Capstone Green Energy Corp (CGRN) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2006 Capstone Turbine earnings conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the presentation over to your host for today's conference, Miss [Melody McCoy]. You may proceed.

Thank you. Good afternoon and welcome to Capstone Turbine Corporation's conference call for the second quarter of fiscal year 2006. I am Melody McCoy, your contact for today's conference call. Capstone filed its 10-Q with the Securities and Exchange Commission on November 9, 2005. If you do not have access to this document and would like one, please contact me at 818-407-3740 and I will forward one to you.

During the course of this conference call, management may make projections or other forward-looking statements regarding future events or financial performance of the Company, within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. These statements relate to future financial performance; approval of our New York City materials and equipment acceptance application, and the advantages such approval would bring; expectations of new product introductions; their performance characteristics; and our ability to deliver additional cost reduction, among other matters.

These forward-looking statements are subject to numerous assumptions, risks, and uncertainties, which may cause Capstone's actual results to be materially different from future results expressed or implied in such statements. We refer to the Company's 10-K, 10-Q, and other recent filings with the Securities and Exchange Commission, for a description of these risk factors. Because of the risks and uncertainties, Capstone cautions you not to place undue reliance on these statements, which speak only as of today. We undertake no obligation and specifically disclaim any obligation to release any revision to any forward-looking statements to reflect events or circumstances after the date of this conference call, or to reflect the occurrence of unanticipated events.

I now turn the call over to John Tucker, our President and Chief Executive Officer.

Thanks, Melody. And good afternoon. Before we begin reviewing the second quarter's activities and accomplishments with you, I would like to take a moment and welcome Leigh Estus to the Capstone leadership team. As our new Vice President of Operations, Leigh brings to Capstone a track record of proven performance at Hughes Aircraft, Whittaker Electronics, BAE Systems, and most recently as Director of Operations at the communications and countermeasures systems division of EDO Corporation. Leigh's Six Sigma experience and his focus on continuous improvement, will lead our team in taking Capstone to the next level of operations performance.

This addition to our team provided me with the opportunity to reassign John Fink back to the position of Senior Vice President of Sales and Service, the position that John held when he initially joined the Capstone team in 2003. As our market opportunities have increased, Leigh's addition has afforded me the opportunity to not only position John, but to also reassign Tony Hynes to the position of VP of International Sales, with the responsibility for Europe, Asia and Japan. I would be remiss if I didn't take this opportunity to thank our departing directors, Eric Young and Carmine Bosco, for the valuable service, counsel and direction they provided during their tenure on the Capstone board.

Additionally, I would like to welcome Mr. Gary Simon to our board. Gary is the President and CEO of Acumentrics, and has had a 30-year career in energy policy, technical analysis, and business management. Prior to joining Acumentrics, Gary consulted with several startup businesses involved with clean energy technologies, helping to raise equity and debt financing, as well as developing business plans and financial forecasts. Gary was a Senior VP of Corporate Strategy and Business Development at Northeast Utilities, where he had responsibility for corporate R&D, corporate new venture investment, as well as business planning and strategic transactions. Previously, Gary was Senior Director and head of the global power practice for Cambridge Energy Research Associates for 9 years, and before that, was VP of Sales and Marketing for El Paso Gas Company. Gary also served for four years as the head of forecasting and planning for the California Energy Commission, and five years as the senior consultant to the energy committees of the California State Assembly. Welcome aboard, Gary.

Now let me turn the call over to Chuck McBride, our CFO or the financial results. Chuck?

Thank you, John. I'd like to provide you with our results for the second quarter of fiscal 2006, ended September 30, 2005. Backlog increased to $12.5 million at quarter end, up over 120% from the prior year comparable quarter. Sequentially, we were up 2% from the first quarter. Revenue increased approximately 46% year-over-year, from $3.9 million to $5.7 million. Sequentially, we were up 50% from the first quarter.

Gross losses for the second quarter were $1.1 million, an improvement of $2.3 million over the first quarter. Gross loss expressed as a percentage of revenue, improved approximately 70 points from the prior quarter, and approximately 35 points in the same quarter last year. Research and development costs were 2.7 million for the quarter, up 600,000 from the prior quarter. We had a delay in the start of a government contract that provides a cost sharing component. Had the contract begun when expected, R&D costs would have remained relatively flat at $2.1 million. Selling, general and administrative costs were 6.8 million for the quarter, up approximately 1 million from the prior quarter. The increase relates to nonrecurring severance charge of about $500,000. The remainder was due primarily to an increase in legal and consultant fees.

Our net loss for the quarter was $10.2 million or $0.12 per share, which improved from the $10.9 million or $0.13 per share reported in the first quarter. Our cash burn was $7.9 million for the quarter, an improvement of 3.7 million over the prior quarter. Our cash balance at the end of the quarter was 44.1 million, before taking into consideration our registered direct offering. We completed the offering on October 24, resulting in gross proceeds of approximately 41.4 million. The offering significantly improves our cash and liquidity position, roughly doubling our cash balance. Now let me turn the call back over to John.

Thanks, Chuck. As Chuck mentioned, we had a very active quarter. We shipped 5.1 megawatts of product in the quarter. This performance was up year-over-year by 26%, and quarter over quarter by 51%. Backlog at quarter end was 15.8 megawatts. During our last call, I reviewed with you a number of actions undertaken and accomplished. This quarter was no exception. Let me share with you the progress we are making on numerous fronts.

First, let me provide you with an update on our New York MEA activities for Capstone branded products. We continue to work with the various regulatory agencies in New York City, to finalize our MEA filing. We have made considerable progress in this regard, and expect our final approval shortly, and we will issue a press release at that time. You should also know that we have expanded our MEA filing request to include the integrated elevator emergency package, data center, and emergency service package, so that one MEA filing will cover all of the Capstone branded microturbine insulation scenarios within the greater New York area.

As you may recall we previously announced that the elevator package was developed to address the growing concerns of city governments and building owners due to grid failure or other power loss events. This package will provide stand alone emergency power, thereby specifically restoring elevator operation, and providing power for communications and other special contingencies for emergency scenarios. Since our announcement, we have received a significant amount of interest from many of the top elevator companies about this new product. In anticipation of our initial release of the product, we have begun discussions with a number of elevator manufacturers, on the value that this package will provide to their new and refurbished installations.

During the quarter, we completed our initial sales and product information training for the Northeast WESCO sales force. This training effort proved to be a good starting point, as we hosted a WESCO day recently at our New York facility. The day was targeted to present and demonstrate the capabilities of Capstone's systems to some of WESCO's largest corporate clients in the greater New York area. We were very pleased with the interest generated and response that we received, and the WESCO sales team is now following up on the leads generated from this presentation.

Next, I would like to speak about our activities with KeySpan Energy. As you may recall, we announced our marketing promotion campaign with KeySpan during our fiscal first quarter. KeySpan mailed promotional material to approximately 1200 of their customers. We were very pleased with the response to this mailer. We received a response rate of about 7%, which is statistically quite high for a mailer of this type. As we received the responses, joint KeySpan and Capstone sales personnel have been meeting with those prospective customers, performing site evaluations and preparing proposals for their consideration. We will keep you appraised of our progress on this important sales initiative, as we move forward.

In order to manage the volume of inquiries occurring in the New York market place, we have recently repositioned sales resources to our Brooklyn office. Today, we have three sales persons, two application engineers, two application support persons, a service manager, and one logistics and sales administrator, on-site. This brings the total number of Capstone personnel in the New York office to nine. By locating resources in New York, we can better serve the customer base, and we will be able to respond to their requests in a timely fashion. Additionally during the quarter, we continued to extend our presence globally. Shortly following our last conference call, we executed the required government documents to establish Capstone de Mexico, located in Mexico City. And this week, we announced the opening of our new China sales office, in Shanghai.

On the operations front, I'd like to provide you with an update on our product cost reduction initiative. During our last call, I discussed our supplier development action plan, and the targeted areas of electronics, electromechanical components, sheet metal, castings, and machine parts. This quarter, we have finalized supply agreements for C60 components. These reductions, and the reductions that I discussed in our last conference call, will begin to impact product that we ship beginning in January of 2006. This accomplishment brings the total savings for C60 product line to approximately $2,500 per unit. And, we will continue to develop and implement additional cost reductions to effect continued improvements in the future.

Now let me shift our discussion to the area of product development. First, an update on the progress of our C200 development activities. We continue to perform our analysis of the equipment returned from our UC Irvine testing, and are integrating those results into our commercialization plants. Furthermore, we recently installed one of our beta test units at our New York test facility for winter performance testing. We decided to do this in response to numerous market inquiries in the northeast region, and our desire to obtain real world testing through the rather harsh northeast winter environment. As this testing progresses, we will keep you appraised of our progress. On another front, we are completing the testing and evaluation of performance on our C65 bio-gas microturbine product. Thus far, testing of the product has proceeded extremely well, and we expect to release this new product for production in early February of 2006.

You may recall that we recently reported the accomplishment of 10 million cumulative run time operating hours of our installed base. We are obviously very proud of this accomplishment, which has been achieved as a result of the product improvements and sales efforts over the last two years. And today, reflective of our commitment to continuously improve our product performance, I'm very pleased to announce that effective Jan 2006, the Capstone C60 microturbine will be replaced by the C65, with an installed output of 65 kilowatts, 29% efficiency, and NOx emissions of less than 5 parts per million. This approximate 8.5% increase in electrical output, 4% increase in efficiency, and a 45% reduction in NOx output, is reflective of our continuous engineering effort to provide our customers with the best distributed generation product available.

Capstone will continue its efforts to be a leader in the development of low emissions power generation equipment, with its lean premixed combustion system, that requires no after market cleanup equipment, keeping maintenance cost as low as possible. Continued efforts are underway to further reduce emission levels, to achieve the stringent carb 2007 requirements, and additional updates will be provided by me as we demonstrate progress. Thank you for joining us today. And we will now take your questions.

And your first question comes from the line of Sanjay Shrestha with First Albany.

Great. Good afternoon, guys. First of all, congratulations on a gross margin trend here. A couple of quick questions. Staying with the gross margin number, obviously sounds like we've taken a lot of cost out, and seems like it's an ongoing effort. Where could we see that gross margin as you guys exit fiscal '06? What are some of the other ongoing initiatives over at the Company at this point in time?

Hi, Sanjay This is Chuck. I'll take the call. The biggest area where we're seeing improvements, there's really three fold points of opportunity. As we're seeing higher volume, that of course is increasing our purchasing power, in terms of being able to go to our supplier base with larger volume orders. Second point is, as you know, we're running one shift. And as you saw in this quarter, one of the primary areas of improving our margins is, as we pushed up to $5.7 million in revenue for the quarter, we had better absorption in the factory in terms of fixed overhead costs. And the third element, as what John talked about in his prepared remarks, was of selected outsourcing of components, is also driving up our costs. So as we look forward, those are the three ingredients that really give us confidence that we're on a good trajectory to achieving our goal of going cash flow positive by the end of 2007.

Great. Great. Just a follow up on that, Chuck. So the $2,500 saving per unit on the C60 unit, is that already reflected in that negative 19% gross margin here in the second quarter? Or is that an incremental, so that gross margin number is essentially heading the right direction as you go into Q3 and Q4 of the fiscal year?

That's right. The 2500 John mentioned, won't cut in until January 1.

Got. Okay. So just then also, on the operating expense line, I guess we had a couple of, sort of, one time related stuff here in the SG&A line. But when we think about the second half of the year here, you guys seem to be ramping up your operations, and the sales force ramp up here in New York, and maybe the ramp up also in Shanghai office, and Mexico City as well. I mean, would that really sort of give you some meaningful uptick on SG&A line or the operating expense on a sequential basis? Or how shall we think about that?

Sanjay, this is John.

John, how are you?

I'm fine, thanks. The movement in personnel has been just that. That's why I used the term in my prepared statements, "repositioning." What we've done, is actually taken some of our associates that were in the sales department, we've reassigned them to Singapore, as an example, so it's not been additional head count.

Got it.

Similarly, the folks that are in the New York office, I mentioned we have nine folks there. Four of them have been reassigned from Capstone here in California. And the others are new adds, if you will.

Got it. So it's really more of a strategically right aligning the work force, than incremental additions, so the operating expense should not continue to trend higher?

Absolutely. Frankly, you know, the approach here is, let's put our resources that know Capstone, know our product, know how to apply and install it, and work with customers, let's put them where the best opportunities are. And we viewed that, obviously, to be New York. And we have certainly, while we haven't announced anything exciting in terms of new orders out of Asia and China, we see that as a very positive opportunity, and that's why we put two of our people at our Shanghai office.

Got. And if I could, a few more questions. Obviously you guys talked about -- John, I think you mentioned something in your prepared remarks about final approval shortly on the MEA application. When we say shortly, are we talking about weeks, months, or? Hoping if you can, maybe, give a little more color on that. And two, again, this C65 sounds pretty exciting. So does it mean that you are also going to get some increasing pricing leverage? And is it a wash with an increasing cost on that, or how should we think about that offering?

Let me try to take each of your questions in order. First on the MEA approval. In my prepared remarks, I did make the comment to you that we added some additional packages to that MEA approval process. That being, specifically, the elevator emergency package and our data center package, which we felt was another market opportunity for us that should be addressed for Capstone products in New York.

Yeah.

That did add a little time to the review process. And I think I'd be telling you a fib if I said to you that I could rush the city of New York along, but --

Understood.

Relative to shortly, I expect that within the next week or two, we should have our final approval. The city has been really very good to work with. We've had to produce numerous documents to assure them of the performance of our equipment. And I'm quite confident that we'll be achieving that final MEA approval, which by the way is one of the reasons, perhaps, you might ask, we've really been working the market and sales side very carefully. One of the concerns we had in not having that final approval number, was we didn't want to begin too many installations in New York that would be started, and then find that, perhaps, there was a requirement that we quite didn't fully understand.

Got it.

And we'll be able to do that, once we receive that final approval, which will really be important for us. And more importantly, we don't want to cause delays to our customers. I don't want to start a project, and then have to have a hiatus while we decide with the city about a new, undefined requirement. We'll get the requirements defined. We'll be clear in our direction. And that way, we can better serve our customers. So while quarter over quarter, as you noted, our sales were slightly flat in terms of backlog, I have very positive feelings about how we can move this forward, as we finalize that MEA process. So I'm very positive in that regard. With regard to the C65, for me, that was really the highlight of my prepared remarks today.

Yes.

It is reflective of the hard work that our engineering team has done to move our product forward, and improve not only on our performance from a robustness perspective, but also from the perspective that we're improving performance in the frame size, that was identical to our C60 microturbine. So without changing footprint or anything else dimensionally, including weight, we have been able to up the performance significantly, as I mentioned by 8.5% over our previous product, and of course, as we all know, customers pay for output power.

Precisely. One last question, then, guys. I don't know how much you can talk about it, but first, congratulations on a nice sales diversification here in the quarter. Is there anything more you guys can share with us regarding a ongoing discussion with the United Technology at this point in time?

Sanjay, there's really nothing that is reportable at this point in time. As we get to where there is something, of course, we will respond publicly and quickly as we can.

Okay. And congratulations on a good quarter, guys.

Thank you so much, Sanjay.

And your next question comes from the line of [Avi Kanikar] from [Roe] Capital.

Hi. I just wanted to ask you to speak a little further on the C65 product. I wasn't sure I really understood all of the benefits of coming out with the new product in basically a category that you already occupy.

Avi, could you please repeat that? We're having difficulty in our end hearing you. If you could just speak up a little?

Sure. I just wanted to ask you to elaborate further on the C65 product. I just didn't fully understand the benefit of having, essentially, a new product occupying the same marketing space that you're already in.

Oh. Okay, Avi. Let me make sure that we're clear here. The C65 will replace the existing C60 product. Okay?

Yes.

And it will have an output improvement for our customers of roughly 8.5%. So when you buy what was the old, if you will, C60 product, you'll now be receiving in terms of your output, instead of 60 kilowatts of power, you'll be receiving 65 kilowatts of power. Additionally, when the product, obviously, is installed in your facility, you'll be able to receive 29% efficiency, which is up about 4% over the past model C60 product. And additionally, as you may recall, we always talked about our microturbines having about 9 parts per million of NOx production or less. We're now saying that, as installed, you'll be able to realize 5 parts per million, which is a 45% reduction in NOx production from the turbine.

So what that means is, you're going to have more output, better efficiency, and less emissions. And that for our customers, across all three of those critical characteristics, are obviously very important. So we're really excited about, as a result of our continuous improvement program, our engineers have done an excellent job to really peak the performance out of what was once the 60, to now make it a 65 kilowatt machine.

Okay. And is there a change in the bill of materials, apart from the January first cost savings you mentioned?

You mean in terms of numbers of components or something like that?

Yeah. I'm just trying to understand --

No. This is all through the efforts of our supply chain folks, who have been working closely with our supplier base to improve their performance, to help us lower costs.

I see. Okay. Great. Congratulations.

Thank you.

And your next question comes from the line of Steve Kohl with Matador Capital.

Good afternoon, guys.

Hi, Steve.

Hi, John and Chuck. Let me touch on a couple of things. First of all, let me go to the easy one. I know you talked about you're reassigning some folks from California to New York, now. I presume, the last time I checked, I know it's a little bit mild in New York these days. But are you having any issue? Are these folks going to relocate physically to New York, with their families, or are they just going to work part-time out of there? Or how easy is that a sales proposition to them?

So far the sales proposition has been pretty good, Steve. We've actually relocated some permanently, and we've actually, two of them are temporary but on long-term temporary assignment.

Okay.

As we develop the resources there.

Let me hit you with a couple more difficult ones. If you look at UTC, for example, I know you answered the question with Sanjay, on kind of where you're at. But let me look at this a little bit differently. If you look in the quarter, I think you all mentioned in the Q that they are 6% of revenues, I think?

That's correct.

Do you have any color on what percentage of bookings they were in the quarter? And then, one step further than that, can you give us a little color on what, was there a mix shift within your bookings and backlog this quarter as well?

Steve, we'll have to develop that portion of the bookings that UTC was in the quarter. We just don't have that at our finger tips. In terms of the mix of business, it's been pretty consistent. The backlog is made up of our typical products of bio-gas, ICHP equipment, and you know, we've got some resource recovery product. So it's a pretty even split among our various products that we have available.

Okay. And one last one, you obviously, from Q1 you obviously had a big pick up -- or Q1 to Q2 you had a big pick up sequentially in backlog in this quarter, you're up more modestly. Do you think the MEA approval is the next catalyst that you see for the next step up in backlog and bookings? Or maybe you can kind of give us some color on how do you see -- what do you see is the next driver for bookings and backlog. Thanks, guys.

Well, you know, there's two things that I think that are really important to us as we move forward, Steve. You mentioned the MEA. Certainly as I mentioned in my comments to Sanjay, having that final approval is certainly very important to us, because it's solidifying both the risk for customers, and the risk for Capstone, in being able to move forward really briskly. The second thing that I would say to you, that in my prepared remarks I talked about us, as I actually had mentioned in the first quarter comments, in first quarter I said we would be training -- in the second quarter, the WESCO key sales personnel. I mentioned that we did have a WESCO day at our facility, with some very high level corporate clients of WESCO.

Just to name a couple as an example, we had the facilities directors from Goldman Sachs, and we also had the Lehman Brothers corporate real estate folks there, evaluating the potential of what Capstones would mean to their facilities, in helping them reduce their energy costs. So it was very positive in that regard. And with that kickoff with WESCO, now really being active with their corporate clients, we really see that as a second positive. And of course, last but not least, we kicked off the KeySpan promotional activity a couple of months ago. We're now really beginning to feel our way through how it's necessary to work with that clientele base of theirs. And we see that as a third possibility that can help, really become a catalyst, as you mentioned, to future order and sales growth.

Your next question comes from the line of Walter Nesdeo with Ardour Capital.

Good afternoon, guys.

Hi, Walter.

Hi. I have a question kind of -- and I know this MEA thing has kind of been talked about quite a bit. But my question is, I understand and I've kind of talked to [Denny] a little bit about how involved and intricate this whole process has been. Is there any way that can be translated into other metropolitan areas, as you do begin to expand out of the northeast, say like Chicago, or some other major city that has other codes and standards? The exercise that you've done here in New York, is that any way transferable into other markets?

Well, I think it is very transferable, Walt. Let me give you one example. I can share with you all publicly that when we announced our elevator emergency package, we got several calls into New York from places like Detroit and Chicago, because of their interest in how will they deal with emergency egress of the tenants of buildings, in the event of power outages or other catastrophic events. So I do believe that it's -- I truly believe that in the past, New York has set a standard, if you will, for the type of regulatory requirements that have been emulated in other cities around the country, perhaps not 100%, but certainly they followed their lead. And as a result, I truly believe that this will help start to set a standard for other cities throughout the U.S.

Okay. All right. The backlog is, like Steve noted, is a little less than it was the prior quarter. What kind of visibility?

No, it's up 2%, Walt.

It's up a little bit, Walt. It's up to 15.8.

Right. What kind of visibility do you have coming out into the rest of this calendar year and then early into next year?

As it relates to opportunities?

Yeah. Right. Areas other than up here in the northeast.

You know, we've got a lot of things in the marketplace that are, you know, really under work, if you will. As I mentioned to you, just on the KeySpan mailer, we have been out meeting with prospective customers and doing the type of work that's necessary, evaluating their site, preparing proposals. And we have a number of those that are out, and potential to close as sales. So I feel like we have pretty good visibility as we move forward.

And you know, there's activities going on in Asia, we're working projects in Mexico, and certainly we see opportunities that are beginning to boil up and have been active in Europe as we well. So there's a lot going on out there. It's just as we all know, the importance of the orders is bringing them across the goal line, and that's what our sales team is focused on. And I'm frankly very excited to have John Fink back in the Senior VP of Sales position, to help us drive those opportunities across the goal line.

Well, thank you very much. I appreciate it, guys.

Okay, Walt.

And you now have a follow up coming from the line of Sanjay Shrestha with First Albany.

Great, thanks. Just a quick follow up on the MEA approval, guys. How shall we think about that MEA approval, obviously anticipated here in the near future? Would that also facilitate, or even accelerate, some of the opportunities that might materialize with your relationship with the KeySpan? How should we think about that? Can you guys go into some more detail on that?

Well, Avi, it's John. Certainly having the MEA -- sorry, Sanjay, geez. I apologize. Gosh. Actually Avi's up is the next question. That's why I said that. I apologize for everybody. Sanjay, look. Having the final MEA, really crosses all opportunities, and in particular, certainly KeySpan. So it should be a positive, in terms of not only the activities of KeySpan, but the activities that we've begun to work with WESCO, and it's a positive all the way around. And quite frankly, I'm very excited about the potential that that approval will bring, as it relates to our elevator emergency package.

Okay. Okay. Great. Great. And in terms of an existing proposals, or anything like that that you guys can share with us, as it relates to KeySpan. And also if you could tie that with, obviously, at this stage in the game, should we take into consideration that maybe things can be lumpy on a quarter-to-quarter basis? Or would it be sort of like with a lot of opportunity out there, a lot of variety of market you guys targeting, we should continue to see, kind of, the sequential growth here, based on your year-over-year growth in the backlog for the second half of fiscal '06?

Well, Sanjay, I think that it would be -- I'd be remiss if I didn't tell you I was looking at targeting to obtain sequential growth. But, I think that as we begin to work the market, particularly in New York and elsewhere, we're going to see a little bit of lumpiness as we go forward. But with the broader opportunities that we see, not only here in New York, but in Europe and Asia, it's certainly going to be our focused effort to smooth that as much as possible.

Okay. But when you say lumpiness, with your existing backlog, that does support the continued sequential growth in your top line here in the near-term, but --

Right. The backlog that we have -- and I think we clearly commented on this is last time -- there was a question that asked, what's this backlog? When will it be realized? And we mentioned that it will be realized in this fiscal year.

Got it. So your comment is probably more towards the potential lumpiness on the new bookings?

On bookings, yeah. Sorry. I should have been a little more clear on that.

Got. That does it. Thanks a lot, guys.

Okay, good.

And you now have a follow up coming from the line of Avi Kanikar, with Roe Capital.

Now, I notice in your 10-Q and in more of your discussions, you're talking about the secure power market. This sounds like it's really opened up a new vertical for you, compared to the historical verticals of resource recovery and combined heat and power. And I'm just wondering if you can help us understand a little more about the market opportunity here. Clearly in New York, four years after 9/11 and two years after the New York City blackouts, it's finally looking poised to start adopting more secure power applications. Now with the gulf coast hurricanes, and your elevator product out, it does look like the federal government and other localities are getting a little better organized and learning some lessons to have a more speedy adoption of these applications. But I'd love to hear what perspective you have on this vertical.

Avi, this is John. I think this is probably one of the more exciting verticals that is available to Capstone product, particularly with our black start capability, if you will, our dual mode capability that Capstone has. If we go back to, you know, the lessons learned comment that you made, I absolutely believe that you're spot on. When I arrived here in 2003, and the northeast blackout took place, you know, it certainly brought to light the consideration of the importance of secure power. And then when you add to that what's recently happened in the gulf with the hurricanes, and certainly the most recent hurricane that crossed the peninsula of Florida, and look at the needs for secure power, we really see this as a very important aspect of our growth potential.

Not withstanding, we should always keep in mind that when we think about secure power, that is specifically what this elevator emergency package was targeted as a vertical. It will not only provide, as I mentioned, the secure power for elevator operation, but it will also provide ancillary power for communications, and other secure issues like emergency lighting and et cetera. So when you really look at that capability, and you think about the world that we live in today, I truly believe that one of our true growth verticals, as we move this business forward, we'll really start to see secure power becoming a more and more important aspect of our business focus. In that regard, though, I might point out that I was asked earlier a little bit about the balance of our orders and our revenue in this quarter. Secure power deliveries were about 5% of the revenue in Q1, and in Q2 of this year it was about 10%.

So I think you can see some traction being developed when I share with you all those specific numbers. And I truly believe as we move forward, and when you think about the sheer number of elevators that are existing out there in the marketplace, not only those which are need to be refurbished, but new construction, this will become, I believe, a very important play for Capstone as a product line, and in that vertical you mentioned as we move forward. I have been very, very impressed with the amount of contact we've had from the large, major elevator corporations around the world. Folks like Mitsubishi, [Tissin], Schindler, have all been excited and have begun working closely with us, to understand how this elevator package can assist them in providing a more secure, safe elevator system for their customers in the construction marketplace. So we see that with a very keen eye as an opportunity for improvement.

Thank you.

You're welcome.

And you now have a follow up coming from the Steve Kohl with Matador Capital.

Thanks, guys. A couple quick ones. John, you mentioned the secure power, it's like 5 and 10%. Do you have a little more color? Let me take that sliced a little bit differently, between OEM applications and retrofits? Then I got another couple quick follow ups.

For these particular segments that I just mentioned, Steve, those are primarily new applications.

Okay.

When we look -- when I mentioned refurbishments, I think what we'll see as we move forward, it will be particularly with our elevator emergency package that we'll really start to see the potential of activity there.

Okay. And on KeySpan, you talked a little bit about that relationship. Maybe I missed this and I got disconnected, so my apologies if you answered this. But within the bookings number or the backlog number, have you guys booked anything from KeySpan yet, or has that really, does that start to kick in through the -- since I'm not an expert on how the MEA relates to bookings, does that really start kind of in Q -- in the December quarter, March quarter?

Yeah, I think we did talk about it, Steve . But let me just reiterate. There isn't anything yet that's kicked in from the KeySpan activity in terms of the order book. As this MEA becomes finalized, one of the things that I mentioned was I expected that we would, now with that clarity, begin to see some things happening there.

Okay. And the last question is, just on in another one on your bookings, do you have any idea what the geographical mix, or how do you guys look at them within the mix of bookings and orders? You know, just whether how much is northeast versus west coast, or -- I don't know how you look at it, but if there's some way or some metric that you could potentially point to.

Yeah. We looked -- well, we typically look at bookings as it relates to the U.S., Asia and Europe primarily, Steve. And Chuck's, I think, trying to do some math over there.

Just to give you a feel for the second quarter, Mexico's, Canada, and other, were 25%. The U.S. was about 42% of our business, and Europe and Asia was about 32,33.

Thank you. Thank you very much, guys.

We're well spread out.

And your next question comes from the line of Tom [Cloggis] with Graham Partners.

Hi guys. Just one quick question on this MEA thing. In my discussions with people, I guess the one I'm trying to understand is, is if you guys get this MEA approved, does that set form factors? My understanding is it sets form factors and emissions requirements, et cetera, for those applications that competitors of yours would have to submit a MEA to compete on the same, to get the same kind of deal. Is that -- and that would then be a competitive advantage to you. Is that correct?

Tom, this is John Tucker. What I -- I don't know how the city will regulate going forward, quite frankly. But what I can tell you, is that the process that was developed in the city, this MEA process, was one that really puts in place the standard for defining the acceptance of a product to be installed in any building in the city of New York. So I know that the amount of work that we have put in place to meet the requirements, as we know them, of the city, has been really a terrific amount of effort.

And I think it will pay off in the long run, because what it will do is, I hope, provide a standard by which there would be a level playing field, for all manufacturers of this type of equipment, to be able to comply with. So I can't tell you if it puts us in a unique position, for sure, but certainly as far as I'm concerned, the work that we've put in should really be very positive for Capstone and our ability to be successful in this marketplace.

But just to confirm it, if the MEA is approved, the competitors would have to have meet those requirements.

I believe that certainly would be the case. The reason why I wasn't as forth right, is that one never knows what the regulatory agencies will do. But if you equate it to the similarity with emissions, we're all required to meet those same type of standards. So certainly one could expect that.

Okay. Thank you.

And you now have a question coming from the line of John [McKeen] with Wachovia Securities.

Hi, gentlemen. Nice quarter.

Thank you.

My question was, you opened an office in Shanghai, and are also going to be meeting with governor Schwarzenegger with the Chinese trade mission. Was there an expressed interest by the Chinese to have an office there?

Well, this is John. Actually, what the interest in the office actually came out of the discussions that have taken place over many months now, as we've begun our outsourcing activities looking for various suppliers in China. We believe that the interest that was demonstrated in our product, and the market that's available there was certainly a very big catalyst in us making the decision to set an office up in Shanghai. So, yeah, we really see that, not only the interest, but the real opportunity as well.

Is this an opportunity for secure power in the large cities, or is it a rural electrification type opportunity?

Wow. Where do I start? It's a really -- it's a real positive in both areas. It's not only the issue of secure power, but certainly as you know, China is developing at incredible rates of speed. There's numerous opportunities that we see ongoing there, with companies as an example like China Oil and Gas, China Mobile, Beijing Gas, China Waste Management. As you might imagine, we're very excited with our new product coming out in February, that I mentioned in my prepared remarks, that that being our C65 bio-gas machine that will have tremendous opportunities, we believe, in the marketplace in China. Because certainly waste management is a real issue. And if we can take the bio-gas coming off of the landfills, et cetera, and feed that essentially free fuel into our microturbine, we're making electricity at very, very inexpensive cost. So, yeah, we're very positive and upbeat on the opportunities in China as well.

Any estimates as to what part of rural China needs electricity at this point?

Gosh, you know, if you look at it in a number of areas surrounding Shanghai, as well as Beijing, we just -- we're just now doing that pick work, if you will, with our new sales team that's located in Shanghai, and developing clearly those areas of interest. But if you look around Beijing and Shanghai, gosh, there's numerous opportunities that we see as near-term as well as long-term possibilities.

Thank you.

You're welcome.

And ladies and gentlemen, that concludes the question and answer portion of today's conference. I'd now like to turn it over for closing remarks.

This is John Tucker again. I very much want to thank you all for joining the call today. We're very pleased with your participation, and we look forward to talking to you at the close of next quarter. All the best and thanks, guys.

Ladies and gentlemen, we thank you for your participation in today's conference.