American Superconductor Corp (AMSC) 2007 Q1 法說會逐字稿

Good morning everyone and welcome to the American Superconductor's First Quarter Conference Call. (Operator Instructions) With us on the call this morning are American Superconductor's founder and CEO, Greg Yurek, Senior Vice President and CFO, David Henry, and Investor Relations Director, Jason Fredette. For opening remarks and introductions I would like to turn the call over to Mr. Fredette. Please go ahead, sir.

I'd 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 that may cause actual results to differ significantly from these statements. Please refer to our 10-K, which was filed with the S.E.C. on June the 14th, for information about these risks and uncertainties. I would also like to note that we will be referring to EBITDAS this morning, or earnings before interest income, other non-operating expense, income taxes, depreciation and amortization and stock compensation. EBITDAS is a non-GAAP financial metric. A reconciliation of EBITDAS to operating loss on a GAAP basis is included in the Press Release we issued and filed with the S.E.C. this morning on Form 8-K. All of our S.E.C. filings can be accessed in the Investor Section of our website at www.amsc.com and now I will turn the call over to CEO, Greg Yurek to begin our discussion of the quarter. Greg?

Thanks, Jason, and welcome to the call everyone. The Press Release we issued this morning provides you with a good overview of our progress and outlook here at AMSC so we'll keep our comments brief this morning. First, we reported this morning that revenues increased more than 40% year-over-year as we grew the business organically and through strategic acquisitions.

We also cut our EBITDAS loss during the quarter, both sequentially and year-over-year and remained on track to achieve EBITDAS positive results in our next fiscal year. In fact, at this stage we now expect to approach EBITDAS positive results in the fourth quarter of this fiscal year.

In addition to these accomplishments and our strong growth outlook, we completed a successful follow-on stock offering in July, which netted about $94 million to the Company. Our balance sheet is quite strong with over $120 million of cash and cash equivalents and no debt. And in addition to having a balance sheet that we certainly believes takes us through profitability and positive cash flow, we have generated contracts and orders already this fiscal year to help fuel our continued growth in the quarters and years ahead.

Let's begin with our discussion with our AMSC PowerSystems Business unit, which is serving as the catalyst for our current and near-term growth. PowerSystems delivered yet another record quarter with revenues more than quadrupling over the year ago quarter. What's driving this tremendous growth? In a word, wind. We have positioned AMSC very well in this market with a unique mix of technologies, products and services. Among them is our D-VAR solution, which regulates voltage between wind farms and the grid. Recent months have brought D-VAR orders for wind farms in South Australia, Canada's Prince Edward Island and two substantial wind farms in the Midwestern United States. With more than 30 wind farms being supported by this product, AMSC has become the de facto standard for voltage regulation in the wind industry.

Another major driver for our growth in the market is AMSC Windtec. This is a business we acquired in January 2007 that provides complete wind energy system designs and sells wind turbine electrical systems. In the months following the acquisition Windtec signed several multi-million dollar contracts with new customers like Doosan Heavy Industries in South Korea and Dongfang Steam Turbine Works and Xu Xu Electric in China as well as a new development contract with an existing Chinese customer, Sinovel Wind.

But these contracts were trumped two weeks ago with the announcement that AMSC Windtec had received a $70 million order for wind turbine electrical systems. This was a follow-on order from Sinovel Wind, a spinout from a large company called Dalian Heavy Industries, Sinovel adopted a 1.5 megawatt wind energy system design a couple of years ago and has been aggressively scaling up production for the Chinese wind energy market. They've produced more than 100 systems in calendar 2006 and are on track to manufacture more than 500 wind turbines this year. They also have a public objective to scale manufacturing to 1,000 wind turbine systems per year by 2010. The order we received in July calls for us to ship all $70 million worth of electrical systems to Sinovel in calendar 2008. This translates into well over 1,000 electrical systems that we need to ship to Sinovel in calendar 2008.

To put this order in perspective, our Company as a whole generated 52 million in revenue in our fiscal year ended March 31st, 2007 and that $70 million order comes on top of about $50 million worth of orders that Sinovel previously placed with Windtec. We're now also working with Sinovel on designs for 3 and 5 megawatt wind energy systems that they plan to sell worldwide, not just in China. We expect that when they begin producing the 3 and 5 megawatt wind mills we will benefit from more electrical system sales. In the quarters ahead we expect our other Windtec customers to begin placing electrical system orders of their own as they enter the manufacturing phase with Windtec designs.

With all these growth prospects ahead of us, our main focus now is on execution including manufacturing and shipping product and achieving our revenue and earnings growth objectives. At the heart of each of our electrical systems is the PowerModule, a very versatile IGBT based power converter. We are currently shipping hundreds of power modules each quarter to China from our operations in Wisconsin. At this stage with three wind customers already in China and with a fourth Chinese customer likely to be signed by the end of our fiscal year, it makes sense to shift some of that manufacturing closer to the customer. We believe we will be able to reduce costs by 15% to 20% by manufacturing PowerModules in China and that's exactly what we're in the process of doing. At the outset we'll most likely outsource through a third party but we're also planning to initiate a manufacturing operation of our own in China.

At the same time we'll be taking steps necessary to protect our IP, our intellectual property. For instance, central to PowerModule's success is a control card that contains encrypted software needed to run wind turbines. We'll continue manufacturing those control cards here in the States and shipping them over to China to insert into the electrical systems that will be assembled and tested there. Now while the wind power is propelling AMSC's PowerSystems today, our business pipeline in the utility and industrial markets is also strengthening.

In April we completed our acquisitions of Power Quality Systems in Pennsylvania. PQS, as we call it, brought to us a proprietary thyristor switch technology that is used in static VAR compensators or SVCs for utilities and industrial companies. As was the case with Windtec, we're seeing a very quick return on investment. In July we announced that we have received about $1.5 million worth of orders for our power quality SVC offering from four industrial customers. We also are bidding very actively with utilities on a larger scale, SVC Contracts. AMSC PowerSystems, which doubled in size from approximately $15 million in fiscal year 2005 revenues to $31 million in FY 2006 revenue, is certainly positioned for another tremendous year. In fact, we expect this business to grow by more than 100% again to more than $60 million in FY 2007 revenue.

Now let's move on to AMSC Superconductors. In our Q4 conference call we spent a good deal of time discussing our Secure Super Grids system level solution. In short, Secure Super Grids involved the installation of high capacity super conductor 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. In essence, Secure Super Grids make critical power grids bulletproof. The initial secure to super grids deployment is set to take place in ConEd's grid in Manhattan in early 2010 under a project partially funded by the Department of Homeland Security.

As you may have seen, prior to the pricing of our stock offering we reported that we had just learned through a media report that a Congressional Subcommittee had sent a letter to the Department of Homeland Security indicating it is reviewing the origins of the projects award to AMSC and ConEd. Late last week we received a letter as well requesting information for this review. The Committee still has not stated the reason for its review but we're cooperating fully. We don't know any more than that. Of course, we followed the appropriate protocols on the contract and Homeland Security certainly went through an exhaustive justification process in awarding this project on a sole source basis. This included a review by Congress, which is normal course of business. But these types of inter-governmental squabbles take place in Washington D.C. and all we can do is cooperate in the process. We continue to work actively with Homeland security to finalize the contract and the project is already under way under an initial letter contract. The entire Homeland Security ConEd South Wire AMSC team is moving forward with a strong sense of urgency so we can keep on track with ConEd's construction schedule in Manhattan.

Since introducing Secure Super Grids in May we have been contacted by a number of electric utilities that want to learn more about how this solution might benefit them and we are in the midst of an aggressive outreach campaign to market the solution to utilities here in the U.S. and overseas. We believe the introduction of Secure Super Grids represents a tipping point for the industry so we're energized and marshalling our forces to make this new grid level solution a big success. Several weeks after announcing our project with ConEd we were awarded two additional HTS power grid projects by the Department of Energy. The first is another superconductor cable project we'll be undertaking with Long Island Power Authority, or LIPA. As you may recall, we are now nearing the completion of the world's first transmission voltage HTS cable system in LIPA's grid. This system is based on our first generation, or 1G, wire.

Under this new project we'll be replacing one of the cable systems three phases with a cable made with 344 Superconductors, our brand name for what is generically known as 2G HTS wire. We will again serve as prime contractor and project manager and expect to receive up to $9 million in cost sharing revenues from DOE. DOE also awarded us a project to develop and perform in grid testing of a standalone fault current limiter, or FCL, made with our 344 Superconductors. We'll serve as project manager on this program as well and have selected Siemens and Nexans as our industrial partners. This project extends the reach of HTS to yet another big name utility as our FCL will be going into Southern California Edison's grid. DOE expects to provide up to $12.7 million to AMSC for this project over the next several years. We're continuing to work with DOE to hammer out the final contract details and we expect the DOE and DHS contracts to be finalized within our current fiscal year.

And there is still upside. At the same time the DOE awarded us two HTS projects it awarded three additional projects to other companies. We see these as candidates for our HTS wire sales. For instance, South Wire Company in Georgia won an exciting HTS cable project of its own. They'll be installing the one mile substation to substation HTS cable system in Entergie's grid in New Orleans. This system will require a substantial amount of HTS wire. Given our experience working with South Wire on the cable that was energized last summer in ADPs grid in Columbus, Ohio and our selection of South Wire for the Secure Super Grids project in Manhattan, we like our chances of winning that order. But we still have work to do to close that deal.

As I said before, it's all about execution at this point, not only winning wire orders and new power grid projects, but also in scaling up manufacturing of 344 superconductors. This is key because we have to have the capacity to support projects like the ones ConEd, Southern California Edison and Entergy are undertaking. We're executing well on that front and look forward to turning on our full scale manufacturing line in December this year at which time we'll have a gross capacity of 720,000 meters of 344 superconductors annually.

The follow-on offering we completed in July provides us with the flexibility we'll need to ramp up production quickly once we see demand increasing further. Because of the way we design the manufacturing operation, we can quickly break bottlenecks in the line as demand grows. So in summary, we have tremendous growth prospects ahead of us here at AMSC and that's reflected in our new forecast, which calls for a 67% year-over-year growth on the top line. We also have a good plan in place to continue expanding our business and improving our bottom line.

Before getting into the financials, particulars of the financials, I would like to formally introduce Dave Henry, our new CFO. Dave joined us in mid July, the same week, in fact, that we commenced our follow-on stock offering road show, trial by fire you might say. Dave has already made a very positive impact here at the Company. Prior to joining AMSC he was CFO of AMI Semiconductor, a company with nearly 3,000 employees worldwide and more than $600 million in annual revenue. Dave is exactly the kind of CFO we need here at this stage of our evolution. He knows what it takes to grow a company and do it profitably and I look forward to working closely with him and the team to make that happen.

So without further adieu, let me turn the call over to Dave to discuss the financials and our forecast. Dave?

Thanks, Greg and good morning everyone. It's been a busy first few weeks since I joined the Company on July 9th but it's been great getting to know the team here at AMSC. The way I look at things our best days are in front of us. I will be working hard to ensure that our rapidly increasing sales translates into meaningful improvements on the bottom line. The team here has been tensely focused on achieving profitability and we have a good business plan that will get us there.

Let me speak to the first quarter financial results in more detail. Revenue for the first quarter of fiscal 2007 came in at $19.8 million, up 41% from $14 million in the year ago quarter. Our AMSC PowerSystems segment generated a record $14.4 million of this total, which is up more than 300% from $3.5 million in the first quarter of fiscal 2006. As Greg noted, D-VAR and PowerModules systems shipments, as well as contributions from Windtec and PQS helped us accomplish these solid results.

Our AMSC superconductor segment generated $5.4 million of Q1 revenue, which is down 49% from $10.5 million in the year ago quarter. This decline was primarily the result of $7.7 million in lower revenue associated with our 36.5 megawatt motor program with the Navy as this project was winding down. The motor was delivered to the Navy in June. This was partially offset by $2.6 million in higher revenues from the Long Island Power Authority cable project as a result of additional funding.

We entered the second quarter of fiscal 2007 with $75 million in total backlog, which is down 6% from $80 million at the start of the first quarter. The real story about our backlog though is the $70 million we received from Sinovel Wind in July, which is the largest commercial order in the Company's history. Sinovel's order contributed strongly to an increase in our backlog to approximately $140 million as of July 31st, a record for the Company. And, as Greg noted, we are expecting approximately $45 million in government project awards to hit our backlog in the months ahead. Needless to say our backlog is as healthy as it has ever been.

Gross profit for the quarter was $3.6 million resulting in a gross margin of 18%. This compares with the gross profit of approximately $100,000 and a gross margin of 1% for the first quarter of fiscal 2006. Gross margin is low in general at this point in the Company's evolution due to the accounting for superconductor development contracts, which results in pushing operating expenses to or from cost of sales, depending on revenue levels. The year-over-year increase in gross margin reflects the contribution of higher margin generating commercial sales out of our PowerSystems segment.

R&D expenses for the quarter were $4.2 million, or 21% of total revenue. This is relatively flat with $4.1 million, or 29% of revenue, for the first quarter of fiscal 2006. SG&A expenses for the first quarter of fiscal 2007 were approximately $6.1 million, or 31% of revenue. This was up from $3.5 million or 25% of revenue for the first quarter of fiscal 2006. This increase is primarily the result of our increases SG&A cost resulting from our acquisitions, the accounting effect of lower superconductor's revenue and higher stock based compensation expense.

We incurred $1.2 million in amortization of acquisition related intangibles related to our acquisitions of Windtec in the fourth quarter of last year and PQS in Q1 of fiscal 2007, which we did not incur in the first quarter of fiscal 2006. Until we have year-over-year comparables this amortization will continue to impact our incremental operating profit in 2007.

Our results in Q1 were affected by approximately $2.9 million or $0.08 per share in unusual charges. These charges primarily resulted from the following items; a $1 million charge related to a higher mark-to-market valuation adjustment on an outstanding warrant required by increases in our stock price, $800,000 in restructuring and impairment charges related to our AMSC superconductor's business unit. I don't expect any further charges in the future relating to these actions.

The third factor was the write off of the remaining super VAR unit we had planned to ship to a customer. This $900,000 charge for Super VAR will not recur in future quarters. With so many growth opportunities ahead of us and only so many resources to go around, we made the decision along with our customers to cancel the Super VAR program. Our focus on product sales will be based on our D-VAR and svc product lines, which have been adopted by the utility industry and have quite good gross margins.

Looking at the business units, AMSC PowerSystems generated an operating loss of approximately $600,000 in Q1 of fiscal 2007, which includes the $1.2 million amortization of acquisition related intangibles I mentioned a moment ago. This is still an improvement from a $700,000 operating loss in the first quarter of fiscal 2006. AMSC superconductors generated a $6.5 million operating loss for the first quarter of fiscal 2007, which compares with a $5.5 million operating loss in Q1 of fiscal 2006. The year-over-year change was a result of additional restructuring and impairment charges in this business as well as the write off of the last super VAR unit in inventory.

On a consolidated basis including the unusual charges we reported a net loss of $9.7 million, or $0.27 per share for the first quarter of fiscal 2007. The Company's net loss in the first quarter of fiscal 2006 was $6.7 million or $0.20 per share. Given the increasing effect that non-cash charges have on our bottom line, management is using EBITDAS, or earnings before interest income, other non-operating expense, income taxes, depreciation and amortization and stock compensation, as the measure as the measure of our-- of the Company's bottom line performance. Our EBITDAS for the first quarter of fiscal 2007 was a loss of $5.3 million compared to a loss of $5.6 million in the first quarter of fiscal 2006.

Turning to the balance sheet, as of June 30th we had no debt and $30.5 million in cash, cash equivalents and investments. This compares with $35.3 million on March 31st. Of course, subsequent to the end of the quarter we completed a follow-on offering of our common stock that yielded net proceeds to the Company of approximately $94 million. Needless to say our Company is very well capitalized and has the resources necessary to carry out its aggressive growth plan.

And now I'd like to discuss our forward-looking guidance. Based on the momentum we continued to build in the first quarter, we now expect an even stronger year in fiscal 2007. We currently expect that revenues for fiscal 2007 will increase to approximately 67% year-over-year to a range of $85 million $90 million. This is up from our previous forecast of $75 million to $80 million. Of this total we expect more than 75% of our revenues will come from commercial sales and approximately 65% will come from the wind power market, which is up from our previous guidance of 60%.

We expect our net loss for the fiscal year will be in the range of $21 million to $24 million or $0.54 to $0.62 per share based on an expected $39 million weighted average shares outstanding. This is an improvement from our previous net loss forecast of $22 million to $25 million. In addition, we continue to expect that AMSC will be EBITDAS positive fiscal 2008. In fact, we now believe we will be approaching positive EBITDAS by the fourth quarter of this year.

Finally, we now anticipate that our EBITDAS loss will be in the range of $8 million to $10 million, an improvement from our previous forecast of $9 million to $11 million. So while there is much work to be done, we're certainly moving in the right direction.

With that, I will now open the call for questions.

(Operator Instructions) Our first question will come from Corey Tobin with William Blair.

A couple of quick housekeeping things and then I want to move on to some bigger picture questions if I could.

Corey, one question at a time. We have a lot that are in line so, as the instructions were read, one question at a time please.

Okay so let's go to I wanted to focus on the incremental margin on the revenue. If you're anticipating $10 million in additional revenue and only $1 million in contribution from EBITDA, can you just address why the incremental margin on revenue is so low?

Yes when we gave our guidance, Corey-- this is Dave Henry. When we gave our guidance last quarter we did not anticipate that we would have these $2.9 million of unusual items that hit and then we're just not going to be able to make up for all of that even with the interest income we'll get on the proceeds from the offering. We just can't make up for those unusual items. We'll do our best we can to try to make those but so given that, we're guiding to the $1 million increase but it's primarily because of the unusual items that hit in Q1.

Jim Ricchiuti with Needham & Co.

The question on gross margins, you showed significant improvement sequentially even taking the charge out of the last quarter and I wonder if you'd comment on the trend in gross margins over the balance of the year and to what extent did Q1's gross margin have any benefit from potential 1G wire sales.

I think the major improvement in our gross margin this quarter was due to the fact-- well, it's two reasons. One, PowerSystems was a bigger part of our revenue mix this quarter so PowerSystems has higher gross margins than the superconductor segment does, which really doesn't have much in the way of gross margin because it's primarily driven by government contracts with very little margin associated with that. So there's two factors. First of all is the higher revenues that come from the PowerSystems segment that come at positive gross margins. And then the other part is that the superconductor revenues declined and so there was a positive mix shift in that regard pushing the gross margin overall up. Now in terms of your other question and what does that mean for gross margins going forward, I would say that the gross margin mix going forward will depend on how on the mix between PowerSystems and superconductors as to how much that mix grows over the course over the course of the rest of the rest of the year.

And, Jim, going to the specific question I think you're asking on an historical basis, on the 1G wire sales as we make those, as you know, they drop right to the bottom line. We have regular shipments that we make every quarter over 10 kilometers on a take or pay order that we have and we still have about I think net 179,000 meters to sell. We do believe we're going to ship those out of here but it had a small effect only on the bottom line in the first quarter.

Walter Nasdeo with Ardour Capital.

I had a question. I am a little bit intrigued by the PQ SVC. Could you possibly give me a little of compare and contrast that with the Super VAR and then what you see as the market for the PQ SVC going forward?

Well, the PQ SVC is the SVC or static VAR compensator. This is based on the thryristor switch technology we acquired along with the acquisition of Power Quality Systems, so it expands our product offering both in the industrial space, which is a PQ, a power quality SVC, and in the utility space for SVCs that are typically sold to utilities. And in that case, by the way, we are addressing a number of bid opportunities as we speak so PQ SVC is a smaller product. We typically are selling those on the order of $300,000, $400,000 apiece.

We announced orders for four systems from diverse industries back in July and what it does is it takes care of voltage regulation problems at a more local level. You do recall that we also sell a power quality industrial voltage restorer, IPQ IVR and that provides full factory protection. For example, we commissioned a system in Micron Technologies 40 megawatt semiconductor fabs back in December '04 and that's worked successfully. We've gotten a follow-on order from another U.S. utility, which has already been shipped this past winter and we're bidding on another semiconductor fab now outside the U.S. So PQ SVC adds a tool to our toolbox to address that industrial opportunity, which I see as the third wave of growth in revenue for our PowerSystems business unit behind wind, behind utility, next comes industrial.

The addressable market, Walter, is potentially very, very large. You can look at EPRI studies, for example, that say the annual cost of voltage problems, power quality problems related to voltage is over $100 billion a year and so the opportunity is just tremendous. We're arming ourselves with the technologies. We're selling the product now and we'll look for a lot of growth. But, again, in the third wave I'd expect the industrial sector to be adding to our top line strong in the next two to three year period of time.

Michael Carboy from Signal Hill Group.

Greg, I'd like you to talk a little bit about U.S. grid integration standards and give us an idea of the pace at which you see change occurring that will sort of bring U.S. grid integration standards for wind farms more in line with what we see in Europe or we see a lot more D-VAR use.

Well, Michael, maybe a general comment first but I'm sure we have all noticed over time-- I certainly have noticed running this business is if you wait for the U.S. to put in place the regulations and rules and whatever is needed, you might as well hang it up and go home. It just takes very, very long with our process. But it actually works and it's terrific but it takes a long time.

So with that, we've turned our focus over the last couple of years to outside the U.S. for growing our sales. This year, this fiscal year along, over 50% of our revenues are going to come from outside the United States so you have it right. There are grid interconnection standards for wind farms today in Australia, New Zealand, Canada, UK. Spain just introduced them in January and here I am referring to standards for dynamic voltage control.

The U.S. has grid interconnection standards but they don't include dynamic voltage control. Having said that, and I think that will come in the future because as we have more and more wind farms going into place it starts to have an impact on the grid and you do need to control the voltage dynamically. And we're already seeing that. We got an order for a wind farm for our D-VAR grid interconnection product I think it was back in maybe March we announced it. American Electric Power is the local grid operator. The wind farm developer wanted to hook up the farm to the grid and AEP said no, can't do it unless you meet our dynamic voltage standards and we got the D-VAR order for that. We just got an order we announced-- I think it was in June-- for two very large Midwestern wind farms and here in the United States, no dynamic voltage standard yet the local grid operators insisted that they meet the dynamic voltage needs and we got the orders for those.

So as more and more countries-- China, China is growing so rapidly now, 107% growth in installed wind last year on a megawatt basis. We're already addressing issues there where wind farms in China are finding that the grid is weak enough there that they need dynamic voltage control so the opportunity, Michael, is only going to get bigger and bigger for us and as more and more wind goes in. And, by the way, once they start putting in large solar farms of the 100 megawatt class, you're going to meet grid interconnection standards there as well for voltage so I think the opportunity is in front of us.

Stuart Bush with RBC Capital Markets.

Could you give us some guidance on how you expect operating expenses to trend going forward, given-- especially given the build out with the 2G?

Yes I think it's really tough to give specific operating expense guidance because of what goes on with superconductors and the fact that operating expenses get pushed up or down depending on what's happening with their revenue levels and so to me it seems like the focus is probably best placed on operating income as a line item and maybe not worrying so much about geographically where things fall in the P&L until the superconductors piece and specifically contracts related to the superconductors revenue. It becomes a lesser piece of our business because otherwise the operating expenses can be lumpy just because of accounting and it has nothing to do with how much money we're spending. So I'm not really answering your question but that's probably the best answer I can give you right now.

(Operator Instructions) Peter Patterson with Patterson Investment Advisors.

Congratulations on some real positive traction here. Reliance Electric and Siemens has been rattling around in the motor area, the 1,000 horsepower and so forth and I wonder if we see anything going on in there.

Well, you're right. Siemens has been developing motors at larger and larger scale over the years. I think the last they did was a 4 megawatt generator I believe and we believe they're moving on to another, a motor about 5 megawatts right now. Reliance, of course, we worked with them in the past. I think they got up to-- I'll switch to horsepower now-- about 1,600 horsepower with our wire and coils inside. Doosan Heavy Industries announced just a couple of months ago a 1,300 horsepower motor with our wire inside so the good news is and I think there's also in Japan one of the heavy industries companies over there has also made a small motor. There's a lot of interest here.

There's a lot of development if you followed our Company I think you know we're way ahead of the pack here, having gone through successful factory testing of a 36.5 megawatt motor back in March. That's 49,000 horsepower if you want to use those numbers and so we enjoy a very strong lead here. We're looking forward to competing for additional contracts with the U.S. Navy for motors in the future. There's a lot of opportunity there and there's clearly interest around the world so we're in a good competitive position there, Pete. In the meantime, as we wait for that market to develop, I think we've been pretty clear about this our last earnings call and otherwise. Our focus is really on the power grid in terms of individual superconductor cables, fault current limiters. It's a major problem in today's grid. And Secure Super Grids, which we described in my comments earlier here is designed to make critical grids in the U.S. bullet proof and we're executing on that. That's where the big growth for our Company is. That's what's going to be the superconductors part of our business and the motors and generators and other non-grid applications are going to add very, very strongly in the future as well.

Corey Tobin with William Blair.

Just a quick follow-up, can you clarify please on project hydra there is a comment in the press release relating to the need to still contract with the Department of Homeland Security and then you made a comment in your prepared remarks relating to that the project is moving ahead based on a letter agreement. Can you just please clarify what the status of the agreement is and when do you just expect to see revenue begin to contribute from that?

Well, we already had some revenue contribution in the first quarter. It will be some in the second quarter and when we put out the press release on May 21 I believe it was, we delineated that there's $1.7 million under the letter contract, $1.1 million coming from Homeland Security, which we recognized as revenue as the prime contractor. So that was put in place.

Why not just wait to get a full contract? Why go to a letter contract I think is your question basically and the answer is ConEd has a construction schedule that we and Homeland Security, all members of the team, want to meet. They have to have this secure super grid system ready to go in the commercial grid in midtown Manhattan in early 2010 and when you back it up till now there's a lot of thing that have to happen sequentially here so the team has already been working. We had here at AMSC a week before last the Homeland Security was here along with ConED. South Wire is the cable OEM we chose for this project ourselves. We're working through all the details, laying out what needs to be done, already getting some of the work done, of course. As we negotiate the details of the contract and what that really means is the cost proposal so the general idea has already been accepted.

That's why we're under a letter of contract. What needs to be worked out is the cost proposals from us and all of our subcontractors like ConEd and so forth and to be frank, companies like ConEd and South Wire are not used to doing government contracts so it takes a little bit longer to negotiate all these things. So I think you also asked in terms of that what's going on with Congress there, this house energy and commerce committee. As I said earlier, we don't know what's going on there. It is very clearly and all our advisors tell us this is a very typical inter-governmental squabble. I don't pretend to understand how that all works and so forth. You know we'll provide whatever they ask for but we're not under investigation and everybody, certainly Homeland Security expects that this contract will go forward.

By the way, just to add to that not to make this so special, the Department of Energy awarded us two contracts. We're the prime contractor. I think they announced that on June 27th if I remember and we're negotiating for the contracts there as well so in a very similar vein but there we wait till we get the full contract negotiated, which probably takes us out into the October, November time frame, certainly within this fiscal year. All of these government contracts always take a lot more time than anybody expects and so we don't have any of our future guidance that Dave has given you before, that really doesn't include contributions from Homeland Security and Department of Energy so we have that guidance without those contracts involved. Next one?

(Operator Instructions) Jim Ricchiuti with Needham & Company.

Greg or Dave, if you look at your backlog as of July I wonder if you can give us a sense as to how much of the revenue that you are forecasting for the full year would you be recognizing from the backlog that you stated? And then how much of the balance would you see in general terms in fiscal '08?

Yes I think we-- this is Dave Henry. Yes what we did at the beginning of the year was to-- because we guided to such a large revenue increase at the beginning of the year as compared to where revenue had historically been and we felt we needed to provide guidance that said okay look this backlog is real and so we kind of-- we went into probably more detail than we otherwise normally would to say how much of our backlog is shippable in the current year and how much is not. So I guess I'll try to answer your question this way, so on a go forward basis that's not really information that we're going to provide because we feel that our backlog is strong enough now we have demonstrated the fact that we've got strong growth and orders in place. The Sinovel order has come on, for example, but I'll just take you back to what was said before and I'll just help you out as best I can.

We said that entering around the end of the first quarter, around May, we had about $68 million of backlog on our books toward our then guided revenue of $75 to $80 million. We got the Sinovel order that came in July. Some of that order is shippable this fiscal year and so that's probably as far as I am willing to go in terms of how much of our backlog is and breaking it down to what's shippable this fiscal year versus last. Other than to say that generally on the PowerSystems stuff, and we've said the PowerSystems represents about 75% of our sales, commercial PowerSystems and commercials sales are sort of synonymous with one another. The turns on that, you know the time from order to shipment is it's somewhere in the 6 to 9 month range so that's probably the information I'm-- we're prepared to give here on the backlog and we kind of-- we gave you a gift at the beginning of the year because we wanted people to feel comfortable that the backlog we had in place was indeed real and that we were going to grow at the rates that our backlog was indicating we could.

I would just add to that obviously with the increase in the guided revenue to $85 million to $90 million this year, we obviously think some of that is going to be turned into revenue so I'll just add that little point. Next.

Robert Smith with Center for Performance Investing.

I was off the call for about 15 minutes due to telephone trouble from an island off the coast of Maine but anyway I don't know whether you went over this ground. I was wondering if you said anything about the LIPA project and the time lines from here say till the end of the year or early next year?

The LIFA project?

Yes.

Yes the circuit we're putting in there has three cables. Every cable or circuit contains three cables and all three cables are now pulled into the duct work and terminations on either end of the cables, at least for two of the phases are already being made. Connections are made. Everything else is there in line so all the pieces are coming together and we expect the commissioning will occur in-- it should be certainly October, November time frame, so this will be operating in the commercial grid in the fourth quarter of this calendar year and this will be, by the way, the third superconductor cable system operating in the commercial grid in the United States. There have been two cables now operating almost 12 months in the commercial grid in the United States, one up in Albany, New York with National Grid as the utility and one in Columbus, Ohio with American Electric Power as the utility so that speaks volumes in terms of the customers adoption cycle for superconductor cables, two in the commercial grid for 12 months.

Utilities are now saying, "Hey, this stuff really works and I could take advantage of all the benefits of superconductor cables, relieving grid choke points, increasing reliability etcetera." And now the LIFA cable will go on line the first transmission voltage cable in the world by the way, this-- later this Fall. That's going to add to the momentum. That's part of why we talk about being at the tipping point for the superconductor industry. The cherry on the cake, if you will, is in fact the Secure Super Grids contract with ConEd and just the technology let alone the contract, the idea that you can make grids bulletproof here with a system level solution like this I think just adds to the momentum and really calls out as a tipping point.

Our final question will come from Michael Carboy with Signal Hill.

Greg, I'd like you to chat a little bit more about volt current limiters and if you could elaborate for us on the market applications. Do we see this more as a distribution level device or is this something that's suited better for transmission or is it really ideal for both?

Well, it's the biggest problem for the utilities operating grids is at the transmission voltages and so if we talk about Manhattan as a large city grid, highly interconnected and so for the, demand for electricity continues to increase everywhere, certainly in Manhattan, and it's not just for the digital age and our computers now. ConEd talks about a 5% penetration of plug-in hybrid electric vehicles in Manhattan. You know this is where you plug the car in at night and charge up the battery in addition to running it on a hybrid basis. A 5% penetration of those in Manhattan will increase their rate of electricity growth by 50%, five zero percent, and they admit they don't have the grid to support that.

So what happens, you've got all this demand for electricity. You put in more generation in and around a city like Manhattan and the result of that is the fault currents. What happened with the fault current? When you get a short circuit in the grid caused, for example, by a lightning strike or the proverbial squirrel getting across the lines, the generators that you have installed now spin up to push electricity into that vacuum caused by the short circuit. You get a power surge or a fault current as they call it. It runs through the grid and blows up expensive equipment, you get blackouts. What you'd like to do is limit or suppress that surge and you have no way to do it. There's no commercial product out there today. All they do is put a circuit breaker in the gird which is a mechanical opening of the grid too slow usually, it arcs over. You still get the damage and so the fault currents have gotten so big that they are clamoring-- grid operators are clamoring for a solution.

The only way you can really solve this effectively is with a superconductor, which is a smart material. It carries a lot of electrical current, many, many amps but turns into a resistor if you put too many amps through it, too much current, so it's perfect in that regard. And so utilities are looking for transmission level solutions around the country, literally around the world. We're supplying our 344 superconductors to 7 electrical equipment manufacturers around the world who want to develop this product, introduce it into the market so the games have begun, if you will.

At the distribution level there is opportunity. In fact, the secure super grid system that we're developing and plan to install in midtown Manhattan is at 13 kilovolts. That's distribution voltage and so the problem exists at the distribution level as well and ConEd and other cities, grid operators, know they need to solve that problem. So it's both levels. I'd say the bigger market opportunity is at transmission levels going forward and it's a problem that has to be solved and there's no other way to solve it. We're meeting an unmet need with fault current limiters.

I'd like to turn the conference back to Mr. Greg Yurek for closing remarks.

Thank you. So we've made tremendous progress in penetrating and growing with this global wind industry. We're not a pure play and win but 65% of our revenues this year are going to come from sales into the wind industry so many have labeled us as a very direct investment opportunity for a U.S. company traded on the U.S. markets. That's a good thing. Having said that, we're also poised to grow on the superconductor front and I mean grow strongly. This ultimately, superconductors, is the rocket ship for American Superconductor. So we're excited about where we're at, how we're growing. We're driving hard to profitability. We'll get there sooner than later and we look forward to keeping you updated on future calls. Thank you and goodbye.

That does conclude our call today. We'd like to thank everyone for their participation. Have a great day.