American Superconductor Corp (AMSC) 2007 Q2 法說會逐字稿

Good day everyone and welcome to American Superconductor's record quarter second quarter conference call. All participants will be in a listen only mode until we reach the question and answer session. Just as a reminder today, this call is being recorded.

With us on the call this morning are American Superconductor's Founder and CEO, Greg Yurek, Senior Vice-President and Chief Financial Officer, David Henry, and Investor Relations Director, Jason Fredette.

For opening remarks and introductions, I would like to turn the conference over to Mr. Jason Fredette. Please go ahead sir.

Thanks Kristina. I would like to point out that certain remarks we make this morning regarding our financial forecast 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 SEC on June 14, and our subsequent 10-Q for information about these risks and uncertainties. I'd 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, amortization, and stock compensation. EBITDAS is a non-GAAP financial metric. The reconciliation of EBITDAS to operating loss on a GAAP basis is included in the press release we issued this morning and filed with the SEC on form 8-K. All of our SEC fines can be accessed in the investor section of our website at amsc.com.

I'd also like to point out that we will be taking part in the Pacific Growth Clean Tech and Industrial Growth Conference on November 8 in San Francisco, and we'll be hosting an analyst day on November 15 in Devens, Massachusetts. Both events will be webcast live and will be archived on our website. We hope you can tune in.

And now I'll turn the call over to Dave.

Thanks Jason, and good morning everyone. I'm going to review the financial highlights from our earnings release this morning, and then I'll turn things over to Greg who will provide an update on our business.

Revenue for the second quarter of fiscal 2007 was $21.6 million, up 125% from $9.6 million in the year ago quarter. Of this total, AMSC Power Systems generated a record $19.2 million, which is up 196% from $6.5 million in the second quarter of fiscal 2006. A major driver of the increase is sales of electrical systems for wind turbines and other revenue contributed by our acquisitions of Windtec and PQS, which are not included in the prior year amounts.

Note that prior to the acquisition of Windtec, AMSC was Windtec's supplier of power converters, which is a key component of those wind electrical systems. As a result, a portion of our revenue growth is attributable to Windtec is organic.

Our AMSC Superconductor segment generated $2.4 million of Q2 revenue, which is down 22% from $3.1 million in the year ago quarter. There are a number of -- this decline reflects unfavorable percentage of completion accounting effects, particularly for the LIFA program. It also reflects the completion of our U.S. Navy motor program, which had been a major contributor to superconductor's revenues in past quarters.

I'm happy to report that we entered the third quarter of fiscal 2007 with approximately $180 million of backlog. That's a 140% increase from our $75 million in backlog on June 30.

Gross profit for the second quarter was $5.6 million, resulting in a record gross margin of 26%. This compares with a gross margin of approximately 5% for the second quarter of fiscal 2006. The improvement in gross margin was driven by the higher mix of Power System sales in our second quarter revenues. We're clearly pleased with this progress and see room for additional improvement in the quarters to come as commercial sales out of our Power Systems business continue to increase.

R&D expenses for the quarter were $3.8 million or 18% of total revenue. This compares with $3.5 million or 37% of revenue for the second quarter of fiscal 2006. R&D expenses can fluctuate quarter to quarter depending on contract activity in superconductors. If contract activity is high in a particular quarter, development costs are pushed up to cost sales to match revenues, which reduces gross margin.

R&D expenses are similarly impacted by the magnitude of development contracts for new wind turbine designs in our Windtec subsidiary with similar accounting implications. Taking this accounting into consideration, as our total revenue continues to grow driven primarily by Power Systems, we would expect R&D expenses to continue to decline moderately as a percent of revenue.

SG&A expenses for the second quarter of fiscal 2007 were approximately $7.2 million or 33% of revenue. This compares with $4.4 million or 46% of revenue for the second quarter of fiscal 2006. This increase in SG&A expense is primarily the result of our acquisitions earlier this year. Operating expense growth required to manage our revenue growth unabsorbed SG&A in our superconductors business as a result of lower revenues and higher stock-based compensation expense.

The second quarter is generally the highest expense quarter for stock compensation as a result of the Board of Director's annual stock grant. We have been adding and expect to continue to add SG&A costs in future quarters to support our growth, but we intend to do so in a carefully managed way to maximize the fall-through from incremental revenues. As a result, we expect SG&A to continue to decline on a percentage basis in future quarters as revenue grows.

We incurred $1.8 million in amortization of acquisition related intangibles primarily related to our acquisitions of Windtec and PQS earlier this calendar year. Amortization of intangibles has been negatively impacted by the recent strengthening of the Euro as a majority of our acquisition related intangibles were generated by the Windtec acquisition. Windtec intangibles are denominated in Euro.

Our operating loss was $7.2 million in the second quarter of fiscal 2006 -- 2007, I should say, compared to a loss of $7.5 million in the second quarter of fiscal 2006.

AMSC Superconductors generated operating income of approximately $800,000 in Q2 of fiscal 2007. This compares with an operating profit of approximately $200,000 for the year ago quarter. The improvement in Power Systems operating income is due to the incremental operating income from our acquisitions, particularly Windtec. As a result of these acquisitions, however, Power Systems operating income includes $1.8 million of intangible amortization that was not incurred in the second quarter of fiscal 2006.

In addition, there are higher corporate charges in the second quarter of fiscal 2007 as compared to the second quarter of fiscal 2006 as Power Systems is being allocated more of these costs as revenue grows.

The AMSC Superconductors generated an operating loss of approximately $5.4 million in the second quarter of fiscal 2007. This compares with an operating loss of $6.1 million in the second quarter of fiscal 2006. The improvement in Superconductor's operating loss is driven by cost savings derived from the restructuring actions we announced in fiscal 2006, as well as lower corporate charges as those costs are being increasingly absorbed by Power Systems, partially offset by unabsorbed overhead due to lower revenue.

Please note that stock compensation expense is not allocated to our reporting segment.

On a consolidated basis, we reported a net loss of $6.7 million or $0.17 per share for the second quarter of fiscal 2007. Our net loss in the second quarter of fiscal 2006 was $7 million or $0.21 per share. The improvement net loss was driven by a lower operating loss and higher interest income as a result of cash received from our stock offering in July 2007, partially offset by higher stock compensation expense.

Because of the increasing affect 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 primary measure of our bottom line performance. The reconciliation of EBITDAS to GAAP net loss is provided in the earnings press release we issued earlier this morning.

EBITDAS for the second quarter of fiscal 2007 was a loss of $2.3 million compared with a loss of $5.5 million in the second quarter of fiscal 2006. This results the progress we have made in generating fall-through on our incremental revenue. It also shows how much our GAAP operating loss in the second quarter was negatively impacted by higher non-cash charges for intangible amortization and stock compensation expense.

Looking briefly at our year-to-date results, revenues for the first six months of fiscal 2007 were $41.4 million compared with $23.6 million in the year ago period. Our net loss for this first six months of fiscal 2007 was $16.3 million or $0.44 per share. It should be noted that this figure includes approximately $2.9 million or $0.08 per share of unusual charges in the first quarter. This compares with a net loss of $13.7 million or $0.42 per share for the first six months of fiscal 2006.

For the first six months of fiscal 2007, AMSC generated an EBITDAS loss of $7.6 million. That compares with an EBITDAS loss of $11.1 million for the comparable period in fiscal 2006.

Turning to the balance sheet, at the end of the second quarter we had no debt and $118.2 million in cash, cash equivalents and short-term investments. This compares with $30.5 million at the end of the first quarter. This increase is the result of a follow-on offering we completed in July 2007.

I would also like to note, we recorded $4.3 million as restricted cash, representing collateral for performance bonds required by utility customers in our Power Systems business. Factoring this in, our cash burn of approximately $3 million in the second quarter was the lowest since the third quarter of fiscal 2004.

Now we'd like to turn to our forward-looking guidance. As Greg will highlight shortly, our momentum continues to build, providing us with an even more bullish feel of our prospects for the remainder of the fiscal year. We are now expecting that revenues will increase approximately 100% from $52 million in fiscal 2006 to a range of $100 million to $110 million for fiscal 2007. This compares with our previous forecast for 67% growth and our original 50% growth estimate at the beginning of the fiscal year.

With growth in Power Systems driving our overall revenue increase, we now expect that more than 80% of our fiscal 2007 revenues will come from commercial sales, up from our previous guidance of 75%. We continue to expect that approximately 65% of sales will come from the wind energy market.

Operationally, we expect that the fall-through from higher Power Systems revenues will be offset by higher operating expenses in support of our growth, higher stock compensation expense and unabsorbed overhead in our AMSC Superconductors business unit due to delays in certain programs. In conjunction with the consolidation of our operations in Massachusetts, we expect to incur a restructuring charge related to lease termination, relocation and other costs in the range of $5.5 million to $6 million. Of this total, $4.5 million to $5 million is expected to be recorded in the last two quarters of fiscal 2007, with the majority of that occurring in the third quarter when the consolidation is expected to be substantially completed. The remaining amount is expected to be recorded ratably over the remaining term of our Westborough lease, which expires in May 2009. Excluding continuing restructuring charges associated with the lease, we expect to realize annual savings from this plan of $2.5 million starting in the fourth quarter of fiscal 2007. Including the restructuring charge, we are now forecasting a net loss of $27 million to $31 million, or a loss of $0.70 to $0.81 per share. This compares with our previous range of $21 million to $24 million and an EPS loss of $0.54 to $0.62 per share. Including the restructuring charge, we now expect that our EBITDAS loss for the year will be in the range of $10 million to $12 million, compared with our previous guidance for a loss of $8 million to $10 million. We continue to expect that the Company will approach positive EBITDAS in the fourth quarter of fiscal 2007, and we remain on track to be EBITDAS positive in fiscal 2008. With that, I'll now turn the call over to Greg.

Thanks Dave, and good morning everyone. Our second fiscal quarter was a very important one for AMSC and our shareholders. Our successes in the quarter significantly strengthen our foundation for profitable growth going forward. First of all, in July we raised approximately $94 million in a public stock offering of $21.25 per share to strengthen our balance sheet to support our strategic growth initiatives and our drive to profitability. As the first substantial step toward achieving profitability, we are driving hard to turn our EBITDAS losses to EBITDAS gains. We expect to approach EBITDAS positive results for the first time in the fourth quarter of this fiscal year, and we expect EBITDAS positive for our next fiscal year, that is in fiscal 2008. So, we are closing in on being cash flow positive from operations, and therefore, we expect to be able to continue to maintain a strong balance sheet going forward. We note, by the way, that we have no debt on the balance sheet, which also gives us a lot of flexibility going forward. We also note that we believe we certainly have a strong enough balance sheet to see us through to GAAP profitability. The second fiscal quarter was also important because we booked a number of substantial commercial orders and development contracts that support our new forecast for 100% growth in revenue in fiscal 2007 to a range of $100 million to $110 million. To be specific, we booked about $129 million in new orders in the second fiscal quarter, a record for our Company. The net result was that on September 30, 2007, we had approximately $180 million in backlog. This is up about 320% from the year ago quarter, and it is a 140% sequential increase. We expect that over $100 million of this backlog will be recognized as revenue in fiscal 2008, which is our next fiscal year, and we still have five months to go before we even begin fiscal 2008. The orders and development contracts that we closed in the second fiscal quarter came from our three target markets in the power infrastructure arena, namely the wind energy, power grid and industrial sectors. Without question, the biggest driver behind the growth in orders this fiscal year has been to wind energy market. Approximately 65% of our revenues this fiscal year are expected to come from this sector. Our sales into this market today are based on three main offerings. The first is licenses for wind turbine designs from our Windtec division. The second is our D-VAR systems for interconnection of wind farms to power grids. And the third is our wind turbine electrical systems. We received orders in all three areas in the second quarter, and for good measure. We also signed a contract with the U.S. Department of Commerce for the development of core technologies for superconductor wind generators. I'll speak more to this later in the call. Other than the superconductor wind generator project, which was won by our AMSC Superconductors business unit, all of the other orders from the wind energy sector came through our Power Systems business unit. In the second quarter, Power Systems delivered its best quarter to date, both in terms of new orders and revenue, and it generated an operating profit for the quarter. The largest share of the new orders in the second quarter came from Sinovel Wind in China, which ordered approximately $90 million worth of core electrical components for the 1.5 megawatt wind turbines they are manufacturing and installing in wind farms all over China. The $90 million worth of electrical components, which include PowerModule power electronic converters we manufacture in our Wisconsin operations, are to be delivered primarily in our next fiscal year. As you might recall, we were shipping PowerModule converters to Sinovel through Windtec prior to our acquisition of Windtec in January 2007. We received our first order for 20 PowerModule units for Sinovel in November 2005, just two years ago. Today, the cumulative number of wind turbine electrical systems ordered from Sinovel is over 2500. Sinovel, which manufactured and shipped about 100 of these 1.5 megawatt wind turbines to Chinese wind farms in 2006, expects to ship over 500 of these wind turbines in 2007. Sinovel also plans to continue to ramp production to 1000 wind turbines per year. The Chinese Wind Energy Association now expects this relatively new entrance to the wind energy market to be the second largest manufacturer of wind turbines in China next year. And by the way, Dongfang's Steam Turbine Works in China, one of the new customers we signed on this past winter, is expected to be the third largest wind turbine manufacturer in China next year. Remember that the average selling price, or ASP, of the core electrical components we are shipping to Sinovel is about $50,000. So the 1000 wind turbines they plan to manufacture each year going forward translates into about $50 million in orders for our core electrical components annually. Not to be outdone by Sinovel, another of our Chinese customers, Zhuzhou Electric, or ZELRI for short, licensed Windtec's 1.65 megawatt wind turbine design this past winter and just ordered the core electrical components from Power Systems for the first ten wind turbines they intend to manufacture next year. In this case, we are receiving about $65,000 in revenue from ZELRI for each wind turbine that they manufacture, which is about $55,000 deemed for the core electrical components and about $10,000 for the royalty they must pay us for each wind turbine they manufacture. Based on ZELRI's plans, we expect to receive over $30 million in revenues from electrical component sales and royalty payments for ZELRI's initial production run of 1.65 megawatt wind turbines. We have brought on four new customers on board in 2007 through Windtec. These include ZELRI and Dongfang Steam Turbine Works in China, Doosan in South Korea, and AAER in Canada. We also landed a new contract to custom design higher power wind turbines for Sinovel Wind. I view each of these customers as seeds we are planting today that will grow into recurring streams of revenue down the road just as we have seen with Sinovel Wind. You might have noticed that each of these new wind energy customers is located outside the United States. In fact, over 50% of our revenues this fiscal year will be international sales with a lion share of those going to China and the Asia-Pacific region. As a result of this growth and sales to China, we recently established AMSC China, a new division that will enable us to more effectively and more profitably meet the needs of our current and future customers throughout the Asia-Pacific region for both our Power Systems and Superconductors business units. AMSC China currently has 25 employees in manufacturing, sales, field service and support functions between our sales office in Beijing and our new manufacturing facility in Suzhou. We expect to commence manufacturing of our PowerModule power electronic converters in Suzhou in the first half of calendar year 2008 to supplement our manufacturing operation in Wisconsin. We believe this is an important step to take for several reasons, including lowering our manufacturing costs, increasing our margins and being closer to existing and potential new customers in China and the Asia-Pacific region where we expect to see increases in sales going forward. The growth potential in China for both Power Systems and Superconductors is huge, and we intend to participate in that growth as fully as we can. In addition to licensing Windtec wind turbine designs, developing custom wind turbine designs and selling wind turbine electrical systems, our Power Systems business unit also received in the second quarter two additional orders for D-VAR voltage control solutions to meet power grid interconnection requirements for wind farms. These orders were for wind farms being constructed in the United States and in Scotland. These were the 32nd and 33rd wind farms worldwide to have purchased AMSC's D-VAR systems. AMSC products are now serving approximately 6.3 gigawatts of wind power worldwide, more than double our 2.5 gigawatt total at this time last year. So, wind is clearly a big driver for our growth today and it will be for some time to come. Let's now turn over to the power grid market. In addition to the great traction we've been achieving in the wind energy market, bookings and sales in the power grid market have also been picking up steam. Orders from electric utilities for our D-VAR and SVC grid infrastructure solutions and contracts for super connector power cable and fault current limiter development projects during the first half of this fiscal year increased to approximately $24 million compared with $2 million for the same period last fiscal year. Our acquisition earlier this year of Power Quality Systems provided us with the core technology needed to begin offering SVC's, or Static VAR Compensators, in addition to D-VARs. This provides us a basis to compete more effectively head to head against major global players like ABB, Mitsubishi Electric and AREVA in North America. As was the case with Windtec, we have gotten a quick payback on our investment because we have closed several orders for SVC's since we acquired Power Quality Systems in April 2007. The lion share of these orders is for large scale SVC's for power grids for which we have now received two significant orders. One is with Bonneville Power Administration, which operates 75% of the high voltage transmission grid in the Pacific Northwest. Our turn-key SVC solution will provide 95 mega-VARs of dynamic reactive compensation for one of BPA's transmission lines in Oregon. Close of the hills of this announcement, another major U.S. utility placed an order for a 150 mega-VAR SVC system. While we can not disclose the financial details of these particular contracts, turn-key SVC solutions typically go for more than $5 million each. The third market segment being addressed by Power Systems is the industrial sector. We've just begun to scratch the surface here, but this is a market we expect will be ramping up for us in a couple of years. In Q2, a major U.S. based semiconductor chip manufacturer placed a follow-on order for our Power Quality Industrial Voltage Restorer, or PQ-IVR system, for one of its large wafer fabrication facilities in Southeast Asia. This is the third substantial order for AMSC's proprietary full factory Power Quality solution from the semiconductor industry. It is also the first order for a PQ-IVR to be shipped outside the U.S., and is the second order from this particular customer. So, Q2 was quite successful for AMSC Power Systems on all fronts, and this business unit is solidly on track to more than double in size this fiscal year. Now let's turn our attention to AMSC Superconductors. AMSC Superconductors is not yet the financial success that Power Systems is quickly becoming. However, this business unit is approaching several significant milestones and has just begun working on several important new projects. The first of these projects demonstrates, once again, how we are able to tap into talented people across our Company to address power infrastructure sales opportunities. In September, we joined with TECO-Westinghouse Motor Company to develop HTS technologies for high powered direct drive wind generators for offshore wind farms. In this case, we are tapping into our superconductor motor and generator experts who have pioneered the development and demonstration of superconductor (inaudible) motors with our employees who are experts in designing wind turbine systems. This combination of talent in one company is unique. Combining that talent with the design and manufacturing capabilities of TECO-Westinghouse Motor Company makes for a truly powerful team. The team approach that we've put together here was recognized by the U.S. Department of Commerce's advanced technology program, which is providing $3.4 million in cost shared funding for a research joined venture between AMSC and TECO-Westinghouse to develop the core technologies needed for these superconductor wind generators. The focus of this development effort is on creating 10 megawatt class offshore wind generators, a highly desirable power capacity that is very unlikely to be achieved by any other technology. We also recently signed a cooperative agreement with the Department of Energy to develop and deploy transmission voltage fault current limiters, or FCL's, in the power grid. FCL's are essentially surge protectors for the grid, and they're in high demand given that today's fault currents are surpassing the capacity of circuit breakers. There is no conventional solution on the market to limit or suppress these fault currents for today's power grids. This new project engages yet another major electric utility, Southern California Edison, in the development and deployment of superconductor power grid solutions. In addition to these new superconductor projects, we're nearing completion of the first phase of our current project with Long Island Power Authority. We've installed the cables, high temperature superconductor cables, and all the ancillary equipment, and initial calibration and testing of system components has been underway now for over a month. We expect this first in the world HTS transmission voltage power cable to be operating on a regular basis in LIPA's power grid by the end of this quarter. This first transmission voltage HTS power cable operating in the LIPA grid will join two other distribution voltage HTS power cables operating in commercial grids in the U.S. for already 12 months, and this will add further momentum to the adoption of HTS power cables by grid operators. In addition, the Department of Energy announced over the summer there our plans to fund a second phase of the LIPA superconductor cable project. We are currently finalizing the details for this new contract with the Department of Energy, LIPA and our subcontractors. There are exciting new aspects to this second phase of the LIPA cable project that we can't talk about just yet. So stay tuned. In addition to the current and future superconductor cable projects being funded by the DOE in the United States, we've also made good headway on Project Hydra. Project Hydra, which is funded by the Department of Homeland Security, calls for the deployment of our Secure Super Grids technology in Midtown Manhattan. Secure Super Grids involves the installation of high capacity superconductor cables between substations and the use of ancillary controls and other propriety technology to protect grids from wide-area blackouts in the event of severe weather, accidents or willful destruction. The project team, under American Superconductor's leadership, has been achieving all project milestones and remains on track to commission this system in Con Ed's grid in Manhattan in early 2010. The contract with Homeland Security is being actively negotiated and could be signed later this quarter or early next quarter. In the meantime, work has continued at an aggressive pace. All of these new superconductor power infrastructure projects will be utilizing our 344 Superconductors, which is our brand name for what is generically called second generation, or 2G, HTS wire. We remain on track to initiate production on 344 Superconductors at our Devens, Massachusetts facility in December 2007, which is none too soon because we need to ship about 17,000 meters of 344 Superconductors by the end of our fourth quarter to Southwire Cable Company to keep on schedule for Project Hydra. This wire will be used to produce the second prototype HTS cable for the Hydra project. The actual cable going into Manhattan later on will require a lot more wire. To help frame this for you, 17,000 meters is about 56,000 feet or about 10 miles of 344 Superconductors. So, we're going to be cranking hard right out of the gate in December to meet this critical milestone for Project Hydra in our next fiscal quarter. We're currently in the midst of qualifying the full manufacturing process utilizing all the new equipment we have installed in the Devens facility for producing 344 Superconductors. This has not been without its challenges being a first of a kind manufacturing facility. Wherever, we have overcome each and every challenge in this manufacturing start up, and we fully expect to be on schedule. Speaking of our Devens, Massachusetts facility, this morning we announced that we are consolidating all of our Massachusetts operations into this facility. This action is important because it gets all of our people with superconductor R&D and manufacturing expertise and sales expertise under one roof. And because we'll reduce our expenses by approximately $2.5 million annually, another step forward in our drive to turn EBITDAS positive and achieve profitability on a GAAP basis. At the same time, we are continuing to hire people across all of our businesses and in all of our locations to support the growth we expect this fiscal year and beyond. On March 31, 2007, we had 263 employees worldwide at AMSC. That grew to 316 employees on September 30, with much of that growth taking place in China. By March 31, 2008, we expect to have more than 350 employees worldwide. So, we're currently in a growth mode at AMSC, and that will be the real theme from here on out in fiscal 2007. We're executing well on our business plan and making good progress toward our financial objectives. We'll look forward to reporting back to you on that progress next quarter. With that, we would now like to open up the call for your questions. Operator, Kristina, could you take over at this point?

Absolutely. (OPERATOR INSTRUCTIONS) And our first question will come from Jim Ricchiuti with Needham & Company.

Hi Jim.

Just on customer concentration. Can you say what percent of revenue Sinovel was in the quarter, and then just a clarification on ZELRI?

Yes, with respect to Sinovel, they are our largest customer and they represented about 50%, a little over 50% of our revenue this quarter.

What's the question about ZELRI Jim?

I think I heard you say that ZELRI your production rate for them in wind turbines of about I guess it looks like it translates to around 500 a year. Is that correct, and what year are we talking about?

Alright, well I'll let you do your calculation to that that's on the numbers. We're not at liberty to go into the details there. What we said in our press release when we announced that contract or that license was over $30 million in revenue associated with the royalties and electrical systems. So they're going to start production next year, and they'll be cranking up that first production run will lead to over $30 million in revenue, however. Sorry I can't give you more specifics on that. It's not something they want us to talk about.

And our next question will come from Mike Carboy with Signal Hill.

Good morning ladies and gentlemen. Congratulations Greg and David. I guess first off I guess I'll jump back on here for another question. But let's chat a little bit about grid dynamics. I'd like to get a better sense of your understanding of the timetable with which utilities are likely to be pushing more the non-superconducting power electronics into distribution and transmission level here in the U.S.

Well Michael, we got our first sale with Power Electronics back in 2000 and it's been rather a rocky road over the years here. But clearly with the ramp up in investment and the transmission and grid that started last year, there's a clear effort by utilities to start acquiring to buy power electronic based solutions, Static VAR Compensators or D-VAR solution and so forth. And so we're seeing a number of requests for quotes that have been coming out from utilities. The first two that we were able to big on at their invitation for SVC's came after we acquired Power Quality Systems in April, and we won the first two -- one for BPA and one for another that we're not supposed to name, and they are substantial orders. I see that trend continuing. The addressable market right now is about $250 million a year. I think that's going to continue to increase. We're obviously doing well against the major corporations and bidding on these projects here in North America. So, I just see this as an upward trend. And there's plenty of data, as I'm sure you're well aware of, published on the spending trend by U.S. utilities going forward. So, I think we're in the game now. We've got products based on power electronics that have been adopted over the last six, seven years. We've added new product to the line called SVC, and we're looking for growth in this sector.

And our next question will come from Walter Nasdeo with Ardour Capital.

Good morning.

Hi Walter.

I apologize if I missed this, but can you give a little update on how the Secure Super Grid with Con Ed is developing?

Sure. Just to repeat what I said in my remarks earlier and that is the project is moving forward full speed. Nothing has changed in that regard, to be sure. We're meeting all of the milestones that have been set in the program back in April, May timeframe. Those are getting knocked out one after the other. We're building the first prototype cable, which is a very short one, but you have to build the first one. I mentioned in the call that we'll be shipping the wire in our next quarter or fiscal fourth quarter for the next prototype. It will be the second prototype that has to get built. That all leads to, of course, we're on Con Ed's construction schedule and working through all the details on that. And all of that -- those milestones that we're hitting now and expect to hit over the next year keeps us on that schedule and get this installed and operating in Midtown Manhattan in early 2010. So it's all green lights all the way.

Okay. Good. Good. And just kind of like off of that, how much of the revenue that you guys were reporting this quarter is made up of contract, government contract type of revenue? I'll just get off and listen.

From our press release this morning you can kind of see the break out by business unit. Power Systems was $19.2 million of revenue. Superconductors was $2.4 million. The vast majority of Superconductor's revenue is government contract revenue. I'd say 90% of it. The rest of it is small sales of some of the remaining 1G wire for prototyping and things like that. So, when you look at it in total, Superconductors was a little over 10% of the business and the majority of that was government contracts.

Our next question will come from William Blair Company, Corey Tobin.

Hi, good morning. Let's talk a little bit about the movement of production in China. How much of the power electronic business do you expect in terms of percentage of revenue to come out of the China facility going forward? What do you expect the gross margin improvement to be once you get that facility up and running? Thanks.

I'll just give you some general comments. We're not going to comment yet on the gross margin advantage here, but it's a clear advantage that we've calculated and understood getting quotes from various vendors before we took this move. We expect that we'll start picking up our production of PowerModules in the first half of calendar '08. The facility is just about ready to go. The final equipment is being put in place. And we'll pick up probably about a third of the production in the first year from our Wisconsin operation, and we expect that to ramp for our PM 1000 PowerModule while we're still ramping up production of sort of the next versions, if you will, in our Wisconsin operation. We said in our press release the other day on EMSC China that we also see, clearly, the opportunity to also produce Static VAR Compensators, D-VAR's, PQ-IVR's, all of our power electronic based products in the China facility. And so we'll be expanding that, we believe, over time. But we start out with the PM 1000's. We start taking over on that production, reducing our costs. And Corey, it is a nice value add in terms of the gross margin, but we're not putting out any particular numbers at this time.

Our next question will come from [Brian Yurger] with Jesup & Lamont.

Good morning gentlemen.

Good morning.

I just had an actual little fall along to Corey's comments on the Chinese wind market. Do they currently have grid connection standards in China?

They don't. But about a year ago I actually met with a fellow there in one of the utilities, one of their major grid operators actually, that is responsible for developing those grid interconnection standards. They don't have it in place yet, but they need to put them in place and they realize that because they're putting so much wind in place to generate electricity and also reduce pollution at the same time, of course. What we've seen though as we're working with, first of all, Sinovel Wind who is shipping product into various wind farms around China that a number of these farms that are starting to go online are having grid interconnection problems. So, obviously, we show up as the knight and shining armor and say "Well we know how to solve that problem." So we're looking for the opportunity to expand beyond selling the electrical components for wind turbines themselves to going into solving the grid interconnection problems with our D-VAR solution. So, I think it's a great opportunity. It creates a great challenge for us to address that opportunity, and it's happening already today.

Our next question will come from Peter Patterson with Patterson Investment Advisors.

Good morning gentlemen and congratulations on a significant accomplishment.

Thanks Peter.

Thank you.

We're all excited about the FCL side of the business and, Greg, I wonder if you see anything developing with other people of the caliber of Southern California Edison?

Well Pete, there's just a tremendous amount of activity going on around the world in the area of these FCL's, these fault current limiters. There's seven electrical equipment manufacturers around the world that have already bought some of our 344 Superconductors. They're developing their prototypes. I think you know we've been working very closely with Seimens over the last two and a half years to develop a particular design of the fault current limiter. That's the design we're going to be using in the Southern California Edison project. But there's worldwide demand for this kind of product. It turns out, as you put more generation, electrical generation on the grid, which is a requirement to meet the growing demand for electricity, it increases the level of the fault currents. And the fault currents are now exceeding the levels of the breakers, the circuit breakers in grids in New York City, Boston, all around the country. And so there's an absolute requirement, and yet there's no conventional solution to meet the need. So, tremendous amount of demand. Tremendous amount of interest. We think it's a great growth area. Now, I'm going to be clear, that's not a revenue growth area for us next year. We look at this in the next two to three years as really taking off in that timeframe.

(OPERATOR INSTRUCTIONS) Our next question will come from Robert Smith with Center For Investing.

That's Center For Performance Investing. Good morning and --

Hi Bob.

Congratulations on the strong growth. My question it centers on the role of the Chinese government and fostering the implementation of wind power option in China. Could you give us some color on that?

Sure. I guess the key answer on that is that the Chinese government mandated, oh, about a year or so ago that 70% of the wind turbines that are installed in China have to be manufactured in China. And that's why we have three Chinese wind turbine manufacturers. We've set up in business now Sinovel, ZELRI and Dongfang Steam Turbine Works. There's a great demand for this. There's a great demand for the electricity, and the reason the government is supporting all this in China is, again, they need more electricity. So one way they look at wind farms as well that's just another source of electrical generation, which is a good thing. But they've also gotten the message that from the world that the pollution in China is just unacceptable. Beyond that, they're really recognizing that the pollution that's being created from all the coal-fired plants is diminishing their productivity. The pollution gets so bad that it harms, of course, the human beings in China, and this diminishes productivity. So, all of these reasons have driven them to support wind farms all over China, and they want to capture the value. So they're saying 70% have to be manufactured in China. That put us in a very strong position with the customers we've set up in business. And that's why we formed now or established AMSC China so that we could supply them very directly, very effectively and increase our profitability.

Our next question will come from Stuart Bush with RBC Capital Markets.

Yes, hi. Good morning.

Good morning.

You've previously given guidance of cash burn less than $20 million for fiscal '07. Is there an update there? And then secondarily, how much stock compensation are you guys assuming for '08?

Yes, if you look -- I'll answer the last question first. If you look to our earnings release, we give a forecast because we reconcile net loss to EBITDAS and since stock comp is excluded from that we give you our stock comp forecast for the year, which is a range of $5.5 million to $6 million. Now we haven't updated our cash burn forecast per se, although what we have done though is we've updated our EBITDAS guidance today to reflect the restructuring we announced this morning for a loss of $10 million to $12 million and we've not -- we don't have any updates at this time on our capital spending forecast for the year. So, what we say is we've burned about $3 million of cash this quarter, which was the lowest in about three years.

So we don't expect to see that $20 million number. That's for sure.

We do have a follow-up question from Jim Ricchiuti.

You alluded to some delays that you're seeing in the Superconductor business. I wonder if could elaborate on that?

We didn't say that Jim.

In some of the revenues, delays in some of the start up of some of the revenues of the contracts. So there's just -- the Superconductor revenues are down year over year, and they're down quarter on quarter. We're just starting up the DOE contract, for example, with Southern California Edison and fault current limiters. We're working on another contract right now for the second installation in LIPA. Project Hydra is kind of ramping up slowly here. We're working on the contract with -- we're meeting deadlines but we're still working on the final contract with the government and things like that. So, that's what I'm referring to.

Jim, this is Greg. I thought you were referring to the manufacturing, so different question I had in mind.

Our next follow up will come from Mike Carboy.

Greg, you mentioned superconducting wire as a growth opportunity in China going forward. Given that we've talked about superconducting wire being best used in real high density environments were physical constraints are a problem, how do you see it really unfolding in China? Do they have the same degree of power density challenges in Beijing, Shanghai as you guys are dealing with in New York?

Yes, absolutely. I don't know if you've been there Michael, but you ride around the streets of these cities, they still have overhead lines in the cities. A lot of extra wire sort of hanging up on the telephone poles waiting to be used. And the demand for electricity keeps increasing. So, just take the central parts of the Beijings, the Shanghais and all that, or even go to one of their smaller cities, Suzhou, where we've set up manufacturing. It's one of the smaller cities --10 million people by the way. And demand is there. You start at the core of each one of these areas and then they build out from there, and everything is going underground. So, the congestion is there. The demand for electricity is there. The grid congestion is there. It all adds up to a great opportunity. And it would just be a gleam in the eye, and maybe that's all it is right now, but in fact we're working with Shanghai Electric Cable Research Institute, which is one of two outfits in all of China that certifies all new power cable technologies, and we're building the first prototype with them right now. They want to have the first one in the commercial grid in Shanghai operating in 2010. So, we have an entre there if that business aligns with Shanghai Electric. Has been in place for one year right now and the progress is good. So, we think we have a pretty good channel in there. And by the way, they'll need the fault current limiters as well. So, I think there truly is a great opportunity in China. And by the way, everything we've been saying about China, whether it's on wind or superconductors, we see that happening again in India and Brazil and other fast growing economies that just need more and more electricity. So, great opportunities around the world for all of these product lines.

Our next question will come from Corey Tobin.

Hi Greg, just to clarify on one of your prepared comments. You spoke in the press release and in your prepared comments about approaching EBITDAS positive at the end of this year and fiscal year next year. But Greg, you also mentioned being free cash flow positive. I just want to be clear. Are you saying you plan on approaching free cash flow positive at the end of this year as well?

I'm going to ask Dave to address that because I don't think I said that.

I don't recall anybody saying that either. We're not expecting to be -- we haven't given guidance that says we're going to be free cash flow positive next year.

Now what I did say, Corey, is that's the step on the way to being cash flow positive from operations. Maybe that's what you're referring to. I did say that, which is the case. EBITDAS is especially a proxy for cash flow positive from operations. So as we get to the next fiscal year -- and we'll get you specific guidance on this down the road. We're not doing that today. But being EBITDAS positive is really a close step to being cash flow positive from operations, and of course after that it's GAAP profitability. Free cash flow means we've overcome even our CapEx requirements. And I don't think we're too far away from all of that, but that's as far as we've gone today.

And our final question will come from Brian Yurger.

Just a follow up on the AMSC China. Was there a CapEx number that I missed? I didn't see that at all. Did you have an estimate for that?

We did not give anything on that. Quite frankly it's relatively minor. All of our power electronics, which is what we're starting out with in Suzhou, is not capital intensive. Repeat, not capital intensive. You're really doing assembly and testing and shipping product out the door. So, we have all the vendors in that area. We've identified. They make certain subcomponents for us. They come into our facility. We slap them together, so to speak. We import the control card with the encryptive software from our Wisconsin operation. Put that in. Test it. Ship it to the customer. So it's not capital intensive at all.

That does conclude our question and answer session. I would now like to turn the conference over to Mr. Greg Yurek for any closing remarks.

Thanks for your attention today. We had a great second quarter, truly building the foundation. And we look forward to a great fiscal 2007 and fiscal 2008. Thanks for your attention and good-bye.

That does conclude our teleconference for today. We'd like to thank everyone for your participation, and have a wonderful day.