American Superconductor Corp (AMSC) 2009 Q1 法說會逐字稿

Good day, everyone, and welcome to American Superconductor's First Quarter Conference Call. This call is being recorded. All participants will be in a listen-only mode until we reach the question-and-answer session. With us on the call this morning are American Superconductor's Founder and CEO, Greg Yurek; Senior Vice President and CFO, David Henry; and Corporate Communications Director, Jason Fredette. For opening remarks, I'd like to turn the call over to Jason Fredette.

Thank you, Michelle, and welcome to the call, everyone. Before we begin, please that various remarks management may make on this conference call about American Superconductor's future expectations, plans and prospects constitute forward-looking statements for purposes of the Safe Harbor Provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors including those discussed in the risk factors of our company's annual report on file with the SEC for the year ended March 31, 2009. These forward-looking represent the Company's expectations only as of today and should not be relied upon as representing the Company's views as of any subsequent date to today. While American Superconductor anticipates that subsequent events and developments may cause the Company's views to change, the Company specifically disclaims any obligation to update these forward-looking statements.

I also would like to note that we will be referring on today's call to non-GAAP net income, or net income before amortization of acquisition related intangibles, restructuring and impairments, stock-based compensation, revaluation of stock warrants, other unusual charges and any tax affects related to those items. Non-GAAP net income is a non-GAAP financial metric. A reconciliation of non-GAAP to GAAP net income can be found in the press release we issued and filed with the SEC this morning on form 8-K. All of our SEC filings can be accessed from the Investor section of our website at amsc.com.

And finally I would like to mention that we will be taking part in some upcoming conferences. These include the Pacific Crest Tech Forum in Vail, Colorado on the 10th of August, the Citigroup Technology Conference in New York on the 15th of September and the Jefferies Cleantech Conference in London on September the 30th.

Now I'll turn the call over to Greg.

Thanks, Jason, and good morning, everyone. We are pleased to have announced today the achievement of another record quarter at American Superconductor. A combination of additional strong growth and the China Wind Power market, crisp execution by our global manufacturing team, and careful management of our expenses enabled us to grow revenues in our first fiscal quarter, maintain solid gross margins, and increase our earnings quarter-over-quarter. This in turn has put us in good position to continue to improve our financial performance for the full fiscal year.

China, in particular the China Wind Industry, is a primary driver for our growth today. China's economy has continued to grow, albeit at a somewhat slower rate through the worldwide economic downturn over the last year. During this period of time, the Chinese government embraced wind power as a key new way for them to generate electricity and they ramped up investment in wind with an eye toward creating a wind turbine export business.

In 2008, China grew its installed base of wind turbines to about 12 gigawatts of power and early this year declared that it intended to add another 10 gigawatts or more in 2009. In the spring of this year the Chinese Wind Energy Association projected China will grow its wind power install base to between 108 gigawatts and 132 gigawatts by 2020. And more recent reports state that China may exceed 150 gigawatts by that time. To put all those numbers in perspective, one gigawatt is enough electricity to power about 500,000 US homes or about 3,000,000 Chinese homes. It's quite clear that the opportunity in China is tremendous and we are definitely taking advantage of the situation.

Through our wholly owned AMSC Windtec subsidiary, we have aligned ourselves with five Chinese wind turbine manufacturers. These include three relatively new entrants to the market and two of China's top wind turbine manufacturers, Dongfang and Sinovel, who continue to gain market share.

Sinovel, of course, is AMSC's largest customer. Sinovel began manufacturing wind turbines less than four years ago, yet they have emerged as China's largest wind turbine manufacturer today and one of the world's ten largest turbine producers. Sinovel's growth is nothing short of incredible. The company produced just 100 1.5 megawatt wind turbines in its first year of manufacturing in 2006. In 2008, they shipped approximately 1,000 wind turbines. Backed by strong support from the Chinese government and gigawatt scale wind farm orders, Sinovel is looking to double its production again in 2009, and further growth is expected in 2010 and beyond.

Yesterday afternoon, we announced that we have amended our contract with Sinovel for the delivery of wind turbine core electrical components for their 1.5 megawatt wind turbine, a contract AMSC and Sinovel originally signed in June 2008. At that time we had agreed to provide thousands of sets of core electrical components to Sinovel under a 36-month shipment schedule running from January 2009 through the end of December 2011.

During the fourth quarter of fiscal 2008 and the first quarter of fiscal 2009, we exceeded our monthly shipment schedules to enable Sinovel to meet its increasing production targets. Based on recent wind turbine orders Sinovel has received for new large scale wind farms in China, we have now agreed to shorten the shipment schedule under the amended contract. This amendment increases core electrical component shipments to Sinovel in calendar year 2009 and 2010 and calls for the completion of all shipments under this contract by the end of April 2011. In short, we're condensing our 36-month shipment schedule to 28 months.

We've also agreed to reduce the number PowerModule PM1000 power converters included in our core component packages and increase our supply of wind specific PowerModule PM3000W power converters starting in September 2009. Introduced late last year, our PM3000W comprises proprietary hardware and software that is optimized for wind turbine applications. This product, in fact, enables our customers to include grid-friendly features such as low voltage ride through in their wind turbines. As a result of this power converter upgrade, the overall value of our existing contract with Sinovel has been increased by approximately $20 million to more than $470 million. To be clear, this figure excludes value-added taxes. Dave will discuss the expected affect of this amendment on our fiscal 2009 results in just a few minutes. However, the simple message is that this amendment significantly improves our financial outlook for this fiscal year and next.

We expect Sinovel will continue to produce 1.5 megawatt wind turbines for many years to come, which we believe will result in additional orders from Sinovel for core electrical components for 1.5 megawatt wind turbines beyond the term of the current amended contract -- that is beyond April 2011.

We also believe there is opportunity for additional core electrical component orders from Sinovel for their new three megawatt wind turbines, which were designed by AMSC Windtec and co-developed by Sinovel and AMSC Windtec. As of now, we have shipped all core electrical components to Sinovel for their new three megawatt wind turbines under an order we received in April 2008. Sinovel initiated volume production of three megawatt wind turbines in May 2009 and it would be reasonable to expect that they will need more electrical components for three megawatt wind turbines sometime in 2010 and beyond. We'll see how this develops over the months ahead.

In the mean time, our other wind turbine manufacturing licensees around the world are making progress in building their first reference wind turbines and preparing for initial volume manufacturing. We believe we will see initial orders for core electrical components and full electrical systems within this fiscal year from new wind turbine manufacturing companies such as Hyundai Heavy Industries in South Korea, Ghodowat in India, and ShenYang Blower Works and X.J. in China. As was the case for Sinovel four years ago, we would expect the initial order from new wind turbine manufacturing customers to be for a dozen or so sets of core electrical components, followed later by larger orders as they begin volume wind turbine production. We expect our newer licensees to contribute significant streams of revenue in future fiscal years as the wind energy continues its double digit growth and our customers ramp their production.

In addition to current licensees coming online over the next six to 24 months, we expect to sign additional new licensees, which will produce new sources of revenue in the years ahead. We also expect current and future licensees to adopt AMSC hardware and software innovations, as well as entirely new core electrical component solutions from AMSC going forward, all of which we believe will provide us with additional sources of revenue.

Our development and introduction of the PM3000W with additional features and functionality relative to the PM1000 is a great example of the type of product improvements we routinely make. And Sinovel's $20 million upgrade from PM1000 power converters to PM3000W power converters under the amended contract is a great example of the kind additional revenue that can be derived from our innovations.

This is a success story we expect to replicate again and again with new and future licensees. So the AMSC Windtec business model is a powerful one, one that we expect will create continuing increases in value for our shareholders for many years to come.

And this growth strategy applies not only to our Wind business, but also to our Power Grid business. In the Power Grid sector we have a strong base of technology in both HTS Wire and applications for this wire. In fact, we are a clear leader worldwide in HTS technology and product development, which is one of the greenest of green technologies.

Ultimately, we believe our largest wave of growth and revenues and earnings will be driven by our Superconductors business, which has application not only in the wind and power grid sectors, but also in the marine, medical and industrial sectors. We believe the investments we continue to make today in superconductors will pay off handsomely for our shareholders for many years to come. Whether in the form of Sea-Titan superconductor wind turbines, super conductor electricity pipelines for renewal power transmission or ship propulsion motors for more energy efficient transportation on the high seas.

Our AMSC's Superconductors business has made progress on many fronts. But perhaps the most gratifying recent milestone occurred last quarter when we received our first commercial order for HTS Wire for a power cable project near Seoul, South Korea. The order came from LS Cable Company, which will make the power cable with our wire and supply it to Korean Electric Power Company for its power grid. There is a good amount of momentum in South Korea for the wide spread adoption of HTS technology, particularly in the area of power cables. LS Cable executives have recently been quoted in the media as saying they see $1 billion opportunities in the superconductor market and are going after that opportunity aggressively.

They are also saying they plan to continue turning to AMSC for the superconductor wire based on the compelling price performance of our 344 Superconductors. In addition to our business development efforts in South Korea, we are pursuing other superconductor power cable projects for cities in Europe, China and the US. Closing an order for any one of these projects will be the catalyst for us to expand our wire production capacity, including scaling up from 40 millimeter to 100 millimeter technology. We have been preparing systematically for a migration to 100 millimeter technology and production to ensure we are ready for emerging commercial superconductor cable projects.

In the midst of all this commercial business development activity, HTS technology continues to find strong support from the US federal government. Last week we were awarded $12.4 million of federal government stimulus funds by the US Department of Energy under the auspices of its Smart Grid program for the further development of HTS Power Cables and Fault Current Limiter Solutions. Note that these funds do not represent additional revenues for new programs, but rather the next round of funding under existing contracts. In addition, we have continued to work vigorously to develop projects for long-haul direct current superconductor power transmission cables called Superconductor Electricity Pipeline, a solution that we and many others believe is crucial to the achievement of our country's renewal energy goals.

Whether or not the American Clean Energy and Security Act is enacted and whether or not language remains in the final law supporting superconductor electricity pipelines remains to be seen. Clearly, however, if incentives are provided in this law, it would be a boon for our industry. So superconductor technology will continue to be a core focus of our technology and product development efforts going forward.

In conclusion, with Sinovel continuing to gain market share and a host of our other wind turbine manufacturing customers set to commence production in the near term and Power Grid orders on the rise, our outlook is stronger than ever. Through the remainder of the fiscal year, we will continue focusing on operational excellence to ensure we meet customer demands and maximize earnings.

We have now achieved our second quarter in a row of GAAP profitability. Based on our current outlook, we are highly confident we will achieve solid profitability for the full fiscal year 2009. We also expect to be cash flow positive from operations and net cash flow positive for the full year. We look forward to reporting back to you on these and other financial metrics over the remainder of this fiscal year.

And now I'll turn the call over to Dave for a recap of the numbers. Dave?

Thanks, Greg, and good morning, everyone. In our last conference call in May, we provided some directional guidance for our first core fiscal quarter. We said we expected revenues to be flat to slightly up from the $61 million we reported for the fourth quarter of fiscal 2008. We also said we expected a rather significant sequential decline in gross margins, leading to a break even bottom line for the first fiscal quarter.

As it turns out, Sinovel's continued dominance in China's burgeoning wind power market, stronger than expected D-VAR system shipments to customers in the US, Canada and the United Kingdom and better than expected fixed-cost absorption at AMSC Superconductors enabled us to exceed this forecast. As a result, we reported our strongest financial results to date in the first quarter of fiscal 2009 as our revenues and profits grew to new record levels. With a solid first quarter behind us and a further ramp in Sinovel's shipments ahead of us under our current -- under our amended contract, AMSC is positioned to grow revenues by more than 40% while generating solid profits for full year fiscal 2009.

Now let me turn to our first quarter results. AMSC delivered its tenth consecutive quarter of sequential revenue growth, generating $73 million in revenue, an increase of 19% over the $61.2 million recorded in the fourth quarter of fiscal 2008 and an increase of 83% over the $39.8 million recorded in the first quarter of fiscal 2008.

Sequential increase was driven primarily by higher D-VAR system shipments and shipments of our new D-VAR RT solution to Spain's ACCIONA Energy. These factors plus higher demand from Sinovel drove the year-over-year increase.

AMSC Power Systems revenues represented 97% of total sales and nearly doubled in the first quarter for fiscal 2009 to $70.7 million from $35.9 million in the first quarter of fiscal 2008. Our AMSC Superconductor segment generated the remaining 3% of sales. AMSC Superconductor's revenue in the first quarter was $2.3 million, which compares with $3.9 million in the year ago quarter.

This decrease was primarily the result of lower revenues from our Hydra LIPA II and FCL projects. Given the recent Department of Energy Smart Grid awards we've received under the federal government stimulus plan, we expect the contribution from our LIPA FCL projects to continue to increase going forward.

Backlog as of June 30, 2009, was approximately $497 million. That is down from $558 million at March 31, 2009. The decline is due primarily to shipments under our multi-year contract with Sinovel. Gross profit for the first quarter was $22.6 million, resulting in a 30.9% gross margin. This compares to a 32.6% gross margin in the fourth quarter of fiscal 2008 and a 29.2% gross margin for the first quarter of fiscal 2008.

The year-over-year improvement is the result of higher volume of wind turbine core electrical component shipments. The sequential decline, meanwhile, is the result of shipments to ACCIONA under our initial D-VAR RT contract. The sequential decline was less than expected, however, due to additional wind turbine core component shipments and better than expected fixed-cost absorption in superconductors.

R&D expenses in the first quarter of fiscal 2009 were $4.5 million or 6% of revenue. This is slightly lower than R&D spending of $4.8 million or 8% of revenue for the fourth quarter of fiscal 2008 and $4.9 million or 12% of revenue for the first quarter of fiscal 2008.

SG&A expenses for the first quarter of fiscal 2009 were $10.9 million or 15% of revenue. This compares with $10.4 million or 17% of revenue for the fourth quarter of fiscal 2008 and $8.9 million or 22% of revenue for the first quarter of fiscal 2008.

While combined R&D and SG&A expenses were roughly flat sequentially, we expect R&D and SG&A expenses to increase in absolute terms in the coming quarters as we build out our global workforce. On a year-to-year basis, however, we expect the total to continue to decline as a percent of total revenue.

In the first quarter we incurred approximately $445,000 in amortization of acquisition related intangibles related to our acquisitions of Windtec and PQS. This is down from $503,000 in the year ago quarter due to exchange rate differences. Intangibles amortization should remain roughly flat at $400,000 to $500,000 per quarter in the near term. We recorded a restructuring charge of approximately $334,000 in the first quarter for additional cost related to the consolidation of our Massachusetts operations and the closure of our former headquarters facility in Westborough. These additional costs were driven by delays in returning the building to the landlord in its mutually agreed condition. Further restructuring charges related to this effort are not expected in future quarters.

Our operating income for the first quarter of fiscal 2009 was $6.4 million. This compares to operating income of $4 million in the fourth quarter of fiscal 2008 and an operating loss of $2.7 million in the year ago quarter.

Higher Power Systems revenue drove the sequential and year-over-year improvements. Power Systems generated record operating income of $15.4 million or a 22% operating margin in the first quarter of fiscal 2009. This compares to a 22% operating margin in the fourth quarter of fiscal 2008 and 14% in the first quarter of fiscal 2008.

AMSC Superconductors generated an operating loss of $5.5 million in the first quarter of fiscal 2009. This compares with operating losses of $6.4 million in the fourth quarter of fiscal 2008 and $5.1 million in the first quarter of fiscal 2008. Please note the stock compensation expense is not allocated to our reporting segments.

Income tax expense increased to $2.9 million from approximately $1.7 million in the year ago quarter due to the growth in sales and profits in foreign jurisdictions. We generated approximately $58 million in international revenues for the first quarter of fiscal 2009 versus approximately $32 million for the year ago quarter.

Our income tax as a percent of pre-taxed income of 62% in the first quarter of fiscal 2009 is skewed by the fact that we do not record a tax benefit on losses in the US.

For the first quarter of fiscal 2009 we reported GAAP net income of $1.8 million or $0.04 per diluted share. This compares to GAAP net income of $1.3 million or $0.03 per diluted share in the fourth quarter of fiscal 2008 and a net loss of $6.1 million or $0.14 per share for the first quarter of fiscal 2008.

Excluding amortization of acquisition related intangibles, restructuring, stock compensation, revaluation of a stock warrant and related tax effects, our non-GAAP net income for the first quarter of fiscal 2009 was a record $5.5 million or $0.12 per dilute share. This compares with non-GAAP net income of $4.1 million or $0.09 per diluted share for the fourth quarter of fiscal 2008 and a non-GAAP net loss of $1 million or $0.02 per share for the first quarter of fiscal 2008.

Turning to the balance sheet, AMSC ended the first fiscal quarter with $103.2 million in cash, cash equivalents, marketable securities and restricted cash. This is down from $117.2 million on March 31, 2009. The decline was primarily due to a greater volume of shipments to customers late in the quarter. We either have received or expect to receive payment in full from these customers in the second quarter of fiscal 2009.

As a result of the aforementioned timing differences of shipments and collections, our DSO increased to 80 days in the first quarter of fiscal 2009 from 74 days in the fourth quarter of fiscal 2008. Correspondingly, however, days of inventory for the first quarter of fiscal 2009 decreased to 57 days compared to 77 days in the fourth quarter of fiscal 2008.

And moving on to our guidance, based on the Sinovel contract amendment and the increased volume of core component shipments requested for the remainder of the year, we are raising our financial forecast for full fiscal year 2009. We are increasing our revenue forecast from a range of $225 million to $235 million to a range of $260 million to $270 million.

We now expect that AMSC Power Systems revenues will represent more than 95% of total sales for the full fiscal year. We continue to expect that international sales and wind power sales will each represent approximately 80% of our total revenues for full year fiscal 2009. They represented 79% and 73% of our total revenues respectively in the first quarter of fiscal 2009.

Our gross margin for fiscal 2009 is expected to be in a range of 32% to 34%, up from our previous forecast of 30% to 32% due to the higher than expected gross margin in the first quarter and the increased volume of shipments of wind turbine core electrical components for the remainder of the fiscal year.

We are now expecting GAAP net income for fiscal 2009 in the range of $5 million to $7 million or $0.11 to $0.16 per diluted share, which compares with our previous forecast of $0.01 to $0.03 per diluted share.

We expect our non-GAAP net income will be in the range of $18 million to $21 million or $0.41 to $0.47 per diluted share for fiscal 2009. This compares with our previous guidance for non-GAAP net income of $12 million to $13.5 million or $0.27 to $0.30 per diluted share.

We continue to expect to increase our cash, cash equivalents, marketable securities and restricted cash in fiscal year 2009 as compared to the end of fiscal year 2008. And we continue to expect capital expenditures for fiscal year 2009 to be in a range of $11 million to $15 million.

As to our revenue profile for the remaining quarters of the fiscal year, we are now expecting second quarter revenues and net income to be flat or slightly down as compared to the first quarter as a result of stronger Sinovel shipments offsetting lower ACCIONA revenues.

Our third quarter outlook remains unchanged and is expected to be our weakest quarter with the potential for a small net loss. This should be followed by a rebound in both revenues and profits in our fourth fiscal quarter.

With that we'll open the call to questions. Michelle, would you please provide the instructions?

(Operator Instructions). We will our first question from Carter Shoop with Deutsche Bank.

Good morning, guys. Congratulations on a great quarter.

Thank you.

Thank you.

In regards to the contract's renegotiation, can you discuss a little bit maybe why we didn't just keep the original length and increase the size of the contract? Or is it just because the PowerModule evolution was at incremental $20 million and we just didn't want to mess with the total number of shipments.

And then based on those numbers, it seems like the core business might have seen a little bit of the push out and was that the case? If not, are we just being a little bit conservative here given how strong demand is out of China?

Well, Carter, this is Greg speaking. The simple answer here is that Sinovel kept ramping up and they kept pushing us for faster delivery -- monthly shipments that is. We finally sat down with them and said look, give us the numbers you want, when do you want to have all these shipments made. That became clear -- we could have gone two ways. We could have renegotiated a whole new contract. That could have slowed things down because we have to make certain commitments in our assembly and test operations, bringing in new test equipment and so forth to expand capacity, which we have done by the way now.

And we said let's not renegotiate a contract, let's just condense the current contract and then we'll talk about future orders, for futures years separately. So that's I think the long and short of it.

And as we said in the comments here, they're going to need more core electrical components for 1.5 megawatt wind turbines for 2011 and beyond, and, by the way, we don't have an order for their 3 megawatt wind turbines for 2010 and beyond either. So those will be separate negotiations and we wanted to avoid any complexities there from both sides. Speed is of the essence here from both Sinovel and ourselves.

And also to get to your question on the PM3000 versus the PM1000, we -- it's to Sinovel -- it's in their interest to migrate to the PM3000 because it's -- that product is specifically designed for the wind market. It has additional features that the PM1000 base converter doesn't have.

So Sinovel recognizes that's a very good product and would like to migrate to it. So that's the reason for that.

And by the way also in the original contract was signed June of '08. There was the option in there for Sinovel to change the ratio of PM1000 to PM3000 as time went on. This just kind of takes it the full swing here to all PM3000's going forward.

And we will take our next question from Paul Clegg with Jefferies.

Hi, guys. First of all, congratulations on the great quarter and the great outlook here.

Thanks.

The -- obviously the acceleration on revenues under the Sinovel contract as you kind of alluded to has implications for the future ramp rate for orders beyond April of 2011. I was hoping you'd just confirm with us that you've been having discussions at Sinovel about what does come after.

And when we're talking about those types of volumes, which are obviously huge, I was wondering what level of discussion you're having at this point on pricing discounts just given the huge volumes we're talking about. Any margin implications that you could discuss related to that.

We're in constant discussions with Sinovel on many fronts. Don't forget we're developing -- co-developing a five megawatt wind turbine for them. They want to get it in production in a couple of years as well. Helping them set up their first three megawatt wind turbines in Shanghai Harbor and then all the negotiations around future orders is almost a constant thing with them.

Because they're moving fast and they need to give us information and we need to be putting that into our plans. So it's basically a constant negotiation on what's coming next. One example is this amended contract, which we hammered out and move on to the next things here.

The second part of the question, Dave?

Was on pricing and in this particular amendment there's -- there's really no impact to pricing except for the fact -- the increase in the value of the contract at $20 million is really driven by the mix. Less PM1000's to be shipped as compared to more PM3000's being shipped. The contract pricing was not amended in this current contract, so it stays as it.

And by the way, don't forget, if there is any pricing pressure going forward, we've built that into our plans by actually increasing our production of products in from China, which we've been reducing our prices and allowing us, we believe, to maintain strong gross margins going forward.

And next we'll go to John Hardy with Broadpoint AmTech.

Yes, good morning, guys, thanks for taking my call. Congratulations as well for the quarter. I guess my first question would be, obviously there's an increase in the revenue contribution from the Sinovel contract for the PM3000 mix, I was wondering what impact you expect that to have on the margin embedded in the contract now.

PM3000, the gross margin isn't all that entirely different from the PM1000 even though we've added some features and things that -- it'd improve its functionality. The margins are relatively the same, but what we're trying to do, as Greg just mentioned earlier to improve margins, is to move more of that manufacturing into China. And not only that but localize some of the sources of supply for the components for the PM3000, which as we told you last quarter is one element of why we expect some gross margin improvement to occur later in the year.

And next we'll go to Jim Ricchiuti with Needham & Company.

Hi, thank you. I did not see a bookings number in the release and I was just wondering if you could provide that and talk a little bit about how you see the orders shaping up with some of the other wind turbine manufacturers that you're working with over the next couple of quarters. Thank you.

On the -- we don't normally provide bookings, what we do is we provide the change in backlog so you can basically come to bookings number by taking the difference, the reduction in backlog is $61 million minus the shipments of $73, so you come basically to a bookings number of $12 million in all.

And, Jim, on the second part of your question about the new licensees coming online, I commented on that earlier. We've seen very good progress with our newer licensees, the Hyundai's of the world -- ShenYang Blower Works and so forth. And we've published previously -- I won't go into details here, but we've published previously what the expected initial production timing would be as well as going -- timing for volume production. And nothing's really changed there.

So we do look for orders coming in from those new licensees. We've always said three months to nine months ahead of their production schedule, so we'd expect to be seeing some orders emerge soon.

But don't forget what we said also today in the call that just like Sinovel, you'd probably get an order for a dozen sets of core electrical components or there abouts in the first orders. They go into first production and then we look for following orders. Just like we saw from Sinovel.

And next we'll go to Timothy Arcuri with Citi.

Hi guys, its Seth actually. I was wondering with the amendment to the Sinovel contract, I was wondering if there's any little change in terms of how this $470 million comes in over the 28 months. Is it sort of kind of a straight line fill or is it kind of like just a little fatter in the end?

There's really no change, Seth, to -- we still expect that shipments next year will be higher than this year and then there will be obviously the contract ends in April of calendar 2011, so we don't have a full fiscal year there.

So basically the shipment schedules don't change year-over-year all that much from -- as compared to before in terms of -- in comparison to one another.

Still originally we always said, it's a ramp first -- second year -- third year over second year, second year over first year, that's still the case in terms of ramp. It's all compressed now, which is a good thing.

And next we'll go Meghan Moreland with Ardour Capital.

Good morning.

Hi Meghan.

Could you give a little more color on the expected improvement in gross margin over the rest of the year? Is it more a result of the product mix or cost reductions or price increases, all of the above? Jus a little more color there.

We'll say D all of the above.

As we said, we're -- our gross margin was about -- was just under 31% in the first quarter, we're saying that for the full year we expect to be in the range of 32% to 34%. That improvement will come from, as I mentioned earlier, efforts that will begin to bear fruit in the second half of the year from localization of some of the sources of supply for components that we'll be manufacturing in China.

so we're moving our supply chain from US and European sources to Chinese sources. That will help improve our gross margins as well as the fact that with the fact that we are increasing our guidance today, we have a higher percentage of our revenue coming from Power Systems than what our previous forecast was. So that has a beneficial effect on gross margins as well. So those are the primary factors.

And next we'll go to Ben Schuman with Pacific Crest Securities.

Morning, guys, thanks for taking my call.

Sure, Ben.

Are you guys seeing any D-VAR SVC opportunities or maybe incremental HTS projects in any stimulus grant proposals for Smart Grid?

Well, we commented today and the press release last week in terms of the stimulus monies coming in for existing contracts. The question was where's the money going to come for those contracts, it's coming out of stimulus funds under the Smart Grid arena.

There's a lot of opportunity out there, Ben, and we continue to go after that for the D-VAR and SVC as well as Superconductors, though I've got to tell you on the D-VAR and SVC there's a lot of good commercial opportunity out there. We expect to see a continued growth in orders and sales of D-VAR and SVC, not just in the US but around the world including now China.

So, that's more I think independent of stimulus funds per say. We're not counting on that, we're not depending on it. Superconductors in terms of the stimulus funds and even the new American Clean Energy Security Act we talked about Superconductor Electricity Pipeline. I have now idea whether that law gets passed or whether the language that's already in there remains. We just don't know these things ahead of time. But if it does, that's certainly going to be a boom to our industry.

I mentioned in my earlier comments, and I want to focus on this, we are engaged with many different potential customers on many different potential projects for superconductor cables in the US, Europe, China, Korea. That's where the focus is.

If stimulus funds can be made available, great, but don't count on them.

And our next question comes from Stuart Bush with RBC capital Markets.

Yes, hi, guys, thanks for taking my question. You mentioned the possibility of additional Sinovel contracts after April 2011. But are you a captive supplier to Sinovel because of your Windtec design stem or when will they be allowed to seek alternative suppliers for electrical components?

Well again, by contract, the original contracts, they buy the core electrical components from AMSC. So that's true for the three megawatt, and it will be true for the five megawatt going forward. So nothing in the world is 100% certain, but we have contracts in place and probably more importantly than the contracts themselves is, we have designed ourselves in to these wind turbines.

There are proprietary components to this and in particular in the encrypted software that we write that controls systems that go into these wind turbine's core electrical components. So we just try to make it as fool proof as we possible can and by the way, our pricing is really quite good. Good gross margins, but also good prices for our customers. So we've made is pretty difficult for the Sinovels of the world to try to break a contract, I guess, and go off and find some other supplier. We think we're in good shape here.

And our next question comes from Pavel Molchanov with Raymond James.

Thanks for taking my question and great job, as everybody said. You indicated on last quarter's call that backlog is likely to decline in the course of fiscal '09. Can you give us any updated thoughts on that?

It did decline, didn't it? As we reported today because we're working down through the main order, the Sinovel order. And that's the long and short of it. Now as the new licensees go into that initial volume production and then ramp up after that, one would expect that there would be opposing forces here, some places that declining backlog levels and starts to rise again. So we haven't made any forecasts or predictions on that, but we've given a lot of indication, so I think we'll have to look at it that way.

And our next question comes from Jesse Pichel with Piper Jaffray

Congratulations, Mr. Yurek, Mr. Henry and team. I have a two part question. first is last quarter you were quite conservative and that didn't quite dovetail with our discussions with Sinovel and I'd like to know what in particular accelerated Sinovel. Was it stimulus, government directive, protecting the steel industry jobs in the north of China? So that's my first question.

My second question is in the solar industry, the western suppliers point to port product quality in China and in solar, the product quality is actually exceeded that of the western suppliers at a much better price. How do you view the quality of these Chinese wind turbines at this point of the industry and how long do you think it will take China to become a factor in the global market? And part of that is do you think these firms in China will have to manufacture in the US or Europe to penetrate those markets, either because of shipping limitations or because of protectionism? Thank you.

Well, Jesse, thanks for sticking with the rule of one question. So first of all, clearly the $586 billion in stimulus funds that the Chinese government put out there in November of '08 has helped the wind industries because they have carved out wind, nuclear as well by the way, but wind as one of their core areas for meeting their needs for electricity, for stimulating job growth in China as that goes to the second part of your question, I believe.

And because, your third part of your question, they see it as an export opportunity. You mentioned steel, I always point out the China was the net importer of steel three or four years ago, now they're a net exporter of steel. And we expect to see that in the wind turbine market as well.

So in the midst of all that, Sinovel is in particular really favored by the Chinese government and that's clear, so they're really reaping the benefits of all this. Plus they have a very aggressive, very smart CEO, Mr. Han, who has taken full advantage of the situation, has pulled a really good team around him and made sure his supply chains are all intact, including on the core electrical components. So he's driving this very hard.

And part of the message here, there's been public documentation of this, they're going after markets outside of China, US included. The last part of your question, which also leads to let's say they do penetrate the US market, will they put up manufacturings here. I don't know the answer to that. Logically you would think at some point depending on volumes they'd want to get to that point, but just as in the solar industry, I think you're starting to see the quality of the Chinese wind turbines, Sinovel wind turbines in particular, at this stage of the game being very high quality. Same is true for CSR-ZELRI, good quality wind turbines coming out here.

Lower cost-based that can compete on the world markets on the basis of equal quality I think and lower price. They're talking about this publicly. You can read it in the Chinese newspapers, so I'm just reporting what you can read over there yourself.

So Sinovel is picked as a winner in the midst of all this and look to them for the exporting wind turbines in the next couple of years.

And we'll take our next question from Vijay Singh with Janco Partners.

Good morning. The question is on superconductor. And it's -- given your qualitative outlook for superconductors and the interest generated, what's your profitability target on that? Has that changed any or we continue to look at two to three years out?

Well, what we've always said, and we've reconfirmed this on a regular basis as an executive team, it's in terms of wire shipments, you need three million to four million meters of wire shipped out the door to achieve break even in the superconductors business. So that remains the same. Maybe we can lower it in the future, but that's the good general number to keep in mind.

So how do you get there? Well, you need orders. You need projects. And so as I mentioned earlier, we're working aggressively on developing projects, not just in the US but in Europe and Chine, Korea and those projects will lead to topline growth, potentially because we're the project manager as we have been in a number of cases.

But certainly on the wire orders, and that's what's going to drive that business through the break even, past break even and on to profitable growth.

So it's still reasonable to expect that it's going to be about two to three years out?

No, you're the analyst; you can make your forecast. I've just given you the numbers and that's all I can give you.

And we'll take a follow-up now from John Hardy with Broadpoint AmTech.

Thanks guys, thanks for taking the follow-up. Two quick questions, one more logistical. What percent of the cash have you collected already in July from the increase in accounts receivable? And, Dave, two, hopefully I can get an answer out of this. Probably not though. Can you give the gross margin breakout between systems and superconductor this quarter?

Let me take the second on first. we don't disclose our segment gross margins unfortunately, that's one of the things we keep to ourselves. But we do disclose obviously the segment operating margins and we did for the quarter.

With respect to your first question, I don't have the information at my fingertips, just to know how much of our accounts receivable was collected in the -- in July. But I can tell you that for some of the shipments that occurred toward the end of the quarter for customers obviously like Sinovel or even, as I mentioned earlier, ACCIONA, a lot of that cash has already been received.

(Operator Instructions). And we'll take our next question, a follow-up from Jim Ricchiuti with Needham & Company.

I was wondering Greg, given the enormous growth of the wind power business for you guys, has the amount of investment that you've put into this area in terms of R&D changed? Or is it going to change going forward?

It's the wind industry you're asking about?

Yes.

No, we've continued to invest in innovations in the wind side, whether it's the superconductors Sea-Titan wind turbines where we get government help on some of that of course. But we invest time of our Windtec engineering team on the design of the entire wind turbine system out of Austria or our power electronics guys out of Wisconsin as well as, of course, our superconductor experts, rotating machine experts here in Massachusetts. So there's an investment that goes on there.

In terms of the PM3000W, that was an investment we made over a year ago leading to the product launch in September, there are designs on the books for the next version of that already. The more you learn from the customers from having all these thousands of wind turbines out there hooked up to many, many different power grids, the more learning we have the more that can lead to product innovations and we're doing it.

Expect us to continue to do that, we'll continue to invest in the development of new product solutions for the wind industry. We see lots and lots of opportunity here. It will mean improvements in our revenue streams from existing and new licensees going forward. It's going to increase our earnings going forward, we believe. So we'll keep investing in there significantly going forward.

Our next question is a follow-up from Carter Shoop with Deutsche Bank.

Hi, guys. Two quick follow-ups here. In regards to China, can you talk about the wind power tariff there are how removing away from awarding contracts based on pricing more towards quality -- I know you guys believe that Sinovel's quality has picked up quite a bit, but are you concerned at all that we might start to see a little bit more competition from foreign vendors?

And then also on the balance sheet, payables actually came down, I'm curious why that happened given the back end load and the nature of the quarter. Did it have anything to do with the new Sinovel contract? Thank you.

Can you repeat the first part of that question? Just the first half of the first question?

Yes, I'm sorry. So does the new wind power tariff in China and we're trying to move away from a purely pricing based award system for the wind farms. It seems like the government is moving a little bit more towards evaluating quality more so hat they have in the past. Do you see that possible impacting Sinovel's share gains in that market over the next year?

I think, Carter, what trumps all of that is policy in China, and I don't see it changing. That is they're going to favor the domestic suppliers. They've done that for the last four years or so, they've upped the ante on that over the last twelve months according to domestic suppliers because, again, they wanted -- they see an opportunity to turn that into an export business.

So they're going to favor domestic suppliers with their policies. Four year ago, five ago it was 20% domestic wind turbine manufacturers, 80% foreign, it's totally reversed today. I think that trend continues going forward.

And as you said, the earlier wind turbines they made had a lot of problems. They broke a lot of things, but they broke things quickly and they moved on to solutions and improvements. And so now they have quality wind turbines and I think you'll see that quality continue to improve moving forward. That will allow them to really enter that export business. And Dave, the second part of the question.

Yes, you had a question on payables. I would attribute it to a couple of factors. Payments to sub-contractors and -- for not only our superconductors business but also some of our turnkey stuff, D-VAR and SVC. Also, what I'll -- I guess I'll turn to the ACCIONA affect. You know we have the ACCIONA affect on our days of inventory, our DSO. Our days of inventory came down and a lot of that inventory that we -- that was purchased as components to build the D-VAR RT's was actually paid for during the first quarter. And then during also the first quarter incentive payments to our employees from the annual plan, from last year, those payments were also made in the first quarter. So those would be the primary reasons.

And next we'll take a follow-up from Timothy Arcuri with Citi.

Hi, guys, its Seth again. I just wanted to get your thoughts on in terms -- I think this was asked a little before and I'll ask a different way. I know there probably margin improvements for some of the - based on the AMSC China manufacturing at least, but can you just give us a little comfort or your thoughts on your on to the extent some of these gains might not be pressured by Sinovel maybe pushing for more favorable pricing on future contracts?

You always expect pressure from all customers, and that's part of the game. And so you anticipate that. And it's not just -- Dave already pointed this out earlier, it's not just our cost of finally assembly and test in our stage of operations, there is a benefit there.

It's also that the components that we source, and we spend a lot of time qualifying multiple vendors for each of the components that goes into the core electrical components, there's an opportunity there quite clearly to reduce our cost. And we've been doing that.

So if we ever get price pressure, we haven't seen anything overwhelming or out of the norm I would say at this point for sure, we also get to pass that on to our vendors. Again don't forget that our motto is that we outsource everything really that goes into PM3000W. We do the assembly of all those outsourced components do the final test, ship it out the door. So it goes right down through the supple chain if it needs to. But we anticipated that, we've already built that into our supply chain today. And I think we're going to do quite well. So I -- we feel comfortable. We've increased our guidance on gross margin for this year, a bit of that's driven off of this even though we're anticipating new orders coming down the road here.

And we'll take our final question from Paul Clegg with Jefferies.

Hi, guys. Thanks for taking my follow-up. I just wanted to touch on the issue of there's been a lot of talk and some articles published about wind turbines in China not spinning, not working, not being connected to the grid even sometimes. Have you guys heard any of that with Sinovel developments and then any concerns there about ultimate push back from the government making sure turbines are functioning perhaps slowing down the rate of growth of wind turbines. Do you spend much time worrying about that? Any reason from your perspective to be concerned there?

All I see there is opportunities because part of the reason is that some wind turbines might not be turning in some places and I have nothing special to say about Sinovel in that regard. The very quick build out has in some places started to overwhelm the grid.

Now the Chinese have recognized that earlier and have in place, for example, 800 kilovolts DC, direct current, of power lines that they've been installing. They've been installing them already. They have a lot more to do to build out the grid. They also have the problem that they finally recognize the dynamic of voltage control. Remember we announced the first order for D-VAR for a substation in inner Mongolia served by seven wind farms we announced that back in January of this year.

That will be going in operation later this year. We expect it to be successful. We expect that that's going to give us more opportunity there and we expect, by the way, that superconductor cable is going to be an opportunity as time will come in the not too distant future in China.

So you -- I could turn that around and I am, to say that I think it's going to create more opportunity on our grid side our business here. But we haven't seen anything -- obviously when you look at the order flow, we haven't seen anything slowing down order flow either from Sinovel or from existing licensees who are putting up reference turbines and about to go into initial volume production.

So haven't seen it, don't anticipate it and we look for opportunity on the grid side.

And with no more questions in the queue, I'd like to turn the call back over to Mr. Greg Yurek for any additional or closing remarks.

Well thanks for all your good questions today and for listening in to the call. We're really proud that we have now achieved our second quarter in a row of GAAP profitability. And we are very confident we are going to achieve solid earnings for the full fiscal year and growth going ahead beyond that. So thanks again and look forward to reporting back to you in the future.

Ladies and gentlemen, this does conclude today's conference. We thank you for your participation.