American Superconductor Corp (AMSC) 2006 Q3 法說會逐字稿

Welcome to the American Superconductor fiscal year 2006 third quarter conference call.

[OPERATOR INSTRUCTIONS]

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.

Thanks.

Good morning, and welcome to the our fiscal 2006 third quarter conference call. On the call with me today is Kevin Bisson our Chief Financial Officer. In our call today, we're going review the numbers we released in this morning's announcement and we'll also provide a brief update on the key benchmarks for our company and then we'll open up the session for your questions and discussion.

First, however, I would like to ask Kevin to provide the Safe Harbor Guidance and then to review the financial results.

Kevin?

Thanks, Greg, and good morning, everyone.

Before we begin discussing financial results for the third 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 or beliefs, plans, and expectations which constitute forward-looking statements.

There are a number of factors and uncertainties that's may cause actual results to differ significantly. Please also refer to our SEC filings and in particular Management's discussion and analysis and future operating results section for more information on these factors and uncertainties.

Now turning to our third quarter financial results, revenue for the third quarter of fiscal 2006 was $13.5 million compared with record revenues of $23.2 million in the third quarter of fiscal 2005. Last year's record revenue quarter included substantially all of the high temperature superconducting or HTS wire shipments for the 36.5 mega watts HTS motor contract for the Navy which was booked as revenue at or SuperMachines business unit.

In addition, last year's third quarter included the commissioning of four PQIVR units at a major US semi-conductor manufacturer for our Power Electronic Systems business unit. Revenue in the third quarter of fiscal 2006 included continued work on the manufacturing of the large Navy motor contract including $3.6 million of inventory cost at the end of September that were booked as revenue in the December quarter.

In addition, AMSC Wires shipped the final 90,000 meters of HTS wire to power cable manufacturer Nexon in support of the LIPA cable project. Power Electronic Systems revenue for the third quarter stemmed largely from the shipment of the first of three D-VAR units to its Canadian mining company. The order of which was announced in September of 2005. The remaining two units are expected to be shipped in the fourth fiscal quarter.

Revenue for the first nine months of fiscal 2006 was $36.6 million compared with revenue of $45.4 million for the first nine months of fiscal 2005. The year-over-year decrease in revenue for the first nine months of fiscal 2006 resulted from the lower level of work performed on our SuperMachines business unit--by our SuperMachines business unit on the 36.5 mega watt Navy motor program resulting from the completion of design and HTS coil fabrication in fiscal 2005. In addition, lower year-over-year revenue at Power Electronic Systems due to lower D-VAR orders was partially offset by increased activity on the LIPA cable contract at AMSC Wires as substantially all of the HTS wire for this project was shipped in the second and third quarters of this fiscal year.

Orders received during the third quarter of fiscal 2006 total.ed $32.8 million which was demonstrably higher than the $3.7 million of orders generated in the third quarter of fiscal 2005. In fact, third quarter orders were the highest quarter for orders in nearly three years. Orders for the third quarter were driven by contract modifications for the large Navy program and LIPA cable contracts that we have discussed over the past two earnings conference calls.

In addition, Power Electronic Systems generated approximately $7 million in orders for the quarter. The Company also booked in its AMSC Wires business unit, $5.4 million in connection with the previously announced award from the department of defense for the accelerated manufacturing scale up of second generation or 2G HTS wire. Backlog as of December 31, 2005 stood at $37.1 million which was $18.7 million higher or more than double the Company's backlog of $18.4 million at the end of the second quarter.

Of the $37.1 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 2006 amounted to $40.3 million which was $21.5 million higher or more than double orders of $18.8 million for the first nine months of fiscal 2005.

The operating loss for the third quarter of $8.3 million was $5.6 million higher than the operating loss of $2.6 million for the third quarter of fiscal 2005. The unfavorable operating loss for the quarter compared to the prior year's quarter due mainly to an approximately $4 million swing in the operating results of Power Electronic Systems due mainly to lower sales volume related margins.

In addition, the higher year-over-year operating loss at AMSC Wires was primarily due to lower manufacturing overhead absorption due to lower first generation wire production. Lower margins related to wire shipments for the LIPA cable contract and higher 2G related R&D spending.

The operating loss for the first nine months of fiscal 2006 was $21.8 million which was $9.9 million higher than the $11.9 million operating loss for the first nine months of fiscal 2005. =Similar to the third quarter's results, the higher nine month operating loss this year compared to last year was driven by lower manufacturing overhead absorption, lower margins primarily related to the wire deliveries for the LIPA cable contract and increased 2G related spending all at AMSC Wires.

In addition, lower sales volume related and product mixed driven margins at Power Electronic Systems contributed to the higher overall nine month operating loss this year compared to last year.

Net loss for the third quarter was $7.5 million which was $5 million higher than the net loss of $2.5 million in last year's third quarter. Included in other income for the third quarter, were the $200,000 gains on the revaluation of stock warrants issued in April of 2005 in connection with the litigation settlement.

Net loss per share for the third quarter of $0.23 per share was $0.14 per share higher than the $0.09 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 2006 was $19.8 million, and $0.61 per share respectively. Both amounts are higher than the net loss and net loss per share of $11.5 million, and $0.41 per share respectively for the first nine months of fiscal 2005.

Turning to the balance sheet, the Company ended the third quarter with $71.1 million in cash, cash equivalents and short-term investments compared to the corresponding $74.5 million balance at September 30, 2005, and the $87.6 million balance at March 31, 2005, our previous fiscal year-end.

The cash burn for the third quarter of $3.4 million was driven mainly the net loss of $7.5 million offset by lower networking capital of $3.2 million and non-cash depreciation and amortization expense of $1.8 million.

For the full fiscal year ending March 31, 2006 the Company is adjusting its previous financial guidance with revenue expected to be in the range of $52 million to $57 million which is slightly lower than the previous range of $55 million to $60 million. Based on this revised guidance, fourth quarter revenue is expected to be in the range of $15 million to $20 million.

The Company is also adjusting its full year net loss guidance to a range of $22 million to $25 million from the previous guidance of $21 million to $23 million. This revised guidance corresponds to a net loss per share of between $0.67 per share and $0.75 per share compared to prior guidance of between $0.65 per share and $0.70 per share.

Based on the revised full year net loss guidance, the fourth quarter net loss is expected to be in the range of approximately $2 million to $5 million with the associated loss per share to be between $0.06 per share and $0.14 per share.

Before I turn it back to Greg for his remarks I would like to remind everyone that consistent with our prior earnings conference call 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.

AMSC had a very strong third quarter in terms of new orders and contracts in fact, it was the best quarter in this respect in nearly three years. In addition, during the third quarter and into the current quarter the Company has been achieving one significant benchmark after another.

One year ago in our earnings conference call, we began providing and updating subsequent calls key benchmarks for our Company and the industry looking forward through the fall of 2006. We have since achieved many of these very important benchmarks and we provided a report on these achievements in our earnings press release this morning.

Those benchmarks that have not yet been achieved are on track to be completed on schedule and are included in our earnings press release along with new benchmarks that we aim to achieve over the next 14 months. The benchmarks we have achieved have contributed to the building of a strong platform for long-term profitable growth and market leadership.

As we achieve each of our benchmarks going forward, this will continue to strengthen our business platform, a platform from which we expect to achieve long-term profitable growth. I won't review all of our achievements in our new benchmarks in today's call because you can read those in the earnings press release. In this call, I want to highlight just a few key items so we can get right to your questions and discussion.

Let me start with our new first in the world commercial high temperature superconductor power grid reliability solution. And by that I mean SuperVAR synchronous condensers. We developed this grid reliability product with our launch customer TVA or the Tennessee Valley Authority.

During the last six months or so as the eight MegaVAR advanced prototype was going through rigorous accelerated life testing in the Tennessee power grid, we were simultaneously negotiating the final promotional product specifications with TVA. Those negotiations finally came to a successful conclusion in December of 2005 and after subsequently negotiating the final details of the first commercial contract last Friday, we announced that SuperVAR, the world's first commercial high temperature superconductor grid reliability product, was now entering the the production phase at AMSC.

This is a huge step forward for American Superconductor and for the industry. First, it says that TVA is satisfied with the results from the beta sight and is therefore taking delivery of the first two commercial units. We expect to deliver the first machine to TVA in December of 2006 and the second by March 31, 2007.

Second, think of this as TVA's good housekeeping seal of approval. That's important because we can now expect other electric utilities to view SuperVar as a viable commercial product, not just a product under development. We have in fact, completed several grid analyses for utilities interested in SuperVAR and we currently have outstanding quotations to electric utilities for SuperVAR solutions. We expect that we will receive additional orders for SuperVAR in our next fiscal year.

As we stated in our last earnings call, we were targeting the release by TVA in December, 2005, of one or two SuperVAR machines to production. The final answer was a release of two machines. The final specification that was negotiated with TVA for these two machines was 12 MegaVAR, a 50% higher power rating than the advanced prototype.

We agree to a TVA's request for the much higher power rating because market information showed us that it would provide a more broadly applicable product for the utility industry.

The bottom line is that we have moved into a few phase in the evolution of American Superconductor and the HTS industry. That is, we have stepped across the threshold to the production of large scale commercial HTS grid reliability products for the first time. This is an historic moment. One that I believe will mark the acceleration of growth and transition to future profitability of the HTS industry.

A second item worth highlighting is the renewal of our strategic alliance with Siemens for the development and commercialization of Faulk current limiters based on second generation or 2G HTS wire. We started the first year of this strategic alliance in February actually on February 1, 2005.

In our joint announcement with Siemens yesterday, it was stated that technical results during the first year of the alliance had exceeded our expectations and as a result, we had renewed the alliance for a second year.

It was also stated in the joint announcement that we expect to demonstrate a small prototype fault current limiter by this time next year. That is a very important step for 2G HTS wire technology, and as a result the demonstration of this prototype has become one of our new key benchmarks for fiscal 2007. It represents a big step on the way to commercial 2G based fault current limiters. In fact, in yesterday's joint announcement it was stated that HTS fault current limiters are now expected to be commercially available in a couple of years.

We think this is a big deal because the market demand from the electric utilities for fault current limiters is very strong. There's no conventional solution available and our 2G HTS wire is now fast becoming the pathway to a commercially viable solution.

It's worth noting that the U.S. Department of Energy has forecasted a market for fault current limiters of several billion dollars over the next decade in the U.S. alone. We're aiming to get a big share of that market.

The third area I want to highlight today is our proprietary second generation HTS wire. First, let me note that when I say proprietary I really mean protected by a strong patent state in addition to trade secrets and know how. AMSC now owns over 70 patents and patent applications worldwide on 2G HTS wire technology alone. By all accounts this is clearly the deepest and broadest 2G portfolio held by any company or institution worldwide.

And by the way, we have licenses to a lot more 2G related patents that are owned by others. We believe this strong patent portfolio will help assure our market leadership in 2G HTS wire but I diverge. Let me turn back to the key benchmarks on 2G technology and products. A key 2G benchmark we set this time last year was the demonstration of a repeatable production process for manufacturing 4 centimeter wide strips of 2G HTS material and the shipment of 344 superconductors which our 2G HTS wires with industry standard dimensions.

We started regular repeatable processing of 4 centimeter strips in September 2005 including slitting the strips into eight, 344 superconductors per 4 centimeter strip. We announced recently that we have orders for 2,500 meters of 344 superconductors from 18 customers in seven countries and in fact, that we had shipped the first 1,000 meters of the 2,500 to customers in the third fiscal quarter. There by achieving our key near term sales benchmark for 2G wire. And we're on schedule to ship the remaining 1,500 meters by 344 superconductors to customers this quarter as planned.

In addition, the forecast of demand we currently have for over 14,000 meters of 344 superconductors over the next 12 months is already exceeding our planned capacity of 10,000 meters during this period. We are doing everything we can to accelerate the manufacturing scale up of 344 superconductors, including accelerating the specification, purchase, commissioning and qualification of additional full scale manufacturing equipment to meet the anticipated growing demand.

With this objective in mind, we set a new benchmark that we intend to achieve by the end of fiscal 2007 and that is as of March 31, 2007 to install, commission and qualify 70% of all full scale manufacturing equipment needed to achieve a yielded output of 344 superconductors at a rate of 300,000 meters per year by December, 2007.

Achieving this benchmark means we'll be on track to achieve a major milestone on our 2G road map which is to have the yielded output of 344 superconductors at that rate of 3,000 meters by December 2007, our long-term road map benchmark. We're confident, based on the current status of our operation, that we'll achieve this all important benchmark.

Why is this manufacturing benchmark so important? Our ability to meet anticipated customer demand for high performance, high quality HTS wire on the customer's schedule is what created our market leadership in first generation HTS wire and we expect to maintain this market leadership with second generation wire.

Another really big benchmark for this year is the installation and operation of the world's first transmission voltage HTS power cable system in the grid of Long Island Power Authority, Long Island, New York. This cable system is on track to be energized by the end of the calendar year and will be another historic benchmark for the HTS industry as well as for American Superconductor.

An important new piece of information is that utilities like Consolidated Edison in New York are now openly seeking HTS cable and fault current limiter solution. This demand creation for HTS solutions originates from two factors. First is the real needs of electric utilities to move more power though congested corridors to deal with ever increasing fault currents and to solve voltage related grid reliability problems.

The second factor is the recognition by electric utilities of the maturation of HTS technology and products represented by successes such as AMSC's SuperVAR synchronous condenser and the expected economic and operating benefits associated with adoption of HTS solutions.

We expect the LIPA HTS cable system to be installed and operating by the end of calendar year 2006 and we believe this will provide another strong validation point for electric utilities who are now seeking the advantages of HTS solutions in wake of future profitable growth of our wire business.

Well, we can go on forever, drilling down into details of each one of our key business benchmarks. However, in order to leave plenty of time for discussion, let me end by highlighting the growing market for our products in the area of wind generated electricity.

The rapidly growing market for wind generated electricity is creating increasing demand for our power electronics products and solutions to meet the needs for voltage regulation of wind turbines and to meet grid interconnection standards for wind farms. According to the 2004 world market update from BTM Consulting the worldwide installed base of wind generated electricity in 2004 was 48 billion watts or 48 gigawatts.

I have not seen the final numbers yet for the install base for 2005 but according to the BTM report it was supposed to increase by about 10 gigawatts to 58 gigawatts. By the end of 2009, the BTM forecast say this will double to about 117 billion watts. So by all accounts, this is a big and rapidly growing market and we expect to grow our Power Electronic Systems sales at a correspondingly rapid rate as this wind market continues to experience explosive growth worldwide.

We currently have an installed base and orders in hand for D-VAR and PowerModule Solutions to serve over 1 billion watts or 1 gigawatt of zero emission wind generated electricity. These products are used to meet grid interconnection standards for wind farms which are being adopted by more and more countries that's are installing these wind farms and also to regulate voltage of the wind generated electricity.

We currently have systems installed or on order for wind farms in Australia, Canada, China, Japan, Scotland and the U.S. By March 31, 2007 we expect to have an install base and orders in hand to be serving 2 billion watts of wind generated electricity or double the current amount of 0 emission electricity served by our products.

Our solutions are priced effectively and can be shipped and installed rapidly. Based on our anticipated growth in power electronic solutions for wind farms, as well as to industrials and electric utilities, we're forecasting profitable revenue growth for our Power Electronic Systems business of 25% for fiscal 2007.

With that, I would like to conclude by noting that we intend to continue our focus and unrelenting drive to continue to build a very solid business platform that we believe will ensure strong long-term profitable business growth and shareholder value. We have the right stuff to achieve these objectives. We have deep and strong internal capabilities in science, manufacturing sales and management.

We have powerful strategic alliance partners and the broadest and deepest 2G HTS patent portfolio of any company in the world. We have a leadership position in the markets addressed by our products and solutions and we have a strong balance sheet. I believe these factors taken together, with our persistence and determination will ensure business success and increasing shareholder value.

Let's now open the session for questions and discussion.

[OPERATOR INSTRUCTIONS]

We'll take our first question from the site of William Benton from William Blair, go ahead please, sir.

Good morning guys, a couple of questions actually I know I'm only allowed one, so how about one clarification and one question.

That's the limit.

The one clarification item if you could just talk about the orders. The total orders I got in my list here and I don't think you ran through all of these about 10,000,036.5 megawatt 8.3 million in LIPA , 7 million in PES, and 5.4 million DOD 2G wire is that right? That is correct. Okay, and then the other item is--could you just offer, the question is could you guys be a little more specific on with regard to your change in terms of your fourth quarter outlook. What maybe some of the relative small shifts there where within PES or SuperMachines?

It was in both Bill, and in the last earnings call, we noted that orders that were coming in for Power Electronic Systems could be delayed in terms of the orders and if they come in a little bit too late. Whether we can actually ship them out the door and recognize revenue in the fourth quarter was debatable.

Some of that may, in fact delay some of our revenue into the first quarter of next year. So that was one factor. The other factor is we have been saying since last May. We were expecting two Navy -- U.S. Navy contracts to come through in the fourth quarter. We announced the first one, the first of a series of new contracts Northrop Grumman Wind Systems actually announced it, we're the subcontractor and that's for a 40 megawatt generator, that's starting up, we'll recognize a bit of revenue this quarter, but not a lot.

And secondly. We said by the end of this quarter, we would have a--the first of a series of new contracts and we would be the prime contractor for the design, development and shipment a 36.5 megawatt mill spec motor. We believe that contract is coming in however, the start of it is late enough this quarter that the amount of revenue we'll recognize this quarter is going relatively small. So it really pushing into next quarter.

Those are the main contributing factors.

Okay, thanks a lot, I'll go back in the queue.

Thank you, sir, we'll take our next question from the site of Jim Ricchiuti with Needham & Co.

Good morning, Greg, just a follow-up on the Power Electronic Systems business. It recorded I guess the lowest quarterly revenues in a couple years, yet you still seem pretty optimistic about the business enough to talk about 25% growth at least 25% growth next year. When do you anticipate being behind some of the lumpiness in this business where we can start to see some consistent growth on a quarterly basis?

Yeah, Jim, this is really that kind of transition period. You look back a couple of years and it was even lumpier of course. We doubled revenue year-over-year going to March of '05. We had $15.7 million of revenue.

The backlog is building up. You saw the $7 million additional new orders that occurred in the third quarter. You listened to Kevin's comments. We're clearly expecting more orders coming in this quarter.

So we expect to be going into the new fiscal year starting April 1st with a pretty healthy backlog for Power Electronic Systems. And Jim, I wish I could forecast with a lot more precision but I think we're now emerging over the next year I'm going to say into reduction in that lumpiness but it's part of that transition period, but starting out the new year with a good healthy backlog I think is going to be a very positive sign.

Okay, thanks a lot.

Yep.

We'll move right onto to the site of Walter Nesdeo with Ardour Capital, go ahead please.

Good morning.

Good morning, Walter.

Hi, I have a quick-- a little bit more conceptual kind of question for you guys. As you strive for this $300,000 meter output of 2G wire, expected to kind of hit that at the end of '07. What do you do next? Where do you go for more capacity?

Have you thought about that because obviously that will be a mile stone but to really get up into the next level capacity's going have to increase substantially from there. So what's your plan for that?

Yeah, good question, Walter, when we went out literally a year ago, February of 2005 on a road show to raise capital so we could in fact support the build out of our 2G manufacturing, we put up a road map and that road map is available. You can actually go to our home page www.amsuper.com and you'll find under the "learn more" section an investor presentation that we gave recently in January and you'll see the road map in one of the slides there. That's been out there for a year.

After the operation is running at the yielded output of 300,000 meters per year, December of '07. The next step is to continue to scale up at a rate that's dictated by customer demand. You don't want to go to fast, also don't want to go too slow. I think we've pointed this out before. The good news is that our process for making these 344 superconductors is modular.

So as you identify each bottle neck in a manufacturing process, and this is just classic manufacturing. You're able to bring in a module, relieve that bottle neck and continue to expand capacity. We want to do that at a rate dictated by customer demand.

We said in our road map for an additional $25 to $30 million in capital, we could get that up to 8.4 million meters per year of capacity. So that just gives us a sense of how much capital required to get up to the next high level of production.

I could tell you we have our finger on the pulse of this market everyday. We're selling -- we sold the first is 1,000 meters in our last quarter of 344 superconductors. Demand already exceeding our planned capacity for the next 12 months and we're seeing some customers that are coming forth and saying hey, you know I need this kind of capacity in 2009, 2010, 2011 are you able to do it.

Well we're working with those customers and we have plans that will allow us to accelerate as that current forecast demand really turns into reality.

We have all of the plans in place, literally detailed plans, spread sheets we'll pull the trigger as the timing is right.

Okay, thank you very much.

We'll take our next question from the site of Jarett Carson with RBC Capital.

Good morning, I wanted to try that clarification and then a question. On the clarification, are you selling -- what's kind of the percentage mix on the D-VARs or wind farms to new installations versus a retro fit something that's been existing for a while was it predominantly or all new or is there some substantive mix that you can go after existing installations out there to give you a bigger market opportunity.

Yeah, Jarrett, and thanks for your clever approach to getting two questions in. Jarrett, we are primarily, I would say in fact, 100% supplying to new wind farms. So as the new wind developer comes along and they select their wind turbine manufacturer let say Advest or something, we get called in to meet the grid interconnection standards. We're starting to see a little bit where there have been established wind farms, and as grid interconnections standards are now being introduced.

They don't have to put in, perhaps, the grid interconnection standard but there's a lot of clamor to do that and in at least one or two cases we are being called in to look at that situation and provide a potential D-VAR solution. So, we'll probably see more of that going forward, but it's 100% new farms right now.

Maybe this is two clarifications plus one question. On -- you just mentioned your looking for one more contract at the ONR I think it's 36.5 megawatt and mill spec , can you, without the exact number what's the range I know the initial contract if I recall is around 70 million maybe you're not expecting something of that magnitude. Could you give us some frame of what the size might be and then over what potential time frame?

Right, so Jarrett, first of all, really important point here, the contract to Northrop Grumman for the 40 megawatt generator and the one we're anticipating for the mill spec motor are not coming from Office of Naval Research. They're coming from the procurement arm of the Navy, NAVC it's called. I think that's a really important sign. That really is stepping forward in the very strong way.

Out of the research environment if you will into the procurement environment point number one.

Point number two we've been saying since last May, these two contracts would be on the order of tens of millions of dollars per contract. Now, we said in the last call and I just want to clarify this further, as needed, that these are the first of the series of new contracts.

So, this is the way the government stuff works as we move into this next phase, you get the first contract, you deliver on that. Before that's done delivering, you have already negotiated the next contract and so forth.

Both the generator contract as well as the anticipated new mill spec motor contract are probably going to go about three years total and really, together, to AMSC we're going to be the prime on the motor contract. These are literally going to be worth many of tens of millions of dollars to the Company and on our top line.

Okay, thank you.

Yep.

We'll move on and take our next question from Robert Smith with Center For Performance Investing, go ahead please.

Good morning.

Hi, Bob.

With respect to the wind farm market. What do you judge your penetration on a competitive market share of this market to be? Power Electronic Systems.

Right, when it comes to the D-VAR, wind farm, whole wind farm kind of solution, we are probably the only key solution in North America that's out there today. Don't forget power electronics is a whole new animal for electric grid operators.

So what would be the variables for ordering the D-VAR, why wouldn't someone order a D-VAR?

Well, Wind Developer is in the business to make money. So when you develop a wind farm I should say. You want to make money so you select your wind term manufacturer and unless somebody tells you you must put in a grid interconnection product like a D-VAR, you're probably not going to do that because it costs you money and you have to worry about the return on that capital investment.

What's happened here is the United States just put in --introduced new grid interconnection standards last May or June, Canada's already has them so we have a bunch of orders for Canada.

Australia just instituted the grid interconnection standard several months ago, we just announced our first order from Australia for D-VAR. U.K. is now put in the standards, we have one operation in Scotland, D-VAR in Scotland, we're looking for more orders coming out of that--out of the U.K. and it looks like Spain is about to go forward with grid interconnection standards.

So, Bob, once that is put in place I think you're on the right track here then you're going have to put in a solution, we have an established solution, look for our growth to continue along these lines. By the way, the other aspect is don't forget the PowerModules we announced last quarter an order from Wind Tech an Austrian wind turbine manufacturer for 23 wind turbines, PowerModules for 23 wind turbines, 20 going into China, three going into Japan and we're expecting a lot more growth out of that product area as well so watch that place.

I'll get back in the queue, thank you.

We'll move right on onto the site of Jerry Harnish with Independent Advisors, go ahead please.

Glad to see that backlog growing a bit. I have a question on this 2G. The 2G HTS achievement of 448 amps per centimeter wire width is just 52 amps per centimeter below the 500 amps needed for broad commercial applications.

Right.

Too improve the 344 an additional 52 amps, are new development--did or is that a matter of tweaking?

Yeah, if I said that to the manufacturer, go hey, it's a matter of tweaking they would probably kill me. The real challenge here, Jerry is first of all you have to have the good science going on in the back room so to speak to find the pathways to achieving these higher performance levels for the broad market penetration as we talked about so being only 52 amp away from that is a very positive result. The next challenge, of course, is now handing that over in a sense to the manufacturing floor and saying hey, take this result, here's the recipe,e now make these wires everyday at high yields 344 superconductors, and I don't care what industry you're talking about that takes time.

Certainly, it's always been true for the semiconductor industry. The way we structured our business is the transfer of technology to the manufacturing floor and scale up. We'll be there. This is very positive but don't look for us to in fact have 448 amps per centimeter width next month.

By this time next year, we'll be shipping the first higher performance wires that incorporate this new science and that's an important factor because it will continue to strongly differentiate us from the competition as we go into full scale manufacturing. So, I don't know if I'm being long winded, I probably am but the point is you need the seed corn from the research in the back room but you need to also transfer it into manufacturing. We know how to do it, we've done it with HTS for over a decade and we're on the track make it happen here too.

Just to sneak in a second question with a yes/no answer and I'll get back on the call for my others. Do D-VAR and F-VARs create any meaningful maintenance in servicing revenue streams in what they're sold?

Well, they certainly create -- we sell service contracts with the D-VAR and we'll certainly do that with the SuperVAR as well. As most service contracts in any business, you'd expect our nice high profit contract, so we would like to get those and we get them with almost 100% of the customers.

Okay, thanks guys I'll try on get back if we have time.

Our next question comes to us from the site of Richard Dearnley with Longport Partners, go ahead please.

Good morning, could you talk some about the results of the beta test of the -- with TVA and then talk about your marketing strategy going forward?

Sure, I think we've recounted the TVA beta site results a number of times including in press releases just to give you one -- First of all, this was put in a sub-station serving a steel mill in Gallatin, Tennessee, and the important fact is that that steel mill has an arc furnace and as that arc furnace is melting steel you have a tremendous amount of voltage fluctuation which go back on the grid and also reduce the performance of the arc melting operation itself.

So we put it at the site at TVA's request to have an accelerated life cycle test of the SuperVAR. You're going see a lot of voltage swings, in fact, it turned out to be over 5 million-voltage swings much more accelerated than TVA actually anticipated.

It went through all of that and did very well and TVA said okay we're satisfied, here's the order for the first two commercial units, but we want you to do this at 50% higher power rating up to 12 MegaVAR we've agreed to do that, again, because we see that as a broader market need, so we're moving forward.

Moving forward our approach to selling SuperVAR to answer the second part of your question. Exactly the same as it is for D-VAR. So in fact, the sales force that we have for our D-VAR systems calls on electric utilities particularly in this case.

We do grid analyses with our staff of six transmission planning engineers and then we specify the solution. So we've done that now for several utilities for SuperVAR and we have quotations now outstanding at a couple of these utilities for SuperVAR. Very same process that we've used in the past for D-VAR.

Okay, thank you.

Sure.

Our next question comes to us from the site of David Kerstner with Kerstrum (ph), go ahead please.

Yes, hi, question on the AMSC Wires business, given that we're currently at low volumes, I suspect of the 2G wire, I suspect that the AMSC Wires losses are probably only going to grow in the near term and what we're talking about is 10,000 meters through March of '07 of production capacity. How do you -- I'm sorry that's not right 300,000 meters of production capacity by December '07. How do you sort of get to a point where wires division, which is traditionally been a drag on the losses generated turns to a profitability and can you put that in comparison to how Super Power has said that they'll have the capacity to do a million meters by December of this year?

Well, we've stated several times in past earnings conference calls that we certainly don't expect the AMSC Wires business unit to be profitable until we're selling large quantities of 2G wire. So that's why that benchmark for December of '07 of 300,000 meters have yielded high performance wire.

It's so vitally important, you've got to get past that threshold, then you can start looking at ramp up of sales and then can think about AMSC Wires as a business unit becoming profitable. I think that's quite correct.

With respect to the broader comparison question, we simply don't believe that company you mentioned Super Power will have that kind of capacity or certainly not that output as of the end of calendar '06. We don't think it's physically possible and so, we'll leave it at that.

Okay. As a follow-up then, can you give me a sense as to what level of meters or revenues the wires grew -- does need to be at. You say it's a large number but can we narrow it a little bit as to when it could be break even or profitable.

We've said in the past and I'll simply repeat the public disclosure on this. We see the break even point at about 2 million meters per year shipped out the door.

It appears we have a follow-up from the question of William Benton with William Blair, go ahead, please.

Hey, guys I would like to point out first that mine was definitely a clarification the first one.

We marked it down on paper, Bill, we'll keep it in mind for the next call.

It certainly wasn't a math question. But the other thing I really wanted to ask you was on the operating losses in some of the segments could you just kind of maybe explain what might be going on in there, I know there's some accounting shifts in the SuperMachine sides but obviously you had a huge sequential uptick in revenue there and operating loss declined just a little bit.

I want to make sure I understand there and as well as on the power electronics side I presume that's really just because of the lower sales level that you're just not getting the absorption there that would be the only reason why that loss would be larger.

Yeah and I think I'll let Kevin, if you want to dig in to just a little more detail there. As much as you can.

Yeah, I think, we tried to discuss and I think you're right on power electronics I think it's largely a function of volume. The sales volume is obviously at a lower than normal level so I think that's really the big issue there.

I think on the SuperMachine side. Yes we had an increase in revenue sequentially, a couple of things you are seeing here is the we had anticipated -- we have been anticipating obviously over the last couple of quarters, the advent of these Navy contracts coming in and so what we have done is we have kept many of the R&D people that would be doing that work, unfortunately until those contracts come in, those costs are are not absorbed and consequently that's part of the loss, so to speak, on the SuperMachine side or even though we higher revenue.

The other reason is we have obviously been anticipating the conversion of the TVA order to production. That has come in a little later than expected. Obviously, that has come in.

So those costs will begin to be absorbed and then finally with the increase to the overall cost of the 36.5 megawatt contract, we have obviously adjusted the cost incentive fee associated with that contract and that's been a somewhat of a slight drag on earnings as well for that business unit.

Okay and then if you could quickly update us on the commercial motor relationship. I know it's one of the items that you've kind of put in your 2007 benchmarks.

Yeah, good question. It is there, it remains objective for this Company. We think it's important to have that channel to ship marine propulsion market outside of the U.S. Navy. So basically repeat what I said the last call.

We are in discussions right now with, I'll say, explicitly three different companies that could set the bill here. We're going through various analyses. As I said last time, I would love to get the right relationship done sooner than later. It's important to us, but you know, you don't sign up for a strategic alliance if you don't feel all the T's are crossed and the I's are dotted we're very optimistic about having the right relationship or in fact maybe relationships, plural in place and we're working on that very actively, Bill. So, we see it as an important objective. It's not going to go away as an objective. We'll deliver on that one as soon as we possibly can.

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We'll move back to the site of Robert Smith with Center for Performance Investing, go ahead please.

Hi, Greg, a couple of weeks ago there was a major front page story in the "Wall Street Journal" on the hurricanes blow down of transmission poles and lines, and clamoring of communities to bury wire. Would second generation wire be suitable for this kind of a use?

Well yes, absolutely. Look the big deal here is you want to go underground. It costs money and I'll give my classic example here in the Boston area. NStar Utility 18-mile underground copper cable system made with 345 kilovolts, they put out a published number of about $11 million per mile for this 345 KV copper based underground system.

So nobody will see the lines it's protected from all of the ice storms and everything else. Wonderful, but pretty darn expensive.

1G wire used for that particular cable system. We went and did the analysis with them on this and as all of these wonderful attributes of higher efficiency and all that sort of thing, but it cost $13 to $15 million per mile. You really don't have a leg up on copper.

2G wire with that much lower cost of manufacturing you do the analysis again and you're below $10 million per mile with 2G so now, you have all of the advantages of the superconductors and you have a lower systems cost for that kind of an application.

So yeah, you would like to have the increased reliability, the increased security, associated with going underground there's a lot of customers clamoring for this from North Carolina to Texas to Boston. Not to mention in other parts of the world. You have to have the price point on the wire, though, we think to penetrate that market and it's coming.

Okay, thank you.

Yep.

All right, it appears our last question is a follow-up from Jerry Harnish with Independent Advisors, go ahead please.

Glad to have the time here, guys. I have a question on margins, you made an estimate of a top line revenue of $52 to $57 million and an estimate of $22 to $25 million on the loss figure on the bottom line. That shift of $5 million created a $3 million decline in losses or 66% margin which is pretty impressive.

It looks like you guys are expecting your margins to improve considerably going forward and in fact, under that kind of scenario would it be possible you would only need about 90 million to break even for the Company. Is this assessment pretty well on line or are you still sticking with the 100 million for a break even top line revenue?

Jerry, you're asking us to look a little bit further over the horizon and you're in the right ballpark, let's put it this way. In the near term selling more D-VAR is a good thing because these are 45% to 50% gross margin products, so the more you sell of that in any given quarter, the better your margins--overall corporate margins are going to appear and I think you're seeing that effect anticipated for the balance of this year. I think we just stated earlier that significant uptake in revenue for the current quarter is going to be associated with D-VAR sales. Kevin, I don't know if you have anything else you want to add to that.

No, I think that -- the point is that there's a tremendous swing in terms of profitability to the extent that the Power Electronic Systems either has a high revenue quarter or a lower revenue quarter, so as Greg pointed out, we said that we expected $15 to $20 million in revenue this quarter and a lion's share of that we expect to be in the Power Electronic Systems business.

In any case, Jerry, our focus is on and we're incented as a management team to get to profitability. So, you're definitely in the right ballpark in terms of overall top line and in terms of achieving profitability.

Since I'm the last one here I'll cheat again, on your benchmark for the growth in 2007 for Power Electronics you had a minimum of 25%, do you guys have any kind of reasonable range for the growth of SuperMachines business in '07?

Jerry, we're not--we stretched ourselves to give some guidance on one business unit, we thought that that was appropriate because it's selling commercial products and growing profitability, so we wanted to give some indication. We'll come back as we always do in the May conference call after our year is done. After we get our budget's approved by the board here and so forth and we'll give our full year guidance for fiscal '07 but beyond that, we're not going to get into any more comments today.

Thanks for your time guys.

Sure, thanks very much and we would like to thank all of you for participating in today's call. Good questions, we appreciated that and we look forward to speaking with you again at the next call.

Thank you, ladies and gentlemen, this does conclude today's teleconference. You may disconnect at this time.