American Superconductor Corp (AMSC) 2010 Q3 法說會逐字稿

Good day, everyone. Welcome to American Superconductor's Third Quarter conference call. This call is being recorded. All participants will be in the 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. Jason Fredette.

Thank you. 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 the company's annual report on form 10-K for the fiscal year ended March 31, 2010 and subsequent reports 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 date subsequent to today.

While American Superconductor anticipates 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 would also 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.

Finally, I would like to note that we will be taking part in several upcoming conferences, including the Deutsche Bank Small & Mid Cap Growth Conference on February 16 in Florida, and the Jeffries & Company Global Clean Tech Conference in New York on February 23. The Deutsche Bank event will be webcast. More details on that will be published next week. With that, let me turn the call over to CEO Greg Yurek.

Thanks, Jason. Good morning toeveryone. We are proud to be reporting to you on our 16th consecutive quarter of revenue growth, and a record quarter of profitability here at AMSC. As you will hear from Dave Henry in more detail in a few minutes, we expect to end fiscal year 2010 in powerful fashion, as we achieve another quarter of sequential revenue growth with gross and operating margins at or near record levels in our fourth fiscal quarter. The strength of our third quarter results was driven not only by continued growth in our wind power business, which remains quite strong, but also by record power grid revenues.

Power grid revenues grew by 60% year-over-year, and represent a nearly 20% of our total revenues for the fiscal third quarter. We believe revenues for our power grid related products including D-VAR, D-VAR RT, SolarTie, Amperium Wire and Superconductor cable projects will become a much bigger contributor to our growth over the next 12 to 24 months.

Another feature of our third quarter was that virtually all of our revenues and orders for the third fiscal quarter were from outside the United States. That perhaps should not come as a surprise, because we are a multinational power technologies company with a focus on the wind energy and power grid markets, and we are, moreover, specifically focused on these markets in China and other fast-growing economies in the Asia Pacific region. The corollary to that, by the way, is that we are not dependent on the wind energy and power grid markets in the US and Europe, which have been in the doldrums over the past couple of years. We expect the US and European wind and grid markets to revive and grow quite attractively in the years ahead, for right now our focus must be on China and other fast-growing economies in the Asia Pacific region, continuing our strategy of the last six years.

In 2005, we had already developed and begun implementing our globalization plans and strategy to penetrate the Chinese wind energy and power grid markets. Since that time, we have set up separate divisions in countries around the world that are each headed by a local general manager from the country, and are staffed by engineering, sales and field service personnel and, in the case of China, manufacturing personnel, to serve those local markets. As simple as it sounds, American companies do not always take this approach, but we believe this is clearly the best strategy to succeed in local markets around the world.

Today, in fact, a majority of American Superconductor's 850 employees are located outside the US, enabling us to be well positioned to attack the global opportunities in the wind energy and power grid sectors country by country. The first significant leg of growth emerging from our globalization strategy has been in the wind energy market. Here we have aligned ourselves with a dozen wind turbine manufacturers in six countries, again primarily in the Asia-Pacific region, by licensing wind turbine designs to them or co-developing wind turbine platforms with them. The key steps in the strategy are to fully support each new licensee by helping them build the first prototype wind turbine, helping them localize their supply chain and getting them into volume manufacturing, when our sales start to take off. About half of our current wind turbine licensees will be in volume production in 2011, and in 2012 virtually all of our licensees are expected to contribute meaningful revenues to AMSC, some from multiple wind turbine platforms.

Of course, our largest geographic market, from a revenue perspective today, is China, where the wind market continues to grow. According to the Chinese renewable industry's association, China installed over 16 gigawatts of wind power in 2010, a new record, up from a little over 13 gigawatts in 2009. To put this in perspective, the 16 gigawatts that China installed in 2010 roughly equaled the amount of wind power that was installed everywhere outside of China, and was triple the amount that was installed here in the United States. This enabled China to surpass the US as the world's largest adopter of wind power, with total installations of approximately 42 gigawatts, compared with 40 gigawatts here in the US. So it's quite obvious that China is the market to be in from a renewable energy perspective, now and into the future. With six Chinese wind turbine manufacturers on our customer roster, AMSC is a key enabler and beneficiary of China wind.

We believe 2011 will be another record year for the Chinese wind market, and even though the amount of wind turbines installed in China may increase only moderately year-over-year, we believe our rate of growth will be higher, because we expect to be taking more market share each year going forward. Today AMSC's power electronics and control systems are contained in roughly 25% of the wind turbines produced in China. In the years ahead, we believe we can grow our market share in China to 50%. In doing so, we should see our global market share grow from about 10% today to more than 20% in the years ahead.

One way that we expect to capture a greater share of the market in China, specifically, is through our largest customer, Sinovel. Sinovel ranks third in the world in terms of wind turbine production, and they just completed a successful IPO on the Shanghai Exchange, raising $1.4 billion. Sinovel's stated use of proceeds from its IPO is to help it fuel its production of multi-megawatt wind turbines that were developed with AMSC and powered by AMSC power electronics and controls.

We expect to close follow-on orders from Sinovel in the next three to nine months for three megawatt and five megawatt wind turbine core electronic components and control systems, which bodes well for our business later in fiscal 2011 and beyond. We believe Sinovel is well positioned to capture a market share north of 30% in China in the years ahead. Sinovel has, in fact, stated publicly that it aims to be the number one wind turbine manufacturer globally in a few years and, of course, we will do all we can to support their growth plans both within China and in western markets.

Beyond Sinovel, we expect to see an increased revenue contribution from Chinese customers such as XJ Group and Shenyang Blower Works, which are scaling production of AMSC-enabled wind turbines today, and from Dongfang Turbine Company, which should start producing three megawatt wind turbines late this year.

Then there is our newest wind turbine licensee, Beijing Jingcheng New Energy, or JCNE. This company has been producing wind turbines in China for several years under a licensing agreement with a European company. Under the contract that we signed with JCNE in December, we have licensed four new proprietary wind turbine designs to them, two-, three- and five-megawatt full conversion systems and a three megawatt turbine employing our unique SuperGEAR drive train. JCNE plans to begin production of its two megawatt this calendar year, and its three-megawatt full conversion wind turbines soon thereafter. Look for that first production order to AMSC for full electrical control systems for JCNE later this year.

Looking outside of China, we closed orders in the third fiscal quarter with Hyosung Heavy Industries in Korea and with Inox Wind of India for core electronic components and control systems for their initial wind turbine production runs. And, by the way, with Hyundai Heavy Industries in Korea, not to forget them, we would expect follow-on orders from them in the relatively near term as well.

So, while revenues remain concentrated with one customer today, we believe the growth in our sales to additional wind turbine licensees in the next year and beyond, and the growth of our power grid sales going forward, will lead to Sinovel being well under 50% of our total sales within the next several years. This forecasted decrease in the amount of our sales to one customer is tied quite directly to the plans we are implementing to accelerate our growth to $1 billion in revenue, annual revenues, with operating margins in excess of 20%.

Our plan has been to achieve these financial metrics in fiscal year 2015. However, with the strong technology and business platforms we have established, the successful equity offering we completed in November 2010, and the new growth strategies we are implementing, we believe we have a pathway to shave at least one year off that plan. We will share more details of our plans with you on this front during our next earnings call, and at our analyst day, both of which we expect to be in May.

Now, however, let's touch briefly on some of the growth strategies we have in mind. As stated earlier, we expect growth in our power grid sector, which has picked up nicely, to continue in the years ahead. We see great opportunities for power grid sales in the Asia-Pacific region generally going forward. However, we believe the China power grid market is going to be especially important for us. As the world's biggest adopter of renewable energy, China is facing significant grid interconnection issues that we are well positioned to address.

Our initial D-VAR installations in China are performing well, and we are pursuing additional business in this area for both general power grid use and for grid interconnection of wind farms. Furthermore, we believe China could adopt new low-voltage ride through, or LVRT, requirements in 2011 that would present us with a great incremental power grid sales opportunity in the year ahead. And as China moves to install large-scale solar PV farms, we believe there will be significant growth opportunities for our SolarTie grid interconnection solution in that country.

Superconductors, which are now coming of age, are also expected to play a pivotal role in our next phase of growth. We spoke last quarter about our first commercial-volume Amperium wire order from LS Cable in Korea, and the $300 million in additional Amperium wire orders and cable projects that we see in the pipeline over the next few years. We believe that Korea may well be the first country to deploy superconductor power cables on a grand scale, and our AMSC Korea team is in hot pursuit of that opportunity.

However, the superconductor orders pipeline also includes a project with China's State Grid Corporation, which operates 88% of China's power grid. State Grid plans to install its first superconductor power cable in the Chinese grid by the end of 2012. We believe State Grid will have a bid spec on the streets soon for this power cable and that we will know the results of their bid process in 2011. So, watch for this as a significant benchmark for the superconductor industry and for American Superconductor.

So, in terms of superconductor power grid opportunities, the game's afoot. There is a lot of bid activity going on around the world in China, Korea, Europe and the US, and we are very excited about superconductors for power cables really taking off this year in terms of new orders and cable projects getting underway. Now let's not forget that beyond power cable order opportunities, there are -- we are also actively pursuing our first SeaTitan superconductor wind turbine licensee. Discussions are ongoing, and we are optimistic we will close our first licensee in the not too-distant future.

In addition to the organic growth strategies I've touched on, we also believe there are opportunities to accelerate our revenue and profit growth inorganically. Blade Dynamics is a good example.As you may recall, we made a minority investment in this company in 2010, alongside Dow Chemical Company. Blade Dynamics is executing its business plan on schedule and has started adding staff at its new manufacturing plant in Louisiana. We believe Blade Dynamics' proprietary blade technology will help our wind licensees gain market share faster and, in turn, drive higher sales volumes for our wind turbine power electronics and controls.

We also have a minority investment in Tres Amigas, LLC. We increased that investment by $1.8 million just a few weeks ago and have committed to invest another $1.8 million, subject to Tres Amigas meeting certain milestones in the months ahead.Tres Amigas has garnered international attention for its plan to tie together America's three power grids for the first time ever. And, it has assembled a team of partners and vendors that resembles a who's who of transmission, including Burns and McDonald, CH2M Hill, Alstom, LS Cable, Nexans and, of course, American Superconductor. All of us are working aggressively to get this project under way, and we are making good progress.

This would be a boost for our nation's energy sector because, quite simply, without transmission projects like Tres Amigas, the vision of generating a substantial amount of our electricity from clean energy sources simply cannot be met. We believe strategic investments such as these will help speed the adoption of AMSC solutions and contribute excellent bottom line returns over the long term. We will, of course, also continue to explore opportunities to make additional strategic acquisitions that would be accretive and could help us broaden our product portfolio and the customers we serve.

So, fiscal 2010 has been a tremendous success thus far. We look forward to closing the year in strong fashion and are working aggressively to meet our objective of achieving $1 billion in revenues with operating margins in excess of 20% within four fiscal years. Now, let me turn the call over to Dave, who will review our third quarter results in a lot more detail. Dave?

Thanks, Greg, and good morning, everyone. We are happy to be speaking to you about a robust third fiscal quarter at AMSC. This marked our 16th consecutive quarter of sequential revenue growth, and was also a record earnings quarter. In fact, our net income for the third fiscal quarter more than tripled year-over-year. Revenues for the third quarter of fiscal year 2010 were a record $114.2 million. This is up approximately 12% from $101.5 million for the second quarter of fiscal 2010, and 42% from $80.7 million for the second quarter of fiscal 2009.

While shipments of wind turbine power electronics and control systems accounted for the majority of our year-over-year revenue growth, our power grid solutions drove the majority of our sequential revenue growth. As Greg mentioned, we expect to see continued strengthening of our power grid-related sales in the years ahead. We generated approximately 82% of our third quarter revenues in the wind power sector, with essentially all of the remainder coming from our power grid solutions and projects. We generate the vast majority of our revenues outside of the US.In the third fiscal quarter, we generated 97% of our wind energy and power grid revenues outside of the US, with the remainder essentially coming from superconductor projects.

Sales to China's Sinovel Wind represented 73% of total revenues for the third fiscal quarter, down from the previous quarter because of the increase in power grid revenues in third quarter compared with second quarter. Our backlog as of December 31, 2010 stood at approximately $883 million, down from $956 million as of September 30, 2010, and up from $546 million as of December 31, 2009.As we said in the past, that due to the long-term nature of many of our customer contracts, bookings tend to be lumpy on a quarter-to-quarter basis. In the third fiscal quarter, our bookings were in excess of $50 million.

We also reversed approximately $20 million worth of backlog related to a core component contract with one of our wind-tech licensees, Ghodawat, since we no longer expect them to enter volume wind-turbine production, due to organizational changes within that company, even though the contract remains in place. We expect to enter our new fiscal year 2011 on April 1, 2011 with a strong total backlog, will which give us very good visibility to fiscal 2011 revenues, and beyond.We plan to provide our guidance for fiscal 2011 when we provide our results for the fourth quarter and full fiscal year 2010 in May.

Gross profit for 2010 was $46.5 million and our gross margin was 40.7%, which compares to 40.7% in the second fiscal quarter and 37.5% for the third quarter of fiscal 2009. Because of our ongoing hedging activities, changes in exchange rates had only a minimal impact on gross margin in the third fiscal quarter. Approximately 67% of our forecasted Euro cost exposure in the fourth quarter, related to wind core component sales, is hedged at a rate of approximately $1.32 per Euro, compared to a blended rate of approximately $1.28 per Euro in the third fiscal quarter.

A favorable product mix from higher wind core component shipments is expected to offset any foreign exchange headwinds with respect to gross margin in the fourth quarter. R&D expenses for the third fiscal quarter were $9.1 million, or 8% of revenue. This compares to $7.9 million or 8% of revenue, for the second quarter of fiscal 2010, and $6.4 million, or 8% of revenue, for the year-ago quarter. SG&A expenses for the third fiscal quarter were $15.6 million, or 14% of total revenue. This is down from $17.1 million or 17% of total revenue for the second quarter of fiscal 2010, and is up from $12.9 million or 16% of revenue, for the third quarter of fiscal 2009.

The sequential decline was primarily the result of lower stock compensation expense related, in part, to annual restricted stock grants to our board of directors in the second fiscal quarter. Our expectation continues to be that our combined R&D and SG&A expenses, as a percentage of revenue in fiscal 2010, will be lower compared to the prior fiscal year. Operating income for the third quarter of fiscal 2010 was $21.5 million, and our operating margin was a record 18.8%. This compares with an operating margin of 15.7% in the prior quarter, and 12.9% for the third quarter of fiscal 2009. Longer term, our intent is to drive our operating margin well in excess of 20% as we achieve greater operating leverage and reduce our losses in the superconductors business.

We reported other income of $2.1 million in the third quarter of fiscal 2010. This compares with other income of $2.4 million in the second quarter of fiscal 2010 and $200,000 for the third quarter of fiscal 2009. Other income recorded in both the second and third quarters of fiscal 2010 was primarily due to net foreign exchange translation gains. Our income tax expense for the third quarter of fiscal 2010 was $7.8 million, equating to an effective tax rate of 33%. Our effective tax rate is down significantly from 46% for the second quarter of fiscal 2010, and 52% for the third quarter of fiscal 2009. The sequential decline in our effective tax rate in the third fiscal quarter was due to a particularly strong revenue quarter for our D-VAR product line, which resulted in lower losses in our US operations.

We expect higher US losses in the fourth fiscal quarter due to a more normalized level of D-VAR revenues, and as a result, we expect an increase in our effective tax rate in the fourth fiscal quarter compared to the third fiscal quarter. For the third quarter of fiscal 2010 we reported net income of $16 million or $0.33 per diluted share, a new company high. This compares with net income of $10 million or $0.22 per diluted share for the second fiscal quarter, and is more than triple the $5.2 million or $0.11 per diluted share that we reported in the third quarter of fiscal 2009.

As Jason noted at the outset of the call, 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 third quarter of fiscal 2010 was $19.8 million or $0.40 per diluted share. This is a significant increase from our second fiscal quarter non-GAAP net income of $14.6 million or $0.32 per diluted share and our non-GAAP net income of $9.1 million or $0.20 per diluted share from the year-ago quarter.

In our business units, AMSC Power Systems contributed revenue of $112.1 million or 98% of our third quarter revenues, This is a 46% increase from $77 million in the year-ago quarter. AMSC Power Systems generated operating income of $31.8 million, resulting in a 28% operating margin for the third fiscal quarter. This margin level is up from 26% for the third quarter of fiscal 2009. Our AMSC Superconductor segment generated revenues of $2.1 million, or 2% of our third fiscal quarter revenues, which is down from $3.6 million for the third quarter of fiscal 2009. The decrease in revenues was due to a large wire shipment in the prior year quarter.

The operating loss at AMSC Superconductors for the third fiscal quarter was $6.9 million. This compares with an operating loss of $5.9 million for the third quarter of fiscal 2009. The increased operating loss in third quarter of fiscal 2010 is due primarily to lower revenues. As a reminder, stock-based compensation expense is not allocated to our reporting segments.

As of December 31, 2010, AMSC had $260.5 million in cash, cash equivalents, marketable securities and restricted cash. This compares with $131.2 million as of September 30, 2010 and $155.1 million as of March 31, 2010. A follow-on stock offering that we completed in November 2010 drove the sequential and year-over-year increase.

I would like to take a moment and address our accounts receivable. For most of this fiscal year, Sinovel has been paying us between 60 and 90 days after shipment. All shipments to Sinovel during the third quarter occurred within the last 60 days of the quarter. So, while DSO, based on average accounts receivable, increased from 76 days in the second fiscal quarter to 83 days in the third fiscal quarter, payments have not been delayed despite the reported increase in accounts receivable. So far this quarter we received $30 million from Sinovel and more is expected soon.

Please note that our accounts receivable and DSO includes the effect of a reclassification during the quarter of value-added taxes, or VAT, from accounts receivable to other current assets. This was done to in order to more closely align accounts receivable with reported revenue as we do not record any revenue related to VAT. Prior amounts have been reclassified to conform to the current year presentation. Reduced inventories as a result of strong D-VAR shipments in the quarter droves days of inventory down to 55 days in the third fiscal quarter, from 69 days in the prior quarter.

Now let's discuss our latest financial forecast for fiscal 2010. Our revenue forecast range for the full fiscal year remains unchanged at $430 million to $440 million. We are, however, increasing our forecast for net income from a range of $44 million to $46.5 million to a range of $48 million to $50 million. This would enable us to deliver fiscal 2010 diluted earnings per share of between $0.99 and $1.04, which is higher than the $0.95 to $1 per diluted share that we forecasted last quarter. This is despite the dilutive impact of our recent stock offering. Our non-GAAP net income guidance has also been increased from a range of $60.5 million to $63 million or $1.30 to $1.35 per diluted share, to a range of $64.5 million to $66.5 million or $1.33 to $1.38 per diluted share. This guidance implies a forecast of fourth quarter non-GAAP net income in a range of $17.2 million to $19.2 million or $0.32 to $0.37 per diluted share.

It is important to note that we expect that both gross and operating margins in the fourth fiscal quarter will be at or near record levels on record revenues. Below the operating line, we are forecasting lower foreign exchange gains and a higher effective tax rate in the fourth quarter.

Lastly, of course, our share count in the fourth fiscal quarter will increase compared to third quarter, as it will fully reflect the 4.6 million shares issued in our recent stock offering. Roughly half of the 4.6 million newly issued shares were included in our third quarter weighted average share count. Finally, we continue to expect that CapEx will be in the range of $40 million to $50 million for the full fiscal year. With that, let me turn the call over to Alicia, who will provide the instructions for our question-and-answer session. (Operator Instructions) .

We will take the first question from Jeremy Hellman from Divine Capital Markets.

Hello, good morning everybody. Can you guys hear me okay?

Yes.

A couple of the questions I had, you actually touched on in your comments Greg. A question for David. With respect to the power grid segment stuff, do you anticipate breaking that out onto its own line any time soon?

I guess the question is, in terms of reporting, do we expect that we will change our segments any time soon? I guess -- the answer to that is no, there is not an anticipation that we'll change our segments at this time.

By the way, I want to point out that Dan McGahn, president and chief operating officer is also here in the room so I may direct a question or two to him as we go through the call.

Our next question comes from John Hardy from Gleacher & Company.

Thanks for taking the question. Congratulations on another good quarter.

Thank you.

I wanted to go in a little bit more -- I know it's pretty far out there, but the $1 billion target for 2014. Again I know it's early, but I was wondering if you could give us some detail on what you think the breakout there will be between HTS wind and ancillary grid business like D-VAR and that stuff.

We won't give a detailed breakout on that, to be sure, but we pointed out in the last few months that, for example, in our wind growth wave, as SeaTitan starts to make an impact there in the outer years of that five-year plan, it will accelerate the wind segment, the wind growth wave as we call it.

And I think the bigger one is going to be with superconductors. Superconductors in terms of cables for power grid sectors are really going to accelerate the power grid sector. Power grid, as I mentioned, includes not just the Amperium wire and superconductor power cables but D-VAR, D-VAR RT and SolarTie, which is a new product. So with SolarTie coming in, here, sales starting up as we've always said, in 2012 it's going to be -- we think -- a significant contributor to that.

We think, as I mentioned in the call, with new standards coming into the wind arena, particular in China this year for low-voltage ride through, we believe we have the right solution for that and there will be a nice uptick in our revenues associated with low voltage ride through sales. Those are some of the contributors here, but the big contributor over the next few years is going to start to be superconductors, to that $1 billion in our five-year plan.

The other thing to note, too, as we did mention in the call, that we do expect by the time you get up to that point in time, Sinovel is well below 50% of our total revenue.

Of course, we talked also in this call about shaving a year off of that five-year plan, and I'm not going to get into more specifics on that, but we listed in my remarks some of the ways we will be doing that, and we feel confident that we will be able to, in fact, achieve that $1 billion in revenue. I think it's very important to add that's with an excess of 20% operating margins in that four years or less from now.

We will take the next question from Anthony Kit from Barclays Capital.

Hello?

Mr. Kit if you can please reprompt.

Let's move on to the next one, Alicia.

Our next question comes from Timothy Arcuri from Citi.

A couple quick things. Dave, what do you think the receivables balance will be, given the payments that you've gotten in this month, what will the receivables balance be at the end of the March quarter? Because last time you got some payments in the following month, DSOs still went up, so I'm curious what you think the balance will be. Secondly, last year you guys tightened the range for the last fiscal quarter of the year to about $3 million, but it's much bigger than that. This year it's about $10 million, so you didn't tighten the range. Is there any reason why?

The first question related to the AR balance, we are not guiding to what our balance is going to be on that, but I guess I will tell you, that if you look back in history, and you look at our operating cash flows, there seems to be a seasonal pattern emerging with our operating cash flows. I can go back two years and point to the fact that first and third quarters we always have a down quarter for operating cash flow, and then that recovers in the second and fourth quarter. If fourth quarter were to follow that seasonal pattern, I imagine that will be driven by accounts receivable collections, and so if we are able to do that, then the result would be lower accounts receivable. That is only if the -- if that -- if the seasonal trend were to continue, and we're not providing any guidance to that.

Tim, this is Greg. With respect to your second question, if you take the midrange of the guided revenue, it's about 38% growth in revenue year-over-year. We think that is pretty strong growth, so we are very happy with that. By the way, the earnings, non-GAAP earnings per share, non-GAAP earnings for that matter, is about 100% growth year-over-year. We think this is a spectacular year for us, and as I said the game is afoot. We are looking forward to the next year and the next few years thereafter to continue this very fast growth rate.

Our next question comes from Ben Schuman from Pacific Crest Securities.

Hello, guys. Can you talk a little bit about why you decided to wait until May to give guidance for the out year, given that the last couple of years you guys have come out and given some directional guidance a little bit earlier than that?

Well, I think that's--You said the key word, there. In the last few analyst days, we've-- maybe the last three, perhaps, we have given a sense of direction, because I think it was in the earlier stage of the company. We wanted to give some idea that we were going to be growing and, you know, that that was important, we thought, at that time. What we found is, because of that, we subsequently got punished because we didn't up our directional -- sense of direction on the revenues.

Last year we said we would achieve over $400 million and we left it at that and got punished because of it, so it's not good for the shareholders to do that, so we decided let's get the year done with, let's go into the year-end earnings call, and then we'll go right into analyst day and we can really dig into the strategies, our numbers, whatever else we need to cover at that time. We think this is the right way to do it.

We will take our next question from Theodore O'Neill from Wunderlich Securities.

Thanks. Congratulations on a good quarter. I loved your answer, there, Greg, to the last question. Just looking at the customer list for wind turbine customers--you had a pretty big ramp in terms of adding customers, and it sort of settled in here.

You've added JCNE but sort of lost Ghodawat. It looks like TECO and Model Energy maybe are pushing out a little bit. Can you talk about how we should think about you adding customers, or is it something that -- is there a limit to the number of customers you can serve on the wind turbine business? Thank you.

With respect to the first part of that, I guess the cream rises to the top, as we used to say in the past. And so we are seeing the strong winners come through here. Ghodawat had some internal family squabbles. Those things happen. So, you have to put it aside. We don't expect growth there.

Going forward, though, in terms of new licensees, we were very actively engaged in other growth economies, and I think that's again where we need to be focused, outside of China and even outside of Asia-Pacific region; Brazil for example. Brazil has had a lot of renewable energy in the form of hydro. However, more recently they are starting to bring a focus onto wind. Well, they don't have a domestic wind turbine manufacturer, so we think, here is a growth economy, strong growth economy, here's a country that doesn't have a domestic wind turbine manufacturer yet they're going in that direction, so we're spending effort, as you can well imagine, to attack that market.

There are others like that around the world. Russia for years has said, no, they're not going to really go to wind. They have all this natural gas. On the other hand, more recently, they are now looking quite seriously at adopting wind energy as a source, an additional source of electricity.

So, we are looking at all of those, Theo, but again focusing on the growth economies is the right thing. Eventually the US, as I said, is going to come back in wind area, we believe. Some companies are saying-- in fact, even this year, the wind industry will start growing again, primarily because of some of the incentives from the government.

We think that our customers Sinovel and Hyundai Heavy Industries will be attacking the market here in the US and we are strongly supporting them in doing that. Watch this page in terms of our entry into the US, primarily through our licensees outside the US, but there could still well be another licensee within the US itself as well, going forward. We will keep adding to the list, in a prudent way, I think, going forward.

Our next question comes from Colin Rush from ThinkEquity.

Hi, this is actually Brandon Milara for Colin Rush. Thank you for taking our question. You spoke to some of the geographic mix for the wind turbine related stuff, and I was wondering if that would be kind of similar for the rest of your products, in particular the power grid. And then also for the power grid, are you developing some off-grid or micro-grid kind of power solutions, that you might be able to speak about right now?

Well, no is the answer on the micro grid side, but I will let Dan McGahn, our President and Chief Operating Officer, address the first part of your question.

On the micro grid part, we are a megawatt scale type provider, so we are focused on utility scale. That is where our bailiwick really hits home. You heard of it in the commentary from Greg, and Dave echoed it, when we look at our power grid strategy, in some ways it mimics what we are doing in wind.

We see the Asian-Pacific economies investing not only in renewables but also in the grid infrastructure to support them. You heard news from the company about our ability to develop business in Korea. You heard today, again, the emergence of a business for power cables in China. So, we see a bit of a repeat there on the grid side. But, if we broaden it and we look at all of our products across the grid product line, we already today experience very good traction in the European and North American markets for our grid interconnection solutions. We see the power grid market actually today being more diverse geographically.

The other thing I would add-- I think it's fair to say that the majority of our power grid revenues during the quarter occurred outside of the US, particularly in Asia Pacific. We talked earlier about a customer in Australia for -- that's just that we had a large order for D-VAR, and we shipped part of that order in the third quarter.

Our next question comes from Stuart Bush from RBC Capital Markets.

Yes, good morning, guys. In regards to your Tres Amigas, what percentage of the JV do you now own, and have the other partners put in additional capital? Then the follow onto that; can you give us an update on what FERC is looking to do? I guess they previously denied to waive jurisdiction on an exemption for ERCOT, for having oversight on ERCOT if the Tres Amigas is connected to other grids. What's the status there, and when do you expect to hear a decision on that moving forward?

I'll take the first part, on the FERC, and let Dave tell us the percentage so I don't get the number wrong. On FERC there has been -- they gave a ruling. Tres Amigas can be treated basically as a market hub within the usual kind of restrictions, and the second ruling was, as you said, Stuart, on interconnection of ERCOT to the grid, and whether or not FERC would get jurisdiction over any transmission coming out of ERCOT.

They said we can't do it -- FERC said they can't do that on a blanket basis but they would take each case up on a case-by-case basis. There have been some challenges to even that statement by the FERC, which have in fact, been beaten down, whatever the technical term is, and put aside.So, the original ruling is still in place and as each case comes up, it will be taken up on that case-by-case basis. FERC, of course, was very encouraging in terms of what it would do with those case-by-case basis.

Stuart, with respect to your first question on the investment, we are not disclosing the amount of our total ownership interest in Tres Amigas. I will tell you it is still a minority, and that there were current investors that also added capital in this round as well.

Our next question comes from Ben Callo from Baird.

Good morning. Congratulations on the quarter. Can you guys give us a little more detail on your margin? It was pretty strong this quarter, and then last quarter. Was that a mix towards the grid products? Also, as we look forward in larger turbines, becoming a larger percentage of your revenue, how is that going to affect your margin? Do you get lower margins on the three-megawatt and larger turbines, or is it equal or less?

On your first question, gross margin was basically flat compared to second quarter. It was 40.7% in each quarter, so I'm not sure where you got the comment about maybe lower. But we have said in the past that when we have a greater mix of wind turbine core component sales, that is a benefit to our gross margin. So that is what we said for fourth quarter as well. We expect a higher mix there.

Our next question comes from Carter Shoop from Deutsche Bank.

Good morning. Two quick clarifications or housekeeping questions, then my real question here. In regards to the reclassification for the AT on accounts receivable, what was the impact there, and in regards to the $1 billion dollar target in four years, is there any longer term compensation being tied to that goal? Then my real question is SG&A. If you look at SG&A in the quarter, obviously down as a result of the stock options there, but if you look at the past two quarters, sales are up 17%, SG&A is up only 3%. Why aren't we seeing more investment on the SG&A lines? Thank you.

Do you want to pick one of the four questions? Dave will take it.

Let me take the first one, the reclassification impact. It was about $15 million to $16 million or so in the current quarter that we reclassified out to other current assets, and as I said, we did that. DSO is a metric that is tracked, and we don't record any revenue on VAT, so that artificially distorts DSO when people are looking at our balance sheet. We felt it was prudent to do that and many other companies do the same thing.

On SG&A, the reason for the sequential decrease was primarily due to stock comp expense. Every year in the second quarter we give a restricted stock grant to our board as part of their overall compensation. So if you look back in time, we always have a spike in stock compensation expense in the second quarter, then it drops back down in the third. So that is the primary reason, but we do continue to invest in things like sales and marketing. We try to hold down as best we can, obviously, the overhead, the SG&A.

In terms of your question about compensation being tied to the $1 billion in revenues, no, there is no specific compensation package tied to that. However, the board measures us every year and has done for a good, good many years in terms of our financial metrics.

Net income has been the typical team objective for the last several years and of course individual measurable objectives relate to profits in business units and so forth, as well as revenues and orders that are brought forth during a given year. So, no on the $1 billion, and yes on everything else. That is just good financial metrics of course.

Our next question comes from Jinming Liu from Ardour Capital.

Thanks for taking my question. Acquisitions were mentioned that are way to grow your revenue reaching that $1 billion mark. Can you provide us more details, regarding, say in what areas you are looking to acquisition, if possible the size of your targets?

Well, we don't have any specifics to share here of course. But what we said is, first of all, we are looking for creative acquisitions, and we look, and we examine things that come across our desk on a quite regular basis that have to do with power grid, that have to do with wind, that have to do with solar. So, it would be right in our core business areas in electric power applications. That is, I guess, the general answer that I can give you today.

Our next question comes from Jim Ricchiuti from Needham & Company.

Thank you. Just based on your backlog, should we assume that Sinovel is a similar percent of revenues in Q4 or do you see continued convergence or growth accelerating in that non-Sinovel portion of the power systems business?

Do you want to take that, Dan?

Yeah, Jim, with respect to -- we haven't really guided to what customer concentration is going be in fourth quarter, and we are not prepared to do that today. But, we did mention that, overall, wind core component sales will be a higher part of our mix in the fourth quarter.

Next question comes from Pavel Molchanov for Raymond James.

Yes, thanks, this is actually Alex for Pavel. You touched on this briefly in your comments earlier. Do you have any thoughts on what China's level of wind installations is going be in 2011, and following up on that, do you see that the percentage of the wind capacity in China that hasn't been connected to the grid in the past. Have you been seeing that come down, or do you have thoughts on whether that's going to be coming down this year?

We have looked at a lot of information. Of course, we have a lot of feet on the street in China. We think it probably goes 16 to 18 gigawatts of shipments in 2011. As of 2010, we saw more connections to the grid occurring, but it's still up in that 25% range of wind turbines not being connected to the grid. They are getting better on it, moving faster, the gap is closing, but I think it's going to be like that for a while as they continue to build that wind as rapidly as they can.

Don't forget; one of China's objectives -- and I say China, not an individual company per se -- China's objective is to be a net exporter of wind turbines in the years ahead. They are going full blast to meet their internal needs today, and at the same time they're doing that, they are building up all the supply chains and the basic industry that can ship wind turbines around the world, and of course set up manufacturing from that base in other countries around the world to meet local needs. They are doing, I think, quite well at this.

Our next question comes from Paul Clegg from Mizuho Securities.

Hello. Congratulations on the strong quarter. Follow-up for one of the prior questions, you talked a little bit about acquisitions. I wanted to know, as you try to broaden your share of the value of turbine and other products, does that pull you into some more capital-intensive parts of the value chain, and if so, Greg, how do you think about balancing that out, the goal of providing more value with wanting to be kind of capital-light, which is one of the really great parts of your business model up until now?

We still see ourselves being capital light. I think I can say with conviction, don't look for us to look at an acquisition of something that makes towers, or things of that nature. However, there are a lot of guts within a wind turbine that are high value-added, high technology products, and parts of the drive train, which we are really good at, we think. So there is a lot of opportunity in that space, Paul. When you look at, in the grid side here, low voltage ride through, new standards coming on. We have done some of this in the past. We solved a lot of problems.

We think we have some great opportunities there but there could be some opportunities for acquisitions in the low-voltage ride through, so power electronics, control systems, that sort of thing, some of which goes into the guts of a wind turbine and some which goes into the guts of a power grid. That is the general direction, but not capital intensive businesses. I just don't see us doing that in any way going forward. High value added products.

Our next question comes from Anthony Kit from Barclays Capital.

Thank you for taking my question, this is Vishal Shah from Barclays Capital. Greg, can you talk about your bookings breakdown between grid and wind customers in the fiscal third quarter, and it sounds like your nonsignable wind revenues in the quarter declined sequentially. Can you talk about what sustainable run rate we should expect in both nonsignable wind customers and also grid customers?Thank you.

As to your first question on the bookings breakdown, we don't break down obviously our bookings by customers, so I'm afraid I'm not going to be able to go there. Obviously, though, when you look at our overall backlog, Sinovel makes up a large share of our backlog. Now, with respect to your other question, with respect to non-Sinovel wind, I guess-- overall Sinovel revenues, they were 73% in the third quarter, down from about 79% of the second quarter. As I look over our list, I mean, I would say -- I'm not seeing appreciable movement one way or the other in our overall, I'll say, non-Sinovel wind revenues. That wasn't really a meaningful contributor to our revenues one way or the other in terms of the direction one way or the other during the quarter.

Our next question comes from Jesse Pichel from Jeffries.

Congrats to the team on another strong quarter in guidance. I have a couple of questions. Mr. Yurek, can you confirm, is the first SeaTitan being built now, and what will you do with that first SeaTitan--will it be a DOE demonstration project, and where will that be installed?My second question is, up until last week, Egypt had bids out on about a thousand turbines, I think two and a half gigs. I think Siemens and the Japanese had the jump on that. Do you know if any of your customers are exposed in Egypt?

We have on that question-- and I'm going to turn the first one over to Dan to give him a chance here to answer a question. No exposure, in terms of Egypt, for any of our customers. There is some in the Mid East, but it's really a minor part of the exposure that some of our customers have. We think in positive areas, by the way, but not in Egypt for sure. Dan, do you want to take the first one on SeaTitan and give an update where we're at?

If you look backwards, Jesse, we announced a ways back a development agreement where there is US Department of Commerce money to help develop some of the underlying technologies. Since that, we have invested our own money to continue the development of the product, both the generator itself, the sub components for that generator and the turbine design.

Our business model will remain consistent with that, which is to put a partner in the business of making that turbine, and that's kind of the next logical step here, is to involve a partner in the continued development of the product, the erection of the first turbine, and get underway with the business that will be SeaTitan.

Our next question comes from Ben Callo from Baird.

Hello, I just wanted to follow up from my last question. As your turbines get bigger, how does your load margin profile change, as you sell them for bigger turbines?

Ben, this is Dave Henry. We don't -- as we said in the past, we are not expecting any big margin difference between the three-megawatt and the five-megawatt, and what we are currently generating on the one and a half. It really all depends on the pricing that we will negotiate, going forward. Three-megawatt; the volumes are still fairly low, but we would negotiate a new contract, as Greg mentioned in his remarks, in the next three to nine months.

By the way, part of that question, at least what I think of there, part of our objective is to continue to take more dollars per megawatt for every turbine going forth. So not only do we see increasing our market share and what percent stage of the wind turbines that we're inside of, but taking more dollars per megawatt for those wind turbines. That's part of our growth strategy, of course.

We will go to Jim Ricchiuti from Needham & Company.

On the superconductor side of the business, it looks like you had the lowest level of revenue in this area, at least that I can recall. It seems to run counter to the backlog you talked about, so maybe you could help us understand when you see that starting to pick up a little bit. Thank you.

Jim, this is Dan McGahn. What we are really seeing is this transition more to commercial. We announced what we are doing in Korea with that order. We've talked about the revenues there starting in 2012. We are at the point here in 2010, going to 2011, where we're going to be winding down some of the projects. Some of the projects will continue.

We are really in a transition phase from the government-sponsored projects that we've had to really what we have been talking about for some time now, which is utilities looking to specifically adopt the technology, starting with Asia Pacific and continuing, again, along the lines in Europe, and we have visibility in America as well.

That does conclude today's Q and A session. At this time we would like to turn the call back to Mr. Greg Yurek for closing comments.

Thanks. I want to thank all of you for participating in our earnings call this morning. We've had another excellent quarter to report to you today and we expect to end fiscal 2010 in strong fashion by increasing both revenues and earnings year-over-year to new record levels. 38% growth in revenue year-over-year at the midrange, 100% growth in earnings per share at the midrange as well. As far as the future beyond this fiscal year is concerned, the game is afoot.

We are very excited about both our near and longer term growth plans, and we believe we have delineated a pathway for our company to accelerate achievement of our next big goal, and that's the goal of $1 billion in revenues with an excess of 20% operating margin. So our expectation is that we can achieve this next big goal in four fiscal years or less. We look forward to reporting back to you in our May earnings call and to going into more details with you at analyst day after earnings in May. In the meantime, enjoy the Super Bowl this Sunday. Take care. Good-bye.

That does conclude the conference. Thank you for your participation. You may now disconnect.