American Superconductor Corp (AMSC) 2010 Q1 法說會逐字稿

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

Thanks, Jennifer and welcome to the call, everyone. Before we begin, please note 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 factor section of our annual report on form10-K for the fiscal year ended March 31, 2010, which is filed with the SEC. These forward-looking statements 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.

Although 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, other unusual charges and any tax effects 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 Investors page of our Web site at amsc.com. And finally, I'd like to mention that we'll be taking part in the Needham Clean Technology Conference in New York on August the 9th and the Pacific Crest Technology Leadership Forum in Veil, Colorado on August the 10th. We'll provide a live Web site from the Needham event that can be accessed on our Web site. More details on that Web site will be published next week. And now, I'll turn the call over to Greg.

Thanks, Jason and good morning, everyone. We've gotten off to a great start in fiscal 2010, and Dave Henry and I are looking to fulfilling-- filling you in on all of the details. From a financial perspective, our first quarter was impressive. We generated a strong increase in revenues, both quarter over quarter and year over year. We increased backlog to a new record level, approaching $1 billion, providing us with a substantial platform for profitable growth over the next several years. We delivered gross margins of 40% and operating margins approaching 17%, both new company records. And we more than doubled our earnings year over year, all impressive results indeed.

first, spending in our end markets remains robust and is expected to continue increasing over the next decade; second, demand for our differentiated solutions is as strong as ever and getting stronger; third, our execution is excellent and fourth, our solid balance sheet and cash generation are enabling us to make strategic investments to accelerate our near and long term profitable growth.

I'll touch on each of these points further, but let's start with our primary market wind power in the Asia Pacific region. The U.S. and European economies remain bogged down following the great recession, and the wind market in the U.S. is temporarily contracted due to the economic slow down. In the meantime, Asia's wind market has remained vibrant, thanks in large part to China. China boosted it's annual wind power installations from 6 gigawatts in 2008 to 14 gigawatts in 2009. In 2010, we are expecting this figure to rise to 16 to 18 gigawatts, and to potentially exceed 20 gigawatts in 2011 and beyond. This growth is driven by a number of factors. They include the need for more electricity in China to fuel GDP growth, the drive to maintain a high degree of energy independence and the desire to create thousands of new jobs in China in a dynamic new export market. China also has set ambitious targets to reduce emissions, not only because of global warming concerns, but also because pollution is having a very real impact on its domestic work force.

Last week an executive from China's National Energy Administration said that the country likely will spend nearly $740 billion over the next decade to develop and deploy clean energy solutions in the country. China aims to use the investments to double the percentage of power it gets from non-hydro renewables to 15% by 2020. That's no small feat considering China's total power demands are increasing by nearly 10% annually. While nuclear and solar power will share the load, wind power will be the primary means for reaching these kinds of numbers. This provides the RNC and its five Chinese wind turbine manufacturing customers with a tremendous long term opportunity, and we're all ready capitalizing on this in a significant way.

Leading our pack of customers, of course is Sinovel, China's largest and the world's third largest wind turbine manufacturer. Sinovel installed approximately 3,500 megawatts of wind power in 2009, accounting for about 25% market share in China and about 10% globally. Sinovel has publically stated it intends to increase its market share and nearly doubling its installations in 2010. And we're right there beside them providing the advanced wind turbine designs, power electronics and control systems they need to accomplish their goal of being number one in the market globally.

On the design side, following the highly successful 3 megawatt product launch with Sinovel, our full attention has recently been on the company's new 5 megawatt wind turbine platform. We are currently going through factory testing of Sinovel's first 5 megawatt turbine, which will be China's most powerful domestically produced wind turbine. Sinovel plans to erect its first 5 megawatt machine by the end of 2010. As you might recall, 34 of Sinovel's 3 megawatt turbines are powering the first offshore wind farm outside of Europe, the Donghai Bridge Wind Farm in Shanghai Harbor. Plans are now underway for a second phase of this project, and Sinovel's 5 megawatt wind turbines are in contention for this order. We would expect these 5 megawatt, doubly-fed induction systems to be Sinovel's primary platform for the offshore market for the next several years.

Having said that, Sinovel has recently stated it expects to deploy both 3 megawatt and 5 megawatt turbines onshore, which we expect will account for the bulk of their growth in sales in the next couple of years. And as we announced at the American Wind Energy Association Show in Dallas a couple of months ago, we now are developing a whole new range of wind turbines for Sinovel. This new product development effort will cover multiple power rings and new drive trains. For competitive reasons, we're not permitted to discuss which drive trains will be utilized however, I'd like to reiterate that our 10 megawatt Sea Titan is not one of the turbines included in this new product development effort. I'll come back to the licensing of Sea Titan Superconductor wind turbines in a few moments.

Of course, each new wind turbine platform we develop creates a new channel to market for our power electronics and control systems, which is what really drives our top and bottom liens. In May, we announced that we extended our supply of core components for Sinovel's 1.5 megawatt wind turbines out through September, 2013 under a new $445 million contract. Over the next 12 months, we expect to bring in significant full on core component contracts for Sinovel's 3 megawatt and 5 megawatt wind turbines.

Outside of China, we're expecting a similar mix of business from Korea's Hyundai Heavy Industries going forward. HHI has been in early volume production of 1.65 megawatt wind turbines for approximately nine months now, and we all ready have seen several small orders from them for this model. From June, HHI erected and commission its first 2 megawatt wind turbine, and testing of this prototype is progressing well. Both of these models, of course, are licensed from AMSC Wind-tech.

As we announced a few weeks ago, we are now helping HHI launch its own proprietary 5 megawatt wind turbine. HHI plans to erect its first 5 megawatt wind turbine by the end of 2011 and intends to be a major player in the global offshore wind power market starting with this 5 megawatt model.

As we progress through the remainder of 2010 and 2011, we expect to see Hyundai order additional 1.65 megawatt sets and core components along with its initial volume orders for 2 megawatt and then 5 megawatt turbines. And we expect to continue diversifying our business by bringing in orders from many of our other licensees including Inox in India, Mobile Energy in Turkey and ULSAN In Korea.

So we expect our wind business to continue to thrive this year and in the years ahead, as the wind industry continues its impressive worldwide growth. Our unique AMSC Wind-tech business model has been very successful. One key reason for this is that we do everything in our power to help our customers differentiate their wind turbines and gain share in their target markets. This is done in many ways, within our portfolio of customers licenses are often sold by geography. So while Mobile Energy is manufacturing and selling AMSC Wind-tech's 1.65 megawatt wind turbines in Turkey, they won't be facing competition from CSR ZELRI, who has similar rights to the 1.65 megawatt design in China. We also differentiate through the drive train. For instance, while Sinovel's 5 megawatt wind turbine will employ a doubly-fed induction generator and drive train, Hyundai's 5 megawatt turbines will utilize a full-conversion drive train with a permanent magnet generator. Each system has its own distinct advantages in terms of power, quality, efficiency and cost of energy.

While it's important to differentiate operators among our customers, it is even more important for us to help our customers differentiate their wind turbines from those produced by manufacturers outside the AMSC Wind-tech pool. This is accomplished through high performance, high efficiency designs, effective localization and cutting edge components. We discussed AMSC Wind-tech's best-in-class wind turbine designs before. They stack up with the industry elite in terms of performance, efficiency and reliability under a wide range of conditions. We also have spoke in great detail about AMSC Wind-tech's ability to arm its customers with the cost of damage that effectively will localize damage. The third way we help to differentiate our customers through its turbines, delivering proprietary components that provide distinct competitive advantages. You might recall that we accomplished a major step in differentiation with our introduction of our power module, 3000W in September, 2008. This proprietary, wind-specific system remains the world's most scalable and most highly optimized power converter for the wind energy market. The PM3000W provides our customers turbines with the ability to remain online through severe weather and events, ground faults and low voltage events on the power grid. We now plan to expand these capabilities with our next generation power converter, the PM3100W, which introduces additional features and functionalities, in particular for higher power wind turbines.

This is just one of the product development efforts we are investing in today at AMSC. We've also indentified opportunities in other areas of the wind turbine supply chain to further differentiate our customers' turbines, and in turn, drive great sales volumes for our power electronics solutions. We'll update you more on that front soon.

Now, let me take a few moments to bring you up to speed on the activity that we have underway in our Superconductors business. Over the past year, the level of activity on this side of our business has increased dramatically. The Tres Amigas Project here in the U.S. remains solidly on track to start construction in 2012. As a reminder, the objective for Tres Amigas is to tie together America's three power grids using high voltage direct current or HDDC superconductor power cables. In doing so, Tres Amigas will enable the transfer of gigawatts of power from grid to grid for the first time ever. So a wind farm in Texas could, for instance, utilize the Tres Amigas superstation to export its power to California and the western interconnection and Chicago in the eastern interconnection to generate a higher rate of return. Tres Amigas, LLC, which intends to utilize only private financing for the project, in other words no government funding required, has received general approvals from FERC to move forward, and has been quite active in working with potential customers, qualifying vendors and attracting financing.

Under our agreement with Tres Amigas, LLC AMSC is expected to provide transmission planning services and the superconductor cable system for the projects. Part of our responsibility is to evaluate and select one or more qualified manufacturers of superconductor power cables. These cables, of course, will utilize wire produced by AMSC. However, the bulk of the revenue we expect to recognize when the Tres Amigas Project goes forward is for the supply of the full cable system. The competition for the supply of the cable has been underway for some time now and is heating up. For instance, earlier this week, Nexum, the world's largest cable manufacturer, announced that it had successfully manufactured and tested the world's first 200 terravolt HVDC superconductor cable system, the required voltage for the Tres Amigas Project. This prototype cable system is powered by AMSC HTS wire. LS Cable out of Korea, the world's third largest cable manufacturer, is moving forward just as vigorously. LS has (inaudible) to launch an aggressive global roll out plan for superconductor cable that includes HVDC systems as well as alternating current transmission and distribution systems.

On this strategic alliance we aim to help them deploy over 30 miles of the superconductor cable systems over the next five years. The first of these HV cables will be energized in Korea Electric Power Corporation's grid near the city of Seoul late this year. Back in the U.S. , you might recall that project Hydra in New York City was temporarily halted because of the economic slow down. We have continued to work with ConEd and the Department of Homeland Security on this very important project. At this stage, I'm happy to report that a new site has been identified and new sources for the project are being pursued. We'll update you on the progress we're making on Project Hydra in future calls.

In parallel to all this superconductor cable activity, our Sea Titan product development efforts continue to move smartly forward. Sea Titan is a wind turbine platform that utilizes a superconductor generator to produce 10 megawatts or more of power per turbine. We'll be utilizing the AMSC Wind-tech business model for Sea Titan and plan to license designs for the complete wind turbine for wind turbine manufacturers, and separately licensed designs for the superconductor generator for the rotating machine manufacturers. This would result in licensing fees, royalty payments and most importantly the sale of core power electronics and superconductor components for each Sea Titan wind turbine. In fact, those licensing discussion are all ready underway. We continue to expect we will have our first Sea Titan licensee by the end of 2010. We are delighted, of course, by all of the sales and licensing activity on this side of our business, but when we speak with our customers today, whether it be one of our cable partners or a potential superconductor wind turbine generator licensees, the one question we invariably get asked today is, how can we be sure that AMSC will be able to meet our needs for commercial volumes of wire over the next few years. This is precisely the reason we have begun investing in the full migration to our 100 millimeter manufacturing technology for the production for 344 superconductors.

Those of you who have followed AMSC for some time, know that we have been producing our 344 superconductors using a 40 millimeter substrate for the past couple years. This manufacturing line has extended our leadership position in the industry and is enabling us to meet our immediate wire requirements, but it is not sufficient to meet the demand that is coming. Migrating to a 200 millimeter process will enable us to significantly increase our output and significantly lower manufacturing costs. And since our manufacturing process is inherently modular, we will be able to add more manufacturing modules to incrementally expand capacity as demand increases. We now have ordered most of the equipment we will need for our new 100 millimeter manufacturing line. We all ready have received the first pieces of equipment and are in the process of installing those today. Once all of the equipment is commissioned, qualified and producing high quality wire, we will then upgrade our existing 40 millimeter production equipment to 100 millimeters. As you might recall, our 40 millimeter equipment was designed to also operate as 100 millimeters.

The bottom line on all this is our superconductors' investment and expansion plans are on track. Of course, as we discussed in our last conference call, this wire production investment is less than half of the total corporate-wide capital expenditures for fiscal 2010. We are also utilizing the cash we are generating from operations to significantly upgrade our IT infrastructure, increase the manufacturing capacity of our power systems business unit, expand our AMSC Wind-tech facilities and install two wind turbines, one near our facility in Wisconsin and one near our Wind-tech facility in Austria. And these will serve as qualification platforms for future generations of wind turbine design, power electronics and other core components. We also plan to increase our headcount by about 40% this fiscal year to more than 1,000 employees world wide. So while we're tracking for another impressive year of profitable growth in fiscal 2010, we also are making aggressive investments to continue our rapid revenue and earnings growth in fiscal 2011 and beyond. Now, let me turn the call over to Dave for his financial review.

Thanks, Greg and good morning, everyone. We got fiscal year 2010 off to a strong start, generating a 33% year-over-year increase in revenues and record gross and operating margins, while more than doubling our earnings in the first fiscal quarter. The strength of these results is owed to solid end market demand for our wind and power grid offerings, crisp execution on our growth plans, as well as favorable foreign exchange tailwinds during the quarter. AMSC generated $97.2 million in revenues for the first quarter in fiscal year 2010. This is up approximately 11% from $87.6 million for the fourth quarter of fiscal 2009 and 33% from $73 million for the first quarter of fiscal 2009.

Higher wind turbine component shipments were the main factor in our sequential and year-over-year growth. AMSC power systems contributed $94.9 million or 985 of our total first quarter revenues. This is a 34% increase from $70.7 million in power systems revenues for the year ago quarter. Our AMSC superconductor segment contributed the remaining $2.3 million or 2% of revenues. AMSCO superconductors also generated $2.3 million in revenues for the first quarter of fiscal 2009. Sales of (inaudible) represented 72% of total revenues in the first fiscal quarter, with wind in total representing 84% of total revenues. Geographically, we generated 94% of our revenues outside of the U.S..

Gross profit for the first quarter of fiscal 2010 was $39 million and our gross margin was a record 40.1%. This compares with a gross margin for the fourth quarter of fiscal 2009 of 37.8% and a gross margin for the first quarter of fiscal 2009 of 30.9%. As we highlighted on our last conference call, unlike many companies in the renewable energy industry, the recent weakening of the euro against both the renminbi and dollar has had a beneficial effect on our gross margin and profitability because most of our revenue is denominated in renminbi, while about half of our costs related to that revenue are denominated in euro. The strengthening dollar and renminbi versus the euro for the quarter effectively increased our gross margin by approximately 170 basis points in Q1. In response to the recent volatility in exchange rates, we've put hedges in place for the next few quarters in order to provide a more predictable U.S. dollar value for a substantial portion of our euro denominated costs. The exchange rates on these hedges are roughly similar to the current dollar exchange rate. As a result, this minimizes both downside risk and upside potential of exchange rate fluctuations.

R&D expenses for the first quarter were $7.3 million or 8% of revenue. This is up from $7.2 million or 8% of revenue for the prior quarter and $4.5 million or 6% of revenue for the first quarter of fiscal 2009. The sequential and year-over-year increases in R&D expenses are driven by engineering headcount increases and other costs in support of product development efforts for the wind and solar power markets.

SG&A expenses for the first fiscal quarter were $15.2 million or 16% of total revenue. This compares with SG&A spending of $14 million or 16% of total revenue for the prior quarter and $10.9 million or 15% of revenue for the first quarter of fiscal 2009. The sequential and year-over-year increases were again driven by headcount and payroll increases in support of our continued growth.

In aggregate, operating expenses increased on a dollar basis, but remained steady on a percentage basis both on a sequential and year-over-year basis. As we discussed last quarter, we would expect our operating expenses in fiscal year 2010 to decline slightly on a percentage basis from fiscal 2009 levels, even as we increase our headcount by approximately 40% and develop new product offerings to drive new revenue growth.

AMSC's operating income for the first quarter of fiscal 2010 was $16.1 million and our operating margin was a record 17%. This compares with an operating margin of 13% in the fourth quarter of 2009 and a 9% operating margin for the year ago quarter. AMSC Power Systems generated operating income of $25.5 million and an operating margin of 27% for the first quarter. This compares with a 26% operating margin for the fourth fiscal quarter of 2009 and a 22% operating margin for the first quarter of fiscal 2009. The sequential and year-over-year increases were the result of more favorable product mix and foreign exchange effects.

The operating loss at AMSC Superconductors for the first quarter was $5.9 million. This compares with operating losses of $7.3 million and $5.5 million for the fourth quarter and the first quarter of 2009 respectively. Sequential reduction in operating loss was driven primarily by improved wire manufacturing performance. As a reminder, stock based compensation expense is not allocated to our reporting segments.

Our income tax expense for the first quarter of fiscal 2010 was $7.3 million, resulting in an effective tax rate of 44%. This is down from 58% the prior quarter and 62% in the year ago quarter. But foreign profits are expected to increase and U.S. losses expected to remain relatively stable in the near term, we do continue to expect that our effective tax rate will decline in fiscal 2010 compared with the prior fiscal year.

For the first quarter of fiscal 2010, AMSC reported GAAP net income of $9.2 million or $0.20 per diluted share. This was up approximately 86% from $4.9 million or $0.11 per diluted share for the fourth quarter, and is up more than five fold from $1.8 million or $0.04 per diluted share for the first quarter of fiscal 2009. We use non-GAAP net income, which approximates cash based on earnings on operations to track our financial progress, and we reported this metric each quarter. We also provide guidance for non-GAAP net income on an annualized basis. These numbers are reconciled to GAAP in the tables at the end of our earnings press release.

Our non-GAAP net income for the first quarter of fiscal 2010 was a record $13 million or $0.28 per diluted share. This was up 55% from $8.4 million or $0.18 per diluted share for the fourth quarter of fiscal 2009 and was up more than 130% from $5.5 million or $0.12 per diluted share for the first quarter of fiscal 2009. As of June 30, 2010 AMSC had $120.7 million in cash, cash equivalents, marketable securities and restricted cash. This is compared with $155.1 million as of March 31, 2010. As we experienced two quarters ago, the decline in cash was driven primarily by timing differences and payments from Sinovel. Other significant factors include payments for planned capital expenditures and changes in the dollar value of cash held in foreign currencies.

I'd like to point out that a sizable portion of receivables we have with Sinovel as of June 30 are subsequently requested in July. Also note, that we continue to expect that we will be cash flow positive for the full fiscal year. Our days sales outstanding for the quarter declined from 72 days in the fourth quarter of fiscal 2009 to 71 days for the first fiscal quarter of 2010. As a reminder, we use average accounts receivable to calculate DSO.

Our days of inventory for the first quarter of 2010 increased to 64 days from 59 days in first quarter of fiscal 2009. This was primarily the result of increased copper inventories in anticipation of higher demand for wind turbine electrical components.

Let me turn now to our financial forecast. Based on the strength of our first fiscal quarter and our core markets, we are increasing our revenue and EPS forecasts for the full fiscal year. We are increasing our revenue forecast for the full year fiscal year 2010 from a rate of $414 million to $425 million to a range of $420 million to $430 million. We are also increasing our net income forecast for the full fiscal year from a range of $37.5 million to $39.5 million or $0.80 to $0.85 per diluted share to a range of $39.5 million to $42 million or $0.85 to $0.90 per diluted share. And our non-GAAP net income guidance has increased from a range of $54 million to $56.5 million or $1.15 to $1.20 per diluted share to a range of $56.5 million to $59 million or $1.20 to $1.25 per diluted share. In terms of the quarters ahead, we would expect revenues in the second fiscal quarter to be slightly higher than in our first fiscal quarter with earnings remaining flat quarter over quarter due to higher planned operating expenses and a lack of incremental foreign exchange benefits due to hedges recently put in place. We expect stronger revenue and earnings growth in both our third and fourth fiscal quarters, in line with the increased revenue and earnings forecast we have provided today. With that, we'll open the call to questions. Jennifer, would you please provide the instructions?

Thank you. (Operator Instructions) We'll take our first question from Carter Shoop with Deutsche Bank.

Good morning and congratulations on a good quarter.

Thanks, Carter.

Thank you.

Just for my first question, can you tell us what the breakdown was for Sinovel in regards to 1.5 megawatt versus 2 megawatt turbines in the quarter?

No, we don't give that break out, Carter. That's-- never have and that's competition sensitive information right now.

We'll go next to Jesse Pichel with Jeffries.

Yes, good morning. Jesse Pichel from Jeffries, congratulations on a strong quarter, gentlemen. In our polling of certain wind developers in Europe and the U.S., we were surprised to hear that many will be placing orders for Chinese turbines using Chinese bank debt. And can you share with us your view on, you know, Chinese turbine ability to capture global share of the market outside of China using bank debt? And have you been involved in any of the, you know, conversations there with potential developers, since it is relying on your technology?

Yeah Jesse, first of all we have been in discussions over time with, for example Sinovel's U.S. sales force, which they've had on the ground here in the U.S. for over a year now actually. They have an office Houston, opening one in Toronto as well, also one in London. So they're going for the export market, that's quite clear. We think they compete on equal quality, actually higher performance on the power curve as well. So the question is, do they have a bankable wind turbine? And the way I think they overcome that and the steps are all ready going in place is to bring along the Chinese bank financing. So by definition, they are therefore bankable. In support of all that, Jesse, you're going to see here, you know, in this calendar year wind turbines going in the United States from Sinovel, 3 megawatt and 1.5 megawatt machines. So that's underway. And by the way, let's not forget Hyundai Heavy Industries. Their focus is on the North American market and they will be shipping turbines to the U.S., the 1.65 megawatt wind turbine to start. So on top of all that when you speak about Europe, I think we're all thinking about the offshore market in the North Sea, primarily now around the U.K. and our customers, our licensees clearly have their sites set on the offshore market with the 3 megawatt, but primarily the 5 megawatt machines in Europe would point you to Sinovel. Hyundai and Dongfeng, for that matter, who are moving forward now with their 5 megawatt machine. In the future of course, for the offshore, the dominant force we think is going to be the Sea Titan superconductor wind turbines, but more on that later.

We'll go next to Theodore O'Neill with Wunderlich, SEC.

Thank you. Greg, when do you plan to have a 10 megawatt superconducting generator for us to see, and how do you plan to address reliability issues created when you add a refrigeration system to the mix?\

Well, Theodore, we don't think it's that difficult at all to scale down from the 36 megawatt motor, which was fully road tested by the U.S. Navy about 18 months ago to a 10 megawatt size for a wind turbine. Bit higher torque, but we clearly know how to handle that. I'll tell you, the requirements for the refrigeration system are there, but we've been through a very tight screen with the U.S. Navy. I've been in many a meeting with the U.S. admirals, who've asked exactly the same question you have and over a decade of work is the news on that. Using the base of cryo-refrigerators that have been in the market for a very long time from the semiconductor processing industry, for example for MRIs, 8.9 years-- 8.9 years between meantime between failure has been established there over time. So I think the answer is that's reliable technology. It's available to be used and we don't see any issue with it whatsoever.

We'll go next to Ben Schuman with Pacific Crest.

Hi, guys. Two-part question on the D-VAR business, first, if you could tell us how much of the 12% non-Sinovel win business came from d-VAR for wind interconnection, that would be great. And then if you could just discuss kind of the trajectory of the D-VAR business by region and by application as you look out this year and beyond?

Well, on the first one, I'm not going to give you a detailed breakout on that, but I will say it's mostly D-VAR for the grid market. And in fact, this year we plan to be shipping a record number of D-VARs to our customers. And what was the second part of your question, Ben? I guess we lost him. A breakout of the D-VARs by market, I believe.

Ben, just so you're clear, this is Jason Fredette. Our D-VAR is always in the grid side of the business, even though if it's connecting a wind farm to the grid, it's a grid application. So the remaining 12% of our wind business, that's all component sales and licensing and development types of revenues to other customers.

Thanks, Jason. Next question.

We'll go next to Vishal Shal with Barclays Capital.

Hey guys, this is Jay Greenblatt for Vishal, congratulations on a nice quarter.

Thank you.

Just a couple quick questions, looks like on the gross margins, you know, I know you mentioned that 170 basis points on FX. It looks like there was some additional improvement. Could you give a little color on that, and any progress with the solar motor market?

On the gross margins, I think we just continued to execute well. We had, mentioned superconductors, the operating loss there, quarter on quarter and that's because of improved wire manufacturing performance, which has a favorable effect on gross margin. So I'll turn it over.

Yes, on the solar side, we announced on our last earnings call or first order for the solar industry, basically a D-VAR solution for a solar power plant here in the United States. And we are in a lot of discussions with many solar power plant developers. We're very enthusiastic about this area and I think you'll hear more in terms of orders by the end of this fiscal year for sure.

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

Thank you and good morning.

Good morning, Jim.

Greg, just a question on the superconductor wire side of the business, can you talk about where you are in terms of gross capacity now and where do you see yourself as you move forward with this next phase of investment for this new process, manufacturing for 100 millimeter? Is this something that will take over the next couple of quarters, a year? Maybe you can give us some sense of the timeline?

So Jim, the last few calls, we have stopped talking about gross capacity and all that sort of thing. It's now that we're entering the commercial marketplace this is competition-sensitive information. We don't want to put out that information in the public. Competitors do listen to these calls, by the way. So I'm not going to be able to answer that question, but I can tell you that as I said in my remarks, that we're moving forward, on plan, tracking to plan and we expect to be able to meet our customers' demand. And as I said, the question that we're getting now from our customers and potential customers or partners is will we have the capacity to meet their demand. Our answer is a solid yes, and I think we're doing all the right things to be able to meet that demand in the years ahead.

We'll go next to Stewart Bush with RBC Capital Markets.

Yeah hi, good morning guys.

Hi.

When you sign a contract with a wind customer to license a design, does that customer pay royalties on units that they ship indefinitely or is it limited to a certain number of units as it is with Hitachi? And to that point, do I understand correctly that a contract value that you announced includes both power electronic sales and royalties embedded together?

So Stewart, I'm not sure what you're talking about with Hitachi, but that aside, we've said for years now in the case where we do have royalties, and it's not every case, but we do development contracts, you do specific development of designs for certain customers and obviously they're paying for it, but then there's no royalty. But when we do license a design, such as the 1.65 megawatt to a CSR Mobile Energy and so forth, there is a royalty. And as we again, said every time we put those announcements out, it's for the first several hundred units, maybe 300, 400, 500 wind turbines they pay a royalty and then that goes away. In any case, the upfront payments, the upfront license fee and the royalty payments, we've consistently said that's a very small amount of revenue, relatively speaking. It's very nice revenue, because it mostly drops to the bottom line, but the real driver for our top and bottom line is the sales of the core components, which obviously have pretty decent gross margins I would say.

The other thing to note, Stewart, is that we separate, you know, royalties are generally included in the licensing contracts when we have them. And in a component contract we enter into, there's no royalty component to it. It's just a straight value of the components that we sell.

We'll go next to John Hardy with Gleacher & Company.

Yeah, thank you for taking my question. Maybe if I could ask Jim's question a bit of a different way. You basically have three big components for HHS over the next year or two. You have Korean and China, good market, Tres Amigas as well as Sea Titan. I was wondering what you thought-- what type of volume growth you would expect in maybe '11 and '12 base on those maybe three buckets? And during that ramp phase, what potential impact do you think that that could have on gross margins in '11 and '12?

Well, let's step back. First of all, it's not just Tres Amigas and the Korean grid, which we think is going to be huge for us obviously, and not just Sea Titans for that matter. So we're addressing cable opportunities actively, and have been in Europe, China. We've talked about state grid and their request for information out on The Street. We think they'll be putting a first order out in the next 12 months for the Chinese grid. So that's-- we think is obviously going to be huge once that gets going, and in the call here, my remarks about Project Hydra. So there's a lot of activity going on, not just in the ones you mentioned to start with. Beyond that, we don't get into what our projected volumes are and the volumes are per market at this stage in the game, but let me point out and I'll just way the wire side and when I talk about what's really going to drive our top line and bottom line. On the wire side, it's you know, roughly 200,000 meters of wire per circuit mile of cable. And that's pretty much the case with DC or AC systems, and that's I think a conservative number, could be a bit-- should be a bit more actually. And it's about at least 200,000 meters of our wire per Sea Titan wind generator. So a lot of wires gets involved. We've talked in the past about 3 million to 4 million meters of wire shipped out the door is our P&L break even. I don't think we're that many years away from achieving that now, but let me step back.

The answer that I want to give is that what's going to drive our top line in the near term is not just the wire sales, but the revenue associated with the projects. We're running the Hydra Project in New York City. We will be running and supplying the cable system for Tres Amigas. So those project revenues are going to drive our top line and bottom line in addition, of course, to making money on the wire sales going forward.

We'll go next to Timothy Acuri with Citi.

Hi guys. It's Seth. Can you just talk about, you know, a little bit more color, hopefully, on what your outlook is for gross margins?

David Henry. Yes. Seth, on gross margin, we kind of stopped giving guidance on gross margin. We talked about it in our last call, but it was competition sensitive, sensitive information, so we preferred to not talk about gross margin guidance going forward, but that being said, we've also talked about in the past opportunities to improve gross margins. We instituted, you know, cost reduction plans last year that we're still realizing the benefits from. So when you look at our gross margins on a year-over-year basis, you're seeing some of the effects of that, and there's future gross margin opportunities that we think that are available to us to improve them going forward, and of course we'll look to pursue those. But we're shying away from right now giving any outlook on future gross margin.

We'll go next to Ben Kallo with Baird.

Hey good morning. Thanks for taking my question. I have two questions, and following on to that gross margin conversation, can you give us any kind of directional outlook for the wind business? As Sinovel becomes more of a larger portion of your revenue and the orders get bigger and you sign on different types of turbines with them how should we think about margins going directionally there? Is there any pressure on pricing there? And then secondly, in the past you've given a percentage of your revenue guidance in backlog, could you update us on that?

So we really have not seen the pricing pressure that you might be thinking about or might guess about in these orders with Sinovel or others. And I think the reason for that is we are providing a highly proprietary, highly differentiated set of-- product, the core components the control systems for these wind turbines. So it hasn't been there, and don't anticipate it will be there. Obviously, as Dave said, we always prepare for that sort of thing by taking costs out and we have additional efforts and opportunities to remove more costs this year and going forward. We're doing that. And you go on the PM30100, that's going to give us more opportunity there. So we think we're in great shape in terms of our margins going forward. And I guess I forgot, what was the rest of the question, sorry?

Change to (inaudible)?

Oh, how we change to bigger sizes?

You know, I mean, there's not really a significant difference in gross margin, that was your question. There's not a significant difference in gross margin between, you know, say a 1.5 megawatt set of core components and say a 3 megawatt set of core components. It's not-- it doesn't move the deal. Next question?

We'll go next to JinMing Liu with Ardour Capital.

Good morning, nice quarter.

Thanks.

In China, I noticed there are potentially two senders are regulating the connection between wind farms and the grid will come out in the very near future. Can you comment what impact that will have on your business? And also David, can you give us any color on the power amount last on the receivable collected by Sinovel in July?

So I'll take the first part of that. Your question was about grid interconnection of wind farms in China. So for at least four years now we have been in China speaking to [SACRAY], which runs 88% of the power grid in China, southern China grid as well. China [Appery] as well. China wind is typically better in association, and all of those discussions have been focused on that they're going to need to take care of dynamic voltage control for the interconnection of wind farms to the grid in China as wind becomes a larger fraction of the total power generated. I think that started to get some really nice traction in the last year. We have three sites in China now. Our D-VAR is providing the grid interconnection. The Chinese customers, the grid operators are very happy with it. So I think we're just getting started there. Through that entire process, you may know that part of our sales process is that these are transmission planning engineers, call it our Network Solutions Team, to provide the reasons and ways you protect the grid from the wind farms and how the wind farms can be protected from the grid, events that occur on the grid. We've taken that team over to China. They've been in extensive meetings and providing seminars and so forth. So we think we're actually helping to set the grid interconnection standards in China. So with those reference sites in place and influencing the grid interconnection standards, we see a very good future for our D-VAR grid interconnections solutions going forward. And by the way, not just for wind, but China's also going large-scale solar power plants and we think we have our foot in the door quite solidly on that end. Dave, you want to comment on the receivables?

Yeah. On the receivables, we received a payment from Sinovel as I mentioned, roughly around the first week of July. When you back out the BAT, which we just turn back around and remit to the government, it was north of $20 million that we received.

We'll go now to Jeremy Hellman with Divine CapitalMarkets.

Hey good morning, everybody.

Good morning.

I just wanted to speak more broadly, given the shifting winds here in the U.S., Kerry-Lieberman bill is off the table, draft of bill from Senator Reed is out there. What broadly, and also backing that up, was some commentary out of AWEA earlier this week that of course is going to cast things in more of a direr light as they try and advocate for renewable energy standard here in the U.S.. But when you speak to Sinovel and HHI or any of your other customers, what is your sense of their outlook for the U.S. market?

Well, you know, as I mentioned in my remarks, the U.S. market is in a temporary slow down. The forecasts for this year are, I don't know, at least 40% lower installations than last year. That looks to be the case. Everybody seems to be on board with that kind of forecast. Having said that, we're starting to see some traction in terms of wind farm developers moving forward, and the industry expects, not just us, that it's going to pick up ion 2011 and '12 and beyond. Ultimately, we see and I think the industry sees a very healthy, very strong market in the United States. And our licensees, the Sinovels and Hyundais of the world, look at this and say, gee that's great. It's slowing down. That gives us time to get our turbines fully qualified, you know, 60 hertz application here in the United States and so forth. Get our China bank financing lined up, whatever it takes. Get our first reference sites here in the Unites States in 2010 and '11. So I think our licensees are going to take full advantage of this slow down to be ready to go when the market starts taking off here again in the years ahead.

You can fully look for, whether there's something in the new energy bill or not, I think you can absolutely count on there being an extension of the production tax credits for wind farms on a going-forward basis. I see absolutely no stoppage of that whatsoever. Look at the Wall Street Journal this morning and the reports on affirmation of global warming. I think that's going to resonate in Washington. And again, don't look for an energy bill. That's probably gone by the wayside, but look for continuation of production tax credits in the future for sure.

Just to add on top of that, Sinovel, has talked about substantially increasing their production capacity this year. And just to be clear, that's really not dependent upon anything going on in the U.S. market. That's really for internal consumption in China. So Sinovel is preparing in terms of their capacity, meeting the demands that they see in terms of their backlog and the growth of the China market specifically.

Yeah, and let me add there was an earlier question I think as well on that. We remarked that Chins-- Sinovel is about a 25% market share in China as of now. And we all see that growing. So there's going to be growth. I mentioned in my remarks Sinovel probably talking about doubling its output this year, which gets them up around 7 gigawatts. And so as the China market for wind continues to grow strongly, look for Sinovel and I think our other Chinese licensees to continue to take more market share. So right now we're in more than 25% of the wind turbines in China. On a going-forward basis, we see that going up the 50% plus range.

We'll go next to Pavel Molchanov with Raymond James.

Thank you for taking my question. You said before that you're targeting signing off a U.S. wind licensee, and given your comments about the comparatively slower opportunities in the U.S. market, how did that play into that strategy?

Well, first of all, let me affirm that we expect to have our first U.S. licensee, Wind-tech licensee within the next, what is it now, probably now 16, 17 months, and pre-first that 24 months last November. So we think we're very much on track to accomplish that objective. And once again, just like our foreign licensees, the U.S., potential U.S. licensees, they're saying look at the slow down. This gives us a chance to get into the market, get our production set up and be ready to participate in the strong growth that we all see in the U.S. market. So but now we expect to have that licensee and move forward smartly with them.

We'll go next to Carter Shoop with Deutsch Bank.

Yeah hi. As a follow-up question, can you elaborate on your outlook for the superconductors business through the remainder of the year? Do you expect the loss per quarter to remain consistent with current levels?

Yeah, we said that consistently that it should be about the same quarter over quarter for this year.

On a full-year basis we would expect superconductors operating loss to be roughly or probably in line with the amounts that you saw last year.

And that's consistent with what we said earlier, and obviously we're in that investment and scale-up mode right now. So I don't think that's a surprise.

We'll go next to Carter Driscoll with Capstone.

Good morning, gentlemen. First question, just on CapEx side, I think you said last quarter targeting roughly $40 million to $50 million for expenditures. Is that allocation shifted between, you know, plant expenditures or some of your planned projects, maybe on ERP? Has anything changed meaningfully, gone up with them?

Greg Yurek; Yeah, no that really hasn't changed. We're still expecting around $40 million to $50 million CapEx. And we're talking about the superconductors investment in this call, you know, because you know, we see things and we'd like you to understand the reasons for the investment. But that being said, that doesn't mean the magnitude of the investment has changed any. It's still-- so a component of that $40 million to $50 million it's not the majority of it, but it's a sizable component of it. We talked about other investments we're making, you know, the ERP system you mentioned, we're going to be putting up wind turbines both in the U.S. and Europe to be able to test and qualify the next generation components. So you know, those plans have not changed, and as we said before and we continue to expect, you know, the capital that we're seeing this year, we expect it to be substantially lower in fiscal "11.

And I think it's worth repeating that that $40- million to $50 million id going to come from cash we generate from our operations and at the end of the year we expect to be net cash flow positive.

We'll go next to Timothy Acuri with Citi.

Can you guys comment on your outlook? I mean, there's supposed to e a number of customers coming on line and going into production this year. Can you possibly give any status generally as to whether those timelines are still consistent with previous expectations?

Yes, yes they are, so no changes really on that. It's going through. Everything's on track.

We'll take our final question from Ben Kallo with Baird.

Guys, in the past you've given a percentage of your revenue guidance that 's all ready in backlog. Could you update us on that?

Well, we typically give that at the beginning of the year, and we don't typically update that on a quarter-to-quarter basis, but we do have fill, but we still need to get some in terms of orders we need to get in turn them the rest of this year, but we wouldn't have updated our revenue guidance today if we didn't feel, you know, pretty confident about getting those orders, booking them and being able to ship them.

And at this time there are no further questions. I'll turn the call back to Mr. Greg Yurek.

Thanks for listening in today and your great questions and we'll look forward to talking with you on the next quarterly call. Bye.

This does conclude today's conference call. We thank you for your participation.