunity to introduce an offshore design in that market? Or is that something that you could pursue with Inox?
It's certainly something we can pursue, we have a demonstrated track record large turbines. We've delivered production quantity units of the 3-megawatt already to date in multiple geographies, not in India yet. And then the 5.5, we delivered at the prototype kind of early production level. We hope to see more proving of our technology in the South Korean market with Doosan. We hope to be able to see exportation of those turbines outside South Korea into the global market. It certainly does set up kind of the obvious opportunity for us. If there really is an offshore market, we have the technology, it's been demonstrated and certainly should be something that could be utilized in India. We want to respect Inox' wishes. We want to be able to support Inox' business plans. Currently, as you can, see we're in - we're at the - hopefully at the end of a great transition in the Indian Wind market. We want to make sure we get through that and digest that, we want to make sure that Inox is comfortable with whatever we do going forward. But to be clear, it does represent an opportunity in a very unique way for our company in the future.
We'll take our next question from Colin Rusch with Oppenheimer.
Can you talk about the preparedness of the supply chain to support your ramp in both the Grid business and the Navy business?
It's a really good question. I'm happy you asked it. So we think about the ramp in grid and we focused on stuff that isn't the Navy, we've had to develop a way with the D-VAR product to be able to ramp up revenue and also, we've had periods where revenues come back. So we've had to have very good relationships with our suppliers and supply chain to be able to support the market as it changes and we see delivery into new geographies and expansion of the market for D-VAR. So I feel very comfortable at this point that the supply chain that we established could be able to deal with the potential market with us. I think in the case of VVO, it's still a new product. We just got our first orders. We're looking to expand on those orders, we really see 2018 as an ability to deliver on some new orders. But we will be doing a controlled launch in '18 to really try to set up growth potential for the company in VVO in '19 and beyond. We're still at a very early stage with the supply chain, so I really can't give you any additional comfort. Some of the suppliers are similar for part of the D-VAR supply chain.
So I don't see any additional risk that the VVO technology presents to the supply chain. But I think you guys know, John and I are about delivery, not just about speculation. It's risk we're going to have to manage but it's something that we've managed in the past and we have no reason to believe at this point in time that we would have a challenge with the VVO supply chain. But the REG supply chain, we spent a great deal of time trying to think about a magnitude of different options. We have the deal with BASF, which presents a pathway to potentially an additional source for our wire. We've stated publicly that Nexans has qualified a solution for the cable for REG, we've talked a lot about refrigeration possibilities. On some of these calls we have the acquisition as well that helps kind of mitigate longer-term risk. A lot of what we're trying to do now is to make sure the supply chain is able, not just ready, but fully capable to deliver to what utilities want for REG. On the Navy side, a very large fraction of the final systems are made by us. So we're really dealing with component level suppliers and in almost all cases, if the product is very unique, the system is very unique, we're assembling it and then we have to control the supply chain in the same way we've done with D-VAR. Again, I think I don't see any unique risks there, but it's not something that we've demonstrated that we've done a lot of these. So it's something we continually, eventually monitor. But I think that can be managed very well.
That's super helpful. Yes, and then just a question around R&D spending and where that is getting focus right now? Could you give us a percentage breakdown in the - in the spending and where that's going at this point?
So Colin, on the R&D spend, it's been pretty stable over the last two quarters. The vast majority of the R&D spend is on the Grid side of the business. We don't break it down publicly, but what we can tell you is the vast majority of our R&D spend is on the grid business.
We'll take our next question from Carter Driscoll with B. Riley FBR.
First of all, congratulations on putting Sinovel behind you. I know it's been a long, long process and been a strong advocate for they perpetrated against you. If we talk about just, at the high-level, the priorization of your newfound strength in the cash position in terms of where you're going to allocate new spend. I know you don't want to - or can't address the contract - pending contract with ComEd. But I think in the past, you talked about potentially some bonds to support that rollout. Just trying to get a sense of how you're going to be reallocate whether it'll be new buckets of R&D spend as Colin was alluding to. Are you going to kind of sit and just digest and wait for Inox to really ramp back? Just trying to get a sense of how you're going to put that new balance to use now?
Sure, I think as we always tend to be, we're very pragmatic. I think how we're thinking about it is the cash balances whatever it is, the business needs to operate on an ongoing basis in a sustainable way. We are attempting to demonstrate that in the very near-term. We've talked about revenue levels that we still need to grow the existing business to high revenue levels and we see that coming with improved growth in Grid and improve growth in Wind this year. We want to make sure that those things happen, not that we have any reason to believe that they won't. We have them out as objectives and we have the tendency that we deliver and we really over-deliver on the objectives that we state. We think is important for shareholders and ultimately want to think with their interest in mind, to really see us demonstrate that before we start to bite off more than we can chew.
I would not want to take something on right now and accelerate the burn and push out further the point in time we've all been trying to get to, which is getting to an operating cash flows on a continual habitual and eventually sustainable basis. That's the near-term mission for the company and specifically for John and I. That doesn't mean that we don't - we won't look at things. That doesn't mean it certainly won't help with REG, with bonding. It certainly doesn't mean that it doesn't help with maybe the next REG project that we have to ability maybe to do that faster than maybe people anticipated because we have the access to the capital now. We do have more capital coming. So to remind you, we have some additional payments on the Jackson Road facility, and then this additional payment of $25 million for those of you keeping score at home, probably the similar math between the gross and the net, so we're expecting something like about $20 million coming out of that $25 million. So there's more cash coming.
We're thinking about first and foremost let's deliver on what we said we need to do. We need to be able to deliver on Chicago, we want to continue deliver on growth in all of our business segments. And then if there's something strategic that makes sense to accelerate growth, we have a demonstrated history of trying to take advantage of those moments in time. We have a lot to do here over the next couple of quarters kind of as you stated with Inox getting further stability and everybody getting comfortable with that. So we're not of to the races and going to increase the burn to potentially have higher revenues in the very near term. Our business is just - after the number of years we've been at this business, we want to demonstrate and then look to deliver accelerated growth.
Okay, that's very helpful. I know you can't talk about ComEd, but - do you anticipate DHS having any problem with a contract once it's signed? I mean, they've been an advocated for this technology and partnership with you for a long time. Maybe you can at least talk about a potential review period by DHS? Would that be relatively short assuming you do get a commercial contract?.
Yes, it's the government, so I can't speculate. I know they have a fiscal year that's coming up here in the fall, it's going to end and a lot of things can get done before that period usually. We've talked to them and really what you're doing is you're taking already authorized, already appropriated, already allocated funding, and all we're doing is we're really modifying the scope of work to include the project as contemplated. So you're not looking at changing the contract vehicle, all you're really doing is changing an appendix. But it still has to go through the perfunctory review and a number of people have to look at it and all that. And I don't know how long that will take. It could take weeks, it could take months. I don't expect it to take an extraordinary long period of time, but first and foremost, we want to make sure we can move forward with our suppliers, as I mentioned. That's the focus that we need to have on our team side. You can hear the prepared remarks that we said already. So we're close to ready to go. Because the DHS Vehicle allows us really a way for us to get cost recovery and really revenue. So in order for us to be able to collect revenue, we need that in place. In some ways given the commercial nature of the terms that we talked about in the past, it's almost secondary to the needs of the utility.
And does this have to be rate-based by the PEC?
I've got to go back to, I can't make any additional comment at this time and I can't answer any questions at this time.
Fair enough. Are you seeing any impact from the steel and aluminum tariffs in particular on D-VAR. Is it adding incrementally any cost?
No, where we actually see potential growth for our business is in the changing dynamics of those industries. So we support mines and mills and semiconductor fabs, but we see a potential acceleration of growth in the industrial segment coming because of these tariffs. So the nature of the production and the nation state that it's produced in, that may present some interesting opportunities for us to deal with power quality issues that could happen in those industries. So we don't really see it as a cost effect on the business. We've tried to find a way to see where it's a way to accelerate revenues and I think if we're able to demonstrate that over the coming years, that would be additional revenue that people haven't planned for.
Just two quick ones, if I may. So do you see any potential impact from the California rooftop mandate and then some of the allocations the California utilities have gotten for EV] charging as being kind of pulling in demand for VVO at least in that specific territory?
Yes, I think the simple answer is yes. I think, again, what we're trying to do because we're very pragmatic. We want to accelerate revenues, but we don't want to accelerate problems in the field. With a new product, we want to focus on delivery of a finite number of sets this year that we're not releasing what number is in '18. Make sure that we're collecting revenue on these commercial terms and that we really validated what we want, which is product works, utility like them and they want to buy a lot of them. And then as we get into '19, California could be a driver for some growth in VVO. But we are very focused on being deliberate step-by-step, making sure that we retire risk as we go forward, so that we don't get in a situation where you accelerate a lot revenue but you have a new product in the field and then you've got to deal with that many more changes in the field. The other part is we want to make sure the feature set is ready for some of those markets and we want to have demonstrated record and data of those to be able to show the customers, which should again be able to help accelerate revenues.
And the last one for you. You're implying potentially hitting operating breakeven this quarter. Does that imply that your model or your breakeven point has been lowered?
No, please don't take that. No, I would think in your model, you know better with working capital adjustments some changes in inventory in period to period. What we're seeing is hopefully the return on demand on Inox, which allows us to, for a temporarily lower revenue, to have a reduced burn. But the numbers that we've talked about around 25 in scenarios on a quarterly basis, that remains the target that we're focused on and we want to grow revenues to that level as fast as we can. So Carter, just to remind you from the last quarter...
Yes, I'm sorry, so it's working capital changes largely more than anything else that allowed you to at least for this one period to potentially reach breakeven, is that reasonable?
Yes. And so again to backtrack to last quarter, last quarter's burn I highlighted that was a little higher than we would've expected due to the working capital strain particularly on the Grid side related to some D-VAR projects. We're getting some of that recovery in the quarter that we're guiding to. So if you look at the actuals for Q1 and the guidance for Q2, and you provide that by two, that will smooth out that working capital hiccup between the two quarters and then that gives you a more probably reflective view of operating cash flow [indiscernible] demonstrated revenue.
And then going forward from quarters this year and beyond, what level can we grow and how quickly can we get there, and then are there more adjustments in inventory and working capital to help us to hurt us. Really depends upon where some of the businesses are. John, I think has done a great job on calls to try to explain people where the breakeven is, and maybe even walk back to the current levels and what that means and happy to spend some more time, Carter, to go through that again with you.
That's fine. Just last - I'm sorry the $11 million in D-VAR that you earned, is that you expect to pull through in fiscal '18?
You're talking about the orders VVO...
Yes, the most recent one.
There's a fraction in '18 and there is a fraction outside '18. It's healthy either way. So it's - what it really shows is an acceleration of the order book, which is what we're trying to get people to listen. We're going to grow through Grid and now you see evidence of that. I think before we start talking about people didn't really appreciate, we got a lot of D-VAR orders, that it really has a financial impact on the numbers.
[Operator Instructions]. Speakers ongoing showing no further questions in queue.
Great. Well I think we'll go to wrap up the call, Todd, if you don't mind. I think a lot of good news from the company today. I think this is really a series of good news that shows that for the first quarter, again, we said what we're going to do and we did what we said. And we're at the higher end of the revenue range. The burn came in where we thought it was going to be. We kind of pre-telegraphed kind of what next quarter might look like. And you hear us again being very confident, we're going to be able to manage the burn very well in Q2. Going forward, we want to be able to keep growing revenue. The balance sheet is in a position of strength that we haven't been in for a significant period of time. We've been able to mature the business with the Navy, we've been able to mature the Grid business with D-VAR, now with VVO, and I was happy we're able to share some good news with REG. So all in all, everything looks and feels very good for us. I think the specter of our past is gone and it's really a new day for our company and our employees, we're able to think with degrees of freedom that, at one point, were limited for us. So it really is trying to get this thing to grow and accelerate growth as quickly but yet as rationally as we can. Look forward to being able to talk to you again in a few months and hope to be able to report additional good news. Thanks, everybody.
Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect.
- Read more current AMSC analysis and news
- View all earnings call transcripts