American Superconductor Corp (AMSC) 2016 Q1 法說會逐字稿

Good day, everyone, and welcome to AMSC's first-quarter 2016 earnings 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 AMSC President and CEO, Daniel McGahn; Executive Vice President and CFO, David Henry; and Manager of AMSC Investor Relations, Brian Tanous. For opening remarks, I would like to turn the call over to Brion Tanous. Please go ahead, sir.

Thank you, Erica, and welcome to our call to discuss our first-quarter of fiscal 2016 results. Before we begin, I would like to note that various remarks management may make on this conference call about AMSC's future expectations, plans, and prospects constitute forward-looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors including those discussed in the Risk Factors section of our annual report on Form 10-K for the year ended March 31, 2016, which we filed with the SEC on May 31, 2016, and subsequent reports that we have filed with the SEC.

Theses forward-looking statements represent our expectations only as of today and should not be relied upon as representing our views as of any date subsequent to today. While AMSC anticipates that subsequent events and developments may cause the Company's views to change, we specifically disclaim any obligation to update these forward-looking statements.

I also would like to note that we will be referring on today's call to non-GAAP net loss, or net loss before stock-based compensation, amortization of acquisition-related intangibles, impairment of minority interest investment, consumption of zero cost basis inventory, change in fair value of derivatives and warrants, non-cash interest expense, and other unusual charges net of any tax effects related to these items.

Non-GAAP net loss is a non-GAAP financial metric. A reconciliation of our non-GAAP to GAAP net loss can be found in the press release we issued and filed with the SEC this morning on Form 8-K. All of our press releases and SEC filings can be accessed from the Investors page of our website at www.amsc.com.

And now I will turn the call over to CEO Dan McGahn.

Thanks, Brian, and good morning, everyone. I'll begin today by providing an overview of our financial results for the first quarter of fiscal 2016, which ended June 30, 2016. Dave will then provide a detailed review of our financial results and guidance for the second fiscal quarter, which will end September 30, 2016. Following Dave's comments, we'll provide and overview of our activities and future expectations. After that, we'll open up the line to your questions.

First quarter of fiscal 2016 revenues came in as we expected. We anticipated the sequential decline in [EACS] shipments to Inox during the first quarter. On July 25, Inox made the advance payment of $2 million required under the new supply contract, and they have communicated to us that they intend to return to more normal levels of wind turbine production during the September or second quarter.

However, because of the timing of the letters of credit being received from Inox, which we require before we can ship ECS, we are getting off to a late start on ECS shipments in the second fiscal quarter. We continue to be optimistic about the wind market in India and believe we are well-positioned to support any expansion of Inox's business.

Our Gridtec segment has its sights set on growth. We are working hard to further penetrate renewable energy applications as well as industrial and utility opportunities for our D-VAR products.

Regarding our ship protection system products, I am pleased to report that during this past quarter, we made considerable progress towards securing our HTS technology as a production alternative for Navy vessels. Separately, our team at AMSC is working hard to deliver the beta version of a second ship protection system product and begin qualification efforts for this product with the US Navy this fiscal year.

With respect to our resilient electric grid, or REG product, our message and value proposition to electric utilities are being well received as utilities are now requesting engineering and procurement contracts, or EPCs, to quote on superconductor solutions. I'll talk more about these developments later on this call.

I'll now turn the call over to Dave to review our financial results for the first quarter of fiscal 2016 and guidance for the second fiscal quarter, which will end September 30, 2016. Dave?

Thanks, Dan, and good morning, everyone. AMSC generated revenues of $13.3 million for the first fiscal quarter compared to $23.7 million in the year-ago quarter. Total revenue for the first fiscal quarter decreased year over year due to lower wind segment revenues during the period. Revenues from our wind segment were down in the first fiscal 2016 as a result of reduced ECS shipments to Inox. As we noted in our last earnings conference call, Inox has been dealing with working capital constraints, which negatively impacted demand in the first quarter.

Wind segment revenues represented approximately 43% of total revenues for the first quarter of fiscal 2016. Grid segment revenues for the first fiscal quarter increased 38% year over year as a result of higher D-VAR and HTS project revenues versus the year-ago period as well as revenues from the joint development effort with BASF.

12-month backlog at June 30, 2016 was approximately $86 million compared with $89 million at March 31, 2016. 12-month backlog includes forecasted demand under the new Inox supply contract. In late July, Inox completed making all of the necessary prepayments specified under the license agreement and supply contract.

Looking at the P&L in more detail, gross margin for the first fiscal quarter was 6.5%, which compares with 13.6% in the first quarter of fiscal 2015 and 33.6% in the previous quarter. The year-over-year decrease as well as the sequential decrease in gross margin in the first quarter was primarily due to lower revenues, including 100% margin BASF license revenue in the fourth quarter that did not recur in the first quarter.

R&D and SG&A expenses for the first quarter were $10.2 million. This was down from $10.7 million for the same period a year ago. Approximately 15% of this R&D and SG&A spending in the first fiscal quarter was non-cash.

Below operating loss, in the first quarter we incurred a mark-to-market loss on our outstanding warrants of $700,000 compared to a gain of $800,000 in the year-ago quarter. The loss in the first quarter of fiscal 2016 was due in part to a higher stock price during the period, which is a key valuation metric.

Our net loss in the first quarter of fiscal 2016 was $10.4 million or $0.76 per share. This compares to $9.1 million or $0.75 per share in the year-ago quarter. Our non-GAAP net loss for the first quarter of fiscal 2016 was $8.7 million or $0.64 a share, which was flat compared with $8.7 million or $0.72 per share in the year-ago quarter.

Please see our press release issued this morning for our reconciliation of GAAP to non-GAAP results.

We ended the first fiscal quarter with $36.6 million in cash, cash equivalents, and restricted cash. This compares with $40.7 million as of March 31, 2016, and represents a cash burn of $4.1 million for the first fiscal quarter.

We grew inventory in the first quarter due to the late notification from Inox of their constrained demand. As a result, we were not able to adjust our supply chain until late in the quarter. The growth in inventory was funded primarily by collection of all outstanding accounts receivable from Inox for deliveries of electrical control systems. All receivables connected with Inox are in the form of letters of credit with reputable banks. This ensured collection of those receivables and prevented a much bigger issue this quarter given Inox's working capital constraints.

As of June 30, 2016, the principal balance of our debt arrangements excluding the debt discount was $3.2 million compared to $4.2 million as of March 31, 2016. The debt represents two term loans with Hercules Technology Growth Capital. The first term loan has a remaining principal balance of $1.7 million, and the second term loan has a remaining principal balance of $1.5 million. We are paying interest only on a monthly basis until maturity on June 1, 2017 when the entire outstanding amount will be repaid in full.

Turning to our financial guidance, as I mentioned earlier, Inox completed making all of the necessary prepayments under our contracts with them in late July. We have only recently begun receiving letters of credit from Inox for Q2 ECS shipments. This will result in a late start of ECS shipments to Inox, which will impact wind segment revenues in the second quarter. Consequently, we expect that our revenues in the second quarter will be in the range of $16 million to $18 million.

In order to begin consuming inventory, we will be adjusting production in our factory in Romania in the second quarter, which will have a negative effect on absorption and gross margin. As a result, we expect that our net loss for the second fiscal quarter will be less than $12.5 million or $0.88 per share. Our non-GAAP net loss for the first fiscal quarter is expected to be less than $12 million or $0.85 per share.

With respect to cash, because shipments to Inox are expected to be back-end loaded in the second quarter and we have already collected the outstanding ECS receivables from Inox for the first quarter's shipments, we expect a cash inflow gap in the second quarter.

Additionally, we expect to complete paying for the ECS materials we acquired in the first quarter. As a result, we expect that the cash burn in the second quarter will be greater than what we experienced in the first quarter. We expect the cash burn to moderate in the second half of the year.

With that, I'll turn the call back over to Dan.

Thanks, Dave. I'll start today with an update on our activities within our Gridtec business unit. How about we start with Windtec actually. Through our Windtec solutions, we provide our wind turbine licensees with fully integrated electrical control systems, or ECS.

The ECS consists of the electrical pitch system, converter system, power distribution cabinets, and various turbine control cabinets, as well as our SCADA solution and our software. By using our integrated electrical control systems, we believe our customers' wind turbines provide higher availability, reliability, and optimized energy output.

Our primary market for our wind products today is India, and we service this market segment through our partner, Inox Wind. According to the Global Wind Energy Council, the Indian wind energy sector had a total installed wind power capacity of 25 gigawatts at the end of calendar 2015.

In terms of wind power installed, India is a major player in the global wind energy market and ranks fourth in the world in cumulative installations according to industry analysts. The Indian government has announced an impressive target of having 60 gigawatts of wind energy capacity installed by 2022, which is more than double the existing installed capacity.

We are keeping an eye on changes in the macro environment in India. According to news reports, some states in India are not paying wind power producers in a timely manner for power generated and also lowering their tariffs. One example is the state of Madhya Pradesh. According to Inox, roughly 25% of their backlog is for projects in this state. The slow payment by certain states in India can be expected to negatively impact the cash flows of wind power producers. This may also be a factor in Inox's recent working capital constraints.

There are other changes in the macro environment for wind energy in India. The generation-based incentive is set to expire at the end of the current Indian fiscal year ending March 31, 2017. Through this incentive, developers receive about $0.75 for every kilowatt hour of electricity generated. In addition, the maximum accelerated depreciation benefit for wind project developers will be reduced from 80% to 40% at the end of March 2017.

Inox has stated that their strategy to address these macro challenges is to offer their customers more efficient wind turbines. Inox is now marketing a 2 megawatt wind turbine with an 113 meter rotor diameter. We designed this variant of their 2 megawatt turbine for Inox. Inox has said that they believe the efficiency gains from the larger rotor will more than offset any reductions in tariffs. and still allow customers to generate attractive internal rates of return on their projects.

We believe this presents an opportunity for Inox to gain market share. We expect to continue to support Inox's product roadmap for the future while continuing with the supply of 2 megawatt ECS units.

As Dave mentioned, we do expect Inox to resume higher levels of turbine production in the second fiscal quarter and beyond. The completion of a license agreement with Inox for a 3 megawatt wind turbine design continues to be one of our corporate objectives for fiscal 2016. Inox continues to affirm this is one of their goals for this fiscal year as well.

Now moving on to Gridtec solutions. I'll start with our D-VAR STATCOM product. The D-VAR product addresses three primary end markets: renewable energy, electric utilities, and industrial installations like a mine or a semiconductor fab. The majority of our D-VAR revenue today comes from the interconnection of renewable energy generation plants to the electricity grid.

During the first quarter of fiscal 2016, the Federal Energy Regulatory Commission, or FERC, issued Order 827, which mandates all new wind and solar farms under its jurisdiction in the United States to have a defined level of dynamic, variable, reactive power capability. This mandate applies to any new wind or solar farm application and effectively opens up a number of regions in the US which previously did not have any significant local requirements for dynamic reactive power capability.

Clearly, the market for our D-VAR product is expanding, and we look forward to increasing the opportunities to support renewable energy applications in the US in the years ahead. For electric utilities, the D-VAR solution can help utilities carry more power through their existing transmission and distribution assets. It can also enhance transmission system performance and prevent widespread blackouts. Our sales team and our expanding network of manufacture sales reps have been keenly focused on communicating AMSC's value proposition to this important market segment.

One of our objectives for fiscal 2016 is to achieve continued growth of our D-VAR business. And I'm pleased to report that in the first quarter, our D-VAR revenues increased versus the same quarter a year ago.

As I mentioned at the top of the call this morning, I'm very excited about our progress with the US Navy. We've been actively working with the Navy for many years now, demonstrating how our HTS products could enable the next generation of ship protection systems, advanced onboard power systems to support current and future weapon systems, and deliver the necessary power for ship propulsion systems. We are procuring ship protection system components against the $8.5 million contract that we announced last fiscal year.

In addition, we believe that our team made substantial progress with a particular Navy program office and a shipyard during the first fiscal quarter in an effort to secure a contract for ship protection systems on a specific US Navy vessel platform. I am hopeful that we'll be able to report more progress in the months ahead.

We have completed the design work for the next ship protection system application, and we are fabricating the beta unit which will be evaluated by the US Navy. We are on track to deliver the beta unit and begin qualification efforts for this product in fiscal 2016. The Navy has made it clear that it expects that superconductor systems will be deployed in the fleet. In my opinion, the opportunity for AMSC's HTS products to be designed into a new build Navy vessel has never been greater.

Moving on to our REG solution, we are current working closely with ComEd in Chicago in its evaluation of the next phase of the project, the installation of the system into their electric grid. We are working with the utility to evaluate their total cost as well as the timeline for construction.

Our engineers have been working with ComEd on a number of variations and configurations of our REG solution to enhance the resiliency of Chicago's electric grid. Some designs being evaluated are comprehensive and complex. Others are simple and faster to deploy. At this time, we do not have the visibility to indicate which path ComEd may choose to pursue. We will, however, update you on the details once we have more clarity.

In addition, we've been working with a number of utilities that have expressed interest in better understanding the value of our REG solutions. Substantial progress was made during the first fiscal quarter with one such US utility, including the delivery of a budgetary proposal for a REG system from AMSC.

Still another US utility has released a request for proposal for a study to investigate increasing the resiliency of its urban grid in case of a major event. In fact, this utility has specifically required the study to include the evaluation of HTS cable system alternatives as a possible solution.

So our message is getting out. In all, we're currently tracking activity and managing our opportunities with about a dozen US utilities and working to increase the REG opportunity pipeline.

The first quarter of fiscal 2016 was challenging. However, we do see Inox moving past the working capital constraints that affected us during the quarter. We anticipate resuming higher shipment levels of our ECS product to our largest customer beginning in the second quarter of fiscal 2016, albeit with a late start.

We are focused on continuing to grow our D-VAR business. We believe that our opportunities with the US Navy have never looked brighter, and the value proposition of our REG solution is resonating with US utilities. We are executing against our goals, and that is to the credit of our employees for their hard work and dedication.

I look forward to reporting back to you at the completion of our second fiscal quarter.

Erica, we'll now take questions from the audience.

Thank you. (Operator instructions)

Colin Rusch, Oppenheimer.

Thanks so much, guys. And thanks for the detail on what's happening in the India wind market. Can you give us a sense of what normalized working capital should look like? Obviously you've done a nice job collecting and will liquidate this inventory. But should we be thinking about a 30-day receivable level? And can you just give us an update on where you think inventories pencil out by the end of next quarter?

Yes. Hi, Colin. On the receivables, generally, because we -- Inox is the largest customer, and hence the largest component so far of receivables quarter in and quarter out, and the fact that they're under letters of credit means that collection's assured, and it's on a specific time table. So our DSOs really have been -- the normalized level is around 50 to 60 days, which I think is pretty good.

Inventories are, like I mentioned, significantly higher this quarter, and we have to bring them down. We chose to continue to keep our factory operating during the first quarter, and because we had the material to build, we went ahead and built it. So you'll see in our 10-Q that finished goods increased. And so we're going to be looking in the second quarter to decrease the amount of finished goods that we're carrying and adjust the levels in production in Romania.

From a cash standpoint overall, what we've said in the past, I think, still holds true. When the working capital isn't swinging like it did in the first quarter and like we expect it to in the second quarter on sort of a normalized basis at levels of revenue at around $20 million a quarter, the cash burn with normal levels of working capital usage is going to be somewhere in the neighborhood of $4 million to $5 million a quarter on an operating basis, and that continues to hold true.

Okay, perfect. And then once we kind of work through the adjustment here in the September quarter, and you look at incremental revenue -- obviously some of this is going to be mix-dependent -- but can you talk a little bit about incremental operating margins? You've done a nice job with controlling operating expenses. I would just love to understand how you think about the incremental cash flow as you start to grow revenue again?

Well, most of our -- as it relates to -- certainly to the electrical control systems and to the D-VAR, the gross margin that we achieve on those products is actually -- the incremental margin and the overall GAAP gross margin are actually fairly close because there's not a lot of fixed cost per se that's associated with the manufacture of those products. Roughly 85% of the cost of those products is going to be in materials for the most part on average.

So that being said -- sorry, I just lost my train of thought. What was the end question you were trying to (multiple speakers) --

Yes, the end question was on incremental operating margins (inaudible).

So like I said, the incremental gross margin and the GAAP gross margin are fairly close. We don't disclose gross margins on a product-by-product basis, but we've talked about where gross margins have been in the past for these types of products, somewhere in the neighborhood of the mid-30s%.

Okay, perfect. And then the final question from me. With the FERC ruling on wind and solar, can you talk a little bit about the growth in pipeline at this point in the conversations that you're having, and when you'd expect to start to see real material impact on the revenue line from that ruling?

I think the good thing with the US market is you have the extension of the PTC through 2019. That's helping to support the pipeline today. This new FERC ruling will impact new wind projects that are just beginning to be studied. So there's a bit of a time lag between when we believe that this ruling will actually impact the market. We don't anticipate this helping the market this year or next year. But certainly beyond that, hopefully you start to see some uptick.

And really what it becomes is an expansion of the US market to have more geographies that require the most stringent grid codes which really help enable D-VAR sales in the US. So the timing of the expansion of revenues will come over the next years, not in the next quarters. But I think it puts us in a good position for US revenues. We're very much focused on diversification of revenue as you hear and as you know. And we think that this is a good tailwind for the D-VAR business in the US.

Okay. Perfect, guys. Thanks so much.

Carter Driscoll, FBR.

Good morning, gentlemen. It sounds like the visibility into ComEd has maybe gotten a bit murkier. Can you kind of contrast what you have learned over the implementation of phase one and trying to get towards phase two towards the other utilities you're starting to engage with, and maybe how you can potentially accelerate the adoption timeline if you can at all?

Yes, I think the real kind of blunt answer to your question, which I think is right on for looking at Chicago is, the thing that's changed with superconductor systems for utilities is we're not really talking about US government subsidized technology demonstrations.

Granted, the project with Chicago will have federal funding support. But what ComEd's really after is enhancing the reliability of their grid, which means putting the assets in the grid and putting those assets in the rate base like any other piece of hardware. That happening is a tremendous milestone for our company and for the progress with the REG product.

So the challenge that the utility has are like they have with any other system. They have to go through their internal process. They have to understand how they're going to get recovery and what the system is going to be able to do, what alternatives could potentially do. And because this is the first-to-kind system, that work is first-to-kind work. Which I think we've learned a lot with dealing with the pacing at Chicago that it's not just about the value, but it's also how quickly can we install, and it's how they're going to get recovery for those assets.

So fortunately, as part of the DHS contract, we were required to and have worked very hard to develop a pipeline of other cities that would be looking to install the technology. And I think there's a strong desire there to risk reduce and maybe not necessarily be the first, but I was saying in the prepared remarks is we're now moving into a situation with utilities where they're asking basically for pricing, for delivery time tables, for installation time tables. And they're also not asking just only us, but also very large engineering and procurement firms.

So our belief today is, although Chicago is important in the development and the maturation of the resilient electric grid product, what we have today is something that uniquely provides value to utilities that they can't get another way, and that some of these other utilities have the potential either to move prior to or concurrently with the implementation in Chicago.

What we've tried to do is to mature these dozen or so conversations. And what you're hearing from us today is a bit more specificity that some of these are really starting to move forward to become more real, and we've made tremendous progress here in the first quarter of this year doing that. We think REG is a winner, and we think it's a winner because utilities are telling us it uniquely solves a problem that they currently have in their grid.

If I heard correctly in the prepared remarks, Dan, you talked about an RFP release and then also a budgetary proposal. Can you kind of just compare and contrast those with the guys that you had been engaged with that you've talked publicly about, and then maybe where you stand in terms of some of the other utilities potentially hitting, or at least moving to that type of phase this fiscal year?

So I'm unable to have permission from utilities to identify or link them to anything that we said previously, and I apologize for that. So I can't give you any additional clarity on that. I know that's an obvious question from what we've put forth, but utilities and their communication sometimes are, let's say, different than how we would like to communicate to our investors.

That's fine. Let me ask this then. Is the proposal with the EPC done in conjunction with you, or is a separate proposal?

Yes. It'll be done in conjunction with us because the resilient electric grid product is an American Superconductor patented technology that's dependent upon not only the wire, but value beyond the wire and how the system is designed, how the architecture of the whole system is put forth, and really how you make it work within the grid is unique IP to our company.

Okay, okay. Thank you for that color. Maybe just shifting back to Inox. So it sounds like the macro environment is maybe perhaps a little bit less settled than it was just a few months ago -- obviously some expiring and depreciation and the subsidy.

Can you characterize, was that surprising? I mean, is that impact, I guess, from Inox and their working capital, is that kind of like the missing link that you think maybe could persist as some of these states get squeezed financially? Are you more concerned about the potential lack of extension in some of these subsidies? Or are more concerned with (multiple speakers) --

Yes, trying to give some basic color on other issues that maybe affecting collection in the near term, but also try to give you some color beyond this year. If you go back retrospectively in the market India, they've changed their subsidy regime several different times over the past trailing few years.

So we're trying to call to mind to our investors to really identify that it's a good market, but it has some risk that it potentially could be lumpy. And we don't want -- particularly after a lot of the commentary questions that we had after last quarter, we wanted to make sure that people have kind of full disclosure on the market dynamics in India.

We think it's a great market. We think Inox is in a great position. And you heard us talk about, they see this really as an opportunity to differentiate through technology, and that's technology that comes from us. And that may give them some potential to be able to increase their market share.

So going to a bigger rotor, going to a lighter wind speed product, which is something that we've developed for them, strategically probably was a very good decision. And that should help them in the coming quarter and coming years to continue to grow their business as they would like to see.

And how important would you classify getting a 3 megawatt design with them in terms of continuing to be able to differentiate their solutions for them?

I think it's really up to them to dictate that. I mean, we certainly want to move forward with that product with them. Everything that they've said to us directly or that they've said publicly to their shareholders indicates this is important to them. So we continue to have discussions around the 3 megawatt product. It remains an objective for us for this year. It remains an objective for them.

But frankly, if they say, hey, they want this to wait three months or whatever, we don't see that as a negative impact on anything. It's just really making sure that they can bite off what they can chew. They've been very good at focusing on the 2 megawatt. At some point here, we believe there'll be a 3 megawatt. There's a commitment to do that together. And we remained having it as an objective for this year as does Inox.

And maybe just a last question from me. Maybe just remind us the scope again of the beta product you're hoping to deliver to the Navy this year?

So it's a full system that would be deployed on a specific vessel, and that vessel has the ability to do a lot of things for the Navy. So what we're trying to construct, if you want to think of it as a payload to go into a retrofitable solution that can be deployed to the 200-odd ships in the surface Navy today.

This does not address power propulsion though. It is for (inaudible)?

Everything we're doing today that we're working on is propulsion -- I'm sorry, protection with the exception, we are developing a power solution for ship distribution power. So if you want to think about it as maturity, the ship protection system, the degaussing system, the permanent installation, that's what we're talking about with the $8.5 million contract. That's what we're talking about with progress that we announced today that we're very excited about with the Navy.

The second product is another ship protection system product, which is this beta unit, which is this deployable solution that could be a great retrofit extension of the market. That's the focus in the near term. But technology-wise, we continue to develop technology for the Navy that the Navy's paying us for for power cables. And in the long term -- we've gone through this in a few calls now -- the long-term desire to see this technology really help enable the next generation weapon systems and propulsion systems, that's ultimately what the Navy's after later this decade, next decade.

Okay, great. Appreciate all the commentary. I'll get back in the queue. Thanks, gentlemen.

Jeff Osborne, Cowan and Company.

Hey. Good morning, guys. Thanks for all the details so far. Just had a couple quick questions. One on India -- do you expect any type of surge in orders in late December quarter or in March ahead of the tariff reduction -- is kind of question A.

And then do you happen to know the specifics of the rule? You mentioned the percent changes, but is there any protection to developers similar to what we have here in the US with IRS visibility in terms of percent completion accounting so that perhaps there might not be a sudden drop off in March and there's a little bit more leeway for developers to still recapture the --

Yes, I think projects that are ongoing usually are subject to the rules that were present when they started. I think what we're trying to do is give you some color into 2017 and beyond in India. There have been past changes in how depreciation was structured, how the incentives were structured, and the market's kind of been able to handle and absorb those.

And then we also have made the comments on, basically this is a market that's going to go from a 25 gigawatts installed to, like, 60 by 2022. So that's growth that's on the order of 4 or 5 gigawatts a year. Analysts are assuming that it's a market that's going to be approaching here in the next years, in the 3- to 4-gigawatt range. So it still, longer term, looks like a very nice growing market. In the near term, what Inox is trying to do is to differentiate through technology to gain share, which we think benefits them and should benefit us.

The other thing about the tariff regimes, Jeff, is that -- what we talked about, one state that Inox has good portion of their backlog with, which is Madhya Pradesh, those tariffs are coming down. But there are other states where the tariffs are increasing actually. So it's kind of a state-by-state thing in India, which is why, I think, the 60 gigawatts is still -- it seems to us like it's still achievable in India because there is still quite a lot of government support behind that and state support behind that as well.

Okay. So the two other lines of questioning, one on the FERC ruling 827. Historically, when there's been electric code changes, for example, in solar, you've seen a lot of the functionality being added to the inverter. I guess, what's the risk that some of the functionality that the D-VAR does is not added to an inverter two years down the road as some of these facility agreements that people need to file facility studies agreements as part of the ruling for 827?

Yes, there's always the potential for competition. There's been competition that's there. We fit very well with certain makers of wind turbines because we more dramatically augment their capability to provide reactive compensation to the grid. The fact that we know there's an opportunity here means we're not going to stand idle with our product development efforts. We see this as an opportunity for us. We see this as a market that we've been able to drive in many ways, and we want to continue to be focused on growing that D-VAR business. So we see it as an opportunity for us to be able to grow not only the revenue, but maybe the future set of the product line as well.

Got it. And my last question is just around the 10-Q. I had a chance to flip through it before the call. Can you just elaborate on -- you've got three new 10% customers that are roughly 40% of revenue -- so Reed & Reed in New England, Essential Energy in Australia, I believe, and XJ, I believe, is a Chinese company. Can you just talk about what you're providing?

So for the first two, those are D-VAR customers on the grid side, so those are installations for D-VAR. And XJ has been a long-time wind partner in China.

And Reed & Reed, is that as a result of a wind farm it looks like they developed? Is that as a result of the 827 rule, or (multiple speakers) --

No (inaudible) be clear with the 827. The 827's only going to affect new projects that haven't even been studied. So if anybody's looked at a specific site, those are kind of under the current regime. If new assets want to be developed, particularly in these other states in the US, then they would be subject to FERC 827. So anything in the near term that we're talking about today that's revenue for the next quarters, even the next year or two, are going to be all things that are not being driven by the FERC 827 ruling.

Okay, that's helpful. I guess, just maybe I was mistaken. I thought in the past you'd always highlighted D-VAR strength in wind in markets like Australia and South Africa and the (multiple speakers) --

Right. Those aren't FERC's jurisdictional countries, so FERC is just US.

No, no. I'm moving beyond the FERC thing. But I guess just, is Reed & Reed a new customer, and what's their -- it looks like they have a pretty strong presence in the wind development market?

They've been a customer of us before. I think what's interesting is because of the revenue level, you're starting to see some of the components that make up the grid revenue. Usually maybe we have one D-VAR installation. In the case of this quarter, there are two.

Okay, great. Thank you. Appreciate it.

(Operator instructions)

Sameer Joshi, Rodman.

Hey, Dan and Dave. Thanks for taking my question. So I know you gave the backlog of $86 million. Is Inox expected to be still in that $55 million to $60 million range from this backlog?

Yes, they're still a big part of that backlog, and your number is -- I think, it's fair; it's in the ballpark.

Okay. In terms of revenues from Gridtec, you've been around $7.6 million, $7.7 million for the last two quarters. In terms of modeling going forward, based on the commentary that we just heard, should we see a gradual increase in that to $8.5 million, $9 million levels over the next few quarters? Or to be more specific, in the $16 million to $18 million guidance for (multiple speakers) --

I think the blunt answer is no. I think what we're trying to give you is indication -- what are we working on and what macro factors help the Company to continue the process of growing the Gridtec business as well as further diversifying the revenues. And sometimes on these calls it's hard to give you color for next quarter versus the next years. We're attempting to try to step out and paint a little picture for the next few years as well, and hopefully that's not making it hard to understand our comments today.

D-VAR in particular, that business has been and remains -- has a lumpiness to it. So our objective is, over the course of the full year, to grow our D-VAR revenues. We're pleased to report that first quarter of this year over first quarter last year, we grew revenue. I think it's -- I don't know if we're going to grow revenues each and every quarter year over year. I mean, I guess you can model that assumption, but what we're really focused on is growing the full year.

Okay. Coming to Inox, are there any payments due towards -- or payments expected from Inox for the 3 megawatt ECS development, and are they forthcoming?

No, we haven't signed a deal. So to be clear, we've entered into an agreement that we will be the provider, but we have yet to sign a license arrangement with them. So there's no payments in backlog. There's no payments that are planned here in the guidance that we're talking about. Our hope is that we both elect to get this objective crossed off our list mutually this year. And at that point, then we would announce what that deal looks like, and we can talk about how revenue recognition would work at that time.

Okay. So most of my other questions were answered. But I don't think you discussed any of the Beijing Higher People's Court and the intellectual property court cases. Is there any update on that (multiple speakers) --

No real update in China. The only update on all of the court cases is in the US. There was a hearing, which we've talked about that there would be an evidentiary procedural hearing, which has happened. We are still on track to have a court date of 5 December, 2016. We got to get through a presidential election between here and there, so we'll -- all that changes the world or not.

Right. Okay, thanks a lot.

And at this time, we have no further questions. I'd like to turn it back over to our speakers for any closing remarks.

Great, thank you. This has been a challenging quarter, the first quarter, and I think we're signaling that those challenges continue into the second quarter. I mean, frankly, we're getting a late start in the second quarter. We've tried to do the right thing with managing our cash. We're managing our cost. We're happy that the feedback we get continually is that we do a good job with that.

We are subjected to market demand, and we're trying to be very clear about what our partner, Inox, is up against, and how they're going to try to differentiate themselves. I think the good news in today's call is we've made a lot of really nice progress with the Navy and with resilient electric grid, and we look forward to be able to report back to you improving financial results in the future as well as additional progress on these new products.

With that, I want to say thank you, and we'll be talking to you very soon. Take care.

We'd like to thank everybody for their participation on today's conference call. Please feel free to disconnect your line at any time.