American Superconductor Corp (AMSC) 2005 Q3 法說會逐字稿

Good morning and welcome to American Superconductor fiscal 2005 third-quarter conference call. With us today are 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. Go ahead please, sir.

Good morning and welcome to our fiscal 2005 third-quarter and nine-month earnings conference call. On the call with me today in addition to Kevin Bisson, our Chief Financial Officer is Dave Paratore, our President and Chief Operating Officer. In the call today, we will review the numbers that we released in this morning's announcement and we'll provide a brief on some of our summer operations and key metrics and catalysts and then we'll open it up for your questions.

First however, I'd like by Kevin to provide the Safe Harbor guidance and to provide highlights on the third-quarter and nine-month financial reports.

Thanks Greg and good morning everyone. Before we begin discussing financial results for the third 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 plans 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 in future operating results sections for more information on these factors and uncertainties.

Now turning to our third-quarter financial results, revenue for the third quarter of fiscal 2005 was a record 23.2 million, which was 10.9 million or 89 percent higher than revenue of 12.3 million in the third quarter of fiscal 2004. This substantial increase in revenue was driven by a $6 million increase in revenue for the SuperMachines business unit in connection with this unit's 36.5 MW HTS motor cost plus incentive fee contract with the Navy.

As you may remember from our last earnings conference call, we mentioned the Navy had placed a funding limitation on the motor contract during the September quarter. This funding limitation required us to book to inventory on our September 30, 2004 balance sheet approximately $3.1 million of cost incurred on the motor program but not invoiced as of September 30th. We also remarked at the last earnings conference call that the Navy resumed funding on the motor program in October and provided sufficient funding to absorb both inventory costs as of September 30th, and costs expected to be incurred in the third quarter.

As a result, SuperMachines revenue of 13.5 million for the third quarter reflects revenue based on some cost incurred in the September quarter as well as all program related costs incurred in the December quarter. In addition the record revenue generated in the third quarter resulted from a $4.1 million increase in revenue at our Power Electronic Systems or PES business unit compared to the prior year's quarter. Included in the fiscal third-quarter revenue of 7.5 million for PES was the commissioning of four PQ-IVR units at a major U.S. semiconductor manufacturer as well as the delivery of one D-VAR unit to a U.S.-based wind farm.

With regard to the AMSC wires business unit, although reported revenue for the quarter was not a record this unit shipped a record 163,000 meters of first generation HTS wire during the quarter. Approximately 150,000 meters of that bad amount was shipped on intercompany basis to SuperMachines in support of the Navy motor program for which SuperMachines recorded revenue during the December quarter upon invoicing the HTS wire costs to the Navy.

Revenue for the first nine month of fiscal 2005 was a record 45.4 million, which was 15.7 million or 53 percent higher than revenue of 29.7 million for the first nine months of fiscal 2004. It should also be noted that the 45.4 million in revenue for the first nine months of fiscal 2005 was more than the 41.3 million of revenue generated for all of fiscal 2004.

The year-over-year increase in revenue for the first nine months of fiscal 2005 resulted from significant topline increases for all business units. AMSC wires revenue increased by 3.8 million or 78 percent from the prior year due to substantially greater HTS wire shipments to external customers and higher revenue from the Long Island Power Authority or LIPA cable project. PES's year-over-year revenue increase of 6.9 million or 129 percent is due principally to a higher level of D-VAR and PQ-IVR shipments. While SuperMachines' $5 million or 26 percent year-over-year revenue increase is due primarily to increased HTS wire and subcontractor efforts related to the Navy motor program.

Orders received during the third quarter of fiscal 2005 totaled 3.7 million, which was 700,000 or 24 percent higher than the $3 million in orders generated in the third quarter of fiscal 2004. Orders for the third quarter or driven by a D-VAR order for a wind farm application in Canada at our PES business unit as well as several small HTS wire orders and development contracts at AMSC wires.

Backlog as of December 30, 2004 stood at 36.9 million which was down 20.2 million from backlog at the end of the second quarter of 57.1 million. Of the 36.9 million of current backlog we expect 13 million to $15 million of it to be recognized as revenue in the fourth quarter.

Orders for the first nine months of fiscal 2005 amounted to 18.8 million, which was down 6 million or 24 percent from the $24.8 million of orders generated in the first nine months of fiscal 2004. Orders for the first nine months of last year included the LIPA power cable project of which $15 million is being funded by the U.S. Department of Energy. Orders for the first nine months of the current fiscal year were driven by PQ-IVR orders for a large U.S. semiconductor manufacturer, along with D-VAR related applications for several wind farms and electric utilities.

The first nine months orders this fiscal year also included a contract from the Defense Advanced Research Projects Agency or DARPA in connection with the potential U.S. military applications for second generation wire. The operating loss for the third quarter of 2.6 million was 4 million or 60 percent favorable to the operating loss of 6.6 million in the third quarter of fiscal 2004. The quarter marked the first quarterly profit ever for PES.

In addition, this was the first quarter 2 of our three business units achieved profitability. The favorable operating loss from the current quarter compared to the prior year's quarter is due mainly to the $4.3 million swing in PES's operating performance which primarily resulted from increased year-over-year revenue combined with unusually low margins on product related revenues recognized in the third quarter of fiscal 2004.

The operating loss for the first nine months of fiscal 2005 was 11.9 million, which was 9.1 million of 44 percent favorable to the $21 million operating loss for the first nine months of fiscal 2004. Similar to the third quarter's results, the nine-month operating loss improvement was driven by the substantial year-over-year increase in revenue at PES combined with unusually low margins on PES product revenue in the first nine months of fiscal 2004.

In addition, the $4.9 million or 32 percent improvement in the AMSC wire's nine-month operating loss this fiscal year compared to last year was due principally to increased HTS wire shipments due to more favorable manufacturing yields.

Net loss for the third quarter was 2.5 million which was 4 million or 62 percent favorable to the net loss of 6.5 million in last year's third quarter. The net loss of 2.5 million recorded in the third quarter was the best quarterly bottom-line performance for the Company in the last eight years.

Net loss per share for the third quarter of 9 cents per share was 16 cents per share favorable to the 25 cent per share net loss generated in the third quarter of last year. Net loss and net loss per share for the first nine months of fiscal 2005 was 11.5 million or 41 cents per share respectively. Both amounts compare favorably to the net loss and net loss per share of 22.2 million and 96 cents per share respectively for the first nine months of fiscal 2004.

The Company ended the third quarter with 45.5 million in cash, cash equivalents and short and long-term investments compared to the corresponding $45.7 million balance at September 30, 2004, and $52.6 million balance at March 31, 2004, our previous fiscal year end. The cash burn for the third quarter of $200,000 was driven primarily by the Company's net loss of 2.5 million and capital expenditures of $300,000 offset by non-cash depreciation and amortization expense of 1.9 million and net proceeds from stock option exercises of $900,000.

For the full fiscal year ending March 31, 2005, the Company is adjusting its previous financial guidance with revenue expected to be in the range of 58 million to $61 million, slightly higher than the previous range of 55 million to 60 million. Based on this revised guidance, fourth-quarter revenue is anticipated to be in the range of 13 million to $16 million.

The Company is also adjusting its full year net loss guidance to an improved range of 16 to $18 million from the previous guidance of 20 million to $23 million. This revised guidance corresponds to a loss per share of between 58 since per share and 54 cents per share compared to prior guidance of 70 cents per share and 82 cents per share. These per share amounts are based on the current weighted average number of shares outstanding.

Based on the revised full-year net loss guidance the fourth-quarter net loss is expected to be in the range of approximately 5 million to $7 million with the associated loss per share to be between 17 cents per share and 23 cents 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 will be happy to answer that question as well. Otherwise if you have additional questions please allow others to ask their questions first in order to allow as many people as possible to participate in the question-and-answer session.

Thanks and I'll turn it back to Greg.

Thanks Kevin. We provided a significant amount of information for you in the earnings announcement that we released to the public today. So I'll refer you to that document for details and I'll keep my remarks here brief. First I went to comment on the development of our 2G HTS wire manufacturing operation. Let me put this in context. Our AMSC wires has shipped 1G HTS wire to 26 customers in 11 countries around the world. In doing so, we are meeting specifications for prototypes that range from power cables to ship repulsion motors, from synchronous condensers to particle accelerators and from laboratory electromagnets to magnet trains.

In the last nine months alone, we have shipped 330,000 meters of high-performance wire to these customers for their prototypes. Our HTS wire has become the de facto industry standard for HTS wire. We are now entering the final precommercial stage for major HTS applications all based on 1G HTS wire. In fact, we expect the first commercial sales of large HTS electrical equipment this calendar year and again this will be based on the use of our 1G HTS wire.

Our 2G HTS wire builds immediately on the market that has been seeded with 1G HTS wire. Our 2G wire has been designed and developed as a plug compatible replacement for 1G wire at a substantially lower cost of manufacturing. By that I mean 2 to 5 times lower cost of manufacturing. So, because 2G is plug compatible for 1G at lower cost and the market has already been seeded with 1G wire, we expect customers to rapidly adopt products based on 2G HTS wire as soon as we can make it available in commercial quantities.

The bottom line is that 2G HTS wire creates the potential for significant expansion of our revenues and profits. It is the future of our Company. Even as we accelerate our migration from 1G to 2G HTS wire, our 1G wire will continue to be the work horse for the industry. Then and right now it remains critical to the development of HTS applications end markets. So expect to see us continue shipping 1G HTS wire to customers over the next couple of years.

Why are accelerating the migration from 1G to 2G HTS wire now? The answer is that we have made significant progress over the last 12 months in the development of our 2G manufacturing processes. We have achieved higher and higher electrical performance and this is very important, we have achieved that higher performance with our low-cost manufacturing methodologies through all of the many layers that make up the 2G HTS wire architecture.

Based on our evaluations of competing 2G HTS wire manufacturing methodologies, we believe that our commercial 2G HTS wire will have higher electrical performance at lower manufacturing cost than any competing approach. Given all that and also that customers around the world are demanding higher HTS wire performance at lower cost, and that's no surprise, we have decided that we now have the platform in place to accelerate our migration from 1G to 2G HTS wire.

The next question is, how do you get there from here? We published a roadmap to commercial production of 2G HTS wire. Here's a summary. First we plan to complete converting our 2G development facility into what we call a 2G prepilot line by mid 2005. Some of the key objectives of the prepilot line is to provide out our 4 centimeter technology which means fully proving out our high-volume reel-to-reel continuous deposition processing on 4 centimeter wide strips especially treated substrate material. This represents an important migration from the 1 centimeter wide strips that we have been processing in the past. The objective is to achieve uniformly high electrical performance over both wider widths and longer lengths of the 2G process material that can then be slit into multiple 0.4 centimeter wide industry standard HTS wire.

This achieves 2 things at once; first, we process at a lot of material on a wide strip in one manufacturing pass-through and then slit it into multiple wires in the last manufacturing step. So, one 4 centimeter wide strip is slit into 8 to 10 wires which reduces manufacturing cost significantly.

The second thing that it accomplished is that the multiple wires we produce in one manufacturing pass-through each have dimensions that make them plug (ph) compatible with the 1G HTS wire we already have in the marketplace today. So this makes it an easy drop in replacement for the customers who have developed products based on 1G wire. The prepilot line for 4 centimeter technology is fully funded and consists of both upgraded development equipment and brand-new production equipment all designed to produce 2G HTS wire by our high-volume continuous reel-to-reel deposition processing.

In the 12 months subsequent to starting full operation of the prepilot line we expect to ship about 10,000 meters of 2G HTS wire to customers. And by late calendar year 2005, we expect to start writing checks for additional manufacturing equipment for a full 2G pilot line. We plan to produce 2G HTS wire at a gross capacity of about 300,000 meters per year by December 2007 from this pilot manufacturing operation.

We now estimate that the additional pilot line equipment will cost us in the range of the 10 to $15 million. Now that's lower than our original estimate of 15 to $20 million. The pilot line by the way will also be centered on those 4 centimeter technology. We are already doing qualification runs with 4 centimeter wide strips in our prepilot operation including slitting of these strips in our new multiwire sledding machine. I'm pleased to say that the progress has been gratifying.

The next step beyond the pilot line is full commercial production which our roadmap calls for us to achieve by adding more production modules to the pilot line. The rate at which we scale up to full production will be defined by market demand. Full production at a rate of 8.4 million meters per year will require an additional capital investment of 25 million to $30 million.

Now our balance sheet as of December 31, 2004, with 45.5 million in cash and cash equivalents and no debt is solid. So we could fund a significant portion of the capital equipment needed for 2G HTS wire scale up with no additional financing. We believe, however, that it is wise to strengthen our balance sheet at this time. Doing this will ensure that we have the capital required not only for working capital and general corporate purposes but also to provide us with the flexibility to increase the ramp up of 2G HTS wire production as market demand accelerates.

By raising additional capital now we expect we will be in a very strong financial position to meet our needs right through to full-scale commercial production of 2G HTS wire. So, on January 11, we announced our plans for a public offering of AMSC common stock. A key use of proceeds of the planned offering is funding of the expansion of our 2G HTS wire manufacturing operation. That is why we're proceeding with the stock offering now.

Let me give you some idea of the timing. First we plan to file our third quarter 10-Q later today along with our amended registration statement that will incorporate our third-quarter results. With that behind us, we will be out on the road early next week and we plan to price the offering somewhere near the end of February.

Finally with respect to the stock offering, I know I don't need to remind you that we're in a quiet period. That means we're not able to speak in more detail about the offering or to answer questions you may have about it. If you want more details, please refer to the S-3 registration statement we filed with the SEC on January 11, as well as the amended registration statement we plan to file later today.

Now to finish up my remarks. Let's take a look at some key benchmarks and some catalysts for our business. Let me start by giving you a list of 9 key benchmarks that we expect to achieve by mid calendar year 2006, in other words over the next 15 months or so. First, we expect to achieve revenues of 58 to 61 million for the fiscal year ending March 31, 2005, just a couple of months from now. Once we get this fiscal year into the record books, we will meet with you in May to report our fiscal 2005 results and at that time we will give you our new guidance for revenues for the next fiscal year.

Second, we expect to demonstrate our 2G 4 centimeter technology on a reproducible basis and our prepilot line and to be shipping 2G wire. Third, we plan to start ordering and putting in place a significant amount of the equipment needed for our 2G pilot line. Fourth, we expect to have in placed and we believe this will be in the relatively near term, a new business alliance focused on 2G HTS fault current limiters which are basically surge protectors for the power grid.

We halted our development of fault current limiters some years ago around 2000 actually, when our R&D work indicated that the product required the distinct electrical characteristics of 2G HTS wires. Now that we are accelerating our migration to 2G HTS wire, it is time for us to team with an industry leader to develop our 2G wire for fault current limiters in order for this product to penetrate the market in the shortest time possible.

Fifth, look for installation of the world's first transmission voltage VLI superconductor cable in the commercial grid of Long Island Power Authority. By the way, the length of this cable system was recently increased by 10 percent to 660 meters long or if you prefer 2178 feet. That means we will need to ship about 40,000 meters more of our wire than originally planned. No problem. The Department of Energy funding for this cable system continues to look quite solid, so we expect no funding delays on this project.

Also look for groundbreaking for the LIPA cable system to occur this spring which will herald the commencement of a series of installation steps resulting in full system installation and integration with the LIPA commercial grid by the summer of 2006. Sixth, we expect to receive wire orders for 2 additional HTS power cable projects and we expect this to occur by the end of calendar year 2005. Seventh, we expect to ship the first commercial SuperVAR synchronous condensers to TVA. As you may have read in the earnings press release the SuperVAR prototype has been going through rigorous testing on the TVA grid in Gallatin, Tennessee. While TVA expected the machine to be exposed to a couple hundred voltage swings every day, in reality it has been to exposed to more than 50,000 voltage swings daily and has performed very well in this strenuous environment.

This impressive performance of the SuperVAR prototype should lead to release by TVA of some of the commercial machines it has already ordered so we can make those first shipments in our next fiscal year. Eighth, we expect to complete manufacture of the 36.5 MW HTS ship propulsion motor. We got the green light from the Navy in October 2004 to complete manufacturing after a detailed design review. So we have continued to move forward aggressively. As an aside I know that there have been a number of questions about the availability of funding for the 36.5 MW motor, and that these questions arose in January because of discussions in Washington regarding funding in government fiscal year 2006 for the ddx all-electric warships. Our 36.MW motor is a candidate for insertion in the ddx ships.

On this issue let me first comment that we are not funded by the ddx program. Our funding comes from a different part of the Navy. Secondly, no decision has been made in Washington about any delays of funding for the ddx program. That is important to us down the road sometime because we want to sell our motors to the Navy for their ddx ships, but no decisions have been made at this point. We understand if there is a reduction in the number of ddx ships built, we're talking really about building 10 instead of 12 ships, so less than expected but not too bad when we're talking 2010, 2012.

If you read between the lines carefully in the information coming out of Washington, you can also come to the conclusion that any cutbacks in Department of Defense funding could be short-lived. Finally, benchmark number 9. In order to optimize our penetration of the worldwide commercial ship propulsion market with our high-power density HTS motors and generators, we intend to form an additional alliance with a business partner that has both the appropriate industry experience and market presence.

Let me conclude by answering a question I often get about the catalyst for our business. There are several that come to mind. First is the passage of the energy bill which we expect to occur in the relatively near term. This would be a great catalyst for two reasons. Number one, is that the electricity title of this bill as currently proposed provides $140 million for HTS grid solutions and we expect this to lead to one or more large-scale superconductor power grid projects. AMSC is strongly positioned to capture a significant share of these new funds. And number two, the electricity title mandate's strict enforcement of power grid reliability standards. This means rules with teeth in them for the first time and it means that utilities will be forced to take action sooner rather than later in making buying decisions on reliability solutions such as our D-VAR in SuperVAR product lines. This would certainly be a catalyst for more sales in an environment where we are already enjoying significant growth in sales.

By the way, two important organizations are launching initiatives that potentially can be significant additional catalysts for D-VAR and SuperVAR sales. In January the North American Electricity Reliability Council, or NERC, introduced a rule revision that goes into affect this year making it clear that all transmission grid operators are responsible for making sure they have adequate supplies of reactive power for VARs for their local area. And just one month from now, on March 8th, the Federal Energy Regulatory Commission, or FERC, will hold a meeting on this directed to reforming regulatory policies on reactive power. If you are interested in this you can see FERC's initiative called principles for efficient and reliable reactive power supply and consumption. These actions by both NERC and FERC are potentially significant additional catalysts for D-VAR and SuperVAR sales.

And one last catalyst that we should take into account is the signing of the Kyoto protocol this month. It calls for a significant reduction in greenhouse gases. Even though the U.S. will not be a signatory to the actual Kyoto protocol, the Bush Administration in September of 2004 outlined its policy to achieve reductions that are even greater than called for by the Kyoto protocol.

The bottom-line, higher efficiency HTS electrical systems means less fossil fuel consumption, and a U.S. DOE report, in fact, says that potential savings from widespread adoption of HTS solutions would mean a reduction of up to 30 million metric tons of carbon equivalent emissions per year in the U.S. alone. A Sumitomo Electronic Industries' executive recently stated that "The Kyoto protocol will be the wind behind the back of HTS". We will see, of course, but this certainly could lead to more incentives to adopt energy-efficient HTS products. And finally, related to the Kyoto protocol is the utilization of our VAR products to enable the control of voltage for the power coming from renewable electricity generation sources such a wind farms, so that they can meet the grid interconnection standards.

As of January 2005 we have received orders for our D-VAR systems for 7 wind farms in North America and Europe. This will bring the total wind generated electric power served by AMSC's D-VAR systems to more than 550 megawatts or enough clean zero emission energy to meet the needs of a quarter million homes.

In closing, I want to underscore that we had a great first 9 months of our fiscal year. Our progress in pursuing our financial, business and technical goals this fiscal year has been rewarding, and we are excited about the future of our Company and where we are headed. I am now happy to take any questions you might have.

(OPERATOR INSTRUCTIONS). Bill Benton from William Blair.

Just a question, and I will limit it to 1 here. You had -- obviously you've had a lot of success on the wind farm side and on the PQ-IVR side, more recently. I know you just outlined some catalysts for some potential utility action going forward for additional D-VAR orders potentially here. How do you see kind of the next year playing out in terms of the mix of business between those types of reapplications?

First of all, let me comment generally and then perhaps Kevin can add something to the answer here. You've got to look at the business for VAR sales as one that is pretty exciting right now. The sales clearly are ramping up here and it's across this mix of customers, not just electric utilities, but the wind farm is clearly a high growth area for us, as well as now the industrials, primarily semiconductor industry. We actually expect we're going to close additional orders in all 3 segments still this quarter. That's just a base without any new rules with teeth in them, by the way. Clearly putting teeth into new regulatory rules, I'd say you've got to take care of VAR support. It's going to be a nice plus for us. If you look forward, Bill here, clearly we're looking for more growth out of the Power Electronic Systems business going ahead. I'm not going to give you any specific guidance here for the next fiscal year. We won't be prepared to do that until we get to our May conference call of course. Kevin, do you want to add any further color to that?

I think clearly the last several orders at PES, that we announced, are wind farm related. Most of them in the press releases that we had mentioned were for fiscal '06 delivery which means we'll recognize revenue at that point. So they will be a sizable chunk obviously of our revenue next year. However, I think to Greg's point, the utility business as well seems to be percolating as well. I think we would expect that that would be a sizable contributor to PES revenue in '06 as well.

Actually more generally, Bill, some of the other benchmarks we mentioned, don't forget we're looking for 2 orders for power cable projects during the next 9 months, 10 months, I guess it is, by December 2005, however many months that is. That's going to clearly add more into our wire sales area. A good thing that we're seeing on the wires, by the way, we mentioned selling wire to 26 customers in 11 countries. One of the great things we are seeing now is repeat orders, and that we expect to leverage to our advantage here into the next fiscal year on wire sales area. We already commented I guess on the SuperMachines business.

You've answered the question, but I'm trying to figure out if these catalysts come to past very in the near term, obviously the diversity of the different revenue streams of the Power Electronic Systems business is very encouraging. I'm just trying to figure out, how quickly do you think the utility side could ramp and be additive to what you're already doing in the other markets, wind farm or the PQ-IVR segment?

I wish I could predict how fast utilities could make decisions. Look, I think the good news is we now have over 30 installed D-VAR systems. We've got our SuperVAR that is doing heroic work done in Tennessee right now, I think that's going to lead to TVA releasing those orders to production. What I'm getting at is, we have an installed base here with a new product coming out the pipeline. We have been obviously working on the utilities already, on here's the solution that you need. So I think we've conditioned them to move pretty quickly here once those rules go into place with teeth in them. They're going to have to do something. I'm excited about where this could lead.

Fantastic, thanks guys.

Jarrett Carson from RBC.

I'll try to skirt the rules. I had a follow-up to that question before my real question. What is kind of the sales cycle, if you will, that you're kind of seeing in general on the Power Electronic Systems side?

Dave, you want to take the sales cycle in the PES?

It really depends on which sector which you're talking about. But on the industrial side it can be anywhere, I think a good number is probably 6 to 8 months. On the utility side, that could be sometimes a year. It could be nothing -- very really it's going to be shorter than a year. On the industrial side, again, it lends more toward the wind farm side, more like 6 to 8 months.

And then my question is, I didn't hear anything (indiscernible). Could you give us a quick update on how the 5 MW motor is performing? And then I presume that when you talk about aligning yourself with a commercial operator in the chip propulsion market or going after commercial type orders, we're generally talking about trying to leverage off of the 5 MW motor or kind of in the near, intermediate term next, kind of 1 to 3 years?

The 5 MW is already up and operating, so that is definitely a calling card. But I've got to tell you the fact that we've gotten a green light from the Navy and we're actually manufacturing now the 36.5 MW is a heck of additional calling card. It just puts an additional, what shall I call it, stamp of validity on what we're doing here. So you've got to look at both of those, those drivers here. In the commercial side, the sweet spot in motor power rating is somewhere in the 14 to 16 MW range and so we're covering the whole space from 5 up to 36 and that's been the plan all along.

You have to be able to do that and demonstrate you can do that. So in terms of where you might look for orders for the first commercial ship propulsion motors, look for power ratings in the 14 to 16 MW range. I'm not sure if I've answered all of your questions there, but Jarett you're very clever to get 2 in 1.

The current (indiscernible) that is on test, I think it's still on land in Philadelphia, that is still working out?

It's still in CAPS, the Center for Advanced Power System, the Navy Center down in Florida.

It's still there?

Yes. It's going through the mission profile simulation testing, so it's moving forward. It's been doing fabulously.

Thank you.

Jim Ricchiuti.

I wonder if you could give some flavor as to the composition of backlog right now, and how you see that being recognized into revenue over the course if it's below 6.

Jim, basically as of the end of December, roughly probably about 45 percent of it is related to the 36 program, 36 MW program, about just under 20 percent of it is LIPA and about an equal amount is Power Electronic Systems.

Kevin, over the course of fiscal '06 any sense as to how that should be recognized into revenues over the (technical difficulty). Is it more front/back-end loaded?

No, I think on the Navy program it's going to be fairly steady. Again, we haven't, as Craig pointed out, finalized our profit -- business planning, if you want to call it, for fiscal '06. But I think our belief is that it's going to be fairly level loaded on the Navy program. LIPA, I think you will see an increase in that revenue in the current quarter as we begin deliveries of the HTS wire to the program. And I think once those have been completed, going into next year that will be fairly steady state.

Power Electronic Systems I think as you know, Jim, that tends to be somewhat of a lumpy business based on when we recognize revenue associated with the units. However, given the backlog that we have and when we believe these units will be commissioned, we think that's generally a first half of the year revenue recognition with obviously the second half being orders that we anticipate getting between now and then.

Great. thank you.

Peter Simon with Ardor Capital.

Just a quick question regarding your D-VAR product. What is the ratio there between number of wind turbines that a D-VAR product will service?

It's going to vary considerably depending on the local conditions, that is the local grade, which turbines have been selected by the wind farm manufacturer. So a number of variables. Just to give you a very rough idea, typically you're looking at one D-VAR for 50 to 60 MW of wind generated power. That seems to be a general rule, right now at least.

What's the number of employees you have on hand right now, staff?

In the Company? It's 264 employees.

Thanks a lot, guys.

Brian Freckman (ph) from Crown Capital.

Quick question for you. On the fourth quarter call a couple months ago you guys had 46 million in backlog and you guys -- your range is going to be what, 55 to 60 million? If you look at your backlog, assuming that I guess you said 36.9 less 13 is 16, you're exiting the year with backlog, obviously depending what happens in the fourth quarter with $21 to $23 million. I know you're not talking about guidance but this 3 to 76 million, I guess I'm just -- I can't figure out how you're going to get up to those numbers given the way you recognize revenue while booking an order takes about 6 to 9 months to actually get onto the book. Are there more -- I guess could you talk about you're '05 or '06 deal flow that maybe could fill the difference?

Let me just give you a couple of comments before I turn it to Kevin, to get the specifics. First of all, you said 55 to 60. Today we just increased our guidance up to 58 to 61, just so you understand that. I can't comment on the Street numbers or where you get those, so you'll have to check that out for yourself. But more specific, Kevin, on the general backlog question.

I think what's happening with this business from a backlog perspective is that a year ago you would have seen essentially 2 contracts, large contracts, meaning the Navy contract, the motor contract as well as the LIPA contract, constituting a very large percentage of our backlog of which is 80 percent. What you're seeing now is a more diversified backlog where you're factoring in the Power Electronic Systems business which obviously we've had a fairly good year in terms of order growth and revenue, as well as other wire orders as well.

Those businesses, the Power Electronic Systems business and our wires business where we're shipping wire to customers like for example Central Japan Railway. That is a much quicker turn business than the large contracts such as the Navy and the LIPA contract which are effectively multiyear contracts. I think what you're seeing, Brian, is a business where the dependence of the backlog is becoming less and less on these large contracts going forward. I will say this. Will there be large contracts like this going forward? I'm sure there will be, particularly if it makes sense for us to go after these. But I also think that as we move forward in this business you're going to see the composition of the backlog becoming a much quicker turn business than it has been say a year ago.

We're going through that transition and mix type of backlog that we're going to have in place here.

So maybe '06 is a wash or down, then because of the nature, you sort of maybe through that one out and start looking out to '07 as more of a better way to look at the business on a go forward basis?

I don't think we have a throw away a year, but I think that we are, as Greg mentioned before, we're going through the process once this road show has been completed, of finalizing our business plan and we'll obviously communicated that in our next call. But I don't think this business is prepared to "throw away" a year. I think we're intent on keeping the momentum that we've kept over the last year or two in terms of our growth and our financial discipline. We expect to continue that in 2006.

Next question, please.

Jerry Harnish (ph), Independent Advisors.

Couple of quick things for you here. Planned capital expenditures next twelve months.

Next twelve months, next fiscal year.

Not necessarily next physical year, but 12 months ahead. Whatever works for you there.

I think the bulk of those expenditures, Jerry, will be devoted toward the 2G as we start specifying equipment for the pilot production line. We've mentioned that it's about 10 to $15 million for that pilot production. We'll start spending that in the next 12 months. We're not going to spend all of it in the next 12 months, but I would say probably around half of that could be spent.

Don't forget, Jerry, that also as you look at our 3 business units, the Power Electronic Systems, very little capital involved there. It's assembly and test kind of facility. It uses some but not much at all. And SuperMachines is not expected to have any significant upticks really at all in capital expenditures. So really it would be focused on the 2G going forward.

Next question, sort of on the backlog area. What products or projects do you guys expect to contribute the most to backlog over the next 12 months?

I think the answer was already given to this question. We're looking at pretty much state here from the Navy, 36.5 MW, the LIPA project. Clearly we been doling (ph) backlog in Power Electronic Systems for revenue that will be recognized in our next fiscal year. So I think when you think of the catalyst that I talked about which is now an add-on to all of the comments you've heard on backlog, from a catalyst point of view, there could well be, as Kevin mentioned, one or two significant projects that get thrown into backlog.

I don't see anything happening by April 1st here. But just looking at the catalysts, we said the energy bill, the electricity title, $140 million for HTS grid projects there. If anybody's going to get them you can count on AMSC, I think, to be a significant player. So if something like that hits that is going to add to backlog, not by April 1st but sometime during FY '06, absolutely I think it will.

Any guidance on the GE HTS generator progress?

You'll have to call GE for that. I can give (indiscernible) on GE's business. We shipped to (indiscernible) and that's their (indiscernible) customer (indiscernible). They clearly have signaled to us and I think more broadly that for the next time they buy wire for their generators they would prefer to have 2G for all the obvious reasons, higher performance, lower cost. But again I don't give guidance for GE.

Last quick question for you. How quickly can AMSC adjust to a higher demand say for S-VARs, D-VARs, that kind of product?

Please don't throw us into that briar patch. Dave, you want to comment any further?

Frankly, I think I'm not the least bit concerned as an organization that we can handle any kind of volume increase that we would see over the next 12 to 18 months.

Great quarter, guys.

Paul Meeks from NMH Advisors.

Did you mention at the top of the call, and if you did forgive me, what your breakdown of revenue was by the way you break it out in the 10-K's and Q's?

Yes, it was in our press release which I'm just looking at.

I'm looking at contract revenues versus product sales.

You want to look at it that way. By the way, we'll be filing our 10-Q later today. But for those who can't wait, our product sales were roughly 22.7 million and our contractor revenue was about half a million for the quarter.

How that the cost of revenues of those items?

The cost of revenues on the contracts was roughly 500,000 and on the product sales and prototype was about 21.2 million. So my math tells me that our gross profit for the quarter was about 1.6 million.

How do you, and maybe you'll talk about this on your road show, how do you scale this? Because for example your revenues in the September quarter for product sales were 9.1 million and then they shoot up, sequentially, a whopping amount to 22.7. Yet your cost of sales pulls right along with it and you don't really see any leverage or gross margin differential. What's happening over time?

Our biggest contributor to revenue from a business unit perspective is our SuperMachines business and that business is principally focused on our large HTS Navy motor contract which is a cost plus incentive fee contract. So in other words, we bill revenue based on the costs that are incurred and we also bill a very fairly small fee which is really the margin on the business, vis-a-vis our other businesses. Because it's a larger component of our total revenue, as that revenue increases that the margin on that business becomes a higher component of our total gross margin which is fairly low. I think one of the benefits that you saw this quarter was a higher concentration of our Power Electronic Systems business which we have said publicly generates revenues of 45 to 50 percent, gross margins. And I'm happy to report that the gross margins this quarter were in excess of 50 percent on that business. That obviously contributed to the positive gross margin for this business this quarter.

Since we're coming close to the end, I want to move on to the next question.

Mark Plunket (ph) from Atlas Capital.

I just want to do a quick check, not to belabor the point on backlog. At fiscal year end given the additional 13 to 15 you expect to book out of backlog in fourth quarter, what does that composition look like? I know you've given the 45 percent, 20 percent, 35 percent as of the third quarter. But what does that percent -- do those percentages look the same on the remaining backlog at year end? (multiple speakers) that a $23 million number in backlog at year end. I was just trying to get the composition of that 23 million.

The largest component -- yes, I think the percentages are probably about right. The largest component will be the Navy contract.

So 11 million or so there, and then like 6 or 7 million in LIPA and the difference in Power Electronics?

Yes, give or take. I think you can devote a little more to the wires business. But by and large, you're okay.

Great, thanks.

Robert Smith from Center for Performance.

Looking at the wind power segment, I have a Danish company with whom you have a preferred provider agreement or whatever. Is there a way to examine their business to see what you're going to be coming away with?

We have now sold the D-VARS into wind farms that utilize Vestas turbines. I wouldn't call that -- we don't have a formal preferred provider agreement with these guys but clearly they kind of prefer us, don't they? If you tie us entirely to them you'd be wrong. There is no exclusivity. Look for us to be selling D-VARS that are in association with other wind turbine suppliers.

There is no way to examine their essentially business backlog, etc., to see what you would be, going along with them?

I don't think so, Bob.

Thank you.

Tom Crowley (ph) from Amaranth Advisors.

I was wondering, if I look at the new guidance, it's looking like Q4 will be a little more than 14 million at a midpoint range. Can you frame, I would assume SuperMachines would be down really hard sequentially. Can you frame the 3 business sections, or how that might feed into that 14 million?

Yes, I think basically as you said, Tom, the SuperMachines business will be down principally because you don't have that I'll call it the September cost and December cost effect in one quarter. You'll see a more normalized run rate on revenue consistent with say the first quarter of this fiscal year. I think on Power Electronic Systems, again, that was an unusually large quarter in revenue. I think you'll see that better than the first two quarters but not as good as the third quarter. And then I think the wires business, as I alluded to earlier from a revenue perspective, we expect that to be a little higher than normal primarily because of increasing shipments of HTS wire devoted to the LIPA cable project.

Thanks.

Mark Plunkett at Atlas Capital.

(indiscernible) I know you had outlined the 15 to 20 million it sounded like on 2G in the upcoming 12 months or so over the course of fiscal year '06. Given your cash balance now, I wanted to get your perspective on why raise capital now when you've got the positives coming down the pike? You've got a comfortable cash balance. What are your thoughts there just in terms of the timing in terms of raising additional capital?

Mark, by the way as we just mentioned in the comments here, we're looking for 10 to 15 million for the pilot operation. We used to say 15 to 20 but we've now down that to 10 to 15. Just so you know the numbers correctly. And again, we want to make sure we have the flexibility. We have a strong balance sheet as I mentioned, in the earlier comments today, cash, cash equivalents and no debt, no assets encumbered. So clearly a good balance sheet. We want to strengthen that balance sheet to make sure we have the flexibility to put the pedal to the metal when we want to accelerate that transition over to 2G and scale it up to meet the market demand. We just think it's tap the markets now if we can. I don't know what the markets are going to be a year from now. This'll be the time to do it, I believe.

Mark, the other thing too, just to add to Greg's comments is that our objective is to get us through to commercialization for 2G wire and that's going to involve not only the 10 to 15 in the pilot line, but also we think to get to full commercial production probably another 25 to 30 million. You add those 2 numbers together, that range gets fairly close to what are cash balance is right now. So I think it's a prudent measure on our part to do this.

What do you think on the timing for that 25 to 30, that additional? Is that over the next 2 years? Is that over the next 3?

Again, it's going to be driven by market demand. Our roadmap that we have out there says you start writing checks this time next year, late fall next year -- or this year I should say. And you're going to spend maybe 10, 15 million bucks. That gives you 300,000 meters per year capacity, gross capacity, by December 2007. And somebody asked the question earlier, what if market demand increases? The whole process is modular, so we will just put in more modules and keep building that up. However, it's really difficult to imagine spending that 25 to $30 million in the next 2, 3 years. We will have it on reserve. We'll add modules. Let me turn it over to our Chief Operating Officer to give some perspective as well.

The structure of the increase in capacity for the second generation facility, really is as Greg referred to, modular, which basically means you buy it in little bits at a time. So when we look at the 8.4 million 25 to 30 million increase to get 8.4 million capacity, what we're saying is on a yearly basis we might spend 5 to 7 million going out or 7 to 10 depending on which ramp that we look at. The 25 to 30, it's kind of a 3 to 5 year window.

Thanks.

We want to thank you for participating in the call today and we're going to head out on the road, so will see you on the other end. Thanks very much.

Once again, this does conclude today's teleconference. We thank you for participating. You may disconnect your lines at this time, and everyone have a great day.