American Superconductor Corp (AMSC) 2006 Q2 法說會逐字稿

Good morning, and welcome to the American Superconductor Fiscal Year 2006 Second Quarter Conference Call. With us today are Greg Yurek, Chairman and CEO; and Kevin Bisson, SVP and CFO of American Superconductor. I will now like to turn the call over to Mr. Greg Yurek. Go ahead, sir.

Good morning, and welcome to our Fiscal 2006 Second Quarter Conference Call. On the call with me today is Kevin Bisson, as well as Terry Winter, our COO. On the call today, we are going to review the numbers that we released in this morning’s announcement and provide a brief update on key benchmarks and then we’ll open it up for your questions.

First, I would like to ask Kevin to provide the Safe Harbor guidance and to review the financial results. Kevin?

Thanks, Greg, and good morning everyone.

Before we begin discussing financial results for the second quarter of fiscal 2006, 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 $10.9 million, which was $1.4 million, or 14% higher than revenue of $9.5 million in the second quarter of fiscal 2005. Solid growth in year-over-year D-VAR system sales to wind farms and utilities at Power Electronic Systems and higher AMSC Wires revenue, due to HTS wire shipments for the LIPA cable project, were partially offset by lower revenue at SuperMachines as a result of a lower level of work performed on the Navy motor contract in the second quarter this year, compared to the same quarter last year.

It should be noted as well that similar to the September quarter last year, this year’s September quarter for the Navy motor program was affected by a limitation of funding from the Navy, coinciding with the close of the U.S. government’s fiscal year on September 30th. Therefore, not only was the amount of revenue generated for this contract significantly lower than normal in both quarters, the Company also incurred uninvoiced costs for the program in the second quarter of $3.6 million that were included in inventory at September 30, 2005. This compares to $3.1 million of uninvoiced program costs included in inventory at September 30, 2004. We are confident that funding for the Navy motor program will resume within the current quarter and will coincide with an expected increase to the contract cost ceiling, which I will discuss in more detail in a moment.

Revenue for the first half of fiscal 2006 was $23.1 million, which was $900,000, or 4% higher than revenue of $22.2 million in the first 6 months of fiscal 2005. A significantly higher level of D-VAR shipments to wind farm operators by Power Electronic Systems in this year’s first half compared to last year, along with higher wire shipments for the LIPA cable contract at AMSC Wires was partially offset by lower Navy motor program revenue with SuperMachines, as this contract approaches the final assembly and test phase.

Orders received during the second quarter totaled $5.2 million, which was $2.2 million higher than orders of $3 million generated in the second quarter of last year. Orders for the second quarter were driven by a large D-VAR order for a mining company, as well as a series of 2G development contracts at AMSC Wires and SuperMachines.

Backlog, as of September 30th, stood at $18.4 million, which was down $5.9 million from backlog at the end of the first quarter of $24.3 million. As we mentioned in this morning’s press release, we have current visibility to approximately $46 million in revenue for fiscal 2006. This is comprised of 3 distinct parts, which include, 1) $23 million of revenue generated in the first half of 2006; 2) $12 million of the $18 million of current backlog expected to be converted to revenue in the second half of fiscal 2006; and 3) $11 million of an anticipated $20 million of additional funding for the Navy motor program and LIPA cable contract that is expected to be converted to revenue in the last 6 months of fiscal 2006.

With regards to this latter point, we mentioned in our August earnings conference call that both the Navy motor and LIPA cable contracts were approaching their contract funding limits and that they would require contract modifications to complete these contracts by next September. We also mentioned in August that we expected both of these contract modifications to be completed in 3 months. We have been told by the Department of Energy to expect the LIPA cable contract modification to be completed within the next week. Concerning the large motor contract, we expect most, if not all, of this contract modification to be finalized in December.

The delay in obtaining the Navy motor contract modification relates primarily to evaluating 3 available location options in connection with the final assembly and testing of the motor. Both the Company and the Navy are working diligently to finalize this issue, and hence, the contract modification without impacting the overall schedule of the program. Once the Navy motor and LIPA cable contract modifications are finalized, the Company’s backlog is expected to increase by approximately $20 million of which $11 million, as mentioned earlier, would be recognized in fiscal 2006.

Orders for the first 6 months of the fiscal year amounted to $7.6 million, which was down $7.5 million from the $15.1 million of orders generated in the first 6 months of fiscal 2005. Last year’s first half orders included an order for 4 PQIVR systems at Power Electronics Systems from a large U.S. semiconductor manufacturer and a larger than normal U.S. government contract in connection with potential U.S. military applications for second-generation or 2G wire.

Orders for the first 6 months of the current fiscal year included an order for 3 D-VARs for a mining operation, as well as several 2G development contracts at AMSC Wires and SuperMachines.

The operating loss for the second quarter of $7.2 million was $3 million higher than the operating loss of $4.2 million in the second quarter of fiscal 2005. The higher year-over-year operating loss is attributable primarily to AMSC Wires due to increased 2G-related R&D spending, lower average selling price for 1G wire shipments, and higher unabsorbed 1G manufacturing overhead, due to a lower level of production.

In addition to higher operating loss in this year’s second quarter for SuperMachines due mainly to lower sales volume related fee income on the Navy motor program and higher R&D expenses was offset by higher sales volume-related margins at Power Electronics Systems.

The operating loss for the first half of fiscal 2006 of $13.5 million was $4.3 million higher than the operating loss of $9.2 million for the first 6 months of fiscal 2005. Similar to the second quarter’s results, the increase in this year’s first half operating loss compared to last year, was due principally to increased 2G-related spending as well as a lower average selling price for 1G wire shipments at AMSC Wires. This was partially offset by improved margins at Power Electronic Systems to a higher year-over-year revenue.

Net loss for the second quarter was $6.8 million, which was $2.7 million higher than the net loss of $4.1 million in last year’s second quarter. This year’s second quarter benefited from higher interest income than last year’s second quarter due mainly to higher levels of cash available for investment, as well as higher investment yields. Included in other income and expense for the second quarter was a non-cash expense of $200,000, related to the revaluation of stock warrants issued to a past financial advisor in April of 2005, in connection with the settlement of a litigation matter. Under GAAP rules, the Company will be required to revalue these warrants each quarter until the warrants are exercised and book any increase or decrease to the value of these stock warrants to the income statement.

Net loss per share for the second quarter of $0.21 per share was $0.06 per share higher than the $0.15 per share net loss recorded in the second quarter of last year. Net loss and net loss per share for the first 6 months of fiscal 2006 was $12.4 million and $0.38 per share, respectively. Both amounts were higher than the net loss and net loss per share of $9 million and $0.33 per share, respectively, for the first half of fiscal 2005.

The Company ended the second quarter with $74.5 million in cash, cash equivalents, and short- and long-term investments, compared to the corresponding $81.5 million balance at June 30, 2005, and $87.6 million balance at March 31, 2005. The cash burn for the quarter of $7 million was driven primarily by the Company’s net loss of $6.8 million and a reduction in AP and accruals of $2 million, offset by non-cash depreciation and amortization of $2 million. Included in the cash burn for the quarter was $600,000 of CapEx devoted mostly to the scale of the pre-pilot production of 2G wire.

Turning now to our full-year guidance for fiscal 2006. As we mentioned in this morning’s earnings announcement, given our current revenue visibility for this fiscal year, along with targeted Power Electronic Systems orders and Navy contracts we expect to receive and convert to revenue this year, we have tightened our revenue guidance for the full year to be in the range of $55 to $60 million. This compares to our previous public revenue guidance of $55 to $65 million. In addition, due to the timing of the anticipated receipt of the Power Electronics Systems orders and Navy contracts, and when they expect to be converted to revenue, we are forecasting revenue for the second half of the fiscal year to be weighted more towards the fourth quarter.

Consistent with our revised revenue guidance, we are tightening our net loss guidance for fiscal 2006 to be in the range of $21 to $23 million, with the related loss per share to be between $0.65 per share and $0.70 per share. This revised guidance is within the range of our previously issued net loss guidance of $18 to $23 million, and net loss per share guidance to $0.55 per share to $0.70 per share. Because revenue in the second half of the fiscal year is weighted towards the fourth quarter, we anticipate a correspondingly smaller loss in the fourth quarter than the third quarter.

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 Q&A 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 would 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 Q&A session. Thanks, and I’ll turn it back to Greg.

Thanks, Kevin.

In our last several earnings conference calls, we have provided a list of key benchmarks that management and you could utilize to track and measure our progress toward achievement of our business objectives. We also pointed out that we believe the Energy Policy Act of 2005 and the Kyoto Protocol would both be good long-term catalysts for our businesses. Today I will review the benchmarks and update you on our progress for each of them.

I want to start today with comments on the Energy Policy Act of 2005, which was signed into law in August. In our last earnings call, we said we expected this new law to benefit AMSC’s businesses over the long term in multiple ways, which I will not repeat in detail here today. Suffice it to say, the Act provides stimulation for the development and sale of AMSC’s current and future products, including HTS wire for new cable projects – D-VAR, DVC, and SuperVAR systems needed to meet new enforceable grid reliability standards and PowerModules, power electronic converters for fuel cells and wind turbines, among other energy-related applications.

The bill authorizes spending of whatever sums are necessary to carry out the so-called Power Delivery Research Initiative, or PDRI, which specifically directs the Department of Energy to launch a 3-year effort to complete the development and commercialization of high-temperature superconductor power cables to solve power grid congestion problems. In August, after the Energy Policy Act became law, the U.S. Department of Energy requested submission of ideas for a new series of superconductor application projects by September 16, 2005. In December of 2005, DOE is holding workshops to help determine how to implement the PDRI’s projects. And just 2 days ago, the House and Senate Conference Committee on Energy and Water Appropriation increased the DOE super connectivity budget for the fiscal year starting October 2005 from $37 million per year, last government fiscal year, to $50.5 million per year for this government fiscal year. Based on all of these actions, we believe the DOE will start to fund the superconductor cable projects required by law under the Energy Policy Act during the next year. And we believe this will provide a substantial revenue opportunity for AMSC.

We did not include revenues originating from the effect of the Energy Policy Act in our forecast of revenues for the current fiscal year, because we’re not certain of the timing regarding passage of the new law. And as we stated at our last earnings call, look for the effect of the Energy Policy Act of 2005 to start adding to our backlog, possibly as early as the fourth quarter of our current fiscal year, with revenues from contracts such as those called for in these Power Delivery Research Initiative of the Act, ramping up in the second half of our next fiscal year and beyond. We believe it is clear that the Energy Policy Act of 2005 provides a good long-term catalyst for AMSC’s businesses and we intend to pursue every opportunity vigorously.

Now, let’s turn the specific benchmarks we spelled out in our last several earnings calls, some of which have already been accomplished and some of which are expected to complete on schedule by next fall. These are all the big benchmarks to keep your eye on.

Our first benchmark is to achieve our revenue target for the fiscal year. In our earnings announcement today, we adjusted our revenue target for fiscal 2006 to the range of $55 to $60 million from the broader range of $55 to $65 million that was forecasted earlier in our fiscal year. Contracted orders that we believe would be secured by now have taken more time to close. We believe these contracting orders will still be received. However, as a practical matter, receiving some of these contracts and orders in our fourth fiscal quarter will be too late to recognize sufficient revenues to achieve the high end of our targeted range.

We currently have the visibility to revenues of $46 million for the fiscal year, which is 80% of the midpoint of our new target range of $55 to $60 million. To achieve, for example, the midpoint of the forecasted range, we will need to bring in $11 to $12 million in additional orders and convert them to revenues during the remainder of the fiscal year.

We anticipate closing a substantial number of additional orders to Power Electronic Systems in our third and fourth fiscal quarters. The targeted additional orders in our third quarter are in the final stages of the decision making process by customers, so we expect to know the status of these orders by the end of December.

We have procured the necessary long lead-time components in anticipation of these orders, which should enable us to determine quickly and ship the systems before fiscal year-end. To the extent these orders are delayed beyond December, they will likely become backlogged in our next fiscal year, along with orders expected to close in our fourth quarter. We expect a mix of orders for the fiscal year to be relatively equal between utility, wind farm, and industrial applications. And because you need to track our progress regarding these orders, we plan to announce every order as quickly as we can during the remainder of this quarter and the fiscal year.

Before I complete my comments on revenues associated with Power Electronic Systems sales, I want to highlight that we expect this quarter to receive our first order from an electric utility for a large-scale Dynamic VAR Compensator, or DVC system. DVC systems are an extension of our D-VAR product line and they have been in use already by our customers for grid interconnection of wind farms. DVCs provide transmission levels, dynamic reactive compensation in the range of tens of mega-VARs to several hundred mega-VARs, which significantly increases the market reach of our proprietary Power Electronics Solutions for utility transmission grids. We expect orders for DVC systems to add significantly to our backlog in revenues going forward, starting with the first utility ordered this quarter, so we’re very excited about this addition to our toolbox of reactive compensation solutions.

While we are expecting that the bulk of the additional new orders that will contribute to revenues this fiscal year will come from Power Electronic Systems sales, we’re also expecting several new government contracts, including 2 U.S. Navy contracts that we expect to also contribute to our top line in our last fiscal quarter.

So, as we forecasted previously, we are looking for a stronger second half than first half, very much like last year, and we expect that orders and contracts that are not closed soon enough to contribute to revenues this fiscal year will still be closed and will add to our backlog for the next fiscal year.

Our second benchmark, in fact, is securing a series of contracts for HGSK but from follow-on Navy development work. We have targeted contract opportunities that we expect to bring in tens of millions of dollars of revenue per year. Based on our latest information, developing collaboration with our strategic alliance partner, Northrop Grumman Marine Systems, we expect to participate in 2 new U.S. Navy contracts starting in our fiscal fourth quarter. We expect a series of contracts will lead to 2 results. The first result we expect is delivery of a 36-megawatt class [indiscernible] spec HTS ship propulsion motor for a U.S. Navy ship in 2009.

The second result we expect is the development, manufacture, and delivery of an HTS electrical generator for Navy ships. We expect to be carrying out these Navy contracts with Northrop Grumman Marine Systems, as planned, when we initiated our strategic alliance with them 1 year ago.

The larger HTS cable projects referred to under the second benchmark are expected to come from a Power Delivery Research Initiative in the Energy Policy Act, as already discussed. This series of U.S. Navy and DOE contracts are expected to be significant contributors to our revenues in fiscal 2007 and over the next several years.

Our third benchmark includes the demonstration of our second-generation, or 2G, 4-centimeter technology on a reproducible basis in our pre-pilot line, and the shipment of 2G wires to customers. As reported in August, we are now able to make 4-centimeter wide strips of 2G material over 80 to 100meter lengths. Recall that our planning calls for us to produce 4-centimeter wide, 100-meter long strips of 2G materials in our pre-pilot line through mid-calendar year 2007. As planned, we initiated regular prefacing of 100-meter long 2G wires with industry standard dimensions, which we call 344 superconductors, in September. This third benchmark includes shipping 344 superconductor wire to customers during the second half of calendar year 2005.

We have, in fact, already shipped over 700 meters of 344 superconductors to customers, who are testing this wire and developing applications with it. In fact, we have sold most of our limited manufacturing capacity for the 344 superconductors for the remainder of fiscal year 2006. Our current sales activities indicate that orders for fiscal 2007 should exceed our current forecasted production capacity of 10,000 meters in fiscal 2007.

Though interest in 344 semiconductors is strong, the challenge for us is to continue to scale up the manufacturing operation for 344 superconductors, while at the same time meeting the demand from customers who are developing products such as fault current limiters, power cables, rotating machines, and electromagnet systems. We fully expect to meet this challenge.

During the last week of October, I was in Japan to meet with customers and to announce that we have named Suzuki Shokan Co. as our distribution partner for 344 superconductors in Japan. Japan represents one of the world’s largest markets for superconductor wires for applications in the power transmission, industrial, medical, and transportation sectors. It’s worth reminding you that one of our 1G HTS wire customers, Central Japan Railway, announced this past spring that it expected to test the first 1G HTS electromagnet in their superconductor Maglev train system this autumn. I got to ride on the superconductor Maglev train a couple of weeks ago and I can tell you this is the future of transportation. Our job is to make sure that the hundreds of millions of meters of 344 superconductors that I believe will be used for future Maglev trains comes from AMSC.

In the immediate future, we believe that at least a third of our output of 344 superconductors in the next year will be filled in Japan. We are delighted to have Suzuki Shokan as our distribution partner, as we work to meet this objective.

The fourth benchmark is that we plan to start ordering and putting in place a significant amount of the full-scale manufacturing equipment needed for our 2G pilot line. The plans we have reviewed with you previously is that we would start to order full-scale manufacturing equipment for the pilot manufacturing operation beginning in the last quarter of this fiscal year. In actuality, we’re ahead of schedule and we have already started to order the full-scale equipment, so we are definitely on the way of ramping up our production of 344 superconductors. The bottom line, we expect to meet this objective and again expect to have a capacity of 300,000 meters per year of 344 superconductors on schedule in 2 years from now. We expect our CapEx for the pilot plan to be in the range of $10 to $15 million, as previously forecasted over the next 18 months.

The fifth benchmark was the formation of a new corporate strategic alliance, focused on 2G HTS-based fault current limiters. We achieved this objective when we announced in February 2005 that we had signed a strategic alliance with Siemens Corporation to develop 2G HTS fault current limiters. Although in the last earnings call I stated that since we achieved this benchmark there would be no need to revisit again this fiscal year, I’ve inserted it back in the list today in order to tell you that we are now selling 344 superconductors to another large electrical equipment manufacturer that is developing fault current limiters. We strongly believe that our fault current limiters would be a very good market for 344 superconductors and we’ll keep you informed on progress on this front going forward.

The sixth benchmark, we established(ph) the installation of the world’s first transmission voltage, VOI, or Very Low Impedance superconductor cable in the commercial grid of Long Island Power Authority, or LIPA. This cable project, which, like all 10 HTS cable projects currently underway around the world, utilizes 1G HTS wire. The LIPA project is on track for installation of the cable during calendar year 2006, and for energizing the cable in the LIPA grid in September 2006. We shipped half of the 1G HTS wire to this cable to Nexans, the power cable manufacturer, during our second quarter and we are on track to ship the remainder during the current quarter.

The seventh benchmark was the receipt of wire orders for 2 additional HTS power cable projects. We achieved this benchmark with cable wire orders from first Ultera for their HTS cable project with American Electric Power in Columbus, Ohio, and second, from [Crominex] for an HTS cable project in Mexico City. In our last earnings call, we forecasted that we expected to exceed this benchmark with a wire order for a third HTS cable project by the end of this calendar year. This should be a project of similar size to the Mexico City project, and we confirmed today that we expect to receive this order by the end of this calendar year.

It’s worth knowing that each new cable project adds more momentum to the market for HTS power cables. Right now there are 9 cable manufacturers around the world that are engaged in the development and demonstration of 10 HTS cable projects. Of the 10 cable projects underway, more than half are being powered by AMSC. The next really large HTS cable project is expected to emerge from the energy bill’s Power Delivery Research Imitative next year. And let me repeat that AMSC is very well positioned to be at the heart of such a cable project.

The eighth benchmark was shipping of the first commercial SuperVAR synchronous condenser. As we stated in the earnings announcement this morning, the SuperVAR prototype is doing quite well in the TVA grid, where it has successfully handled an astounding 5 million voltage events. TVA is pleased with the performance of the prototype and we are in continuing discussions with TVA regarding the conclusion of their evaluation process, which officially could go into January. We now expect TVA to release the first of the 5 commercial SuperVAR machines, which TVA had previously ordered from us to AMSC’s production floor by the end of December 2005.

Thereafter, we plan to ship the first of the commercial SuperVAR machines to TVA by the fall of 2006. Not only will this be the first commercial SuperVAR machine to be sold, it represents the first commercial high-temperature superconductor product of any kind sold for use in the transmission grid. So, this is really a significant benchmark to watch.

In addition to our continuing efforts with TVA, we are continuing to conduct grid analyses for other utility customers where SuperVAR may be the optimum grid solution.

The ninth benchmark we said was completion of the manufacture of the 36.5 megawatts HTS ship propulsion motor for the U.S. Navy. The 36.5 megawatts ship propulsion motor that is currently being built by AMSC and Northrop Grumman is on schedule to be delivered to the Navy in September 2006. Achievement of this benchmark is going to be a very important step forward in the history of ship propulsion and we believe it will open the door for increasing sales of HTS ship propulsion motors of all sizes and power ratings.

Our final key benchmark was the formation of a strategic business alliance with one of the major players in the global electric ship propulsion market. We created a strategic business alliance with Northrop Grumman Marine Systems 1 year ago, to address the U.S. military market. This aligns us with the very sharp focus today on HTS ship propulsion systems for the U.S. Navy. As we stated earlier, we expect to begin 2 new contracts with Northrop Grumman and the U.S. Navy in our fourth fiscal quarter. So this tenth benchmark is really focused on developing channels to the non-U.S. Navy and the commercial ship propulsion market in the rest of the world. Fundamentally, this is all about creating ways to accelerate sales of superconductor ship propulsion motors and generators.

We are currently actively engaged with several potential candidates that could be very good partners to address the non-U.S. Navy and commercial ship propulsion market. We are working closely, not only with companies that supply conventional electric motors and generators into this market, but also its shipyards that want to differentiate their ship offering with HTS propulsion systems.

In fact, based on current information, it would not be unlikely for us to form alliances with more than 1 partner to best satisfy the market needs. We previously said we wanted to achieve this benchmark by the end of our fiscal year and 2 of the potential partners we are working with are on track to meet this objective. We’ll continue this process of evaluation in order to best ensure that we select the optimum partner or partners to help meet our sales goals outside of the U.S.

So that’s the progress report on our key benchmarks, and we’ll keep you informed of our progress over the next month and quarters, of course.

Before I close my remarks, I wanted to come back to another long-term catalyst for AMSC’s businesses, and that is, in general terms, the Kyoto Protocol, or at least the market drivers emerging from what is represented by the Kyoto Protocol. The market drivers for AMSC Solutions and Products are higher electrical efficiency and alternative sources of energy, both of which are addressed by our HTS wires and wire products, such as high-efficiency electric motors, and by our power electronic converters, or PowerModules, and the systems that incorporate PowerModules, such as wind turbines, fuel cells, and photovoltaic power systems.

To put the market drivers in perspective, it was reported in yesterday’s Wall Street Journal that China’s President Hu pledged that China will generate more clean power, as it opened an international conference on renewable energy amid rising oil prices and nationwide electricity shortages. In a statement, Mr. Hu said, “Strengthening the development,” I’m quoting now, quote, “Strengthening the development and use of renewable energies is a must for us to address and be increasingly serious energy and environmental issues. China attaches great importance to renewable energy and takes it as one of the most important instruments for promoting social and economic development,” end of quote.

If China is starting to take renewable energy seriously, you can be sure this is going to be a big positive for our industry. I visited China in October as part of 12-day business development effort in the Asia-Pacific region. I can confirm for you that China is growing at a very rapid rate, but electricity delivery is not keeping up with demand and that the cities are suffering greatly with air pollution. With China starting to aggressively pursue renewable energy and upgrading those risks to meet electricity demand for economic growth, I believe we can look for the Kyoto Protocol to truly be a business catalyst for companies like AMSC.

In fact, let me add a new benchmark to our list. That is, we expect to ship our first PowerModule, power electronic converters for use in wind turbines in China in 2006. This, I believe, will only be the start of sales growth opportunities for AMSC in China.

And now I’m happy to take your questions. John?

[Operator Instructions.] Ed [Lipman], William Blair.

Great news on the 2 Navy contracts. Can you give us a sense of the size of those, at least the dollar size of those contracts? Would they be similar in nature to the 36.5 project that you have now? Or are they going to be a little different?

I think in terms of an end result they’ll be the same. Pieces of hardware, significant pieces of hardware, get delivered to the Navy, in particular the motor that we’re shipping in 2009. We think that’s a big deal. However, we see this being funded in a different way because we see a series of contracts, Ed, maybe starting off in sort of the $5 million range, but, on average, going forward over the next several years, kind of $10 million per year kind of range. So, if you add it all up, it’s going to be pretty substantial, like the original 36-megawatt motor. But I think we’re going to see it as series of contracts.

Jim Ricchiuti, Needham & Co.

Greg, there is a lot of information. I just wanted to go back to one you made about a third wire project by the end of, I think you said, calendar ’05. Is that correct? And is that related to the order that you alluded to that could come out of this $50.5 million in funding?

No. This will be a total, let me give you a hint, it will a non-U.S. government project.

Okay, great. Now, with respect to the $50 or $51 million of funding for HTS Solutions in the DOE bill, can you talk a little bit about that, as to how you see that impacting you? Is it again going to be a series of smaller contractors, as you just alluded to with the Navy or will there be potentially 1 large project?

I think there is potentially 1 large project there, Jim, but, again, it will be funded -- you don’t get all the money at one time. You have to do things to recognize revenue, as usual, no surprises. Look, it’s locked now. It’s the law and the Energy Policy Act at the Department of Energy will spend the funds necessarily to commercialize HTS cables over the next 3 years. And so that will be a lot of work done over the next 3 years.

The money, the series of actions in the DOE and now the congress two days ago in the Energy and Water Appropriations, which funds DOE, all point in the direction of funding these projects sooner than later. So, we’re saying, given that it’s the government, things move slow. We’re saying look for these projects to get started in the second half of our fiscal year of fiscal 2007. And that’s going to have to be a major project, Jim. It will get funded every year incrementally, as they always do, but got to lead to a cable going into the ground. And literally that’s going to be many tens of millions of dollars for the whole project.

Walter Nesdeo, Ardour Capital.

I have a question that revolves around SuperVARs. Basically, what I’m trying to figure out is what your current capacity, the sales cycle for those, and kind of how you project the size of that market going forward, and what your margins are. So I’ll just sit back and listen.

Okay, Walter. It’s a little hard to talk about a sales cycle when we are just about to get the release for the first commercial system, which will be delivered next fall. So let me back off on that. All large rotating machines typically have sales cycles that are receipt of order to delivery, 9, 12 months, it could be 15 months, especially in the early part of the process because you’ve got a new product. But large rotating machines typically take that kind of time.

In terms of the sales cycle, leading up to the order, I think it’s going to be very similar to what we’ve seen in our D-VAR systems. It’s a brand new product. You’ve got to introduce it to the customer. You have to do the transmission grid analysis, as we do for D-VAR solutions. And that has been typically 6 to 9 months. Obviously, we’ve had some slower cycles this particular year on D-VAR systems and I think you have to understand these are large-ticket items. They cost a lot of money. You are selling them for large organizations, which tend to be slow in their decision making process. And by the way, it’s also a new product.

Let me go back to SuperVAR, as a practical item, we are continuing to work with other utilities that is other than TVA. We are doing grid analyses where we believe supervise the right kind of solution and we believe it will drive some new orders for SuperVAR from other utilities. But TVA is going to get the first commercial systems delivered next fall, by next fall. So that is like a 9 to 12 month delivery for that product.

Gross margins, Walter, we see that, when that product matures, being in the low 30% range.

I think I’ve answered all those questions perhaps. Next one?

Jarett Carson, RBC.

Greg, can you talk kind of qualitatively around 2 points. Number one, what is it that led you to accelerate the order for the equipment on the pre-pilot line? And then secondarily, a little more granularity inside, I kind of recall off the top of my head, it’s kind of like a 9- to 12-step process and several of those are much, let’s call it, higher risk on a relative basis, where you feel on a comfort level on some of those higher risk process steps at this point?

Jarett, very good question, because we had said earlier, when you see us start to order the full-scale manufacturing equipment that goes into the pilot line, that would be a signal that we’re happy with where we are in our process or development of the 344 superconductors. And that’s the case. We’ve had good progress over the last year, certainly over the last 3 to 6 months. And our 4-centimeter technology, which is a key to our success, that’s been very good. We’ve advanced that into splitting the 4-centimeter strips in the 344 superconductors. We’re pleased with how that’s been going. And why wait is the question we asked ourselves. It’s time to get going.

And by the way, there is always a nice tension here and this is a positive thing. Customers are demanding this wire and right now, we’re sold out for what we can possibly make on 344 superconductors for the remainder of this fiscal year. And quite frankly, it looks like we’re going to have orders for maybe double the amount of capacity for the next fiscal year. So, we have to balance a scale of process. You don’t want to get ahead of yourself. You don’t want to fall on your face by trying to go too fast, that’s for sure. We have that experience based in the Company, so we’ll watch ourselves. But you’ve got to meet that customer demand. We’re creating a market. The 344 superconductor customers want to buy it. We’ve got to be able to make it and sell it.

So, comfort level? Jarett, we are feeling quite comfortable. It’s time to move forward. By the way, we’re going to be getting this equipment in over the next 18-month period of time. That’s on plan. Maybe accelerate it by 3 months and that takes us to our capacity of 300,000 meters per year of 344 superconductors by December of ’07. So, I think I’ve answered all that. If I haven’t, give me a follow-up question.

Frank [Barisi], Stifel Nicolaus.

Utilities seem like they’re so conservative and slow to change on things. As you install these, like the LIPA project, and show they work, but they require all this cooling equipment and all, how long do you think it will take before you can get other -- I understand there is a priority to move forward in this before you can get other utilities to take the plunge, so to speak? And that was it.

Thanks for that question. I think you understand the challenge here. Not only are utilities conservative, they are large organizations and they always take a long time to make decisions. And we have a new technology, if you were talking about power cables, and it incorporates a new kind of cooling with liquid nitrogen inside, so those are all challenges. The good news, Frank, is these HTS cables have been in demonstration since 1997, so what’s that 8 years or so now already in demonstrations. There are 10 cable projects going on around the world today. So there is a lot of confidence that’s been building up over time.

Utilities have been asking a lot of the questions you’re asking. For example, on the cryogenic cooling, gee, we’ve never done cryogenic cooling, it’s certainly not a power cable, and how are we going to handle that? And the business model that has emerged is that the industrial gas companies, like the air products and the British oxygens and Praxairs are coming forth and saying, hey, look, we’ll guarantee the coolness of the system, you lease the equipment from us and give us a service contract and we’ll guarantee it’s going to be cold. And so that’s building up the confidence levels.

Having said that, we’ve got to get through these 10 demonstration projects, including the LIPA project, which gets energized next September. They are not going to say, hey, it works the first day and we’re going to put an order in. So, you are looking at another year, I would say, of testing on that for that particular utility, and others, to say, hey, this works, we’re comfortable with it, it’s been now 9, 10 years of development and demonstrations. So we look for the first commercial cables being shipped to customers by the end of the decade, which I think fits the timeline I just described to you. So we are not starting the clock now; the clock started 8 years ago, and that’s the good news.

Tom [Rinetto], DEFG.

I have a kind of a 2-part question for you. In looking at the additional losses that occurred, particularly in the wires area. I wonder if you could just comment a little bit on the drivers and what particular actions you’re taking to reduce those losses. And then associated with that, with the increase in commodity prices and the increase in energy prices that have occurred over the quarter, I wonder if you could kind of comment as to what impact that is having on your business?

I’ll address the second part of that question. Perhaps, Kevin, why you don’t you take the first one?

Sure. I think I mentioned in my remarks that in terms of the losses in the wires business, what has driven them this quarter and for the first 6 months is primarily two things. One is that we have increased our investment in our 2G development plan, so to speak, and that includes both people. It includes increased material usage, as we start production runs of 100 meters for our 2G wire. It also includes incremental depreciation associated with the equipment that we have brought in over the last several months and installed.

Again, this is, as Greg alluded to earlier, this is the future of the Company. This is vitally important for the Company and we are moving as quickly but judiciously in terms of our 2G timeline.

The other major item that I mentioned earlier in my remarks is that, in the first half of this year we saw the average selling price of our 1G wire down versus last year. And, principally, that’s because we are facing more competition on 1G wire going forward. We’ve mentioned it in the past that [Syncomo] [ph] is in the process of having commercial quantities of 1G wire available, so there is competition out there now, and that has been reflected in the pricing this year versus last year.

And as we said previously, this is Greg speaking, the 1G wire, at this time, we view it now as seeding the market for really the commercial product called the 344 superconductors, the 2G-based 344 superconductors. So, in some ways, it’s quite clear we are a lost leader, to use a blunt term. The other competition for, of course, 344 superconductors, going forward is copper. You asked the question about commodity prices and so forth. And if you look at a chart of copper prices over the last several years, it’s just on a pretty steep slope. I just looked at it yesterday. It’s somewhere around $1.80 a pound I think. That means when you look at the price performance ratio of the 344 superconductors, as we projected over the next few years, compared to the price performance ratio of copper, copper has come up, we’re going down. We are going to cross over at a higher price point than we had earlier believed because of the demand for copper.

On the energy side, you asked a question about energy and the cost of energy going forward. Again, I think there are two things here. One is the efficiency associated with high-temperature superconductor electrical machines, particularly the motors, the generators. That’s a real advantage for HTS. I think we’re going to see that advantage in the marketplace, as our machines become accepted in the marketplace. And then we look at the renewable energies, as I spoke about earlier. We announced an order this last quarter for our PowerModules that are used to operate a fuel cell. It’s going on a bus up in Canada. We’ve got our PowerModules operating with wind turbines that can be used with photovoltaic power generation in the future. So, I think the higher price of energy, not to mention the pollution issues associated with fossil fuel, are going to drive more towards renewables and we have a play there. We’re already in that market. As I said, we just got a new benchmark today for next year to look for our PowerModules going into wind turbines in China.

China is going to be moving I think even more aggressively than any country in the world today in terms of building out wind farms. That seems quite clear and we are going to participate in that market, I believe.

Mario Fernandez, Private Investor.

I was wondering whether you could give us some indication as to when you believe you’ll achieve breakeven point and profitability. And also if you could comment to us where you think your revenue base would be in fiscal year ’09?

Well, you are asking us to make forecasts that we are not at liberty to make here in this forum, so we won’t answer that question, I’m afraid. Kevin, if you want to try to give some brackets around that, that would be I think --

First of all, I think forecasting out to 2009 is risky for anybody, never mind this Company. But I think in terms of your question on profitability, we had stated publicly that we do not expect profitability for the Company before fiscal 2007 and maybe later than that. But that’s about as much as we can say.

That wraps up our Q&A session.

Thank you, ladies and gentlemen, for participating in our conference call today. We appreciate your questions and we look forward to keeping your informed as we go forward. Thank you.

Thank you. This concludes today’s teleconference. Have a great day.