American Superconductor Corp (AMSC) 2006 Q4 法說會逐字稿

Good morning everyone and welcome to American Superconductor's Q4 conference call. All participants will in a listen-only mode until we reach the question-and-answer session. With us on the call today are American Superconductor's Founder and CEO, Greg Yurek, Vice President and CFO, Tom Rosa, and Investor Relations Director, Jason Fredette. For opening remarks, I would like to turn the conference over to Greg Yurek. Please go ahead, sir.

Thanks very much [Connie] and good morning everyone. We have a lot to talk about today, including our financial results for Q4 and our full fiscal year, our recent acquisition, and of course, Project Hydra, which was announced earlier this week. Before we dig in, I will turn the call over to our Investor Relations Director, Jason Fredette, for a reading of our Safe Harbor statement. Jason?

Thanks, Greg. I would like to point out that certain remarks we make this morning regarding our financial forecasts and other beliefs, plans, and expectations constitute forward-looking statements. There are a number of risks and uncertainties may cause actual results to differ significantly from these statements. Please refer to our 10-K, which was filed with the SEC this past June, as well as our subsequent 10-Q filings for information about these risks and certainties.

I would also like to note that we will be referring to EBITDAS this morning, or earnings before interest, taxes, depreciation, amortization, and stock compensation. EBITDAS is a non-GAAP financial metric. Our reconciliation of EBITDAS to net loss on a GAAP basis is included in the press release we issued and filed with the SEC this morning on form 8K. All of our SEC fillings can be accessed in the investor section of our website at www.amsc.com.

And now our CFO, Tom Rosa, will begin our discussion of the quarter. Tom?

Thanks, Jason, and good morning, everyone. Before we get into the particulars, I would like to point out that we have changed the nomenclature of our fiscal year to more closely align it with the calendar year. Since nine months of the fiscal year ended March 31, 2007 took place in calendar '06, that period will now be known as fiscal year 2006 instead of fiscal '07. Our current fiscal year, which began on April 1, 2007, will now be referred to as fiscal 2007.

I would also like to point out that the quarter ended March 31, 2007 represents the first quarter in which Windtec's financial results have been consolidated into ours following the January 5 closing of the Windtec deal. The acquisition of Power Quality Systems did not close until April 27 and is therefore not included in our financial results for the fiscal year ended March 30, '07.

Finally, I want to make note that we changed our segment reporting effective upon the March 29 announcement of our reorganization of AMSC Wires, SuperMachines, and Power Electronic Systems into two business segments called AMSC Superconductors and AMSC Power Systems. Therefore, prior year segment results have been restated to conform to the current year presentation.

Now onto the numbers. Looking at our top line results, revenue for the fourth quarter of fiscal '06 came in at $19.1 million. This is double the revenue we reported for the prior quarter and a significant increase from $14.3 million in the fourth quarter of last fiscal year. For the full fiscal year, we generated $52.2 million in revenues, just above the high end of our 50 to $52 million financial forecast. This compares with $50.9 million of revenue for fiscal '05.

In terms of Q4 revenue contribution, our Power Systems business generated a record $13.7 million in revenue, which is more than double the $5.6 million in revenue in the fourth quarter of fiscal '05. Contributing to this growth was a rise in D-VAR and PowerModule systems shipments and a full quarter of revenue contribution from Windtec, although most of the Q4 revenue was organic. Power systems revenues for the full fiscal year were $30.9 million, also up more than 100% from $15 million in fiscal '05.

AMSC Superconductors, which was established March 29 by the consolidation of AMSC Wires and SuperMachines into one business unit, generated $5.4 million of Q4 revenue, which is down from $8.7 million in the prior-year quarter. For the full-year, AMSC Superconductors recognized $21.3 million of revenue, down from $35.9 million in the prior fiscal year. Both of these declines of the results of significantly lower revenues associated with our 36.5 megawatt motor and Long Island Power Authority cable projects, as we had forecast a year ago. On a year-over-year basis, 36.5 megawatt motor revenue decreased by approximately $9 million and LIPA revenue decreased by approximately $6 million as we brought both programs to or near completion.

Backlog as of March 31, 2007 stood at about $80 million. This compares with $23.8 million in backlog at the beginning of this past fiscal year. In addition to our organic growth, the completion of our Windtec acquisition in January contributed significantly to backlog. Of the $80 million in backlog as of March 31, we expect to recognize at least $58 million of this as fiscal 2007 revenues. In addition, since the close of the fourth quarter, we have brought in approximately $10 million of new orders and contracts that we expect will be recognizable as revenue by March 31, 2008. So we are in great shape entering this fiscal year, with orders in hand representing a minimum of 85% of our revenue forecast.

Our power systems business generated a $500,000 operating profit in the fourth quarter and positive cash flow. We believe this business unit will continue to generate positive cash flows and EBITDAS in excess of 10% of revenues in fiscal '07.

AMSC Superconductors incurred an operating loss of $9.8 million during the quarter ended March 31, 2007. Our financial results were adversely affected by higher than planned costs to complete the assembly and test of the 36.5 megawatt motor for the Navy and the write-down of one of the SuperVARs we had planned to ship to a customer. This compares with an operating loss of $10.6 million in the prior year quarter. The prior year quarter included approximately $5 million of impairment charges netted to our decision to complete the transition of our manufacturing operation from first-generation to second-generation wire.

Our total cost and expenses in the quarter were $30.5 million. We recorded approximately $700,000 of restructuring charges in March '07 related to the decision to close one of our two Westborough, Massachusetts facilities and to consolidate two businesses, AMSC Wires and SuperMachines, into the one business unit called AMSC Superconductors. Also as a result of the increase in our stock price over the last several months, we took a $500,000 charge in Q4 related to the revaluation of an outstanding stock warrant. More detailed information will be available in our 10-K, which will be filed with the SEC on June 14.

For the fourth quarter, the Company reported a net loss of $11.4 million, or $0.33 per share. The Company's net loss in the fourth quarter of fiscal '05 was $11 million, or $0.34 per share. For the full fiscal year 2006, our net loss was $34.7 million, or $1.04 per share. This compares with a net loss of $30.9 million, or $0.94 per share, for the prior fiscal year. The Company incurred approximately $3.7 million of stock-based compensation expense this past fiscal year in connection with its adoption of FAS 123(R), compared to approximately $400,000 in the prior year.

As we mentioned last quarter, EBITDAS is becoming an increasingly important measurement for management and investors, given the increasing effect that non-cash charges, such as amortization related to acquisitions, depreciation of capital equipment purchased for the scale-up of our 344 superconductors, and stock compensation expense will have on the Company's bottom line. Our EBITDAS for the fourth quarter of fiscal '06 was a negative $9.3 million. This compares with a negative $9.9 million for the year-ago quarter. EBITDAS with a negative $28.5 million for the full fiscal year 2006 and a negative $25.6 million for full-year fiscal '05.

At March 31, AMSC had less than $100,000 in short-term debt, all of which was acquired in the Windtec transaction, and $35.3 million in cash, cash equivalents, and investments. This compares with $41.6 million on December 31 and $65.7 million on March 31, 2006.

Greg will provide a full rundown of our financial guidance for the current fiscal year. Those of you keeping financial model should be aware that we expect capital expenditures for fiscal '07 to be in the range of eight to $10 million. Of this total, approximately $6 million will be used for our 344 superconductor manufacturing line. This will bring our spending up to about $16 million on that manufacturing line, $13 million of which is being spent to get us to our initial 720,000 meter capacity on our 4 centimeter technology and an additional $3 million -- with an additional $3 million going toward our scale up to our 10 centimeter technology.

As we bring more of that 2G equipment online, we expect fiscal 2007 depreciation and amortization to increase to between 8.5 and $9 million, which includes about $3 million for the amortization of Windtec intangible assets. In addition, we are anticipating $4.5 million to $5 million in stock compensation expense this year.

And now I'll turn the call back over to Greg.

Thanks, Tom. Well, what a better way to begin than with Project Hydra, which was announced on Monday. Our investors have always had a keen interest in the market for superconductor power cables and rightly so, given that this is the largest market for HTS wire and it presents our company with multibillion-dollar opportunities. During the past decade, there have been many successful superconductor cable demonstrate and a lot of learning. These demonstrations have proven that superconductor cables can carry many times the power of traditional copper systems and can enhance grid efficiency. And with each successive cable demonstration, the reliability of HTS cables has gotten better and better.

But until recently, most of these demonstrations have taken place in laboratory settings, with utilities taking a wait-and-see approach. All that is changing now and it's changing very quickly. Within the past nine months, cables have begun going into the grid here in the United States. During the summer of 2006, National Grid began serving customers in Albany, New York with a superconductor cable. Shortly after that, another superconductor cable was turned on in ADP's grid in Columbus, Ohio. Both of these superconductor cables have been working flawlessly and have impressed the utilities keeping track of these demonstrations. Later this year a third cable will be going live on Long Island in LIPA's system and that will be the first transmission voltage cable going into the grid.

So the momentum in the industry and the excitement here in AMSC is clearly building. Which brings us to our announcements earlier this week. On Monday, the Wall Street Journal broke the news about our new Secure Super Grids system, which is going to be deployed for the first time in Consolidated Edison's grid in Midtown Manhattan. We have been saying for years that we will eventually rewire all of Manhattan, as well as all major cities around the world. And now we are taking the first big step toward achieving that goal.

It is a dream come true. We will be building on the platform of technology and product development that has been achieved over the last decade, converging that with Con Ed's System of the Future, which is a blueprint for rewiring Manhattan and all of New York City over the next 30 years. Con Ed first introduced its System of the Future plan about two years ago. The basic idea is to interconnect all of the substations, or nodes, if you like, in the grid so that if one of the nodes goes down, power can be sent from other substations to keep most businesses and residences powered up.

Pretty simple idea. However, Con Ed recognized it couldn't achieve this objective using standard cables based on copper wire, because there just isn't enough real estate under the streets for all these interconnections. Con Ed concluded that superconductor cables were the perfect solution because they can transmit up to 10 times more power than a copper cable of the same size.

Let me put that another way. For every 10 copper cables under the streets of Manhattan, you can pull them out and replace them with just one cable of the same diameter made with HTS wire inside. That simple fact allows all the interconnections between substations and compact distribution networks that Con Ed wants to make.

But then Con Ed decided they had to go a step further. They knew that the grid would become more and more susceptible to blackouts caused by power surges, that they interconnected substations and added more sources of power generation to meet customer demand for more electricity year over year. We worked with Con Ed to create a solution. And based on our years of developing system-level solutions, our knowledge of superconductor cables, and our experience developing superconductor surge suppressors, known as fault current limiters, AMSC invented a new compelling solution -- our Secure Super Grid systems.

In short, Secure Super Grids involves the installation of high-capacity superconductor cables between substations and the use of ancillary controls and other proprietary technology to protect grids from wide area blackouts in the event of severe weather, accidents, or even terrorist attacks. We think it is important to understand that while we can use virtually any superconductor cable design, a superconductor cable alone is not sufficient to create a Secure Super Grid solution. Secure Super Grid systems is a system-level solution for which AMSC has several patents pending and which requires the special features of our proprietary 344 superconductors.

Putting modesty aside for just a moment, this is a blockbuster solution and it is the catalyst to really take superconductor power cables across the threshold to widespread commercial adoption. But we don't need to take AMSC's word for this. What does Con Ed have to say? To quote a Con Ed executive in the Wall Street Journal article on Monday, "if I had a grid to build from scratch, this is how I would build it." Well, that is great. Let's get on with it.

The collaboration between Con Ed's vision of the System of the Future and AMSC's system-level solution approach happily converged with objectives of the Department of Homeland Security to bring advanced technologies to bear on protecting critical infrastructure in the United States, which led to the contract we signed last Friday and announced on Monday this week. The Department of Homeland Security considers the creation of Secure Super Grids a high priority here in the U.S. and that is why they are funding AMSC to develop and deploy the first Secure Super Grid system in Manhattan, the financial center of the world.

This is quite a high-profile project and we believe it will lead to significant and additional business going forward. For example, Con Ed said if this solution is successful, they would look at similar deployments elsewhere in Manhattan and the other four boroughs of New York City. This is big business for AMSC, but New York City is just the beginning, because, well, New York, New York, if we can make it here, we can make it anywhere.

Con Ed is the toughest, most conservative, and most reliable electric utility in North America, so for them to eagerly embrace this solution for their grid speaks volumes. And we believe Secure Super Grid systems will be a compelling solution for virtually every city in the world.

Let me give you a few details regarding the project funding. This project, known as Project Hydra, consists of two phases. The first phase calls for the successful demonstration of Secure Super Grid's technology by the end of 2008 and the second phase calls for the deployment of the first system in Manhattan in early 2010, consistent with Con Ed's construction schedule.

The project cost is estimated at just over $39 million. This is a government/industry cost-shared product. Of the total project, cost AMSC will absorb $6.8 million of the cost in the form of overhead and Con Ed will provide $7.5 million. Homeland Security will provide $25 million. We have signed a letter contract worth $1.7 million for 90 days, during which time we expect to complete the terms and conditions for the full contract.

Work on the project has already begun. Given that AMSC is the prime contractor for the project, the $25 million in expected funding will flow through AMSC as revenue from now through the first half of calendar 2010, when we will commission the nation's first Secure Super Grid. Importantly, we expect this project to be cash flow positive for AMSC. This project, of course, is being managed by our AMSC Superconductors business unit, which as Tom stated, is composed of the former AMSC Wires and SuperMachines business units.

Following the successful completion of factory acceptance testing of our 36.5 megawatt HTS Navy motor in March, we successfully integrated our Wires and SuperMachines divisions in our Devens, Massachusetts facility. That restructuring initiative will yield a savings of approximately $4 million annually. Later this fiscal year, we are considering relocating our Westborough, Massachusetts headquarters and R&D activities up to Devens, which will -- excuse me, which would yield an additional $3 million annualized savings.

Of course at the same time, we will be continuing the process of scaling up a production of art 344 superconductors so we can initiate volume production in December 2007 in Devens, Massachusetts. As of March 31, 2007, we had installed, commissioned, and qualified 75% of the full-scale equipment needed to achieve a gross manufacturing capacity of 720,000 meters of 344 superconductors per year starting in December 2007. This achieves our objective to have 70% of the equipment online as of March 31 and based on anticipated demand for 344 superconductors, we are making some additional investments, as described earlier by Tom, to prepare for rapid migration to our 10 centimeter technology, which reduces costs and increases production volume.

Now let's move on to our AMSC Power Systems business, which has consistently exceeded our expectations. At the outset of fiscal 2006, we had been expecting 25% growth on the top line for this business. Our forecast climbed higher and higher through the year and thanks to our strong organic growth and Windtec's contributions, this business delivered 106% revenue growth, significantly higher than our last forecast of 67% growth on the top line. And with Windtec and Power Quality Systems now integrated into Power Systems, we are expecting another year of 100% growth on the top line. And that is growth with positive EBITDAS.

For several years now, our D-VAR offering out of Power Systems has been the primary business driver in that business unit. That product continues to gain traction, as evidenced by the series of orders we signed during the quarter in the industrial and wind power markets. Last week, we announce that our D-VAR will be used at a copper and gold mine in South Australia to protect a local utility from voltage fluctuations caused by the mining operations. This is our fourth order for VAR products for the industrial sector, a sector that we see contributing good growth in the future, following behind the boom we are already experiencing in the wind industry and the anticipated growth in orders this year from the utility industry.

Speaking of wind energy, since our Q3 conference call in February, we have received orders for five additional windfarms for D-VAR grid interconnection solutions, bringing our total to 28 windfarms worldwide served by D-VAR. D-VAR continues to be the voltage regulation solution of choice for the burgeoning wind power market.

As you probably know by now, Windtec has bolstered up significantly in wind energy. With Windtec in the fold, we are now offering heavy equipment manufacturers and engineering construction firms around the globe with a way to quickly become a leading wind energy system manufacturer. We provide them with the complete designs for those wind energy systems as well at the electrical systems that go into them. As a result -- excuse me, this results in upfront licenses and development contracts for AMSC, royalties for the systems that they built, and a significant flow of electrical system sales.

Since closing the acquisition in January, Windtec has quickly proven its worth by delivering on all of its promises. They have brought in five multimillion dollar contracts, three of which come from new customers. In addition to Sinovel in China, which already is producing hundreds of 1.5 megawatt wind energy systems and soon will be graduating to three and five megawatt systems with our help, Windtec has gained to a traditional customers in China, Zhuzhou Electric and Dongfang Steam Turbine Works. And the customer also in South Korea, Doosan Heavy Industries. In addition to the multimillion dollar contracts these new customers already have signed with us, we believe these relationships will lead to tens of millions of dollars in additional electrical system sales over the next couple of years and beyond.

So what does all this mean in terms of financial results going forward? Simply put, strong revenue growth and a significant improvement in EBITDAS. For fiscal 2007, we are expecting consolidated sales to increase approximately 50% year over year to a range of 75 to $80 million. Of this total, we expect 75% of our revenue to come from commercial sales and the remainder to come from government contracts. This compares with about 30% commercial sales in fiscal 2005 and 60% commercial sales in fiscal 2006. So we are on the right path.

We also expect that more than 50% of our fiscal 2000 revenues will come from the wind power market. And at least 50% will come from sales overseas. We will continue to build out our team in those areas to support that ongoing growth. For example, we already have nine new AMSC employees on the ground in China and we expect to increase the size of our Chinese workforce further this year to support our strong revenue growth there.

We also expect a substantial improvement on the bottom line this fiscal year. Our net loss for fiscal 2007 is expected to improve to a range of $22 million to $25 million, or $0.62 to $0.70 per share, and our EBITDAS loss will be cut by more than 50% to a loss in the range of $9 million to $11 million. Please remember that these figures exclude approximately $5 million in potential restructuring costs, should we relocate our Westborough headquarters and R&D activities to Devens within the current fiscal year.

In our last earnings call, we suggested that the best metric for our financial performance is EBITDAS. Tom gave you some of the breakout on the non-cash expenses that will be hitting our books this year and you will find a rather detailed breakout in tables at the back of our earnings press release that we issued earlier this morning. We plan to cut our EBITDAS lost dramatically going forward and we remain firmly on track to achieve EBITDAS positive results in fiscal 2008, which ends March 31, 2009.

As you know, excluding capital expenditures, EBITDAS is a good proxy for cash flow. As a result of the growth in revenues, the streamlining of our operations, and the completion of the first stage of manufacturing scale-up of our 344 superconductors, our cash burn will also be dropping significantly in fiscal 2007. We anticipate the burn rate will be less than $20 million in fiscal 2007, as compared with approximately $30 million this past fiscal year.

In summary we are set for a quite good fiscal year. Sales are increasing rapidly and will far surpass our previous record performance. To put this all in perspective, recall that our revenues grew by five times from fiscal 2001 through fiscal 2004 and then remained essentially flat from fiscal 2004 through fiscal 2006, which just ended. A factor of five growth in '01 through '02 -- excuse me, through '01 through '04 was driven primarily by substantial growth in government contracts, which strongly supported development of our core technologies. During the '04 through 06 period, revenue remained essentially flat in the $50 million range as we executed on existing government contracts and technology development and started to get some traction in commercial sales.

The platform has now been built. As we enter fiscal 2007, we are now poised for strong revenue growth once again, but this time, driven by commercial sales. Much of this growth is attributed to our Power Systems business and the traction it is building in the wind power utility and industry markets. AMSC Superconductors, meanwhile, is now commencing a project in Manhattan that we believe will push HTS over the goal line into the commercial markets.

Looking forward to reporting back to you on additional successes as we march through this fiscal year. Now let's open the call to questions. Connie, will you please provide the instructions?

(OPERATOR INSTRUCTIONS). Corey Tobin, William Blair & Co.

Hi, good morning.

Good morning, Walter.

I wanted to hit a couple of different things, if I could.

Corey, I'm sorry.

That's okay. You had a very large sequential ramp in the revenue in the PS business, as well as year over year. I am curious as to how you see the incremental margins in that business at this point in time? What should we be thinking off in terms of how the significant rant in revenue drops to the bottom line?

Well, Corey, I think you know that we have a mix of gross margins for the products coming out of Power Systems. D-VAR 40% to 50% gross margins, individual power modules more on the order of 20 to 25% gross margins, Windtec electrical systems, that they resell somewhere in the 35% gross margin range. So as we look at that business over all with that gross margin mix, I think you are looking quite clearly in the 30%, 35% gross margin range. Tom, do you want to add anything?

Yes, Corey, the other thing I will mention is that there are a couple of changes occurring in the fiscal year that we just began that are important to, I guess, delineate versus last year. One is that the stock comp next year will be pushed down. You are not asking about operating margins, I don't believe, but stock comp is going to be pushed down to the operating divisions. That is going to have a change on the bottom line.

And also we are expecting to book next year -- or the year we just began about three to $4 million of in tangible asset amortization related to the acquisitions in Windtec and PQS that of course didn't exist or existed only minimally this past year. So those are going to affect the bottom lines, but as Greg just pointed out, the gross margins are expected to remain very strong.

So stock comp, as we currently see it this year, is not included in the operating number we see by division?

That's correct.

Okay. But next year it will be?

In the year we be just began, it will be.

Okay. But the amortization from Windtec would be?

Yes.

Okay. So where was the amortization from the acquisitions in the March quarter?

As I mentioned in the remarks, we are expecting Windtec amortization in the year we just began to be on the order of $3 million. We haven't even begun to do the calculations on the PQS acquisition we just closed about three or four weeks ago.

Right. What was it in the quarter just reported.

Quarter just-ended was about 600 K.

So it was about 600 K of incremental expense in the March '07 quarter that wasn't there March of '06?

That's correct.

Okay. Great. Thanks.

Once again, Corey, we will have to get you back in the queue, please, but just remember that EBITDAS, I think, is the proper measure here, the proper metric, because stock-based compensation in the business unit, the amortization, depreciation, of course, so this is why we have gone to -- in the last earnings conference call to point out that EBITDAS is the best metric for measuring our performance going forward.

Right. But you don't report that by division, right?

We don't at this stage.

Is there any consideration, perhaps, to do that?

We are thinking about doing that.

Okay, great. I will jump back in the queue. Thanks.

(OPERATOR INSTRUCTIONS). Michael Carboy, Signal Hill Group.

Good morning, ladies and gentlemen. Greg, could you do us all a favor and provide us with a bit of granularity on the breakdown of backlog? First, I want to make certain that the $25 million of Project Hydra backlog is not in that $80 million number and then I would like to better understand what that $80 million number is comprised of.

Well you are correct, the $25 million is not in the backlog. $1.1 million was added to backlog when we signed the Hydra contract last Friday. That is since the beginning of the fiscal year, so that is not in the $80 million as of March 31 that we reported today. The $1.1 million is in the additional $10 million of new orders that will be recognized as revenue this fiscal year that we commented on earlier.

And Tom, I'm going to ask if you could give just a broad brush stroke on the breakout in backlog, not a lot of detail, here, because we don't normally give a lot of detail on the breakout on backlog. If you could give a broad -- (multiple speakers)

Yes, Michael, I would just tell you I guess in terms of overall I would say 75 to 80% plus of the backlog is in the Power Systems group, a much smaller amount, of course, is in Superconductors.

Okay. And then for my follow-up, Greg, could you elaborate on the write-off of the SuperVAR condenser I see you discussed in the press release?

Sure. We have been working on pulling together two 12-megavar SuperVAR machines to send -- to ship to Tennessee Valley Authority. We ran into some additional issues with respect to one of these machines. We evaluated that it would cost us nearly $0.5 million to makes the repairs so that it would be in full shape. However as we announced on March 29 and had a conference call on March 29, we have, in fact, redirected our business there to focus on licensing technology. We cut our costs dramatically and we decided it was the right business decision not to put more money into developing SuperVAR synchronous condensers.

In fact, you know, as we have been selling into the utility market, our VAR solution of choice here is the D-VAR, where we make those 40, 50% gross margins, so it is a no-brainer business decision to not spend the additional cash to repair one of those, write it off, put it back in our last quarter and march forward. So we expect to ship one of those two SuperVARs to TVA and recognize revenue on that in our next fiscal quarter.

But then that one that is being written off will never ship, is that correct?

I will not I am not in a spend a dime on things that we are not pursuing in the marketplace, so this is -- that would not be a good business decision.

Are there any liquidated damages, contractual liquidated damages on failure to ship the second SuperVAR?

No, nothing like that.

Thank you.

Walter Nasdeo, Ardour Capital.

Thank you, good morning.

Hi Walter.

Hi. I am a little bit intrigue by the prospect of actually moving the corporate offices from Westborough up to Deven. Have you got an idea on what the cost savings would be and what type of buildout you would need to do to put your corporate offices in there? The last time I was up there, it was still kind of more of a kind of an industrial kind of facility. So have you kind of got any idea on what the savings would be and when you could actually execute something like that?

Yes, it's actually in the press release, Walter. The savings would be annualized at $3 million. And I agree with you, this is an industrialized facility. It is for manufacturing, but we do have office space, which I'm sure you did not see when you were here. So all in, we reported in the press release today that the cost, if we decide to make this change -- and I will come back to why we would or wouldn't -- if we decide to make that change this fiscal year, the cost would be $5 million. So that would be something to factor in with your models. You may or may want to put it in there this year, that is up to you, of course.

But the reason we might delay that -- again, we are going through a decision process -- is our R&D is located in Westborough still and there are certain things we want to accomplish in that R&D before we shut down those operations and move them up to Deven. So that is the delaying factor for us right now.

What is the physical capacity up there as far as being able to push out second-generation wire. How is the development coming on that and what do you expect the final capacity to be?

Well, let me put it in perspective, because we talked about some numbers today, dollar investments here. We went to raise money just over two years ago, which we did in a public equity offering, we said we would have capacity in place in December 2007 of 300,000 meters per year for an investment of up to $15 million. I think, as you know, we were able to change that in a positive direction over the last year or so. We expect to have 720,000 meters gross capacity in December '07 for about $13 million investment. So more than double the capacity for less than $15 million we originally saw.

We have actually been able to make the decision here to invest an additional $3 million really focused on incorporating more into our current equipment, full-scale manufacturing equipment, for the 10 centimeter technology, which has the effect of multiplying the volume by a factor of 2.5. But only for three additional million dollars right now, we are making a strong move in the migration to the 10 centimeter technology. The full 10 centimeter technology would cost us perhaps another eight to $10 million of CapEx, but as we have always said, we will keep our powder dry there and spend that on the equipment when we have that full customer demand. That would get us up in the 2.7, 3 million meters per year capacity with that additional investment.

Walter, if I follow where you are actually going with that, this facility, the real estate that we own here, could be fitted out fully and produce 60, 6-0 million meters of 344 superconductors per year. So we have plenty of room here to expand.

Great. That's what I wanted to know. Thank you, men.

Jim Ricchiuti, Needham & Co.

Thank you, good morning. Congratulations on the positive news.

Thank you.

One question and then a follow-up. Greg, I wonder if you would characterize the outlook for additional power cable business that might be funded by the Department of Energy? There is -- I assume there is some other activity out there. And then the follow-up question, I will get to that after you answer this one.

Okay. So we, as you may know, we submitted proposals to the DOE on February 13. The had a request for proposal out on the Street for new projects. Their focus was clearly on power cables and superconductor fault current limiters, although they would consider other opportunities. So our proposals are in there. Other companies have put proposals in there, some including our wire, by the way, for their particular projects. The DOE said -- and don't put this on me, Jim, this is what the DOE said -- that they will make the decision later this year on who is going to get the contracts. And it should be plural from what they say.

So we expect to benefit from these decisions, these new contracts coming forth. And I think we will clearly see at least one additional cable project being funded by the Department of Energy.

Having said that, Jim, I have got to tell you that is great, I love it, and I want to participate. It is going to be good for selling more wire, it is going to help develop the industry and create more market pull, but really with Secure Super Grids now, our focus has got to be on commercial sales. And that is what we're working on, that is what we are focused on. It is not going to happen overnight, but with Con Ed giving the blessing to put superconductor cables in Manhattan, you know, we have to go focus on getting the next utility and the one after that and the one after that, and really start building up the demand. That is our job now.

Okay, great. And then the follow-up question, Greg, I wonder if you would talk a little bit about the fiscal '08 EBITDAS target. Could you give us a sense of what you're thinking in terms of your military business looking out with respect to that target?

Fiscal '08, well, there is some opportunity there, Jim. We haven't thrown away all this technology and all the patents that we have developed in the superconducting motors, generators, synchronous condensers, all these rotating machines. Again, our objective is to make money by licensing the technology know-how, patents to other companies to manufacture these to meet the needs of various customers in various industries. And so the wire and coils incidence, so it is very much the Windtec model as we have discussed before.

In terms of the government area, we believe we will be getting -- we do have right now some Navy contracts. We are continuing to work on the designs of militarized versions of the 36.5 megawatt motor and as long as the Navy is paying for that, we think it is a good thing to take that money and continue to develop the technology. We think there is opportunity for later this fiscal year for additional Navy contracts, but I have got to tell you in the kind of forecast that we gave in terms of the revenue and the EBITDAS for this year, fiscal '07, we really don't count much in there from the Navy.

Going out to your question, fiscal '08, we will be competing for the motor on hull number three of DDG1000. We should be -- the Navy should be full load testing of the motor by this time next year. We understand that they will be making a decision on the propulsion motors for hull number three of DDG 1000 in the second half of calendar '08. We expect that our motor will be lined up to compete for that opportunity. There is five hulls, two motors per hull, 155,000 meters of wire per propulsion motor.

Okay. Thank you.

Sure.

Pete [Patterson], Patterson Investment Advisors.

Greg, Tom, good morning.

Hi Pete.

Hi Pete.

How are you guys doing?

Great. How are you?

I'm fine. Congratulations on the exciting accomplishments in the last six months. I was just checking in to see what kind of developments are coming along with the superconducting fault current limiters. Siemens, for example, announced commercial significance in that area. Can we expect to see anything more in the next year?

Well, it's a very good question. We have been working with Siemens in a business alliance for just over two years now and you are right, we announced with them commercial grade performance in I think it was February. But in that same month, Hyundai in South Korea announced, also, great performance also using our 344 superconductors. In fact, it was a total of eight companies, organizations around the world using our 344 superconductors to develop what we now call standalone fault current limiters.

Why standalone? Because we don't use a standalone fault current limiter in Secure Super Grids. It is integrated into a system-level solution that incorporates the HTS power cables and other proprietary technology and ancillary controls. So I think there is a market for both. The really great thing here is that you can use standalone fault current limiters in a grid that is made with copper cables. And there is a need for that and I expect that those standalone fault current limiters will be sold to meet that need around the world.

In the case where you put in a Secure Super Grid solution, you won't need the standalone fault current limiter. Together, this is a very significant market opportunity and we are in both. And we will be pursuing both in the commercial marketplace.

Thank you very much, and take care, gentlemen.

Sure. Thank you, Pete.

Robert [Smith], Center for Performance Investing.

Good morning.

Good morning.

Greg, your comment in the Wall Street Journal about we hope this break the log jam. That is an interesting metaphor in my mind. When I see the log jam broken, I see those logs moving kind of quickly. So my question is what are your expectations as far as bringing on additional utilities, as far as a timeline goes? I mean, this publicist must have generated a considerable amount of interest.

Well, it has and the logjam I had in mind there is the utilities that have been watching and observing and asking questions, making suggestions over a decade now as these superconductor cables have been demonstrated in various test facilities. Now they are in the grid in the U.S. operating, as we said. Two of them operating, one more will be coming on in Long Island later this year. So it is building to a crescendo here. One would think that we would be a couple of years, three years, four years away from those demonstrations leading to substantial commercial growth.

Secure Super Grids breaks the log jam in the sense that, you are right, we have gotten a lot of interest from utilities around the world in trying -- trying to understand how this is going to serve their grids, their networks, and their cities around the world. So you know it is just a brand-new opportunity. It opens up the discussions, provides a very neat, very quick solution.

So practically speaking, we have got to get through calendar '08. As we said very clearly, I hope, this is the technology demonstration by the end of calendar '08. Con Ed is working on the engineering construction drawings and planning, so that we will then step right into their construction schedule and have the first Secure Super Grid in Manhattan in early 2010.

The point of saying all of that, Bob, is that I I'm not going to predict that these conservative utilities are going to make really quick decisions on this, but we now have something that makes the use of superconductor cables in their grid quite compelling. And I think that just changes the game here, so we are pretty enthusiastic.

It is really going to take the work on our part. Our network solutions team here that has been part of the selling of D-VARs around the world has been and will be participating in bringing this to utilities. We have the answers to their questions. We have to go out there and get the orders now.

Good luck. And just an observation, which I do want to dwell on, but when you call the year fiscal 2007 ending March 2008, why not simply call it fiscal 2008? I mean I'm not -- it seems like it's a little confusion there at least for me.

Well, we have been doing that. It has been fiscal 2008 in the past. It is now fiscal 2007, because nine months of the year are in calendar '07. And quite the contrary to your confusion, Bob, most other people have been confused the other way. So we are accommodating that broader audience.

Yes, but actually, I think it traditionally, it is your original way, the other way. So it might even foster an idea to go to a (inaudible) actually, that's a possibility.

Well, we wouldn't go to a calendar year, because it cost too much money to do that, a tremendous amount of restating of all the financials from our inception. And by the way, we get cheaper rates on everything from lawyers to accountants with an annual year that is not December 31. So we think that is a good thing.

Okay, well, I would encourage you to go back to the original.

We won't be doing it, Bob, but thanks for the suggestion, anyway.

Okay.

Thanks.

(OPERATOR INSTRUCTIONS). Kenneth Miller, Bonanza Capital.

Morning guys, thanks for taking my question.

Sure, Ken.

My first question is to follow up on the last one. Does the fact that the Secure Super Grid will be operating in early 2010 imply that kind of follow-on orders for these kind of projects by Con Ed will happen after 2010?

Yes, of course. Con Ed I don't think it is -- you know, after we see the first -- the technology demonstrated by the end of calendar '08, I think there is some opportunity here they may be convinced that they want to move more aggressively, but as a practical matter, I wouldn't forecast that. I would say they are going to wait until the first one is operating in Midtown Manhattan in early 2010.

Okay. As a follow-up, I wanted to ask more about your cash situation. It seems like you guys have about $35 million right now and I believe you said the burn you gave, it's something less than $20 million, but that includes CapEx, correct?

Yes, it did include the CapEx, Ken.

Are you looking at raising equity anytime this year? It seems like that would put you at a pretty low cash amount at the end of your next fiscal year?

Ken, if you look at our model -- we look at our model, I should say, maybe, and you look at some of the forecast we have out there, we are planning to be EBITDAS positive in our next fiscal year. Our cash burn rate is way down. Power Systems is generating cash, so we have a model that says that we are in great shape here going forward.

So you're saying you are not necessarily planning on raising equity this year?

We have a model that says we don't need to raise any additional equity.

Okay, thanks guys.

All right. You are welcome.

Corey Tobin, William Blair & Co.

Hi Corey.

Hello.

Hello?

Hi Corey.

Hello?

Yes, Corey.

Okay. A couple of quick follow-ups. I want just wanted to double back on the cash question. I think previously you were saying that the burn in 2007, I guess as it is now called, would have been half of what was done in 2006 and now it seems like it is going to be a little bit higher than that. Any particular reason for the change?

Just prudent. Just being careful.

Okay. Great. And then could you split the -- as we look at next year, can you give us an indication of where you think the two segments are going to come out? I know you said -- was it Tom, did you say 50%, or I guess it was Greg. Did you say 50% you expected of revenue to come from wind?

We are saying this fiscal year the one we are in now --

Right. '07?

Yes. Actually more than 50% of our revenue will be from the wind industry.

Okay. And so should we expect the PS segment to be more than that, obviously, as well, right, because you will have sales outside of wind through that segment as well?

Yes, that's correct. That's correct. I mean if you want to step back, we don't give guidance on business unit segments, of course, but we said 75% of our revenues this year will be commercial sales. Those come from, of course, the power systems business unit.

Right. Okay. Great. And then one final thing, what would keep you from consolidating the R&D to the Devens' facility? It sounds like there is still some analysis to be done as to whether or not that is going to occur. I guess what is the gating factors there?

Well, research and development just on the wire technology, the material science, materials processing of this material. That is the seed corn for the future, so we have great results. We reached commercial grade performance levels last summer on our 344 superconductors. We have made advances in increasing productivity. That is quite clear. And you continue to do some R&D, of course, in these superconductor arena, because, again, it is the seed corn for the future. It provides the results. We will be producing wire here in December '07 with that commercial grade performance, 140 amps in a 344 superconductors dimensions. We believe we will be at 200 amps not long after and there is opportunity to go even higher.

Why would you care? Because you make systems even more power dense and more cost effective. We have research and development activities going on in Westborough right now. You don't want to stop those in midstream. There is a logical stopping point. You want to wait until you get there. That will make the decision for us. I hope that is helpful.

At this time, I would like to turn the conference back to Mr. Greg Yurek for any additional closing remarks.

Thank you very much for participating in the call today. We are very excited about where we are at right now. Our growth is in front of us. We are going into a new growth phase and I think the key here is that this new growth phase is all associated with commercial sales, as opposed to the past. Thanks for your attention and we will talk to you next time.

This concludes today's conference. We thank you for your participation.