American Superconductor Corp (AMSC) 2004 Q3 法說會逐字稿

Welcome to American Superconductor's fiscal year 2005 second quarter conference call. With us today is Greg Yurek, Chairman and CEO, and Kevin Bisson, Sr. VP and CFO of American Superconductor. I would now like to turn the conference over to Greg Yurek.

Thank you, Sarah. Good morning, and welcome to our fiscal 2005 second quarter and 6-month earnings conference call. On the call with me today is Kevin Bisson, our Chief Financial Officer as you just heard, and also Dave Paratore, our President and Chief Operating Officer. By the way, I should mention here that Kevin and Dave are together at the Company. I am actually at a remote location in Washington. So, I think the logistics will work out but bear with us if we have any delays. In our conference call today, we're going to review the numbers that we released in an announcement this morning and we'll provide a brief update on operations and key metrics and then we'll open up the session to your questions. First, I would like to turn it over to Kevin, however, to provide the Safe-Harbor and to provide highlights of the first quarter financial reports. Kevin?

Thanks Greg, and good morning everyone. Before we begin discussing financial results for the second quarter of fiscal 2005 and our outlook for the remainder of the year, let me provide the following guidance. In our attempt to share information with you to provide insight 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 second quarter financial results, revenue for the second quarter was 9.5 million, which was $100,000 or 1 percent lower than revenue in the second quarter of fiscal 2004. A combined 2.8 million or 86 percent increase in AMSC wires and Power Electronics Systems revenues year-over-year was offset by a $2.9 million reduction in Super Machines revenue.

The substantial increase in Power Electronics Systems revenue was due to the recognition of DVAR related revenue in connection with two previously announced wind farm orders. While the 30 percent increase in AMSC wire's revenue was the result of increased year-over-year first generation High Temperature Superconductor or HTS wire deliveries, the decrease in Super Machines revenue was due mainly to the funding limitations placed by the Office of Naval Research on the Company's 36.5 megawatt HTF's motor program that we had discussed in our previous two quarterly earnings conference calls. The Company incurred uninvoiced costs for the program in the second quarter of approximately $3.1 million that were included in inventory at September 30, 2004. We're pleased to report that in mid October, the Office of Naval Research resumed funding for the program and we anticipate sufficient funding in the third fiscal quarter to absorb both inventory cost as of September 30 and estimated cost to be incurred in the third quarter. Revenue for the first half of fiscal 2005 was 22.2 million, which was 4.8 million or 28 percent higher than revenue in the first 6 months of fiscal 2004.

Combined revenue for AMSC wires and Power Electronic Systems more than doubled in the first half of fiscal 2005, compared to the first 6 months of fiscal 2004 due primarily to substantially greater HTS wire shipments and higher revenue from the Long Island Power Authority or LIPA cable project at AMSC wires, as well as higher DVAR related revenue with Power Electronic Systems. The year-over-year increase at these business units was partially offset by a $1 million decrease in SuperMachines revenue due principally to the Navy's funding limitation for the motor program in the September quarter noted earlier. Orders received during the second quarter totaled $3 million, which was down 1.7 million from the 4.7 million in orders generated in the second quarter of last year.

Orders for the second quarter were driven by DVAR related orders for electric utilities at our Power Electronic Systems business unit. Backlog as of September 30 stood at 57.1 million, which was down 7.1 million from back log at the end of the first quarter at 64.2 million and down 8.2 million from backlog at the end of our previous fiscal year, March 31 2004. Of the 57.1 million of current backlog, approximately 36 million is expected to be recognized as revenue in the second half of this fiscal year. Combining this amount was revenue booked in the first half of this year, we currently have visibility to approximately 58 million in revenue for fiscal 2005. Orders for the first 6 months of the fiscal year, amounted to 15.1 million, which was down 6.8 million from the 21.9 million of orders generated in the first 6 months of fiscal 2004.

Last year's first half orders included the life of power cable project of which $15 million is being funded by the US Department of Energy. Orders for the first 6 months of the current fiscal year were driven by D-VAR related orders for a large US semiconductor manufacturer, a US wind farm developer in several electric utilities. The first-half orders also included a contract from the Defense Advanced Research Projects Agency or DARPA in connection with potential US military applications with Second Generation HTS Wire. The operating loss for the second quarter of 4.1 million was 1.9 million or 32 percent favorable to the operating loss of 6 million in the second quarter of fiscal 2004. Sales-volume related margin improvement at AMSC wires and Power Electronics Systems more than offset lower earnings at SuperMachines due to the Navy's funding limitation on this business unit revenue for the quarter.

In addition, SuperMachines small operating loss for the quarter was impacted by development expenses in connection with the delivery and installation of the advanced SuperVAR prototype at the Tennessee Valley Authority or TVA, electric power grids in Dallas and Tennessee during the second quarter. With the successful synchronization of the SuperVAR on the local power grid, we anticipate minimal SuperVAR prototype related development expenses going forward. The operating loss for the first half of fiscal 2005 was 9.1 million, which was 5.3 million or 37 percent lower than the operating loss of 14.4 million for the first 6 months of fiscal 2004. Similar to the second quarter's results, the first half operating loss improvement was driven by substantial year-over-year increases in revenue at AMSC Wires and Power Electronics Systems, partially offset by lower fee income at SuperMachines in connection with the Navy motor program due to lower revenue as well as higher development expenses related to the delivery of the advanced SuperVAR prototype to TVA in the second quarter of this fiscal year.

Net loss for the second quarter was 4.1 million, which was 3.3 million or 44 percent favorable to the net loss of 7.3 million in last year's second quarter. The second quarter of last year included approximately 1.4 million of nonoperating expenses related to a proposed debt financing transaction that the Company subsequently abandoned in favor of a public equity offering that closed in October of 2003. Net loss per share for the second quarter of 15 cents per share with 19 cents per share favorable to the 34 cents per share net loss recorded in the second quarter of last year. Net loss and net loss per share for the first 6 months and fiscal 2005 was $9 million and 33 cents per share respectively. Both amounts compare favorably to the net loss and net loss per share of 15.7 million and 73 cents per share respectively for the first half of fiscal 2004.

The Company ended the second quarter with 45.7 million in cash, cash equivalents, and short and long-term investments compared to the corresponding $49.4 million balance at June 30, 2004 and $52.6 million balance at March 31, 2004 our previous fiscal year end. The cash burn for the second quarter of 3.8 million was driven primarily by the Company's net loss of 4.1 million and a $1.6 million increase in the inventory driven working capital offset by a noncash depreciation in amortization expense of 1.8 million. This significant increase in inventory was mainly the result of 3.1 million of uninvoice costs during the quarter related to the Navy motor program as well as increased Power Electronics Systems inventory to support the anticipated commissioning of 5 PQ-IVR and D-VAR units in the current quarter. For the full fiscal year ending March 31, 2005, the Company reaffirms previous financial guidance, with revenue expected to be in the range of $55 million to $60 million. To that end, the Company expects record revenue in the current quarter, driven by the resumption of navy funding for the super conductor motor program and the forecasted commissioning of 5 PQ-IVR and D-VAR units at our Power Electronics Systems business segment.

In addition, the company reaffirms its operating loss guidance for all of fiscal 2005 to be in the range of $20 million to $23 million, with the corresponding loss per share to be between 70 cents per share and 82 cents per share. Before I turn it back to Greg for his remarks, I would 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 will 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 us many people as possible to participate in the question and answer session. Thanks and I will turn it back to Greg.

Thanks Kevin. I would like to provide some brief highlights for each of the businesses and then we will take your questions. Let us start up with the AMSC wires business. In the first half of our fiscal year, we manufactured 253,000 meters of first generation HTS wire that was either shipped or was placed into inventory for shipment in the second half of this fiscal year. This means, we were on track to meet our goal to produce in ship around 550,000 meters of HTS wire to customers by March 31, 2005, which is the end of our fiscal year. That will be about 4 times the amount we shipped to customers in our last fiscal year.This will be a significant increase and we were shipping the customers and highlight the successful ramp up in the operation of our Devens manufacturing facility. [Inaudible] high performance HTS wire and meeting customer delivery scheduled in 11 countries around the world. And very importantly, these customers are continuing to design new products powered by AMSC wire. We were delighted to be at the heart of this process, a process that is creating a new industry, one that is based on HTS technologies. Our first generation HTS wire will continue to be the primary wire utilized in the HTS products around the world, over the next 2 to 3 years. After that, we believe second generation or 2G HTS wire will become our primary wire product due to an increased customer demand for higher electrical performance and lower cost, both of which we expect to achieve with our proprietary 2G HTS wire.

Several months ago, we provided a roadmap, detailing how we plan to make the transition to second generation wire. The transition is already well underway at AMSC. This roadmap can be found in an announcement we released to the public on July 27, 2004 and which can be accessed under the lot and more feature on AMSC homepage at amsuper.com. as well as to our link in the earnings announcement we released to the public this morning. You may remember from our previous calls and from our roadmap, that 4-centimeter technology is of fundamental importance in achieving the dramatic reduction in the cost of manufacturing HTS wire, that is promised by 2G technology.

By scaling up to wider strips of 2G material over longer and longer lengths and then slitting the wider strips into the industry standard wider dimensions being used in applications today and in the future, we expect to be able to produce multiple wires simultaneously, which is one of the key pathways to substantial manufacturing cost reduction that we are pursuing. Based on our 2G manufacturing roadmap, we expect to complete the conversion of our 2G development facility to 3 pilot manufacturing line and operation that will be capable of 4-centimeter technology, in the string of calendar year 2005, approximately 6 months from now.

By the way, if you would like to see a photo of some of the 4-centimeter material, we are already processing and learn more about this, please go to our homepage, where you will find it highlighted on the left side of the page. We have already installed certain key 2G equipments in our Devens manufacturing facility and we are continuing to procure additional equipment, required for the second generation HTS wire pre-pilot production line. With this equipment, we expect to initiate production of 2G wire from this line and to ship over 10,000 meters of high performance 2G HTS wires to customers in the 12-month period that follows start-up of the line. Essential to our 2G HTS wire manufacturing roadmap is that we are achieving high performance results today. Utilizing the same processes, we are scaling up for production in the next year and beyond. And equally important to the technology advances is the fact that we have the plan needed to continue on our roadmap to full commercial success with the processes that we believe will meet customer requirements.

Looking forward, we expect at our next fiscal year to start the investment as planned in our 2G HTS pilot manufacturing operation. This will be a significant step as we will move from a pre-pilot facility consisting of modified R&D equipment with some production machines to a line comprised completely of production equipment. The capital investment is expected to be in the range of 15 to $20 million over fiscal years 2006 and 2007 as planned. The bottom line with respect to our 2G HTS wire technology is that we believe we have strongly positioned ourselves to the application of our material science and manufacturing development expertise as well as our plan to remain the dominant market force in HTS wires and applications.

To conclude my remarks on the AMSC wires business, I want to point out that our project to install an HTS powered transmission cable in East Garden City, Long Island or the LIPA, is on schedule. This means we expect to install the cable for LIPA in early calendar year 2006. We'll keep you informed of progress on this cable project over the next year. Please keep in mind, however, that we are already scooping out with LIPA the next Asia's cable segments for Long Island.

I would now like to bring you up-to-date regarding our Super Machines business. We announced in September that the 5-megawatt super conductor ship repulsion motor we have developed and delivered to the US Navy had performed successfully under full load, steady stay conditions at the Navy Center for Advanced Power Systems. This 5-megawatt motor which is continuing through its planned testing program is now a calling card that we are using with potential customers for superconductor, ship repulsion motors around the world. We are now able to discuss with these customers not only the great value proposition offered by superconductor ship repulsion motors, we can also point to the full load test results and can invite them to visit the test ward to see the motor operating under load. It is the big selling point for us.

The successful 5-megawatt motor has the power rating at one end of the power spectrum for ship repulsion motors which generally range from 5 megawatts to 40 megawatts of power. The 36.5 megawatt motor we are developing for the US Navy takes us to the upper levels of that spectrum and is expected to put us in a position to offer customers the full power range needed for both commercial and military ship repulsion systems. In October, we achieved a very important milestone when we passed what the US Navy called its detailed design review for the 36.5 megawatt motor program. This is important because it quite directly means that the Navy has now authorized us to move forward to complete manufacturing of the motor. As a result, we expect to manufacture the motor over the next 12 months, to have the motor and factory testing in early calendar year 2006, and to ship the motor on schedule to the Navy in the spring of 2006. So, our super machines business is continuing to make great progress in developing and demonstrating superconductor ship repulsion motors.

The next step is all about getting these new motors adopted by customers and starting to generate revenues not only from product development contracts but also from product sales. In our previous two earnings calls, we stated that we expected to form one or more strategic marketing and sales alliances with significant players in the ship industry and that we plan to form different strategic alliances that would help us address effectively both the military and commercial ship sectors. Last month, we announced the first of these strategic marketing and sales alliances when we signed a 6-year agreement with Northrop Grumman Marine Systems to sell, market, and develop products for the US military based on HTS wires. Our new sales and marketing partner, Northrop Grumman Marine System is located in Sunnyville, California. It is the business that is responsible for providing propulsion machinery that is utilized in Navy ships. The focus of the relationship will initially be on HTS electric ship propulsion motors for the US navy. We believe that this new alliance greatly increases the opportunity for HTS machines to be the solution of choice for future electric warships such as the DDX, the navy's first all electric warship that is currently under development. The DDX requires 2, 36.5 megawatt electric motors for its propulsion system. So our current contract with the Office of Naval Research certainly positions us well to demonstrate the technology needed for both this ship and other future navy ship building programs. The competing propulsion motors for the Navy's ships are conventional copper-based motors, permanent magnet motors, and superconductor motors.

We believe, we are well positioned to win future procure contracts from the Navy for superconductor ship propulsion motors based on the relative merits and state of development of our superconductor motors compared to the competing motors. And we also believe our new strategic alliance with Northrop Grumman Marine Systems, strongly positions our SuperMachines business to be a primary supplier of superconductor motors to the US military. With the business alliance with North Grumman now in place, we are working on multiple opportunities with other companies to create a channel or channels to market for commercial ships. A goal we believe we will achieve in the next 6 to 12 months, we will keep you informed of our progress during that time.

Let's now turn to our SuperVAR synchronous condenser, another rotating machine product that is being developed by our SuperMachine's business unit. The advanced SuperVAR prototype was first tested on the power grid in Ohio in August of 2004, and it was subsequently delivered to the Tennessee Valley Authority or TVA, and installed in one of its substations in Dallas in Tennessee. A substation that serves a steel mill with an arc furnace that creates considerable voltage fluctuations on the local power grid. TVA has been operating the SuperVAR synchronous condenser successfully and it is continuing with its acceptance testing of the machine in Gallatin.

As you know, TVA pre-ordered 5 SuperVar synchronous condensers from our SuperMachines business and has agreed to release the orders to production when they are satisfied with the operations of the advanced prototype machine. While this operation period is expected to continue for a significant amount of time, the operation to date has been successful and we expect to begin delivering the 5 SuperVAR machines to TVA on plan in our next fiscal year. We will let you know as soon as TVA gives us the green light. We are quite encouraged by the overall performance of the advanced SuperVAR prototype, and we believe that the SuperVAR product line will become a significant part of the revenue growth for the SuperMachines business over the next several years.

I would like to close my remarks by commenting briefly on our Power Electronic Systems business. Power Electronic Systems business now has a visibility to a record 14.5 million of revenue for the fiscal year ended March 31, 2005. If you take Power Electronic Systems current backlog, their first half revenues and their solid visibility to additional orders this quarter and next, this business is clearly continuing to build strong momentum for achieving break-even annual revenues of approximately $16 million. Speaking of momentum, in September, we announced an order for 2 D-VAR systems from International Transmission Company for use in one of their transmission groups in Eastern Michigan, to increase grid reliability. This is a significant order not only because of the size of the order but also because we received it off-cycle. In other words we didn't need to wait until our last fiscal quarter in March to get an order from a transmission grid operator that wanted protection for the next summer season. This is also the first order from an independent transmission grid operator.

Also in our second quarter, we received a new follow on D-VAR order from an existing transmission grid operator. Two days ago, we announced another order for D-VAR systems to meet the grid interconnections standards for a wind energy project in Saskatchewan, Canada. This wind farm will generate a hundred 150 mega watts of electric power from Vestas wind turbines. Vestas is the largest wind turbine manufacturer in the world, and this will be the second time in the last 6 months our D-VAR systems are being bundled with Vestas wind turbines. Also to put us in perspective, the Sas power wind farm will be the sixth wind energy project in which our D-VAR systems are helping wind farms meet the standards for interconnection to the local power grid. Once the D-VAR units are installed next year, at the Saskatchewan wind farm, our D-VAR systems will be supporting 500 mega watts of wind-generated electric energy. That's a lot of wind, and we believe prospects are quite good for an increasing number of orders for wind farm D-VAR solutions over the next year. We've added over $6 million in new orders for our D-VAR power electronic systems during the last few months. These new orders, for both wind farms and transmission grid applications, are driving increased revenues in the current fiscal year as well as adding to our backlog through the next fiscal year. And finally, it's worth noting that we already have $4 million of D-VAR orders in backlog, backlog that we expect to recognize this revenue for our next fiscal year beginning April 1, 2005. In fact, the principal focus of Power Electronic Systems in the second half of this fiscal year is to augment this backlog to be converted into revenue for fiscal 2006.

In closing, I want to underscore that we had a great first half of our fiscal year. The backlog of orders was solid and we're now targeting profitability for two of our business units this fiscal year. Above all, we have further strengthened our technical and market leadership position in the Asia's wire industry and we have achieved -- we have advanced significantly on the path to commercialization for our super machines product line. We now would be happy to take your questions.

(OPERATOR INSTRUCTION) Bill Benton, Blair.

On the fear of being beaten if I ask a related question, because it may look like two, I may take a shot anyway. Let's see, PES targeted profitability, you talked about in your press release, your target profitability this year. Is that what's included in your guidance or would that be outside of the guidance?

That would be upside to the backlog that we're reporting here, to be very specific. So, we're reporting what is actually in backlog now. We pointed out in the earnings announcement this morning that we're anticipating after the current momentum we've here with orders to close additional orders for D-VARs within the next several months, that would add to revenue this fiscal year. So, Kevin, I don't know if you want to clarify that any further, but to be specific it would add to our backlog to be recognized as revenue.

Yes, I think though, if you're referencing our full-year guidance from a revenue perspective, it would be on the obviously high-end of the guidance, it would not be in the low-end.

Okay. So, it's included within -- to be at the high-end -- okay, I got you. And at the low-end of the guidance, you wouldn't necessarily be achieving profitability in your PES business?

That's correct.

Okay. And then, just related to that just -- are there any updates on maybe kind of your thinking on good reliability standards, post election anything happening on that front that could really maybe help that market along?

You know, Bill, with the election just over and obviously the change of power in the Congress as well as the President being there now, everybody that I am talking to down here in Washington is looking out for some momentum here. Now, I am going to hold my breath until that happens, but we're working the equation. I think, you know, if the Energy Bill gets passed to with the electricity title in it, that clearly represents upside for us. None of that is in any of our numbers or guidance or anything else like that or any of our models, but if that goes forward as many people here expect here in Washington then -- again that clearly represents upside for us.

Okay, we will keep our fingers crossed on that.

Walter Nasdeo, Ardour Capital.

I have a question relating to the revenue projection. If my math is correct here, in order to get to the low end of the $55 million projected target, you guys are going to have to average about $16.5 million a quarter over the next 2 quarters and here we are already in November. Is that shaping up to be something that's essentially going to happen?

Walter, we gave you both in the press release, as well as I think in our comments, our backlog that we expect to recognize as revenue here, so we are clearly quite comfortable reaffirming our guidance in 55 to 60, in fact, Kevin, said with the backlog that puts us at $58 million in revenue for the year here. So when we said we are expecting record quarter's here for the third quarter, that means we are going to be having a record quarter. And we are on track to meet that revenue target. Kevin, you want to clarify any.

Yes, Walter, I think obviously your math is correct. I think what we tried to portray at least in my remarks, specifically as it related to this current quarter for power electronic systems in terms of objective of commissioning 5 D-VAR or PQ-IVR units. I think you know the average selling prices of those units. We also talked about super machines, the fact that the funding for the navy program has resumed this quarter. We believe that the funding is sufficient to cover not only the inventory costs as of the end of September, but also for our normal run rate of costs that we incur this quarter and we expect that that program will be incrementally funded going forward, at least through the end of this year, this fiscal year as it has in the past. So, I think besides just talking about how much we have in backlog that we expect to recognize as revenue, I think we tried to give a little more color in terms of at least 2 of these business units, power electronic systems and super machines, that I think if you do the math on that, I think should give you some confidence that our revenue guidance is achievable.

Are you going to see any seasonality over the last 2 quarters?

One of the points I tried to make earlier here was, we got 2 orders from transmission grid operators in the last quarter for D-VAR, one was a follow on from an earlier customer and that's our cycle, because we are normally seeing that all get jammed up in the February, March, April kind of time frame here and we might see some of that coming along, that would be good But it is getting spread out now, in the wind farms, clearly that seems to now be a constant, it is a growing area, we are going to keep, I believe selling D-VARs into wind farm opportunities here and you can look forward to that. And we got our first industrial order for PQ-IVR which is a type of D-VAR for industrial size, a big one back in May. We expect to be commissioning those 4 PQ-IVRs this quarter. But we are anticipating some additional industrial orders going forward as well. So that customer mix plus there seems to be a change here from the seasonality we always used to experience, have it spread out a little bit more at this point.

Jim Ricchiuti, Needham & Company.

I wonder if you can comment a little bit about the wire business. As you look at the second half of the year, looks like you are going to be producing somewhere around 250,000 meters or so of wire. Would you expect that to be more backend in terms of the fourth quarter or do you see it fairly, evenly spread in the third and fourth quarter and then just with respect again to the wires business. What the outlook is for new orders, both in the US and overseas?

Look for that to be fairly, evenly spread over the third and fourth quarters as we mentioned in our numbers here for wires production. Some has been inventoried for deliveries in primarily the third as well as the fourth quarter. So, now we are clearly on track to be able to make and ship the 550,000 meters here and look for that to be pretty much spread over the 2 quarters evenly. And with respect to beyond that, as you know we don't give guidance at this early stage for our next fiscal year. But, I could tell you that we're working with many potential customers around the world its a continuous activity, a lot of momentum in that area. We're working on some potentially very big projects that would give us the opportunity to bring in large orders here. So, but beyond that, in general comment again we don't give guidance for next fiscal year at this early date. Kevin, you want to add anything or Dave, perhaps?

No, I think it's -- the only color I'll add Jim is that the wire deliveries in the second half of the year, I think will be fairly evenly spread between the third and the fourth quarter. I think clear focus of the wire deliveries will be on the Navy program as well as on the LIPA cable project as well. 9

And Kevin, do you expect to recognize revenue on all 5 of the systems of the Gallatin grid.

Yes. That is our expectation at this point, Jim. And again not to get into to too much accounting parlance but our revenue recognition on the majority of those units would be on commissioning, which is essentially customer acceptance in the field. So we are tracking to that accordingly.

(Brian Zachman, Crown Capital) (ph)

I know you said you wouldn't talk about the following year, but if I look at the backlog number you gave in your press release, which was $20 million and you said $4 million of that was for the PES division. I can only basically assume unless you have some wires orders that you are looking at a -- if you are looking $14 million from the SuperMachines business for I guess the '06 fiscal. Is that correct?

No. I think first of all, Brian, I think the number -- the $4 million that Greg referenced included the order that was received subsequent to September 30. So I think from that perspective the PES number in terms of what is in backlog for next year as of September 30 is lower than the $4 million but I think reality is, going forward on '06 backlog, principal focus of that is primarily the big Navy program and the LIPA cable project. And obviously as Greg has pointed out, and we've pointed a number of times over the last couple of conference calls, filling the pipelines for fiscal '06 is a not one -- number one priority is 1A, 1A, 1B.

Can you break out the LIPA between the Navy just so I can --?

I think between both of them it is the lion's share.

I mean the difference between the two of them? Is LIPA -- are you 50-50 at this point, or is it --?

The preponderance is in the Navy program.

And Brian, when we come to our next earnings call which is what somewhere in early February, we'll be cautious at the end of our fiscal year, we will -- at that time we at least be able to share with you at least the backlog buildup toward the end of the fiscal year. But as Kevin said, main focus, and we said this in our earnings call as well, is building up backlog for the next fiscal year and we are feeling pretty optimistic about that.

Robert Smith, Center for Performance Investing.

3I'm on a cell phone so I am kind of stating in and out but anyway I hope you can hear me. Can you give me some color on the relationship of AMSC and Vestas. I mean, you said you had some kind of working relationship?

Well, again Vestas is the largest wind turbine manufacturer in the world out of Denmark. And this is the second time we've had our D-VAR bundled in with Vestas turbines for a wind energy project. That's a good working relationship and I can't really say more about that. But we like the working relationship, we like our D-VAR being bundled in, so that the wind farms can meet the grid interconnection standards and we'd expect to do more of that.

So, would it be accurate to say that you are the vendor of choice?

In terms, of D-VAR solutions, I'd say that's a good thing to say, yes.

okay, so what is the criteria for ordering a D-VAR with the wind system?

To be able to connect a wind farm or any remote energy source, but wind farms in particular, connected up to the grid they have to meet certain interconnection standards. It's nice to be able to generate the watts, the megawatts out of a wind farm. But if you are creating variable voltage and you don' t have enough VAR or reactive power support, the grid operator is not going to let you connect.

So, would every wind farm have a need for a D-VAR?

Well, every wind farm has the need to meet the interconnection standards and has a source of VARS in voltage regulation. As I said, this will be our sixth wind farm that we are supporting the D-VAR here. Our reputation is growing, I think, quite strongly in the wind farm arena here. I think best is now selecting us for the second time as the solution, it is a good sign. So momentum is building, Bob.

Quick kind of penetration is there in wind farms for such equipments?

What kind of penetration? I am not quite sure I understand the question.

Okay you said to have -- afford a connectability you have to have some -- this kind of assurance so, what is the D-VAR's place in this side and in versus competing option.

Well, the old options are kind of the old options that have been used in grids for a long time. Banks of -- capacitor banks, which indicates that wind farms are not really very effective because they -- there's too much cap bank switching, it causes problems with the gears in the turn. Yes, Bob, probably you should take it offline here, it's getting a little bit too technique here. You need a solution, D-VAR is a new solution that's clearly being adopted by the wind industry here and we are happy about that.

Mark Funket (ph) , Atlas Capital.

Trying to get a little bit better understanding just from the timeline to the DD(X) and how this might impact funding. So, right now you are still in the kind of the period of the three-year contract that you have with the navy. In terms of when they will select the actual DD(X) program for the different flights, which technology they are going to go with? I guess the flight Zero, they've selected the DRS magnet motor. How do you stand on getting on flight one I guess it is, that's going to get launched next time around.

Dave Paroatore here. In the depths of this with our partner Northrop Grumman and others, so I am going to let you address that if you would please. The problem with DD(X) program is obviously the first ship, which is for a contract in '06. We are activating things that is -- right now, the two motor options are the permanent magnet of DRS or the advanced induction motor out of Alstom in the UK. So, we don't anticipate nor do we have any expectations with respect to the first ship. The question is can we create a technology option for them as they move forward in the latter ships second, third, fourth, fifth ship or what have you.

What's the timing because I know there's been a lot of discussion around the DD(X) getting moved and there's some stuff that was out in the press, a speculation about what might happen to that budget. What is the timing for those additional flights currently estimated to be?

Right now, the way that program is leaning out is it's 1 to 2 ships a year beginning with the initial contract for a ship in '06.

When will that actually -- the ship is not going to get to till -- so the '06 is when they would start building DD(X)?

That's correct. They would actually order a -- a contract for ordering the ship will be in '06, the ship itself will be delivered in the 2010, 2011 time frame.

And that's the technology -- that's -- the first ship is the one that has the DRS technology.

That's correct.

And so then, when would the next flight be selected?

As I said, they would be literally 1 or 2 units a year. 1 or 2 ships a year going out from that point forward. And they roughly -- and they deliver of course the same period of other 12 months lag between each one.

So we are looking for being selected. Our option -- our motor option being selected in the next several years here, not obviously not in 2006. We are just delivering the 36.5 megawatt motor to the navy in the spring of 2006. So that's never been an option really, but as they make selections in the 2007, 2008 and 2009 time going forward that's where we would be able to look for insertion of our technology.

So what happens I mean from -- you deliver the motor in spring of '06 and then who knows what the time line will be with regards to them testing it. What happens -- is there an extension of the contract possible or what happens from a planning perspective? Because obviously that's a portion of your revenue and is that something that goes away or there additional navy contracts you'd be hopeful to get from ONR or --?

Well, you know one of the reasons we have in the sales and marketing agreement with Northrop Grumman is to do exactly that, to sell up our pipeline to make sure that there are additional contracts with the US Military, Navy included four additional motors for the generators, you have to generate the electricity to run these motors. They have real weight and volume challenges primarily weight challenges on theses, all electric warships to bring a real advantage here. So there is plenty of opportunity for us to continue to bring in contracts from the navy in the US military in general, during this period of time. That's always been a part of our model, and our plan.

Are there any things you are currently, I mean bidding on in that space or?

I am going to say, generally yes to that, but let's not get more anymore specific than that okay?

And in with regards to the amount of funding that was allocated to this government, fiscal year for the navy project, how much was allocated to this fiscal year?

We don't have any public numbers out on that do we Kevin?

No, I didn't hear that question Brian, I mean Mark.N

Understand how much, you know I guess allocated if you get the fiscal year in September, that starts October one, so they are allocated in about in October I assume.

I don't think that's public information.

Okay, I just didn't know if you could change.

No we can't.

And then, I guess so as we enter into '06 or fiscal year '06, and with regards to what will be in the backlog. The navy contract is in the $20 million backlog, alright?

That's correct.

And that, is there a portion that has to get reapproved for fiscal year '06 -- for the government's fiscal year '06?

Yes, these programs are with in fact what is called incrementally funded, so, you know, obviously they put a budget together O&R which includes our program. They may put any budget, budget it amount for this program, but in terms of the actual funding it doesn't necessarily mean that entire budget is funded at once, so we do it incrementally over the year. From your perspective that's advantageous to spin up and also to keep strategic vendor [Inaudible] , but I think from our perspective we have a shown a pretty, demonstrable history of having these incrementally funded programs funded quite favorably for us.

Yes, and I think giving the green light from the navy now to go forward in manufacture the 36.5 megawatt means that there's nothing 100 percent sure in life project that's the higher of surety. Mark, I'll ask you to get back in the queue, so we can let some other questions come through.

Jarett Carson, RBC.

Good morning, I'll try to limit mine less than five or one question. With regard to -- Kevin can you give a little color on the fact, the revenues were -- relative to penny where the Street was for the quarter, down in projections yet the bottom line with a lot better and then in that context, looking forward into the back half of the year projecting improving revenues, but maintaining the kind of 20 to $23 billion loss, so revenue is going on, but that would suggest that cost are escalating more so I mean, can you give a little color around that, because in your press release, I mean you are not really showing, is there something going on in the operating and it's been fun (ph) , can you help out that?

No, I think a couple of things are going on, number one, is that there is a ramp up in the lightweight program, which as you know is the 50 percent cautier (ph) , so from the standpoint of as that ramps up, you know, that is obviously going to increase, relatively speaking losses so to speak even though the revenue increases as well. I think relative to the other business units, I think that they are, there is always some as they say uncertainty is going forward that you want to plan for and we are doing so accordingly.

So basically just a bigger loss on the -- with the ramp on the lighter side, I mean it sounds like PS is going be plus or minus a little bit getting close to breakeven and then super machines with the ramp? Is that without the -- getting roughly break-even not including any SuperVAR stuff?

I think the expectation is that SuperMachines we have always said will be profitable this year as it has been in the past year and obviously in order to do that given their first half performance, they would have to make money in the second half of this year and we expect that that will happen principally because the -- we believe the development expenses associated with the SuperVAR are by and large behind us and also that we expect the bulk of the revenue and therefore the profits in the business units to be focused on the Navy motor program, which is a -- as we've mentioned in the past, we book some [Inaudible] .

So, Jarret, to take Kevin's words, clearly all the guidance we are giving today on this call as well as in the release this morning, points in a very nice positive direction here. We just don't see any reason to go over the top and be more aggressive on the bottom line at this stage. Let's see how the year continues, and our expectations are high, we are targeting profitability in Power Electronics Systems. We have to continue to perform in each of our business units. So, we have a positive direction here in mind, but let's go, execute on our plan.

Sure, thanks. Kevin, just to close out on [Inaudible] , do you have a rough, approximate number for what R&D and SG&A were for the quarter?

Yes, I will give you those, all of that. The gross margin was a negative 100,000 and R&D and SG&A was 2 million apiece for the quarter.

Thanks.

As you get into the $4.1 million loss.

Bill Benton, Blair.

Let's see. Just -- I have one point of clarification, just in -- you pointed out that your manufacturer could have been a wire, you obviously didn't ship it this last quarter. Is that related to the navy situation?

By and large, yes Bill.

Okay, so that's the difference really there.

Right.

Okay. And then you have talked historically about trained commercial motor relationship kind of by the end of the year and I think you may have indicated, maybe I'm misunderstanding that you're kind of talking about the next 6 to 12 months. Is that kind of maybe on a slower development pattern than you were initially expecting or am I misreading that?

No, we want to digest (ph) . We said we have 1 or 2 by the end of this calendar year. So we've got 1 and now we are going to the multiple opportunities starting out -- it is a big world out there again. And you want to pick the right guys. We stayed 1 channel, now we are maybe thinking 2 channels. So, we are working our way through that, but Bill, we said 1 or 2 by the end of the calendar year. We checked off that box getting more focus specifically on the US military. Now, we are going after the commercial sector, and we want to make the right decision here.

Jim Ricchiuti, Needham & Company.

I wonder if you could just expand a little bit more on what you are seeing with SuperVAR and the prospects for these to go into production orders next year, would it be more towards the second half of the fiscal year?

Jim, again, the operation of the vast prototype done in Tenesse is going well. So, we are happy with that. And we are hoping that TVA is going to give us the green light here sooner than later, but it may take to the end of our fiscal year here, 6 months from now, something like that. Having said that, we would expect to start production earlier in our fiscal year, but we are not going to be shipping those things in the first half of the year. So, in terms of the revenue, don't look for revenue from SuperVAR shipments in the first half, they would be more in the second half.

Yes, and just to clarify to again going back to the accounting, given these are the first commercial units of the state, our expectation would be that probably up -- probably would recognize revenue when these things are effectively installed in operating the [Inaudible] shipments and which would again enhance Greg's remarks that we would be towards the back end of next year versus the front end.

Is there anything you can say about the initial evaluation of SuperVar, has it attracted interest from other perspective customers? What's been the level of activity or do you expect that to happen as you move further along in the process?

We are obviously always in a pre-selling mode if you will, there is then significant groups of utilities, individuals from utilities are already at the site observing, asking questions. TVA plays a central role in this with us, they will be as the partner. As we are out on the road talking to prospective customers and grid operators it is one of the options that definitely gets put on the table, it's part of the analysis process that our transmission planning team goes through. Maybe SuperVar is a better solution in some cases obviously. Coming back what I thought was first part of your question, the operation of the SuperVar -- the idea of putting at an arc melting furnace site is that the voltage fluctuations are extreme, in fact in the first days of operation TVA was surprised at how severe those voltage fluctuations actually were and was very delighted that they SuperVar handled all of it. So, this is getting accelerated testing to be sure. That's one of the reasons we think that there is an opportunity for TVA to give us the green light sooner than later. Does that answer your question, Jim?

That's helpful.

(Mark Funket, Atlas Capital). (ph)

In terms of time line for the 5-megawatt motor being tested sea, is there an expected date on that front?

Dave, you want to take that one?

Yes. Actually at this point there is not an expected time line for when that would happen, but let me give kind of the steps that have to happen between here and there. We have to finish the testing that's been done are performed at Florida state at the CAPS facility and that's the safety 3 phase of that, we are through the first phase which is that static testing that we talked about, the full load. They've got some model analysis they have to do where they simulate different types of ship environment and they test them on to those different environments and then they would do dynamic testing which is a specific part of the requirements that goes beyond just, you know, pulling it up to full load and see what happens. So those two things have to be accomplished. After that the next likely step is that -- next step for that motor to be removed and to go to a navy facility in Philadelphia for a signature testing, somewhat -- really acoustic signatures what they are looking for. So those two pieces are really the gates for the time line and second piece that I just mentioned the one at Philadelphia is something that hasn't been [Inaudible] concrete in terms of the overall timeframe that is going to take to do that. So the actual putting it on ship will be some period after that and those conversations about what type of ship it would be on, where it would go, what kind of testing platform, we are having those discussions right now.

We are at the end of our hour here. If there is one question in the queue we'll take it and end after that point. Is there another question?

Jim Ricchiuti, Needham & Company.

Got in under the wire. This is an easy one. Kevin, CapEx for fiscal '06, where is that at right now, what are you thinking?

Through the first half of the year it is just under a million. I think that we expect --

That's fiscal '05. Right Kevin?

`05. We expect that 2G CapEx will see an increase in the second half of this year, but I would suspect that we would probably see CapEx for the full fiscal 2005 to be at or slightly up from that of last year, which I believe is around $2m.

And in fiscal '06?

In fiscal '06 you are asking for CapEx?

Yes, yes.

No, I think we have talked about the fact that we expect to begin the procuring equipment for the pilot production for 2G processing, I think that's going to -- we are planning for that to happen next year, we said that before. Based on the time line that we put together I would look for that to be more towards the back end of next year versus the front end, and I think we are not going to spend all the 15 to 20 million next year that Greg had pointed out, but I think we'll start seeing that ramping up around middle of next fiscal year. That will the bulk of it I think from the CapEx standpoint.

Well, that brings us to the end of our call, and I want to thank you for your attention. I think we had a great first half doing everything on plan as scheduled here and we expect to deliver on our promise for the second half here as well. So, thanks for your attention today. Operator back to you.

This concludes today's conference. You may disconnect at any time. Thank you for attending, and have a great day.