American Superconductor Corp (AMSC) 2004 Q4 法說會逐字稿

Good morning and welcome to American Superconductor's fiscal year 2004 and year-end conference call. With us today is Greg Yurek, Chairman and CEO, and Kevin Bisson, Senior Vice President and CFO of American Superconductor. I would now like to turn the call over to Greg Yurek.

Good morning and welcome to our conference call. Today with me in the room are Kevin Bisson, our Chief Financial Officer; Dave Paratore, our President and Chief Operating Officer; and John Howe, our Vice President for Electric Industry Affairs.

In our conference call today, we're going to start with a review of the numbers that we released in an announcement earlier today. And then, we will provide you a brief update on operations and key metrics for the Company. And of course, then we will open up the session to your questions.

First, Kevin, if you could start off with the Safe Harbor and the financials.

Thanks, Greg, and good morning everyone. Before we begin discussing financial results for the fourth quarter of fiscal 2004 and our outlook for fiscal 2005, let me provide the following guidance.

In our attempt to share information with you to provide insights to help you understand our business plan, we may use statements containing our beliefs, plans, and expectations, which constitute forward-looking statements. There are a number of factors and uncertainties that may cause actual results to differ significantly. Please also refer to our SEC filings, and in particular, management's discussion and analysis for more information on these factors and uncertainties.

Now, turning to our fourth-quarter results. Revenue for the fourth quarter was 11.6 million, which was 700,000, or 6 percent, higher than revenue in the fourth quarter of fiscal 2003. It should be noted that the 11.6 million in revenue for the quarter represented the second highest quarterly revenue number in the Company's history.

Year-over-year revenue growth was driven principally by our SuperMachines business unit, as it continues to perform on budget, relative to the 36.5-megawatt HTS motor program, with the latter contributing $7 million of that unit's revenue for the quarter. The increase in year-over-year revenue at SuperMachines was partially offset by lower D-VAR sales in the fiscal fourth quarter of 2004 as utilities continued to delay investments in their transmission grids, despite the fallout from last summer's blackouts.

Revenue for all of fiscal 2004 amounted to 41.3 million, which was 20.3 million, or nearly double, revenue of $21 million for fiscal year 2003. This significant revenue growth was due primarily to increased revenue from the 36.5-megawatt motor program at SuperMachines. In addition, this revenue increase is also attributable to increased HTS wire sales, with fiscal 2004 marking the first full year of wire production at our Devens Manufacturing facility. Also, fiscal 2004 was the first year for generating revenue in connection with our power cable project for the Long Island Power Authority, which began in April of 2003.

Orders received during the fourth quarter amounted to $2.6 million, which was significantly less than the 82.7 million of orders generated in the fourth quarter of fiscal 2003. Last year's fourth quarter orders included the $70 million HTS ship propulsion contract with the office of naval research, and over $6 million of D-VAR orders at our Power Electronic Systems business segment.

Backlog as of March 31st, 2004 stood at 65.3 million, compared to 78.3 million at March 31st, 2003. As mentioned in our earnings release announced earlier today, the inclusion of the four PQ-IVR order awarded to the Company by a major U.S. semiconductor manufacturer subsequent to March 31st, combined with our backlog as of fiscal year end, provides us visibility to approximately $46 million of revenue to be recognized in fiscal 2005, which began about six weeks ago. Orders for the fiscal year ended March 31st, 2004 totaled $27.4 million, compared to 88.6 million of orders generated for all of fiscal 2003. Again, fiscal 2003 orders included the $70 million HTS ship propulsion contract with the Navy. Orders of fiscal 2004 were driven primarily by the awarding of the Long Island Power Authority power cable project, as well as orders for HTS wire for power cable projects and specialty magnet applications.

The operating loss for the fourth quarter of 4.6 million was substantially favorable to the operating loss of $54 million in the fourth quarter of fiscal 2003. The fourth quarter of fiscal 2003 included non-cash charges totaling $45.3 million, driven primarily by a fixed asset impairment write-down. The year-over-year improvement in operating loss resulted from increased revenue contributions from the Navy motor contract and HTS wire sales, combined with the benefits of headcount and other cost reduction actions taken earlier this year. In fact, when the Company implemented its plan to reduce operating and capital budgets last July, principally through an 8 percent reduction in headcount, estimated net savings for fiscal 2004 were expected to be $5 million. As we close the fiscal year, cash savings generated from these cost reduction initiatives totaled slightly in excess of $6 million, or a 20 percent improvement, as compared to the targeted savings.

The operating loss for all of fiscal 2004 was 25.7 million, which was significantly less than the operating loss of $88.5 million for fiscal 2003. Excluding the $45.3 million of non-cash charges recorded in the fourth quarter of fiscal 2003, the year-over-year reduction in operating losses of over 40 percent is due mainly to the turn to profitability this fiscal year of SuperMachines, as a result of the Navy motor contract, LIPA-related revenues at AMSC Wires, and previously-discussed cost reductions impacting primarily the AMSC Wires business segment.

Net loss for the quarter was 4.5 million, which was substantially favorable to the net loss of $54 million in last year's fourth quarter. The fiscal 2004 fourth-quarter net loss of 4.5 million marks the fourth consecutive quarter of sequentially lower net losses for the Company. Net loss per share for the quarter of $0.16 per share was also favorable to the $2.54 per share loss in last year's fourth quarter.

Net loss and net loss per share for the full year ending March 31st, 2004 was $26.7 million, and $1.10 per share respectively. Both amounts compare favorably to the net loss and net loss per share of 87.6 million and $4.21 per share, respectively, for all of fiscal 2003.

The Company ended fiscal 2004 with 52.6 million in cash, cash equivalents, and short and long-term investments, compared to the corresponding $56.9 million balance at December 31st, 2003 and a $20 million balance at March 31st, 2003. The cash burn for the quarter of 4.3 million was driven mainly by the Company's net loss of 4.5 million, an increase in working capital of 2.7 million, offset primarily by $1.9 million in non-cash depreciation and amortization expense. The increase in cash from March of 2003 reflects the $51.1 million in net proceeds from the Company's stock offering in October, 2003.

Upon entering fiscal 2005 with a solid backlog in all three business segments, a streamlined cost structure and improving economic conditions, the Company is forecasting another record year of topline performance and continued improvement to the bottom line. For the fiscal year ending March 31st, 2005, we expect revenue to be in the range of 50 to $60 million, which represents a 21 percent to 45 percent increase in revenue, compared to revenue generated in fiscal 2004.

As was mentioned in the earnings release announced this morning, the decision by the Navy to fund the motor program at a higher level in the second half of fiscal 2005 compared to the first half, combined with the anticipated timing of Power Electronic Systems' revenue recognition, will result in the Company's quarterly revenue profile being more heavily weighted to the second half of the fiscal year. Net loss for fiscal 2005 is anticipated to be in the range of 20 to $25 million, with the corresponding loss per share to be between $0.70 per share and $0.90 per share.

Before I turn it back to Greg for his remarks, I'd like to remind everyone that, consistent with our prior earnings conference calls, during the question-and-answer portion of the call, we request that you ask only one question at a time. If you have an immediate follow-up question to clarify our response, we'll be happy to answer that question as well. Otherwise, we ask that you return to the queue if you have more than one question in order to allow as many people as possible to participate in the question-and-answer session. Thanks, and I will turn it back to Greg.

Thanks, Kevin. I'd like to provide some brief highlights and get to your questions as quickly as possible. Let me start with the Power Electronic Systems business. We're delighted to announce today in our earnings press release that we have received a new order from a major U.S. semiconductor manufacturer for four of our power quality industrial voltage restorers, or as we call them, PQ-IVRs. These are integrated Power Electronic Systems that offer large industrial power users a means to avoid common disruptive power quality problems. Each PQ-IVR system detects voltage sags on power lines within milliseconds, and mitigates them before they shut down sensitive electronic manufacturing equipment.

PQ-IVRs are basically industrial versions of our D-VAR solutions for transmission grid reliability. Our standard D-VAR systems contains 32 of our proprietary power module power electronic converters. The PQ-IVRs that were just ordered contain 54 power modules each. So the order that we announced today is really equivalent to an order for about 7 D-VAR systems.

The net result of this new order is that the current backlog of Power Electronic Systems for recognition as revenue in fiscal 2005 is approximately $10 million. We believe our Power Electronic Systems business is well-positioned to meet the needs of customers coming now from three sectors -- transmission grids, wind farms, and now finally back on the scene, manufacturing. Policy regulatory and legislative bodies are continuing to debate whether or not to create enforceable transmission grid reliability standards. And we expect their action to help improve our sales through the transmission sector. But even while we wait for that to shake out, we're gratified to see that sales to wind farms have continued and that the manufacturing sector is starting to improve. We expect that this mix of customers from different sectors will create both more sales and more uniform revenue growth as changes occur in any one sector due to seasonality or economic cycles.

The total amount of business on which we are currently bidding has continued to increase over the last several months. And during the last earnings call, for example, we commented that we were actively engaged in about 80 to $90 million worth of new business opportunities. In the intervening time, we have not lost a single potential order to a competitor. Potential customers have simply continued to delay making buying decisions. As customers in the wind farms, manufacturing and transmission grid sectors make their final buying decisions, we believe our product offerings put us in a strong position to continue to win a significant portion of the potential orders. The two orders that we announced today should be viewed as evidence that we are, in fact, well-positioned to win the orders as customers do make their buying decisions. We are targeting for Power Electronic Systems in fiscal 2005 to receive an additional 5 to $10 million of new orders.

Let me now turn to the SuperMachines business. I'm very pleased to report that the SuperMachines business exceeded its goals for profitability and cash generation in fiscal 2004. I wanted to touch on three key SuperMachines prototypes in this call. The prototype 50-megawatt ship propulsion motor we delivered to the U.S. Navy in July, 2003. The prototype SuperVAR synchronous condenser we are co-developing with TVA. And the prototype 36.5-megawatt motor we are currently developing for the U.S. Navy.

The 5-megawatt motor we built, tested, and delivered to the Navy a year ago has successful completed preliminary testing at the Center for Advanced Power Systems, or CAPS for short, in Florida, and it is expected to undergo simulation testing under varying load conditions next month once the CAPS facility is completed. So this is an add-on, a new level of testing that the motor will be going through here, varying load conditions.

Based on the performance of this motor so far at CAPS, we expect that it will pass these additional test. The Navy is, in particular, very pleased with the results of the 5-megawatt motor test today. The goal remains to get this 5-megawatt motor out of the test facilities and onto a ship in order to get some runtime on the water. We believe this is an important step that must be accomplished prior to commercialization of HTS ship propulsion motors. We're working hand-in-glove with the Office of Naval Research to achieve this goal. After all, it is their motor and we are optimistic that a suitable platform for (indiscernible) demonstration of the motor can be found this fiscal year. In fact, we already have specific platforms targeted.

This near-term goal for the 5-megawatt motor is to support our fundamental goal of generating sales of HTS ship propulsion motors. In fact, one of SuperMachines' stretch goals for fiscal 2004 was to get an order for a 5-megawatt class ship propulsion motor by March 31st, 2004. This goal was not achieved on time; however, prospects remain good that we will obtain the first order this fiscal year because all of the effort we expended to meet this goal by March 2004 has created significant opportunity for obtaining that first order. Our prospect list for ship propulsion motor sales remains ship owners and operators, ship builders, and ship propulsion integrators. These companies are located in the U.S., Europe, and the Asia Pacific region.

As of today, we have received written business proposals from companies of this type that wish to pursue co-manufacturing and co-marketing of our HTS ship propulsion motors for both commercial and military applications. We are reviewing these proposals and believe they could help provide a basis for obtaining an order for a 5-megawatt class HTS ship propulsion motor this fiscal year. However, we cannot at this stage make any assurances that any of these proposals that we have received will convert into a signed business agreements.

In the meantime, progress under our contract with the U.S. Navy to design, build, and test a prototype 36.5-megawatt HTS motor has been going very well. This project is on schedule and on budget and the Navy is very happy with this program. The delay in funding that Kevin mentioned, and I think we spoke about in our press release this morning for this program, is not a reflection on the progress of the importance of this program to the Navy. Quite frankly, it is a matter of cash flow related to the war effort.

We believe that the likelihood of adoption by the U.S. Navy of this type of motor over competitive technologies, such as copper-based and permanent magnet motors, has continued to increase with each success we have achieved on this program. I would ask you to recall that the Navy plans to launch their DDX (ph) all-electric warship in the 2007/2008 timeframe, which requires 36.5-megawatt motors for the propulsion system. Given this timing and the progress on our program, our motor is a true contender for this business.

The 36.5-megawatt HTS motor is also very important calling card with respect to the development of our overall ship propulsion motor and generator business because it validates that our technologies spans the range of power needed for electric propulsion systems in commercial vessels as well as military ships.

Let me now turn to another aspect of this business. The SuperMachines business is also responsible for the development, testing and future manufacturing of SuperVAR dynamic synchronous condensers. SuperVAR machines are based on the same technology platform as our HTS ship propulsion motor. We began initial operation of the first SuperVAR prototype in a substation operated by TVA near Nashville, Tennessee in January 2004. After the initial shakedown of the prototype, we disassembled the machine to inspect and improve the rotor design, a design we and TVA are confident will prove to meet the reliability standards of TVA and other utilities and that will further lower the cost of manufacturing of SuperVAR machines.

The new rotor is currently being fabricated and the new, improved SuperVAR machine will be in factory tests next month. We expect to have this prototype back on the grid by the end of July. We expect to provide you also at the end of July at the earnings call and the annual shareholders meeting with an update on the progress of this prototype.

Once we go through the testing of the prototype in Tennessee, and TVA signs off on the prototype and releases to production the 5 SuperVAR machines that it has already ordered, we believe we will be in a strong position to close orders with other potential customers.

Let me now conclude with some comments on the AMSC Wires business. AMSC remains the world leader in the development and commercial volume production of high-performance HTS wires, and is the first company in the world to have a commercial-scale production facility. In fact, in the Western Hemisphere, AMSC is the only company that is producing and selling HTS wires. Our key competitor worldwide has been, since our inception, Sumitomo Electric Industries in Japan. Notwithstanding some news articles that appeared on Monday of this week, Sumitomo remains two to three years behind AMSC in terms of price and performance for first generation HTS wires. I should add that by now many of you will have seen the corrections that both Reuters and the Dow Jones news services ran on Tuesday of this week. The announcement on Monday of this week by Sumitomo that they are committing to volume production of first generation wire is good news. It clearly points to the importance that large, highly-reputable corporations put on recent developments of the market for HTS wires.

If the HTS market is worth pursuing, competitors, both large and small, will attempt to enter this market. We believe AMSC is very well-positioned to fend off all potential competitors based on our technology, which is clearly best-in-class; our patent estate, which is second to none; our HTS wire manufacturing experience, which no one else can claim to have; and our strong relationship with customers who manufacture power cables, electric generators, motors, and maglev trains, among others, and who have already developed their products utilizing our wire.

Just to set the record straight, relative to the news items associated with Sumitomo's announcement that they intend to enter into volume production of 1G (ph) HTS wire this year, it should be noted that all of the news articles stated incorrectly that AMSC does not have the capabilities to manufacture thousand-meter lengths of HTS wire. In fact, we regularly produced 1000- to 1200-meter lengths of wire with electrical performance superior to any other company worldwide. Evidence of the superiority of our wire came in the form of orders for tens of thousands of meters of HTS wire from Central Japan Railways, or CJR, as we call it, which we delivered in fiscal 2004.

CJR has the toughest wire specs of any of our customers, both in terms of minimum wire length and electrical performance. We are literally the only company in the world that can meet these very tough specs. As CJR recently announced, the wire we shipped to them has demonstrated the practicality of using HTS wire for superconductor maglev train systems. CJR showed that our HTS wire was more robust than current low-temperature superconductors they are utilizing in their maglev trains. They also demonstrated that HTS was expected to lead to lower-cost maglev train systems.

A single maglev train systems can be expected to use huge volumes of HTS wire. For example, the Tokyo to Osaka system is expected to utilize more than 100 million meters of HTS wire. So this is a customer that we're committed to meeting the needs of, as you can well imagine. We have additional orders from CJR for significant quantities of HTS wire that we plan to manufacture and ship in the current fiscal year. In fact, the CJR wire orders are part of the record backlog of orders for over 550,000 meters of HTS wire that we expect to manufacturing and ship to customers in fiscal 2005.

We expect to also close additional orders during this fiscal year, enabling us to manufacture and ship at least 650,000 meters of wire in the current fiscal year. That represents an increase in wire volume shipments of 4X over fiscal 2004 shipments, and clearly is a world record for the emerging HTS wire industry. This ramp-up from 155,000 meters shipped in fiscal 2004, our first full year of operation of our new wire plant, will be quite significant. We are confident, based on the accelerating rate of production we achieved in the last quarter of fiscal 2004 and continued production efficiencies in fiscal 2005, that we will be fully successful in achieving this next significant step in the growth of AMSC Wires.

Before I continue with my final remarks, let me invite you to ask any and all questions regarding the news article on Sumitomo so that we can clear up any of the misinformation that was created by the incorrect news reports earlier this week. I also ask you, at this point, to recall that in June 2003, we signed a major cross-licensing agreement with Sumitomo Electric Industries on first generation wire. And we also signed, at that time, a memorandum of understanding to cooperate with Sumitomo Electric in developing the markets for HTS power cables. So that should be kept in context.

The AMSC Wires business is also responsible for managing our HTS power cable project for the Long Island Power Authority, or LIPA. I'm happy to report that this project is moving along quite well. It is on schedule and on budget. And it is on schedule for successful installation of the first HTS cable at transmission voltages in the grid by the end of calendar 2005.

Before I close, I want to comment briefly on progress in our second generation, or 2G, HTS wire technology. AMSC's second generation 2G HTS wire research and development program achieved world-leading results in fiscal 2004. The breakthrough results we achieved in the performance of our nanotechnology enabled 2G wire have been outstanding. Our new pre-pilot production line for 2G wire will be up and running soon and we expect to be well-positioned, based on the results from the pre-pilot line, to keep on our schedule to start making significant additional investments in the 2G pilot manufacturing line as we enter fiscal 2004 on schedule -- 2006, I'm sorry. As we enter fiscal 2006. Sorry.

In conclusion, fiscal 2004 was a great year for AMSC on many fronts. We effectively doubled revenue year-over-year; continued to develop our technologies and products. We are cutting our losses and cash burn significantly. Very importantly, we built a foundation on which we can continue to grow our business at a rapid rate. I believe we are well-positioned in all respects to continue to strengthen our leadership role as an electricity solutions company, based on advanced power technologies. I would like to thank you for your attention, and I would now like to open up the session to your questions.

(OPERATOR INSTRUCTIONS). Robert Smith with Center for Performance.

Good morning. The semiconductor order -- is it for a new facility or an existing facility in the amount of the order? Dollar amount?

It's an existing facility here in the U.S. Obviously, a major one. Very importantly, this is a facility that uses over 40 megawatts of power. So this is probably -- and we believe that this is the case -- the largest full factory power quality protection system that has ever been installed. So it's a U.S. facility. Dollar amount, Kevin, are we speaking to that?

I think, Bob, as you look at where we are, we have -- that ads in to now a current backlog of $10 million that we expect to recognize as revenue for Power Electronics this year. Another way you want to look at it -- we often talk about the average selling price of D-VARs being about $1 million. And so, if you do some division on the 54 inverters versus 32 for a standard D-VAR, you can come up with a general idea here.

Okay. How many other manufacturing facilities does this one manufacturer have domestically? Approximately, do you know at all?

Bob, I think we would be going beyond what our customers are willing to allow us to say at this point.

Okay. Thank you. I'll get back in the queue.

Walter Nasdeo with Ardour Capital.

Hi. Good morning, guys. I just had a little background question here -- can you put a dollar amount on the backlog on the wires?

I think what we have said, Walter, in the past, is that the average price, selling price, of our backlog -- the average selling price for wire is roughly $20 per meter. So I think that is a fair assumption to make.

Okay. And what was your SG&A?

SG&A? $2 million for the quarter.

Two million for the quarter?

Yes.

Thank you.

Brian Frackman (ph), Crown Capital.

Hi, guys. How are you? Kind of jumping on the last question -- I guess, I'm trying to run the numbers here and you're saying -- if I kind of go through all the business lines, I look at 650,000 times 20, which is about 13 million, the SuperMachines division, I assume is flat -- sort of 26, 27. And then TES, you guys are saying is 5 to 10, let's say ten at the high range. I'm coming to $49 million -- I guess I'm just trying to figure out, the range is 50 to 60, and your guidance so far is 49, maybe 50. Can you help me understand that? Am I getting something wrong here?

Brian, first of all, what we said here -- and it's in the announcement -- $10 million is in backlog right now for Power Electronic Systems to be recognized as revenue this fiscal year. And what we said in this earnings call is that we anticipate orders for an additional 5 to 10 million coming in, new orders coming into Power Electronic Systems. So, some of that would add into the revenue above 10 million for Power Electronic Systems for the current fiscal year.

I guessed I'm just -- with your revenue rack and the fact that you guys, I think -- you guys got it to 10 and 10 in PS and Wires last year and kind of came up a little short of that. You know, I guess, it makes sense, but then the next question -- maybe you'll allow me this -- last year, you gave a guidance range of about 5 million and now your range is 10 million. I'm just trying to understand if you guys are understanding your business less or more? Can you help me out? A $10 million range versus a $5 million range last year -- it seems like you're not understanding your business quite as well as maybe you did last year.

I disagree with that statement. I think, if you look at the history of this company, it's a very lumpy business. We sell product with high average selling prices. And an order or two that is achieved or not achieved can have a significant impact on revenue. And I think we've also got almost twelve months to go for the remainder of fiscal 2005. I think, based on those facts, we are justified in keeping a $10 million range in terms of our revenue forecast. And quite frankly, Brian, as the year progresses and we get closer to fiscal year end, I imagine that will narrow that range accordingly.

Okay. Fair enough. Great quarter, guys.

Ed Littman (ph) with William Blair.

Hi, guys. Just quickly, can you talk a little bit about the Wires, how the yields are improving? And you talked about the 600,000 meters of orders -- just in terms of how that compares with your capacity? And maybe just how the end markets are kind of breaking out in that?

As mentioned, Dave Paratore, our President and Chief Operating Officer is here with us today, and he was, in fact, General Manager running the Wires business from June of '03 up until he became President in February. By the way, we have found and hired a great new General Manager, Angelo Santa Maria (ph), who is now running the Wires business as of April. So, Dave is moving fully into his role as President and Chief Operating Officer. At this point, though -- I think, Dave, you're in the best position to comment on this question.

Yes, thanks, Greg. The yield, as you can imagine, last year was the first year that we actually had full production out of that facility for the entire year. As you can imagine, that means that there were some startup issues along the way, but we ended the year around 70 percent toward customer requirements. So we feel pretty strongly going into the next year that we are on the right track.

And then -- is the wire here -- you talked about the LIPA cable project. Can you talk a little bit about how some of the other cable projects that you guys have talked about in past calls that are kind of falling out?

Yes, we have now delivered -- we got orders for three cable projects, wire orders for three cable projects in fiscal '04, which is what we forecasted. We achieved the cable wire for that China cable project, which has been shipped. There is one in Mexico that has been shipped to Korea actually. And we anticipate additional orders coming in this area for cable demonstration projects in the current fiscal year. But LIPA is the one that we got last year, fiscal year, that was the largest. And I think I said in the call that we expect to ship 120,000-plus meters to Nexans, the cable OEM, this fiscal year in the fall-time, actually, for that cable project. So we have been getting the orders and shipping them, and the majority of our orders, of course, for wire go for the other form of application, which are electromagnets -- coils of HTS wire. That's what you use in the ship propulsion motors, the generators, maglev trains now.

By the way, the reason I'm excited about the maglev train opportunity here is that something that people have dreamed about for a long time is to see HTS wire going successfully into that application. At this stage, it is gratifying, to say the least. More importantly, for this last fiscal year and this fiscal year, it adds to our orders backlog very importantly. And it speaks to a more general point -- and that is, we've always anticipated that, as we were addressing opportunities in the electric power segment, other segments would start to come in as potential customers -- medical, transportation, industrial processing and so forth. In fact, I would say here in the next 15 months or so, look for new projects going with HTS wire in MRI; it's a great example. So the future on new applications areas coming in, I think, is quite positive.

Great. Thanks, guys.

Peter Patterson (ph) with Green Mountain.

Good morning. How are you all doing. I'm getting very excited about the maglev train system as I'm looking more at it . And looking at potentially over time 100 million meters. And I'm curious, if my arithmetic is right, that translates down the line into in excess of $1 billion. And if that can be compatible with second generation wire, we could really generate some profitability here.

Well, look, again -- you're right, generally speaking, of course. No question. The thing is, I think you're right on the math, I haven't checked your math. The point is, you're going to have multiple markets come in, not just the power cables, which is a great market opportunity. Not just the ship propulsion motors and synchronous condensers, but these other markets are going to appear on the scene as we go forward. Now, very interestingly, I think, CJR, Central Japan Railways, is able to meet their needs with first generation wire for maglev. I think your question goes to will 2G apply? Absolutely.

Our story, our approach, our business strategy on 2G wire has been -- come up with a significantly lower cost of manufacturing, but don't give the wire away. That means increased profit margins for us, and we think broader market penetration with lower price points as well. It would definitely apply for maglev applications as well as MRIs as well as the cables and motors, and so forth. So, as always, 2G is, in fact, take out significant amounts of manufacturing costs in the wire, and we are on that path. More recently, and we've only stared talking about this in the last three months or six months period of time, the performance now looks like it also could be higher. And that was introduced through our nanotechnology approach, where we are getting some additional performance improvements that we had not early anticipated.

Greg, do you still feel there's enough cash, moving forward, to get to profitability?

Peter, this is Kevin. We have built business plans that will allow us to be self-sustaining to profitability. I think it's clear to say that these are aggressive business plans. But we certainly have built them, and obviously, we're trying to run this business simultaneously on the lean aside from a cost perspective, but obviously accelerating the commercial adaptation of our product so that we can get the profitable as quickly as we can.

Thanks.

Jerry Hardis (ph) with Independent Advisors.

A question on the SVAR, I think there was an expected nine-month testing timeline for the TVA SVAR prototype. Does that timeline now begin in July of '04? And has there been similar rotor problems with the HTS ship motor project?

Dave, do you want to take that one?

Yes, the first part of you're question -- the timeline beginning in July is more approximated. It could be anywhere from six to nine month -- excuse me, between six and nine month, because we did some of the testing already. The second part of you're question, could you just repeat that please? I'm sorry.

Were there similar rotor problems with the HTS ship motor as there was with the TVA SVAR Prototype install?

No, and I should clarify the word you used there -- was "problem." Really, what happened with the SuperVAR was a redesign based on initial findings in terms of optimization, so "problem" might be too strong a word. We took the opportunity to go back and make it more cost-effective at the same time. So the whole idea of this prototype was to do exactly what it is doing, which is work with Tennessee Valley and create a machine that is optimal. And I think we are iterating that process. The 36 program, and the 5-megawatts specifically, have not gone through any of those. In fact, the 5-megawatt has worked pretty flawlessly.

So, from what you are saying, it would be possible still that -- I think originally you were thinking as much as a year from the November timeframe that those orders could be initiated by November anyway?

The contract -- and we've said this before -- the contract with TVA is that they could take up to 12 months to make their final decision on releasing the orders to production here. They are anxious to move forward, just about as much as we are, as a matter-of-fact. So, what Dave is telling you, starting in July, we anticipate that it would be six to nine months before we would see that release. It could be sooner, as always, but we don't see this thing getting dragged on for another 12 months, which I think you may be asking about.

Right. Right. Thanks a lot, guys.

David Herwitz (ph) SC Fundamentals.

Hi, good morning. What was your options expense for the year?

David, we do not expense options.

I know, I understand. I think in your 10-K, you have to put a pro forma --

We're in the process of doing that now. We do not have that number available.

That's not available? Okay. And what were your final fully diluted shares?

27.6 million shares.

27.6. Thank you.

Stuart Goldberg, PSD Capital.

Good morning, guys. I just want to confirm one thing and then ask a question. In your guidance of 50 to 60 million in revenues, you have a backlog of $46 million. You're saying, from the backlog, 46 million will come from that. It seems awfully conservative that you are anticipating only 4 to 14 million more in revenue to be booked during the year from what you already have in backlog. Do I understand that correctly?

You have the numbers correct -- 46 million is in backlog, signed purchase orders, signed contracts. And we will come back later in the year and give you our updated guidance as time goes on.

Okay. And then, the question is -- of that guidance, of the 50 to 60 that you anticipate, what percentage will be the Navy contract?

We are not in the habit of giving revenue guidance by business segment. However, I think --

But it was, I mean -- when you file your K, it's going to be more than 10 percent this year, right?

As a customer? Are you talking about for fiscal '04?

We'll, I'm talking about going forward. Wasn't the Navy a 10 percent customer this year?

Correct.

And isn't -- I'm trying -- and you are going to give that information out in your K. So what are you anticipating in '05?

I think you can anticipate going into fiscal '05 comparable to '04.

Okay, same percentage?

By the way, we are simply saying that we don't give quarterly guidance and we don't give guidance by business unit going forward here. We give guidance on a full year. So that's why we're kind of dancing around a little bit, but you got the idea; it's about the same as it was for '04.

Right. Thanks, guys. Congratulations.

Jarett Carson with RBC.

Yes. Hi. Good morning. Regarding the testing of the ship propulsion motors and certainly the contract that you have with the Navy. Do you feel that maybe we are seeing some slowdown because of the current situations that we have ongoing in the Middle East? And do you have some concern that we could continue to get more push-out on that development project? Is that impacting it, I guess?

Jarett, I just fully disagree with that characterization. There is no pull-back on the 36.5-megawatt program. That is going full speed ahead, as they say, in the Navy, I guess. And we're only talking about a shift in revenue that we we'll see on this business more toward the second half than the first half, but all of the dollars are already in backlog. So I don't know how else to say that. It's a matter of cash flow on the Navy's part. They said, "hey look, you know" -- their fiscal year starts October 1st, by the way, or ends September 30th, whatever way you want to look at it. So we are working in cooperation with them, given the current war situation we're in here, but that is all in backlog. It is a matter of timing on that.

Sure. Yes --

The 5-megawatt is, again, we delivered it on schedule. It's not a matter of funding; more funding came through -- I think we reported that on the last earnings call -- to support the testing. So that's actually there. It is, quite frankly, a matter of this Center for Advanced Power Systems, a Navy-funded center there in Tallahassee, to get all of its pieces together. So as an example, they put the load motors in. There was a delay in those being shipped in to that facility. There were some problems with vibration in those motors when they did arrive. These are all things that are out of our control, and has nothing to do with rate of funding from the Navy at this point.

I wasn't questioning that the overall size of the project or whether the overall funding wasn't there as much as whether the rate of spend got extended, and just curious if you felt that could possibly be an issue here?

No, certainly not with the 5-megawatt motor, which is underway. On the 36.5-megawatt motor, potentially maybe a three-month extension for the total life of the project. And if that occurs that way, in fact, the total value coming into AMSC would actually increase above the 70 million. But that's something we may have under our control in terms of speed of working on that program. So we will see how that one develops, but that is a couple of years out there.

Okay. Thanks.

Mark Grzynski (ph), Needham.

Good morning. How are you doing? I was just wondering if I could get any insights as to the steps you are taking to replace backlog that is most likely going to fall off once the Navy contract finishes?

Well, we are in a continuous process here -- look, first of all, I will characterize this company as one that is focused on commercial products. And quite clearly, as of today, a large fraction of our revenue in '04, and '05 for that matter, will be from government contracts. So we're not going to walk away from those. And we will continue our efforts on Capitol Hill to develop additional major projects for funding applications, which puts a pull on our wire plant, which is a real good thing. It provides additional revenue in terms of the projects, such as LIPA, such as the 36.5-megawatt project. So we are actively seeking those additional projects so what you just described doesn't happen a couple of years down the road.

I will add to what Greg said. You also have got to recognize we're talking about accelerating as quickly as possible the commercialization of our ship propulsion motors, and to the extent that we can commercialize that quickly, that will obviously not only lead into backlog for our SuperMachines business, but also for Wires business. Same goes as well for the SuperVAR as we satisfy TVA's requirements. We are also talking with prospective customers as well for the SuperVAR. So it is both a combination of additional government contracts that we're looking at as well as the commercialization of our rotating machine platforms.

Okay. Great. Thanks. And just another quick question regarding the Massachusetts plant, are you guys happy with the progress there? I know that you mentioned yields earlier -- are you happy with the progress?

Yes, we are very happy with the progress. As we've said earlier, it's a facility that was brand new less than two years ago. In most cases, a two-year period, 18 months to 24 months, to get a facility up and running, work all the bugs out, is pretty common. And I think we've done actually better than that. So I'm feeling very good about the position that the facility is in from the standpoint of producing what it needs to, to meet the requirements.

Great. Thanks a lot, guys.

Chris Brennan (ph), Private Investor.

Hi, good morning. Just a few observations -- I would be curious on your comment on the Sumitomo thing. You guys say you are three years ahead of your nearest competitor. So my question is -- why does Niagara Mohawk choose somebody two to three years behind us? Sumitomo's capacity of this plant that is online now -- what is that as a percentage of our capacity? This comment of theirs that they are going to go on a price competition basis, below-market, lose money just to gain market share, typical Japanese philosophy? And then, since there is this co-hab relationship we have, who needs who more? What percentage of their product uses our patents and vice versa? And then, maybe a broad question -- who else is online to surprise us with a plan that is coming online to get into this business that we don't know?

Well, let me start with the last one. There's absolutely zero surprise with Sumitomo, because they have been our perennial competitor, literally since 1987 when we founded this company. And we have been very open about that in public discussions and earnings calls, at various times, certainly in our 10-Ks. So, there's absolutely no surprise here that they are continuing. And by the way, it is actually not much in the way of news, because we've known about their production capabilities for some time. Obviously, they have demonstrated in Japan, with Tokyo Electric Power, 66 KV power cables in the past. I think they shut down on schedule the last test that was in 2003 or 2002. They had to make wire to be able to make that cable. So, they have been there for some time. What they are now saying -- and if you go to their website, you can find what they actually said -- is that they are going to -- they are committed now, I guess, is the way to look at it. Committed beyond the R&D stage to continue into the commercial stage.

Again, I don't see any surprises here. I think it is a good sign, by the way -- I said this earlier -- that we have a large reputable company that says "we have been there for 17 years doing the R&D, we have built cables with our wire and so forth, and we are now going forward with this first generation wire on a commercial basis."

You asked about the Niagara Mohawk. The Niagara Mohawk, which is run by a company called InterMagnetics General, through the prime contractor, chose Sumitomo Electric as the cable OEM, and that's going to use exactly the same design cable. It's 69 KV in Niagara Mohawk; it was 66 KV for Tokyo Electric Power in Japan. That's a fully-demonstrated cable -- it's going to use the Sumitomo wire because that's what they used before. So it's sort of a package deal, if you will, for that cable system. So I don't think there's any surprise there. It would be highly unusual, let's say, that our wire would have been pulled in for that particular project. So I hope that answers your question.

Can I ask a follow-up? Hello?

Sure, go ahead.

I'm just curious, to go back to your statement that you're two to three years ahead --

Oh yes --

Of your competitor --

Yes.

In other words, if I go back to two to three years ago on your conference call, I really have no competition, if I would've put my nearest competition that far back.

Well, two to three years ago on conference calls, you know, any public statements we've made, I can absolutely attest that we have been saying for probably ten years now, that Sumitomo has been sort of two to three years behind us. It has been -- in the early '90s, they were ahead of us. And there's no question about that. But as we got into the second half of the '90s, we pulled ahead of them, and we been constantly keeping that two-to-three-year gap in terms of price and performance ahead of them. Our job is to maintain that position in the marketplace. And clearly, we have been winning the orders and delivering on those orders, and we intend to go forward with that.

So you address those -- their plant capacity versus ours, the price of their offerings, their wire ad versus ours? And who needs whose patents more in this relationship?

Well, we have already cross-licensed everything. So nobody needs anybody's patents more than the other. That was the first major cross-licensing deal in this industry, which again, that happen last June or July, I forget now. And that's a sign of maturation of an industry. This is all on one G wire, and it was that "hey, these are the two companies that have been competing head-to-head and are going to develop this market." And just like IBM and Toshiba cross-licensed so that they can both practice their businesses, the same thing happened here. We have taken that off the table as an issue by that cross-licensing. Again, I think the good news is -- we also signed, in conjunction with that, a memorandum of understanding to cooperate to further develop the business in cables -- HTS power cables. So, I can't say any more than that. I understand we have one more question?

We do have one more question from the site of Vincent Baker with Deutsche Bank.

Greg, nice going. You guys are doing a great job. A while ago, a short while ago, you commented that you felt that next March you guys would swing into being cash positive. How do you feel about that? And when does the company turn profitable? I have been with you since '91, so I I'm patient.

Vincent, you are patient. Probably more patient than I am, in that case. This is something we have been saying on calls, is that we think we need to get to $100 million in revenue to get to breakeven on this business. Now, forecasting a year out from now is kind of a tough job in recent years, the way the economy has been going. If we hit the 50 to 60 million this year, you now, we won't be at 100 million; that's for sure. Will we get to 100 million the next year? You now, we are going to make our damnedest best effort we can to get there. But it's real hard to forecast these days. So, Vinny, I can't say more than that. It's just difficult to forecast that kind of a revenue growth year-over-year for the next two years -- not just this one year. Kevin, do you want to add anything?

No, I think that's it. I think we have been consistent in saying that we believe that breakeven for us is about 100 million in revenue, and it depends upon a mix between the three businesses of roughly split evenly between the three in terms of the revenue contribution. And as Greg pointed out, it is tough enough to forecast this business within a twelve-month timeframe. To go beyond that, you now, it would be very difficult to be quite accurate on that.

Thank you very much. Good luck.

All right. I will go ahead and turn it back over to management for any closing comments.

Well, thank you very much for listening and participating in our conference call today. We think we had a great year last year, and we have a great foundation for this year. So we're looking forward to continuing to grow this company, grow this business as we go forward. Thanks again.