American Superconductor Corp (AMSC) 2010 Q2 法說會逐字稿

Good day, everyone and welcome to American Superconductor's second 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 Managing Director of Corporate Communications, Jason Fredette. For opening remarks, I would like to turn the call over to Mr. Fredette, please go ahead, sir.

Thanks Natasha and welcome to our 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 the Company's annual report on form 10K for the fiscal year ended March 31, 2010, and the subsequent 10-Q filing we made 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 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'll 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 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 8K. All of our SEC filings can be accessed from the investor page of our website at www.amsc.com

Finally I would like to mention that we'll be taking part in the Citigroup Small and Mid-cap conference in Las Vegas and the Jefferies & Company Global Clean Tech Conference in London. Both of these events will take place on November 16, and the Jefferies event will be webcast. More details on that webcast will be available next week. With that, let me now turn the call over to CEO, Greg Yurek.

Thank you, Jason, and good morning to all of you who have joined us on today's call. Before I begin my comments, I'd like to note that Dan McGahn, who was promoted to the position of President and Chief Operating Officer in December 2009, is with us on the call today. Dan has done a terrific job in his new position over the last 10 months. In the question-and-answer later on in this call, I may call on Dan, in order for you to get his perspective regarding certain questions.

Now, let me review some of our key results and provide some insights regarding our future directions and forecasts. The past few months have been particularly eventful period for our company. Most importantly, second quarter we celebrated, the coming of age for superconductors, by booking the world's largest high temperature superconductor wire order. I'll discuss this seminal event and other key highlights in more detail in just a moment, but first here are the high points on the financial results. AMSC continued its solid performance in the second fiscal quarter, achieving its 15th consecutive quarter of revenue growth while also generating record earnings.

We are the only power technologies company in the US market to have grown revenues for 15 consecutive quarters, right through the Great Recession. And, we are one of only three industrial companies worldwide to have achieved this level of performance. In the category of, what have you done for me lately, we are positioned to continue revenue and earnings growth for years to come based on our strategy of first, focusing on the wind energy and power grid markets, and second, focusing on doing business in the growth economies of China and the Asia-Pacific region. In our fiscal second quarter, we achieved a record gross margin of 40.7% and an operating margin of 16%. We still have room for growth in both metrics, indeed, as our superconductors business reduces its losses and becomes profitable over the next few years, we expect we will achieve operating margins well in excess of 20%.

In the second fiscal quarter, we also increased our total backlog quarter-over-quarter to a new record level of $956 million. This backlog provides us with great visibility into what we expect will be a strong second half of fiscal 2010, as well as providing a solid base for continued growth in fiscal 2011. We are raising our financial forecast again for the fiscal year, and now expect to grow revenues in excess of 36% year-over-year while increasing non-GAAP net income by more than 86% year-over-year. Our wind power segment continues to be the primary driver of this strong growth today.

However, our second fiscal quarter officially marked the coming of age of superconductors and the start of our third wave of growth. The timing couldn't be better. Overtaxed power grids around the world are being challenged like never before . Here in the US, the requirements for a modern intelligent grid to meet the needs of our -- for more renewable energy, and to enable widespread adoption of plug-in electric vehicles is becoming critically important, simply as a practical matter. In China, the country's booming economy has spawned booming power demands. And although they don't have the power grid needed to meet this growing demand, the Chinese are actually taking action to build out a very modern grid. Superconductors are part of the solution.

In India, where we already have our foot in the door through our wind business, power outages occur literally every day in major cities because of their incredibly weak grid, providing tremendous growth opportunity for our company. And in Korea, a highly coordinated, smart grid rollout plan is underway and we are right in the middle of it. Meanwhile, countries around the world continue to promote renewable energy and more specifically, offshore wind power as a means to increase energy independence and reduce pollution.

Superconductors can and will play a pivotal role in meeting all of these challenges. And AMSC will continue to lead the charge. American Superconductor is the world's leading producer of high-temperature superconductor or HTS wire. In early October, we introduced a brand-name for this wire, Amperium. The name, Amperium, reflects this product's ability to conduct more than 100 times the electrical current or amperage of a copper wire of the same dimensions. In fact, at transmission voltages a single Amperium wire can carry enough electricity to power more than 10,000 US homes, Amperium wire truly the optical fiber of power.

During the second quarter, Korea's LS Cable, the world's third largest cable manufacturer, placed an order with us for 3 million meters of Amperium wire. In US terms, that's nearly 10 million feet of wire. They plan to utilize this wire for AC and DC superconductor power cable systems for the Korean and global marketplaces. Shipments of Amperium wire to LS Cable are scheduled to begin in 2012, to meet initial demand for Korea's smart-grid infrastructure buildout.

But this is just the tip of the iceberg, in terms of what we see as the business potential here. Earlier this year, we formed a strategic alliance with LS Cable to work together to commercialize at least 50 circuit kilometers of superconductor cable systems by the end of 2015. An additional 3 million meters of Amperium wire, at a minimum, would be required to meet this initial objective. Beyond Korea, there are many superconductor power cable opportunities we have been focused on. In fact, we are interacting today with customers on well over a dozen superconductor cable projects in North America, Europe, and Asia. For these projects are involved in ranges from managing an entire project which would produce the greatest amount of revenue and gross profit dollars, to being a wire supplier only, which involves less revenue but would generate a higher gross margin.

Today, we have about $80 million in total superconductors backlog, on top of that the additional pipeline of projects we are engaged in amounts to more than $300 million of revenue just for our scope of supply. We expect this pipeline of projects and wire orders to drive the continued need for expansion of our Amperium wire manufacturing operation, and to reduce the losses in our superconductors business over the next few years. In addition to this pipeline of business for power grid applications, we expect our Sea Titan wind turbine next generation offshore wind turbine platform to also lead to substantial growth for our superconductors business. The Sea Titan incorporates our Amperium wire and a generator to effectively double the power rating of today's largest commercial wind turbine to 10 megawatts or more. Just what the market is demanding to reduce wind farm project costs and accelerate returns on investment, especially for offshore wind.

Sea Titan continues to garner more and more attention around the world. In fact, Sea Titan and superconductor wind turbine generators were among the hottest topics at the China Wind 2010 trade show in Beijing a few weeks ago. Given China's huge potential offshore wind market, we expect China to be one of the primary opportunities for Sea Titan superconductor wind turbines. We are continuing discussions with potential Sea Titan and generator licensees and aim to have our first licensee on board over the next several months.

Now let's take a look at the broader wind market we are addressing today. AMSC's success the past few years has been tightly linked to China's wind power market which continues to grow robustly. China installed over 13 gigawatts of wind power in 2009 raising total installations in the country to over 25 gigawatts. In 2010, we are expecting at least another 16 gigawatts to be installed, bringing the total installations to more than 40 gigawatts. This expectation was recently confirmed by the World Wind Energy Association, this group reported that nearly eight gigawatts of wind power was installed in China during the first six months of 2010 which will exceed the total amount of wind power installed in the US for all of 2010. As of June 30, 2010, the World Wind Energy Association estimates that the US led the world with a total installed base of 36.3 gigawatts of wind power. While China was coming on strong with an installed base of 33.8 gigawatts by June 30. As a result, China is likely to surpass the US as the world's largest wind power market this year. Looking further out, industry analysts generally expect that China will achieve a total installed base of 200 gigawatts or more of wind power by 2020. And some estimates have it as high as 300 gigawatts.

With five Chinese wind turbine manufacturers as AMSC customers, we are benefiting in a substantial way from this growth and expect to continue to benefit for many years to come. One important reason for this, is our close relationship with Sinovel. Sinovel, of course, is AMSC's largest customer, China's largest wind turbine manufacturer, and the third largest wind turbine manufacturer in the world, based on 2009 data. A host of new information was issued by Sinovel when it filed for its IPO on the Shanghai exchange in late October. For example, Sinovel's draft prospectus said that they had 10 gigawatts of backlog in place as of June 30, 2010. And that they aim to produce 10 gigawatts of wind power annually within the next five years. Over this past summer, Sinovel's 3 megawatt wind turbines, which were designed by AMSC-Windtec, began powering China's first offshore wind farm located near Shanghai.

Since then, Sinovel has won 60% of a new one gigawatt offshore wind farm tender in China. These wind farms will utilize Sinovel's 3 megawatt wind turbines and will increase Sinovel's total installed base of offshore wind power to nearly a gigawatt. As a reminder, the world's total installed base of offshore wind power at the end of 2009 was only two gigawatts. We, of course, will continue to do everything we can to support Sinovel in its mission to be number one globally. Through June 30, 2010, we have helped Sinovel successfully scale production of 1.5 megawatt and 3 megawatt wind turbines that utilize doubly fed induction drive trains, and we have already long-term contracts in place with Sinovel for the supply of core electrical components and control systems for those wind turbines. More orders for 3 megawatt wind turbine core electrical components and control systems are expected from Sinovel in the next 6 to 12 months. In addition, at the China Wind Show a couple weeks ago, Sinovel announced that it had successfully completed the assembly and factory test of its first doubly fed induction 5 megawatt wind turbine and will be erecting its first prototype later this year.

Sinovel's 5 megawatt turbine was of course designed by and codeveloped with AMSC. So we also expect a first volume order for 5 megawatt core electrical components over the next 6 to 12 months. And the future growth of the Sinovel AMSC juggernaut doesn't stop there, by any means. A few months ago, we disclosed that we are working with Sinovel on a whole new range of multi-megawatt wind turbines that incorporated different drive trains. At that time Sinovel had asked that we refrain from describing the details of these wind turbines for competitive reasons. However, in Sinovel's draft prospectus, more information was revealed. The 1.5 megawatt, 3 megawatt, and 5 megawatt wind turbine that Sinovel has produced thus far, all incorporate doubly fed induction drive trains which today are the predominant wind turbine platform in China and around the world.

In order to effectively serve the global market, however Sinovel plans to offer an array of both drive trains and power ratings. To help Sinovel achieve this objective, we are now working with them to develop a doubly fed induction wind turbine with an even higher power rating of 6 megawatt which Sinovel sees as a way to further differentiate itself in the all-important Chinese wind market. In addition, we are now developing for Sinovel 2, 3, 5 and 6 megawatt systems that incorporate state-of-the-art full conversion drive trains. Geared, full conversion drive trains are typically more efficient, more readily compliant with global grid connection standards, and often have a lower cost of energy depending on site conditions and wind speed than doubly fed induction drive trains. Sinovel sees the addition of turbines with full conversion drive trains as a way to further differentiate itself in the Chinese market, as well as enabling it to provide additional highly competitive products to the Western wind market. As many of you know, we have always been Sinovel's preferred supplier of core electrical components and control systems. For all of the new full conversion wind turbine platforms, however; AMSC is the exclusive supplier of core electrical components and control systems. So, we expect to continue to grow our sales to Sinovel for years to come.

Beyond Sinovel, we're seeing more revenue streams come online as newer wind turbine licensees begin to ramp production. This list now includes India's Inox Wind. During the second fiscal quarter, Inox ordered an initial 17 full electrical control systems from AMSC for its first doubly fed induction, 2 megawatt wind turbines. Under our license agreement, Inox has the right to manufacture and sell these wind turbines globally, and they already have started volume production. Hyundai Heavy Industries in Korea is another partner from whom we expect to see substantial growth going forward. In fact, today it was announced that Korea is investing approximately $10 billion in a 2.5 gigawatt offshore wind farm. We believe Hyundai is well-positioned to be one of the wind turbine producers for this massive wind farm in Korea. You can expect to see new ordered from Inox, Hyundai, and other AMSC wind tech licensees in the quarters ahead which will continue to help diversify our revenue streams. Now, let me turn to our continuous and relentless focus on innovation across all of our product lines which is central to our strategy to continue growing our wind and grid businesses.

Our objective is to provide our customers with highly optimized, highly differentiated wind turbines in order for them to become and remain market leaders. Technological innovations are achieved at AMSC on a daily basis, of course, by our companywide team of highly talented engineers. However, we often also tap into and collaborate with other companies who have complementary technologies and products. Blade Dynamics is a great example of this. Blade Dynamics is a UK-based designer and manufacturer of advanced wind turbine blades. Using proprietary materials and structural technologies, this company has developed blades that can increase the efficiency and performance of multi-megawatt wind turbines while also reducing costs. In August, AMSC and Dow Chemical Company both took a minority stake in Blade Dynamics. In conjunction with these investments, the state of Louisiana provided Blade Dynamics with an incentive package worth up to $30 million. Utilizing this funding, Blade Dynamics recently opened a new production facility near New Orleans. Blade Dynamics will completely set this factory out in early 2011, and it will produce and qualify this factory's first production blades later in 2011. The company plans to begin volume production of its wind turbine blades in 2012. AMSC Windtec turbine licensees will have first access to these proprietary, competitively differentiated blades, which we believe will give them a clear market advantage.

We also believe that Blade Dynamics can provide blades and hubs suitable for our Sea Titan wind turbine. Blade Dynamics is just one part of a holistic effort we have underway at AMSC to continue enhancing our wind turbines from the ground or the subsea floor as the case may be all the way through the blades. The reason we are making investments like this is simple. By further optimizing and differentiating our customers turbines, we will be helping them capture greater market share, and in turn we will be receiving more orders for AMSCs power electronics and control systems. We are also expanding our capabilities on the grid side of our business. Over the past decade, our D-VAR solution has emerged as the de facto standard for grid interconnection of megawatt scale renewable power. The system is helping more than 70 wind turbines around the world connect to the grid, and we recently landed our first D-VAR order for a utility scale solar photovoltaic or PV power plant. We believe many more contracts like this will be coming thanks to our recently launched SolarTie Grid Interconnection Solution.

The SolarTie Solution combines two of our proven proprietary technologies, our power module power converters and our D-VAR solution into one package. In other words, this product inverts the direct current or DC power that you get from solar panels into the alternating current or AC power required by the grid. And it also provides reactive compensation and dynamic voltage control in order for solar PV power plants to meet grid interconnection standards. The end result is what we believe is the industry's first fully optimized solution for grid interconnection of utility scale PV power plants.

We are now pursuing our initial SolarTie sales and expect our first revenues from this product within the next 12 months. Industry analysts expect the market for utility scale solar inverters and grid interconnection solutions alone will exceed $2 billion by 2015. We expect to get more than our fair share of this market with SolarTie Solutions. So in summary, we are quite pleased with our financial results for the first, excuse me, second fiscal quarter, and we see further growth through the remainder of fiscal 2010 and beyond. Were also broadening our capabilities, our product lines, and addressable markets to ensure AMSCs strong track record of profitable growth extends for many years to come. And with that, let me turn the call on to Dave for our financial review.

Thanks, Greg and good morning, everyone. As you've all heard, AMSC delivered its strongest financial performance to date in the second fiscal quarter. We generated a 36% year-over-year increase in revenues and achieved our 15th consecutive quarter of sequential revenue growth. We also maintained solid gross and operating margins which helped us grow our earnings to a new record level. AMSC generated $101.5 million in revenues for the second quarter of fiscal year 2010. This is up approximately 4% from $97.2 million for the first quarter of fiscal 2010, and 36% from $74.7 million for the second quarter of fiscal 2009. Shipments of our wind turbine power electronic control systems and components to customers in the Asia-Pacific region accounted for the majority of this growth. We expect this market to continue to be very strong for us through the remainder of this year, next year, and beyond. Sales to Sinovel represented 79% of total revenues in the second fiscal quarter ,with wind representing 91% of total revenues.

Geographically, we generated 94% of our revenues outside of the US, so we certainly do not depend on the US and European wind markets which have been challenging for other companies in 2010. We do believe, however; that we can look forward to significant additional growth in our business when the US and European wind markets get back on track, as discussed by Greg earlier. Gross profit for the second quarter of fiscal 2010 was $41.3 million and our gross margin was a record 40.7%. This compares with a gross margin for the first quarter of fiscal 2010 of 40.1%, and a gross margin for the second quarter of fiscal 2009 of 38.9%. The sequential improvement in gross margin was primarily the result of a favorable product mix. As we have highlighted in the past, unlike many companies in the renewable energy industry, AMSC generates a majority of its revenues in Renminbi while costs associated with those revenues are split fairly evenly between the Renminbi and the Euro. So, a strengthening of the Renminbi in relation to the Euro and the dollar has a beneficial effect on our gross margin and profitability. We have hedges in place to provide a more predictable US dollar value for a substantial portion of our Euro denominated costs for our wind core component sales.

Approximately 67% of our estimated third quarter Euro cost exposure is hedged at a rate of approximately $1.27 per Euro. Net of hedging activity, gross margin in the second quarter was favorably impacted by foreign exchange, by approximately 10 basis points or approximately 1/6 of the gross margin improvement compared to first quarter. R&D expenses for the second quarter were $7.9 million, or 8% of revenue. This is an increase from $7.3 million, or 8% of revenue from the prior quarter, and from $5.4 million, or 7% of revenue for the second quarter of 2009. We plan to continue increasing R&D expenses as we bring new products to market, such as our Sea Titan superconductor wind turbine, SolarTie Grid Interconnections Solution, and PM3100W wind turbine power converter system. The same can be said for SG&A expenses, SG&A for the second fiscal quarter was $17.1 million, or 17% of total revenue. This compares with SG&A spending of $15.2 million, or 16% of total revenue for the prior quarter, and $12.7 million, or 17% of revenue for the second quarter of fiscal 2009. The sequential and year-over-year increases were driven primarily by headcount increases in support of our continued growth.

While we have grown our headcount in the past 12 months to support our growth, we have also continued to increase earnings. In fact, our net income per employee for the past 12 months is approximately $36,000, which is better than nearly all of our peers including GE, Siemens, ABB, SunPower and Itron. So while we continue to expand our operations, we are also doing so with a sharpe eye on the bottom line. For full fiscal year 2010, we continue to expect that operating expenses will increase in total, but will decrease slightly as a percentage of revenue compared to the prior year. AMSCs operating income for the second quarter of fiscal 2010 was $15.9 million, and our operating margin was 16%. This compares with an operating margin of 17% in the first quarter of fiscal 2010, and a 14% operating margin for the year ago quarter. The slight sequential decrease in operating margin was due to planned operating expense growth in the quarter.

In the longer-term, as already mentioned by Greg, we expect our consolidated operating margin to be well in excess of 20%. This will be achieved as we reduce our losses in superconductors, and as we achieve greater operating leverage going forward. We recorded other income of $2.4 million in the second quarter fiscal of 2010, compared to other income of $200,000 in the first quarter of fiscal 2010, and other expense of $900,000 for the second quarter of fiscal 2009. The sequential increase in other income was driven by net gains from balance sheet hedging activities in our Austria subsidiary and a balance sheet revaluation gain on our China books resulting from the recent strengthening of the Renminbi versus the US dollar. We've structured our business in China to enable us to deliver higher earnings as the Renminbi strengthens which is consistent with the consensus opinion of those who forecast exchange rate movements.

Our income tax expense for the second quarter of fiscal 2010 was $8.6 million, resulting in an effective tax rate of 46%. This is up from 44% in the first quarter of fiscal 2010 but down from 55% for the second quarter of fiscal 2009. The increase in our effective tax rate quarter-over-quarter is primarily the result of increased losses in the US, but we do not report a tax benefit on losses. In general, we would expect our tax rate to decline in future quarters as we increase our foreign profits and keep US losses relatively flat.

For the second quarter of fiscal 2010, AMSC reported GAAP net income of $10 million, or $0.22 per diluted share. This is up 9% from $9.2 million, or $0.20 per diluted share for the first quarter, and is an increase of over 130% from $4.3 million, or $0.10 per diluted share for the second quarter of fiscal 2009. We used non-GAAP net income, which approximates cash based earnings from operations, to track our financial progress and we report this metric each quarter. We also provide guidance for non-GAAP net income on an annualized basis. These numbers are reconciled to GAAP in tables at the end of our earnings press release. Our non-GAAP net income for the first quarter of fiscal 2010 was a record $14.6 million or $0.32 per diluted share. This is up 30% from $30 million or $0.28 per diluted share for the first quarter of fiscal 2010, and is up 68% from $8.7 million, or $0.19 per diluted share for the second quarter of fiscal 2009.

Looking for a moment at our business units. AMSC power systems contributed revenue of $98.5 million, or 97% of our second-quarter revenues. This is a 37% increase from $71.8 million in the year ago quarter. AMSC power systems generated operating income of $26.8 million and an operating margin of 27% for the second quarter. This compares with a 28% operating margin in the second quarter of fiscal 2009. Our AMSC superconductor segment contributed $3 million or 3% of revenues. AMSC superconductors generated $2.9 million in revenues for the second quarter of fiscal 2009. The operating loss in superconductors for the second fiscal quarter was $6.5 million, this compares with an operating loss of $5.6 million for the second quarter of fiscal 2009. The increased operating loss is primarily the result of higher HTS wire development costs. As a reminder, stock based compensation expense is not allocated to our reporting segments.

As of September 30, 2010, AMSC had $131.2 million in cash, cash equivalents, marketable securities, and restricted cash. This compares with $120.7 million as of June 30, 2010 and $155.1 million as of March 31, 2010. Our cash balance as of September 30 was reduced by $8 million in cash that we spent during the second fiscal quarter to purchase a minority interest in Blade Dynamics. Our days sales outstanding for the quarter increased to 84 days in the second fiscal quarter from 71 days in the first fiscal quarter of 2010. As a reminder, we use average Accounts Receivable to calculate DSO. The payments we receive from Sinovel increased in the second quarter compared to the first quarter, however; billings increased as well resulting in higher receivables compared to second quarter. Our days of inventory for the second quarter of 2010 increased to 69 days from 64 days in Q1 of fiscal 2010. This was primarily the result of inventory growth to support third quarter shipments.

Moving on to our financial forecast. Based on the orders we received in the second quarter, strong visibility into our business pipeline, and favorable foreign exchange tailwinds from the recent strengthening of the Renminbi, we are increasing our fiscal 2010 financial forecast for both revenues and earnings. Our revenue forecast for the full fiscal year has increased from a range of $420 million to $430 million to a range of $430 million to $440 million, representing growth in excess of 36% compared with fiscal 2009. We have 99% of the orders needed to reach the low-end of this guidance range either shipped or on backlog as of September 30.

As a result of our increased revenue guidance, our net income forecast for the full fiscal year has increased from a range of $39.5 million to $42 million or $0.85 to $0.90 per diluted to a range of $44 million $46.5 million or $0.95 to $1.00 per diluted share. And our non-GAAP net income guidance has increased from a range of $56 million to $58.5 million, or $1.20 to $1.25 per diluted share, to a range of $60.5 million to $63 million, or $1.30 to $1.35 per diluted share per diluted share. We continue to expect that Cap Ex will be in the range of $40 million to $50 million for the full fiscal year.

Looking forward to the second half of the full fiscal year, we expect continued sequential revenue growth with revenues up modestly in the third quarter and stronger growth for the fourth quarter. And we expect growth to continue in our next fiscal year because of our focus on the Chinese and broader Asia Pacific wind energy and power grid markets.

With that, we will be happy to take your questions. Natasha, would you please provide the instructions?

Certainly. (Operator Instructions) We'll take our first question from Colin Rusch with Thinkequity. Please go ahead.

Thanks so much and congratulations guys. Can you give us some additional detail on the dozen or so HTS projects you're working on and what stage of development your at and how many of those are in pilots, how many of those are in conversations stage, and how many are in full on shipment mode?

It's a variety of stages. Some are well advanced because we have been -- we were working on those in the US for example, before the Great Recession hit. And so we have made a lot of progress and we thought we were going to, in fact, wrap up those projects as an order in the last year or two. The recession slowed that all down but those are in an advanced stage.

One of those includes Project Hydra for the deployment of fault blocker cables in the grid in New York which was delayed because of the recession, but as I think we said on the last call, we and Con Ed and Department of Homeland Security have identified the new site and we're seeking financing and we're optimistic about that.

We expect that the State Grid in China is going to put out a request for bid for wire and cable systems in the next three, four months some where in that time frame. That has been under development by State Grid for a good year now, so that's coming to hopefully, a positive conclusion for our Company in the relatively near future.

There's some that have been worked in Europe for quite a long time now, so sites have been defined, site walk downs have occurred, and so it's a pipeline of $300 million plus in revenue for just our scope of supply, we expect that some of this will start hitting over the next year and beyond and start reducing our losses in superconductors.

Perfect. And then two questions on the solar business. Can you just give us initial expectations for sales in the solar business in calendar 2011, and by geography and then if you could talk about a little bit about the functionality of integrating your power grid with the communications systems for grid operators. If you've got anything thing really concretely in place there, in terms of transferring information and performance of those systems back to grid operators right now. Just how you expect the technology road map to play out over the next couple of years.

Well, Colin, I'm going to be nice to you here because you broke the rules, you asked a second question and a third one. But, SolarTie is a product that we said in our call earlier, we expect to get our first order in about a year. We certainly expect to see revenue in about a year let say, from SolarTie.

We already have our first D-VAR order we announced back in May for a solar scale form here in the US and all of that is based off of our D-VAR solution that we use for grid interconnection of wind farms. So we have highly differentiated product from those who just sell plain, old-fashioned inverters. Inverters to take DC and turn into AC, what's missing in the equation there for these large-scale utility scale that is, PV plat, is the reactive compensation and voltage control needed both on the grid side and on the solar farm side. We provide that through our D-VAR capability in terms of communications everything we put in a wind farm today is having all of the wind turbines communicating with each other. Our SCADA systems that we include in all of these systems, all of that experience base will be brought to bear in the solar farms. So that hope that helps on your question and we'll go to the next one.

(Operator Instructions) Our next question comes from the line of Jesse Pichel with Jefferies, please go ahead.

Good morning, Mr. Yurek, congratulations there on a strong quarter and multiple successes. I don't know if I can limit myself to one, but you have a lot going on.

Mr. Pichel. Pick a winner Mr. Pichel.

Has Sinovel booked this three megawatt order for the one gigawatt offshore program? Because the May press release seems to cover just the 1.5's. And can we expect that the Western traditional turbine makers may either license Sea Titan or at least buy the Amperium wire? And then, I do have a follow-up.

Let me take the first part of this and then I'll let -- ask Dan to take the second part on Sea Titan. Dan McGahn that is. So, yes Sinovel just won 60% of the one gigawatt tender, that offshore wind farm tender, that was -- occurred in China. 60% and 600 megawatts, all of that's going to be -- the three megawatt wind turbines that they have already deployed offshore in Shanghai. So its a highly successful product and that's what they are going to be deploying in the 600 megawatts of offshore in the next stage. Dan, there's a second question here on Sea Titan, what's the scope of supply basically, I think it is?

Hi, Jesse, you know we have a broad IPEA state when it comes to rotating machines using superconductors, so we're actively out promoting licensing that technology as well as scope of supply from us that could be, the wire, it could be value-added components that use that where, and we're looking also to couple the two together, so to take our scope of supply to superconductor components plus the converters. So we see our overall dollars per megawatt per turbine actually being able to increase with Sea Titan.

We talked a bit about China already on the call, but obviously there's going to be a need in Europe for offshore and America it if we ever get our act together and the Western companies show similar interest as the Chinese companies do today.

Next question, please

The next question comes from the site of Paul Clegg, with Mizuho, please go ahead

Hi guys, first of all congratulations on everything, you got a lot of stuff to be happy about this quarter. A question about the full conversion drives for Sinovel. How should we think about that in the context of your existing agreements with Sinovel? Is this kind of technology upgrade or diversification due that allows Sinovel to capture more market share and then you benefit from the volumes, or is there real revenue per turbine enhancement on your part?

It's both Paul. For the differentiated product that Sinovel, I think will allow Sinovel to capture more market share in China and certainly as they now go off into the Western world, I think most of you know that Sinovel just landed a $6.5 billion line of credit from a Chinese bank to expand offshore and it's going there. It's already has offices in Houston, and Toronto, and London, so this is going to be helpful to them to increase their market share offshore. From China that is. So the first part of the question was, lost it already.

Revenue per turbine enhancement

Oh yes. It's a revenue per turbine enhancement nominally because full conversion means that all of the electricity from the generator goes right through the converter. It's a higher power rating inverter system that has to be used here, control system as well, so we'd expect more revenue per turbine for full conversion. Next question please

Our next question comes from the site of Carter Shoop with Deutsche Bank, please go ahead.

Good morning, and congratulations on a nice quarter. I have one question, a couple different parts to it. The first part is, was there any noticeable shift at Sinovel in the quarter sequentially between the 3 megawatt and 1.5 megawatt shipments in the quarter, and then as a follow-up can you discuss your outlook for 3 megawatt turbines for the onshore market in China over the next 6 to 12 months, and then lastly is the current level of profitability, at least as it relates to gross margin, sustainable?

So, we're shipping core electrical components and control systems for both 1.5 megawatt and 3 megawatt on predetermined schedules, Carter, so there's been no shift from our contracts that are in place here. Of course you know, Sinovel has always surprised us by accelerating things in the past, but that's not the case right now, we're shipping on schedule for both of those.

As I said earlier in the call though, and I think this may be partly what you're getting at, and that is the new offshore tender that Sinovel won, 600 megawatt is all going to be 3 megawatt wind turbines, so as soon as those get going that will flood in off of the current orders and we said, we expect more orders for 3 megawatt wind turbines in the next 6 to 12 months. We think Sinovel has clearly stated it's also going to deploy 3 megawatt for onshore applications in China as well. I think that answers your question. The last part, Dan, you --

We're seeing a stronger trend, two, three megawatts in China, for onshore, just in general from the Wind Show and from all of our partners and you asked about the sustainability of the profit. I mean, that's the whole point. You heard in the last answer where we're looking at ways to increase the number of absolute megawatts globally that use our technology and we're trying to increase our dollars per megawatt as well and that all relates to increases in profitability.

Our next question comes from the site Carter Driscoll with Capstone Investments. Please go ahead.

Good morning, gentlemen. I was hoping you could maybe compare and contrast the RFP process as you begin to target the solar utility space, and obviously expand your developments in the smart grid. Maybe talk about timing, number of bidders, and the competitive environment between those two markets?

Between those two markets, that's an interesting question. So, look, we're really entering the solar large-scale, utility scale, solar PV sector. So, it's hard for us to say exactly what the timescale is going to be, but I can tell you that one of the reasons we're in this market or entering this market is because the developers of the solar PV farms, and even those who produce panels, and some of them are becoming developers of farms as well, have come to us and said, they don't have a solution out in the marketplace that's going to meet their needs. So that has driven us to take our expertise for wind farm grid interconnection and control systems and pull that together into SolarTie.

So, we feel we're in a very strong position, we do have to get our first alpha sites, and this is all in our press release that we put out about SolarTie, get those through the beta site stage as well, and then we expect to see our first revenue from SolarTie within about 12 months from now. So, then, at that time, we'll have a better idea about the cycle from initial contacts through booking and billing the SolarTie. In terms of the power grid, Dan, do you want to take a whack at that? It's a little bit different sector altogether. You used the term smart grid, but in fact we're talking about smart grid infrastructure, we don't make meters, I think everybody knows that, we do the real stuff that makes things work.

What you're seeing in solar and wind is the same theme that's happened on a different timescale. So, what we have experienced over the past decade with D-VAR and wind, we're trying to be in position to do that again with solar. So the bids out for solar, looking out in the future, are going to be in excess of 100 megawatt type projects and there seems to be a technology product gap there to have a solution that's really grid friendly to make all of that work.

When you look at it on the grid side for the wind products, those cycles all begin and end within about 12 months. We've been able to build a brand there where people come to us, turbine manufacturers come to us, developers come to us, as a requested solution many of the time. So, you're seeing a mature business now, 10 years in the making, on the D-VAR side for grid and for wind and we hope to try to repeat that with solar.

Our next question comes from the site of Vishal Shah with Barclays Capital, please go ahead

Yes. Hi. Thanks for taking my question. Two questions, basically on the Sinovel backlog, can you provide a breakdown between Sinovel and non-Sinovel? I think you said $80 million of backlog to superconductors, and then is your guidance implying sequential improvement in gross margins or operating margins in the third and fourth quarter? Thank you.

Hi, Vishal. This is Dave Henry. Your question on the backlog, we typically refrain from breaking out the components of our backlog, Sinovel is 79% of our revenues in the quarter, so you can presume that the majority of our backlog does relate to Sinovel. And as it relates to gross margin and our guidance, we don't guide forward gross margins. There was a question earlier about out are the gross margins sustainable. There are improvement opportunities that are there, that's why we're here, I think it's our job as a management team to do everything that we can to sustain and grow our gross margin. And so while I can't --I choose not to give gross margin guidance forward, I would say that there is opportunities though for continued gross margin improvement just from operationally as we look at our costs and as also the R&B continues to strengthen as well which is what everybody believes, that to be the case.

Our next question comes from the site of Theodore O'Neill with Wunderlich Securities, please go ahead.

Thanks very much. There's been a number of reports that there is excess capacity of wind turbine production in China. And it looks like the Chinese government is trying to promote the export markets for their manufacturers there, and given that you've got Windtec customers in other countries, India, Turkey, etcetera, how do you think this plays out? Does Sinovel's growth cannibalize sales you'd otherwise get in other countries, or do you think these -- they're all going to grow?

First of all, it's been part of a long-term plan by the Chinese government and Chinese companies state-owned enterprises to be very specific, it's all one team working together, and the long-term plan has been to establish a base -- a manufacturing base for wind turbines in China with the best technologies they could get from companies like Windtec. And once they have that base established and meeting their own needs, which is a continuing growth market, we just commented on the call it's going to be the largest I think in 2011, the largest installed base in the world. 200 gigawatts by 2020, maybe 300 gigawatts, according to some analysts, so a lot of growth in China here. The Chinese government recognized that it had something like 80 different wind turbine manufacturers that have popped up in the last five years in China and that's not sustainable even with a great growth market.

And so they have put in place some laws to whittle that down, probably get down to around a dozen or so, wind turbine manufacturers and certainly the licensees that we have, the five customers we have in China, I think are going to be part of that dozen or so as the smoke clears. And by the way, part of the way they're cutting this back is if you already don't have a wind farm that you're populating today with wind turbines, then you're not getting into the business, you're not getting the financing you need to get into the business and grow. You have to have at least a 2 megawatt wind turbines that you have already developed, and demonstrated, and deployed and so forth. So, that makes it tough for upstarts to get in. So China has really been shaping this up, they're creating a new export business, is where part of your question is going, and quite clearly the Chinese and for that matter, our customers in Korea, Hyundai Heavy Industries, in particular, have their sites set on the North American market, while the US and North America market becomes number two behind China next year, it's still a substantial market.

Yes, it's slowed down a lot in this last year but that is because of confusion in Washington and poor policies and what have you. I think that will get cleared up going forward, but even if it stays up 5 gigawatts a year, what I expect to happen is that the Sinovel's and the Hyundai's of the world are going to take market share away from the existing leaders in the Western markets. They're going to do that by having the best technology, high efficiency, best power curves in the industry, and they're going to have a very competitive price. Because they learned how to take cost out of these wind turbines, So I think that's the way it's going to go. Theo, in terms of where we have licensees in different countries, we've laid out the agreements with our different licensees and the India's, the Korea's, the China's and so forth, very carefully so we know where customers can tread and not tread, and I think that's all been worked out quite nicely. Let the games begin. Next question.

Our next question comes from the site of Ben Schuman with Pacific Crest Securities, please go ahead

Hi, guys. Can you clarify the difference between preferred supplier and exclusive supplier status at Sinovel? Specifically, if they're selling anyone else's core electrical components on the current dually fed design or if they plan to do so, and then also a quick update on Dongfang and the 2.5 megawatt design there would be helpful.

So, preferred supplier, we've always used the term right of first refusal, it turns out when you go back and look at the contracts, it actually says we are the preferred supplier, and so that's just a language thing there, Ben. So what does it mean? It means that we are going to be supplying the core electrical components and control systems for Sinovel as we have been. Now will they try to knock us out and maybe replace one of the core components with somebody else's core component?

We anticipate that companies will try that, we've said this many, many times in the past, we have designed the full system, the full electrical control systems such that it's virtually impossible to replace one of our components with another because we made them all work together. But we're paranoid enough to believe that maybe they can even solve that problem down the road, so we have encrypted, highly encrypted our software that runs all the control systems. We made that very tough and then we're still paranoid, say, maybe they can break the encryption codes and the way you really get around that to make sure you are the preferred and the only supplier is that you constantly innovate. So you go from a PM1000 Power Module to the PM3000W. We're now bringing out the PM3100W. You bring in low voltage ride through capability which we've now demonstrated in China, quite effectively.

And you bring on the next level of software, version 2.0, 3.0 and so forth. So you could constant innovate, which means you have kept your claws into your customers and they depend on you to be the preferred supplier. In the new contract, on the full conversion systems, we made sure the language was exclusive supplier. Because even with all those protections in there, I don't like the wording, so I like exclusive. Sinovel acknowledges that we should be the exclusive supplier and has so named us in the contracts. True and simple. Oh, Dongfang 2.5 megawatt. Dongfang is the third largest wind turbine manufacturer in China that's based on a 1.5 megawatt wind turbine, an earlier design they have from somebody else, they now have a 2.5 megawatt design from us which has gone through the early prototyping stages, it's been erected as a wind turbine, actually. And have since licensed from us a three megawatt design and a five megawatt design. Dongfang has now concluded that they are not going to push forward with the 2.5 megawatt design, they will probably put up a relatively small number of those, but they are going to focus on the 3 megawatt. Why? Because they know, to continue be a strong player in the Chinese wind market, they need to be in that 3 megawatt to 5 megawatt category for both onshore and offshore wind farms.

Our next question comes from the site of Jim Ricchiuti with Needham & Company. Please go ahead.

Thank you, Greg the superconductor backlog that you talk about. The $80 million, can you say how much of that in terms of revenue, will be recognized in the next 12 months, and roughly how many customers, and where do you see that backlog going over the next 12 months? Thank you.

Jim, no we can't break that out for you. We choose not to, I guess is the way Dave would say it. We just don't want to do that because that could lead pretty quickly to getting to numbers like dollars per meter that we have priced in for some of our customers and so forth and so for competitive reasons, we certainly don't want to put that out there. In terms of going forward off of that additional pipeline we are working on, I'm going to ask Dan to address that, get his perspective.

Yes, the things that we are working on, Jim, we are looking at projects that at the earliest would start a year or so out, so these are things from a backlog standpoint. We are trying to be the kind of contract writers that we have been, where we look at things that recognize revenue over multiple years. But it's still kind of early to start trying to put out a line in the sand for how we're going to build backlog on the superconductor side. What we really want to do is move that part of the business to be generating profit as soon as we possibly can.

So we'll look for, toward the end of this fiscal year, maybe at analyst day, to give you a better picture on that.

Our next question comes from the site of Stuart Bush with RBC. Please go ahead.

Hi guys. For the superconducting business, are we still working under the metric that 3 million to 4 million meters a year are needed for break even? When -- what years, with this LS contract in place, do we expect to see that? In the meantime, should we see actual losses grow with shipments to that LS contract before it reaches break-even point? Thanks.

Yes, 3 million to 4 million meters of wire shipped per year is the P&L break-even, the GAAP P&L break-even for our superconductors business, Stuart. So that remains the same, our cost models really haven't altered that metric. But I'm going to ask Dan to comment more broadly, because we don't intend to be just a wire supplier, I made these remarks during the call as well. But it's probably useful to emphasize that. Dan, do want to comment also?

Yes, these are the kinds of things we've talked about, analyst day, kind of positioning the superconductor part of our business. Everybody is always focused on the wire, but the business model at least in the near-term are to do a project installation of cable, we're not going to make the cable, but we are going to aid and facilitate and the installation of that.

Similar to what we do in the Windtec part of our business, we don't make the wind turbine but we certainly help a lot there to make those happen. We've said in the past, that we are targeting to get a couple to a few different cable projects that would generate profit out of the segment. We're positioning on the Sea Titan standpoint, that only within the low tens of units we would we get profitability out of the segment, and again for cable projects in the tens of miles, we get to profitability so we are trying to skin the cat a bunch of different ways. And the hope is that superconductors can actually be an accelerator for our overall growth to both the wind and the grid parts of our business.

So, Stuart, just one other thing. You'd asked whether increasing sales or as we ship wire to LS Cable, to meet that order, will our losses grow? To answer affirmatively to that question would mean that we are basically going to sell wire at below our variable costs and that's just not the case. Even though we are ramping up superconductors and we still -- we never sell our wire below variable costs. Do we have time for one more question?

Our last question comes from the site of John Hardy with Gleacher & Company. Please go ahead

Thanks for sneaking me in guys. I have a couple questions around the bookings number in the quarter obviously, it was very strong. I was wondering if you could give a little bit more detail on what's in that number and maybe asked a different way, how much of that is maybe bookings that should be recognized in the next 12 months and may be the same for total backlog? I think you have given that number before Dave.

We did say in the call that, as compared to our revenue guidance or revised guidance of $130 million to $140 million, we have 99% of that of the low-end of that range, either shipped or on backlog, so you can do some math there to figure out what is left in backlog for the rest of this fiscal year, but in terms of going out past that, we don't provide any guidance, I'm sorry with respect to how much backlog might be shippable in FY '11 for example.

Right. Thank you everybody for participating in the call today and your great questions. We are very excited and very proud that we have achieved 15 quarters of consecutive revenue growth along with profitable growth now, of course, we expect of course to continue that record and can't wait to tell you about number 16 and number 17 quarters in a row coming up soon. Thanks and make sure you go vote.

This concludes today's conference. You may now disconnect and have a wonderful day.