Capstone Green Energy Corp (CGRN) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the fourth quarter and fiscal year '08 Capstone Turbine earnings conference call. My name is Erica, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS).

I would now like to turn the presentation over to your host for today's call, Ms. Libby Reynolds, VP and Chief Accounting Officer. Please proceed.

Thank you. Good afternoon and welcome to Capstone Turbine Corporation's conference call for the fourth quarter and fiscal year ended March 31st, 2008. I am Libby Reynolds, your contact for today's conference call. Capstone filed it's Annual Report on Form 10-K with the Securities and Exchange Commission today, June 12th, 2008. If you don't have access to this document and would like one, please contact Alice Barsoomian at 818-407-3628, or you can view all of our public filings on the SEC website at www.SEC.gov.

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, among other things, future financial performance and attaining profitability, the ability to reduce costs and improve operating efficiencies, achieving positive gross margin and operating margin, compliance with certain government regulations, and increased government awareness of our products, opening new markets for our products and attracting large customers to our products, the performance of our products compared to other technologies, new applications for our products including the hybrid bus, oil and gas, Class A office building, and biogas markets, revenue growth and increased sales volume, our success in key markets, our ability to enter into new relationships with channel partners and distributors and other third parties, the energy efficiency, reliability and low cost of ownership of our products, the expansion of production capacity and improved inventory turns, value to our customers of our new low emissions product, future applications for our products, and the environmental [regulating] of our products.

These forward-looking statements are subject to numerous assumptions, risks and uncertainties, including the following, our expectations about expansion into key markets may not be realized, Certain strategic business and [inaudible] relationships may not be sustained and may not lead to increased sales, we may not be able to reduce costs or improve customer satisfaction, we may not be able to secure future financing, we may not be able to expand production capacity to meet demand for our products,

We may not be able to attain sufficient materials at reasonable prices, our release of new products may be delayed, or new products may not perform as we expect. We may be unable to increase our sales, and sustain or increase our profitability in the future. We may not be able to obtain or maintain customers, distributor, and other relationships that result in an increase in volume and revenue. We may not be able to comply with all applicable government regulations.

We may not be able to retain or develop distributors in our targeted markets, in which case our sales would not increase as expected. And if we do not effectively implement our sales, marketing, service and product enhancement plans, our sales will not grow, and therefore we may not generate the net revenue we anticipate.

These are among many factors which may cause Capstone's actual results to be materially different from future results, in particular when applied to such statements. We refer to you the Company's Form 10-K, Form 10-Q, and other recent filings with the Securities and Exchange Commission, for a description of these and other 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 will now turn the call over to Darren Jamison, our President and Chief Executive Officer.

Thank you, Libby. Good afternoon everyone, and welcome to Capstone's fiscal 2008 and fourth quarter earnings call. With me today is Ed Reich, our Executive Vice President and Chief Financial Officer, Mark Gilbreth, our Executive Vice President and Chief Technical Officer, and joining us on the phone is Jim Crouse, our Executive Vice President of Sales & Marketing.

Today I would like to start the call with a quick review of the significant events of fiscal 2008, and then have Ed walk us through the financial results for Q4 and the total fiscal year. Ed will then turn the call back over to me, and I will discuss our progress towards our strategic objectives, and review developments in each of our key market segments, and finally talk about what we hope to achieve in the new fiscal year, before I open the call up to your questions.

During fiscal 2008 we began to see the impact of our new management team, and our new marketing and branding strategies. We also dramatically improved our relationships with our business partners. During the year we added 15 new distributors, improved relationships with old distributors, and our key vendors. In addition in the last year, we have reduced employee turnover from an unacceptable 38%, to currently 10%. 38% turnover is the equivalent of replacing our most important assets approximately every 2.5 to 3 years. These improvements have led to Capstone increasing revenue to 31.3 million, or 49% from the prior fiscal year.

Unit sales of our products increased from 277 units in fiscal 2007, to 434 units in fiscal 2008. Our backlog entering fiscal 2009 is a record $27.9 million, or 428 units, an increase of 458% from the prior fiscal year. To help put this backlog in perspective, we entered fiscal 2008 with only $5 million in backlog, and achieved 31.3 million in revenue. This year we ended the year with essentially as many units in backlog as we shipped in all of fiscal 2008. The combined backlog was stronger than anticipated demand for our new C200 and C1000 products, makes me believe that fiscal 2009 bodes very well for Capstone.

I now want to take a minute and review some our fiscal 2008 highlights. In September, we announced the signing of a strategic agreement with UTC Power Corporation, part of United Technologies or UTX for $12.8 million, for the development and launch of the 200-kilowatt product. This agreement was critical to our success in several ways, as it afforded not only the cash to commercially launch the C200 product, but also gave us access to tremendous engineering resources from the UTC's Pratt & Whitney and Hamilton Sundstrand divisions.

These engineers are providing a broad range of expertise, and assisting in the development of the C200 product. The $800,000 in engineering support has been invaluable to Capstone, to ensure the C200 is a world-class product, the first day we start commercial deliveries later in September.

In October we received an initial $3.8 million order for a new C200 product, only a month following the announcement of it's initial launch. The new 200-kilowatt product allows us to penetrate markets that were not available to us with our current C30 and C60 series product line. As can you see from our 10-K today, we have almost tripled our C30 sales in fiscal 2008. Obviously this is a tremendous C30 sales effort, but if you look at the revenue generated from our C30 business in the last 2 years combined, it is less than the revenue of our C200 presales.

C200 not only gets us into markets we could not penetrate with our C30 or C65 products, but also improves price tremendous leverage scale to our business as we move forward, that we have not enjoyed in the past. Also in October we announced the release of our ultra low emissions product, which meets the stringent California Air Resources Board for carbon emissions standards.

Installing six of these carb certified C65 MicroTurbines, operating 24 hours a day, reduces nitrogen oxide emissions approximately 5 tons per year, which equates to the same environmental impact of taking 258 cars off the road, based on EPA emissions and efficiency data for the average U.S. power plant and average passenger vehicle.

In December Capstone announced the new C1000 product. Based on the C200 product line, it can be configured into 1-megawatt, or 1,000 kilowatts, 800 kilowatts, or 600-kilowatt solutions. This product allows further penetration into the 1 to 10-megawatt market. We plan to package it in a standard ISO container which has a small 8' by 30' footprint. We will have competitive pricing, built in redundancy, ultra low emissions, be stackable, and can be deployed in configurations up to 10 megawatts.

We recently announced our first C1000 order, when I was in Milan last week at POWER-GEN International, we received orders for our first C800, and a follow-on C1000 order. In addition this afternoon, we are pleased to announce the order from OfficePower for four more C1000s to be deployed in 3 Manhattan high-rises. Management believes that this new product will be well-positioned in the marketplace, offering piston engine pricing, fuel cell emissions, and gas engine reliability.

Also in December we announced the release of our liquid fuel C65 product, and an initial order from entity DoCoMo in Japan. We developed this product not only to serve traditional diesel applications, but also for the growing green applications utilizing BioDiesel and ethanol. In March our efforts in the hybrid electric bus market, were rewarded with orders in excess of $5 million.

Transit properties worldwide are seeking cleaner, cost effective, reliable transportation solutions. When you combine the high reliability of our MicroTurbines with the low total cost of ownership, it's a natural fit for transit properties around the world, looking to cut emissions, improve bus pull-out rates, lower operating expenses, and improve overall rider satisfaction.

During fiscal 2008 we saw significant growth in the oil and gas market. The oil and gas market will continue to be major focus for us in fiscal 2009. As it leverages our value proposition of higher liability, long maintenance intervals, and low total cost of ownership. I believe this fiscal year's significant accomplishments illustrate that Capstone has taken the necessary steps towards achieving our strategic goals of near term profitability, and building long-term shareholder value.

At this point I would like to turn the call over to Ed, to review our specific fiscal 2008 and fourth quarter results. Ed.

Thanks Darren, good afternoon everyone. I would like to provide you with our results for the fiscal year ended March 31st, 2008 and the fourth quarter.

Revenue for the year ended March 31st, 2008 was $31.3 million, an increase of 49% from the $21 million reported in the prior year. Gross loss for the year was approximately $3.8 million, or 12% of revenue, compared to $5 million, or 24% of revenue, from last year. This represents an improvement in gross loss of 12 points. Year-over-year improvement for gross loss is primarily due to increased volume, on both our C30 and 65 products, and lower warranty expense. Improvements were offset by increased manufacturing costs and lower overhead costs in ending inventory, due to our reduction of finished goods at the end of fiscal 2008.

R&D expenses for the year were $8.9 million, improved $500,000, or 5% from the prior year. R&D expenses declined as a result of increased benefits from the cost sharing program with UTC, offset by increased engineering expenses related to the C200. SG&A expenses for the year were $25.6 million, an increase of $1 million, or 4% from the prior year. The increase was primarily due to increased travel related to customer site visits and trade show activity, and higher facility costs offset by lower administrative costs.

Our net loss for fiscal 2008 was $36.1 million, which improved $600,000, or 2% from the prior year. The cost per share for the year was $0.25, or $0.07 better than last year on higher shares outstanding. As of March 31st, 2008, cash and cash equivalents were $42.6 million, cash balances at the end of the year decreased by $17.7 million. Backlog attend of the quarter was $27.9 million, increased 113% from Q3, and 458% from the prior year.

Revenue for the fourth quarter was $9.3 million, increasing approximately 60% from the same quarter last year, revenue for the fourth quarter was marginally higher than the third quarter. Loss for the quarter was approximately $500,000, or 6% of revenue, compared to $1 million, or 17% of revenue from the same period last year. Gross loss for the third quarter was $40,000. Quarter-over-quarter improvement in the gross loss percentage was primarily due to increased sales volumes for the C30 and 65 products, and lower warranty expenses. These improvements were offset by higher manufacturing and overhead costs.

R&D costs were $2 million for both the fourth quarter, and for the same period last year. R&D costs were up approximately $200,000, or 11% from the third quarter. R&D expense was higher in the fourth quarter of 2008 compared to the same period last year, but were offset by increased funding received from UTC.

SG&A expenses were $7.4 million for the fourth quarter, an increase of $1.1 million, or 17% from the same period last year, and increased $900,000, or 14% from the third quarter. The increase in the fourth quarter of 2008 over the prior year quarter was primarily due to increased labor and consulting costs, an increase in accounting fees, facilities and increased travel and trade show costs, reduced by lower bad debt. Fourth quarter net loss was $9.5 million, an increase of $1 million, or 12% from the prior year comparable quarter, and was up approximately $1.9 million, or 24% from the third quarter.

Cash used in operations during the quarter was $2.5 million, down from $3.3 million in the third quarter. It was our lowest cash burn since June 2000. Loss per share for the quarter was $0.07 per share compared to $0.06 per share for the same period last year.

In an effort to provide our shareholders a better understanding of our operating model, we have added additional information to our 10-K on backlog, unit sales, estimated cash flow positive, in terms of units and overall plant capacity. We hope you find this additional transparency into Capstone's business helpful in charting our path to profitability.

I will turn the call back over to Darren.

Thanks, Ed. As I look at the fourth quarter I see another solid revenue quarter, but I am most encouraged by our tremendous backlog growth as we enter fiscal 2009, with a record $27.9 million in backlog. In addition, we again managed lower inventory levels, approximately $2 million while achieving over 9 million of revenue.

Inventory decreased $7.6 million during fiscal 2008 on substantially increased revenue. However, expenses did increase during the quarter, as Sales and R&D increased spending related to the new C200 and C1000 product launch. I look forward to seeing the results of that spending when we launch the C200 and C1000 later this fiscal year.

Our market research indicates that these two products will allow us to more than triple our addressable markets, and should enable continued strong revenue growth. The ability to sell C200 and C1000 products utilizing the same sales and distribution channels and production facilities, will help Capstone provide much needed leverage of our fixed overhead costs.

In Fiscal 2009, I look forward to not only the launch of the C200 and C1000 products, but also the continued growth in several of our key markets, including oil and gas, hybrid electric busses, Class A office buildings, and multiple biogas applications. In the coming year, Capstone will work to better position our products as a green solution for a global market, and work with state and federal governments to increase the awareness of our commercially priced clean and green products.

As they say in politics, you are either at the table, or you are on the menu. Capstone has recently recruited an experienced government contracting expert, to help us get a seat at the table, and improve our awareness and support of our technologies. I believe that Capstone is an excellent power generation solution for a changing world, because unlike solar and wind technologies, our efficient combined heat and power systems reduce greenhouse gas and criteria pollutant emissions, 24 hours a day, 365 days a year, with or without a sun or wind resource, and even without the benefit of electric grid.

Now I will take a minute to update you on the progress several of our key markets, and discuss what you should expect to see from Capstone in the coming quarters. The European and Russian markets continue to show tremendous growth from last year, and have been enthusiastic early adopters of our new C200 and C1000 products.

In addition incentives in markets like Germany, France, Spain, Italy, continue to drive Capstone progress into biogas, landfill, and wastewater treatment plants. The spark has spread in the U.K. and Russia, it is the best it's been in recent years, and is driving combined heat and power opportunities into those countries. You should expect to see the European and Russia markets continue to grow, as the new liquid fuel 65, C200, and C1000 products continue to get traction in these key markets.

The market in New York continues to be a prime opportunity for Capstone's products, because of it's need for clean and reliable power solutions, and the fact that buildings make up 75% of the city's greenhouse gas usage. We are in the process this week of a major sales and marketing blitz with our distributor, RSP Systems and WESCO, a Fortune 500 listed company. The CEO of WESCO and I were in New York last Monday, to personally kick off this sales event of our combined sales teams, which made up over 100 joint presentations to specific targeted potential customers in the New York and New Jersey area. I look for continued slow but steady growth in the New York market, as our partners increase marketing efforts to achieve improved results.

Also in New York, the hybrid electric bus market continues to generate opportunities, as represented by a recent order from our OEM, DesignLine International. In this application, the MicroTurbine acts as a giant battery charger for the all electric bus. The electric bus powered by our MicroTurbines, provides lower emissions, less noise, less vibration, and much improved fuel mileage. California remains a good potential market opportunity, which was limited last year absent a carb 2007 certified product.

With our official certification from the Air Resources Board in September, we are able to once again re-engage this key market. I would look for this market to again start producing in fiscal 2009. As I said, in the oil and gas sector, we had a strong quarter, with significant orders from three large oil and gas producers. Today, Capstone's largest oil and gas customers are Gazprom in Russia, TMEX in Mexico, and Petrobras in Brazil.

Capstone should be successful in the oil and gas market, as petroleum exploration, production and transportation companies, are more focused on reliability, maintainability, and total cost of ownership, than they are on first costs. Because of this, I look for fiscal 2009 as an opportunity to continue to strengthen and broaden our global outreach efforts, as we attempt to gain additional market share in this key market.

During the quarter, we announced Reagan Equipment as a new distributor in the U.S. to handle oil and gas opportunities in the Gulf Coast area. Reagan has been in business over 60 years, and has been heavily involved in oil field sales and service deliveries.

We will continue to work hard in Asia, with a focus on the markets in China, Korea, Japan, and India. You will see slow but deliberate growth in these markets, as Capstone brings on additional distribution, and leverages our current partners, such as Samsung in Korea, will have increased it's market penetration in the combined heating and cooling markets for new high-rise apartments.

As we look to the future of Capstone beyond the current fiscal year, we are seeing other markets of interest beyond what we serve today. These markets include military applications, where our long maintenance cycles and high reliability could prove to be beneficial in our remote military theaters. When you consider the fact that our product has six scheduled maintenance events over five years, and a typical internal combustion engine has over 150 scheduled maintenance events over five years, you see how possible military applications could be very interesting.

We are also looking at potential marine applications, in both the yacht market as well as the commercial boat market, where emission pressures are forcing boat builders to look at alternative energy solutions for on-board power, generation, heating, and cooling needs. However I must say the two most interesting potential markets for Capstone are the Class A truck markets, and the solar or photovoltaic markets. The Class A truck market is interesting because of the current high diesel fuel prices, combined with pending stringent EPA 2010 emission requirements. Those two facts are putting tremendous pressure on diesel engines and truck manufacturers.

We are currently looking at the economics and design viability of commercializing our ICR engine product, to play a role in this large but competitive on-highway truck market. Capstone's ICR Turbine engine design could potentially feature higher efficiencies across a wide power range, while meeting pending EPA emission requirements, without costly heavy after treatment. This product would potentially be lighter weight, and have a lower hood profile than today's heavy duty diesel engines used in the market.

The second most potential interesting market is the solar market. Capstone is evaluating product development opportunities, to combine the benefits of MicroTurbine and solar concentrator technologies. The Capstone MicroTurbine uses natural gas or liquid fuel to heat combustion air. Solar concentrator technologies produce enough heat to provide combustion air at the required temperatures for our turbine.

This combined system would be capable of operating on sunlight during the day, and traditional fuels at night. The resulting system provides the benefit of operating 24 hours a day, at higher energy conversion efficiencies, that we estimate between 26 to 30%. We are currently working in the Company in both the truck and solar markets, to evaluate these opportunities and to validate a possible commercial design.

So in conclusion, when I look back at fiscal 2008, I am proud of my management team, I am proud of the entire Capstone organization, I am proud of our valued employees, key vendors, but I am most proud of our tremendous distributors delivering what we feel is the best year in the Company's history.

At this point, operator, I would like to open the call to questions.

Thank you. (OPERATOR INSTRUCTIONS). Our first question comes from the line of Sanjay Shrestha from Lazard Capital Markets. Please proceed.

Good afternoon, guys. Congratulations on cash burn, backlog, and traction here. Couple of quick questions. I mean, how should we really then think about the backlog number here, and the revenue potential over the next 12 months, Darren, you kind of mentioned a little bit that in your prepared comment about $5.5 million in backlog going into '08, you did about $31 million in revenue, book and burn of $26 million in revenue. You have got almost $30 million in backlog right now. I don't think that even includes C1000 products. How should we be thinking about where revenue tracks for fiscal '09?

Great question, Sanjay. First of all, realize that backlog is only product. It does not include parts and accessories or service. That is only strictly the product backlog. So obviously there is more on top of that.

The recent orders after March 31st, specifically the C1000s are not in that backlog. We anticipate that we would deliver the majority of the backlog we have stated at the end of March 31st, in the fiscal year by March 31st next year. We continue to heavily market the products, both the C200, the C1000, as well as our traditional products, and hope to continue to move that backlog as we move forward.

As I think I have told you many times, as we run the Company today, we are focused on revenue and backlog development, in fact, we like to look at those two together, and chart those going forward, to take the lumps out of the business and get a true picture of how we go forward. Cash is the other driver. We want to make sure that we manage our cash very effectively. I think we have done that last year by reducing our inventories, and getting UTC payments, and had a very nice cash quarter this quarter.

And then the third obvious driver is product development, bringing new products to market, specifically the Liquid 65, the C200, C1000, and HEV improvements to the product. Those are the three key areas we focus on, so specifically to your question, the C200s, C1000s, the vast majority should all ship in the next fiscal year.

What was the number for the service backlog?

Service accessories and parts generally are 30% of the product revenue, Sanjay.

Thanks. Another question here, guys. Obviously we are essentially doubling our addressable market with with C200 and C1000. You mentioned something in passing here, obviously the co-gen market, that the hybrid bus opportunity, and the oil and gas is there, but it also sounds like the opportunity with the military. I mean, is there something near term, or is it an early stage discussion that could turn into something tangible over the next 3 months, 12 months, or how should we think about that? How much of a near term opportunity is that?

I would say that the opportunities I spoke to at the end with the on highway truck market, the military, marine, and the solar market are all things we are looking for future development. I would say those are two to three years out before they provide any kind of revenue. I wanted to give a flavor as we look forward to the new year, what we are seeing over the horizon. We are at the point now that I think we can start raising the headlights a little bit on the car, and see what is on the horizon, and look where we take the Company after the C200.

Got it. In terms of the traction that you guys are getting with the C200 and the C1000, what do you expect your total CapEx number to be, with this anticipated growth here for this fiscal '09?

In fiscal '09, Sanjay, we are planning $5 million in CapEx to build out the C200.

In terms of the feedback you are getting from your customers on C200 and C1000, if you could also share with us some of the recent feedback that you got at the POWER-GEN in Milan, what sort of a profit margin are you seeing, even before thinking about the volume, as it just relates to C30, C60, versus C200 and C1000?

If you remember Sanjay, when we originally launched the C200, we planned on building 28 in calendar '08, and 110 in calendar '09. We were surprised by the initial orders that we received so quickly. We raised those expectations to 48 in '08, and 160 in '09. If you look at that approximately 208 over about a 16 month period, we have seen significant orders through March, and significant follow-on orders for both 200s and C1000s.

So we will continue to monitor that, and if necessary raise that production volume going forward. Obviously cash management, inventory management is crucial. So we will look very carefully before we change our manufacturing run rates on the product. We are very pleasantly surprised by the reception to the marketplace.

Not having commercial units running, either C200 or C1000, to receive the type of orders we have got really in the industrial sector, we are not talking about preselling [Eisel] and [Ruiz]. To presell a product like this in the industrial sector, in my 20 years is somewhat remarkable. So very excited about it. Puts a lot of pressure on the Company to deliver this product on time, and flawless the first time. We are very excited about it.

Specifically in Milan, we had a great booth, great traffic. We did an actual press event for the Italian market. We had over 150 people show up. Unfortunately, we only had 80 chairs. So the interest level again is extremely high. People like the concept of cheap piston engine pricing with the reliability of a turbine, and our emission rates are besides fuel cells, kind of second to none.

Got it. Congratulations on a great year, guys, and the outlook.

Thank you, Sanjay.

Our next question comes from the line of Walter Nasdeo with Ardour Capital, please proceed.

Thank you. Good afternoon, guys. Sanjay touched on most of the stuff I wanted to talk about. However, I would like to get a little bit of understanding on a comparative basis, the efficiency that you see in the 200 versus the efficiencies you are expecting to see in the 1000. Electrical, but more than that even, systematic or systems efficiency?

The C200 is the highest efficiency product we have. It is about 33% electrical efficiency at the generator terminals.

The real advantage we have compared to other products when you look at other gas turbines, that is the most electrically efficient product below 4.5 megawatts, below the solar mercury 50. Over other turbines, we have the most electrically efficient product. When you look at reciprocating engines, there are engines that have higher electrical efficiencies, but their challenge is part load applications. With the C1000, obviously power load applications versus a 1 megawatt engine, we cycle engines on and off to maintain that 33% virtually across the load range.

As you look at total system efficiency, it depends on how much of the thermal you can use. Obviously having all of our heat going into the exhaust, not going into the lube oil and antifreeze, it is very easy for us to maximize that energy coming from the exhaust, or from the thermal. We have seen numbers anywhere from 75% to the highest reported efficiency I have seen on this product is 93%, calculated by one of our partners. A very, very high total system efficiency with the product. Obviously the reliability and the maintenance intervals are also key drivers in installing the product.

Thank you. You are mentioning numbers, production numbers for the rest of this year into next year, that are starting to get pretty significant. What is your feeling, you said, well, if the orders kept coming, we would consider raising that number. Where would you find the break-off, as far as what would you be able to produce on the 200s next year?

I don't see us, Walter, as you know, our forefathers had big visions, so we are blessed and cursed with a lot of capacity. So the 160 units you are talking about in '09 is nowhere near our capacity. We are still running single shifts.

Our real challenge is materials and just scheduling those materials. We have done a great job of lowering inventories this year. Obviously as C200 materials begin to roll in, this quarter you saw some of the cost impacts from R&D and sales and marketing on the C200. Next quarter you will see inventories go up, as we begin to receive those materials. That is our biggest challenge.

The nice thing is with the presales we have these into an order board, and we can start to see in our production slots today, we are quoting customers out in March of '09, just going up September to December range, we are starting to fill up the first quarter of '09.

So what do you kind of foresee your mix going out into next year, as far as 30s versus the 200s and 60s? How is that shaping up?

We tripled our C30 business this year, and that was really on the back of the HEV market and oil and gas. I see both HEV and oil and gas markets as continuing to grow. So the C30 could catch the C60 in total volume this year.

Obviously the C200 we are sharing pretty much real-time with the world, how fast we sell these products, and your guess is as good as mine, to how much we can ramp it. The 1 to 5 megawatt space is the largest space in the power generation market. The total market is a $4 billion market, so there are lots of opportunities to grow this product, and all of our distributors are extremely excited and embracing this product, so we are very excited with the C200, C600, 800, and 1000.

You mentioned earlier but I didn't get it. What is the footprint of the C1000?

8 feet by 30 feet, and it's stackable, so you could put 2 megawatts into that same footprint.

You can parallel up to 10 of them to get to 10 megawatts.

If you wanted to put the absorption chiller on the roof in a separate package, you can do that as well. If you look at the order we got today for OfficePower, when you are putting product on a roof setback in Manhattan, footprint is very, very key. So being able to put 2 megawatts in a 30-foot by 8-foot space on a Manhattan rooftop is extremely valuable.

That is another one of the key reasons, besides obviously the efficiency of the product, and the reliability. The uptime we mentioned in the press release was 99.4%. Compare that to internal combustion engines, you are lucky to get 88% uptime, maybe 90. The C65 product is performing very well in the field.

What is the weight on that that you are putting of on the building?

About 45,000 pounds.

Okay. How are you going to get it up there? We have things going on with cranes here in the city.

Hopefully you can keep the crane standing for a while. But, yes, if the issue is you can't get a crane in, then we have to go with the C65. The C65 fits in a freight elevator. The C600, 800, 1000 will have to be craned.

Okay. Thank you very much, guys. Appreciate it.

Thanks, Walter.

Our next question comes from the line of Jesse Herrick with Merriman. Please proceed.

Hi, guys, how's it going?

Good, how you doing?

Not too bad. Going back to POWER-GEN in Europe, and how things went over there. You had the C200 on display, I believe, the first commercial one, is that right?

It was a precommercial unit, sold to green environment, going to a biogas plant in Germany. That is correct.

Is that on its way to Germany now, or is that -- ?

Correct. It left from the show over to Germany.

Do you guys plan on letting people know when the first preproduction one is up and running, or is that -- ?

I am sure it will be on our website. I don't know if that will be a press releasable event, but we will put it on our website that it is in commercial operation.

Okay. Switching over to the other press release you had today with OfficePower, I am not too familiar with these guys. How much have these guys deployed in the past?

They have done about 3 megawatts in the past, I believe, maybe 4. Relatively new company. Their first installation was with 12 of our C60s about 3 years ago.

Unfortunately we got sideways with them as a company, prior to my coming on board, and their next two or three installations were Elliott MicroTurbines, each one about 1 megawatt apiece. We have now successfully returned that relationship, and got Joel Wilson over at OfficePower to sign a national account agreement, so basically the next 20 megawatts of power he installs in New York will be Capstone product.

So that precludes him from using Elliott products?

The next 20 megawatts has to be Capstone, after that he will be open to look at other products. I don't see that happening frankly, the C1000 from a competitive standpoint is very competitive against the Elliott. It is going to be cheaper to install. He is very happy obviously with the reliability, 99.4%.

Our engineers are working with his engineers on ways to cut installation costs, improve construction schedules, I would say that we have got a close relationship with the [turnaround guy]. Overall efficiency, we are higher than Elliott, and we are also much cleaner than the Elliott. I think you are looking at Mayor Bloomberg, and what he wants to do with the city, our product is a very nice fit.

Got you. That is excellent.

C1000s on the roof tops, C30s in the busses, C65s in every hotel, so --

That sounds good. Now, for those three buildings you mentioned in the press release, what kind of timeframe are you looking at for those?

Those are C1000s, so those will all be after January of this year.

Okay.

So they probably wouldn't be installed until summertime at best, right.

We would probably ship, it would be our fourth quarter of this year. Construction schedules in New York can bounce around. I don't want to quote out of school.

Okay. Just I was looking in general. Okay.

And to switch gears again, the unit breakdown is very helpful. Are you planning on doing that on the K every year, are you planning on doing that for every quarter?

We are committed to it now. It will be in every quarter.

Perfect.

What we found, Jessie, we really want to get our institutional ownership up. We have got some additional folks like yourself following the stock with great models and great coverage. But giving a little more transparency to our shareholders we think is a positive. So we will continue to do it going forward.

Excellent. You mentioned, I haven't had time to pour through the whole K, obviously, you said you had unit break-even in here?

Yes, we do.

Where does that fall?

Depending on mix, approximately a 250 unit quarter.

So 1,000 units a year.

Yes.

250 per quarter, you said?

Yes, 250, yes.

And simple math, we have got approaching 60 distributors, but say we had 50. Each distributor does 20 units a year. Simple math, that gets you 1,000 units.

If our distributors were all actively engaged doing a good job with our products, 20 units is a the project a quarter, so we don't see these numbers as Herculean. Obviously from where we have been in the past, they look very big. But we have seen very nice growth this last quarter, and we are very well-positioned I believe with the backlog coming into this quarter.

Well, excellent. All right, well pass it on to the next guy for questions. Thanks a lot.

Thanks, Jess.

Our next question comes from the line of Eric Stine with Northland Securities. Please proceed.

Hey, guys, congratulations on the backlog and the cash burn.

Thank you, Eric.

Thanks.

A lot of my questions have already been covered. But I would assume, given the unit breakdown that you just gave, you are well on your way to your goal of being cash flow break-even by December '08?

That would be correct.

Fair statement.

Okay. Okay. Switching gears here to the C200, you guys have talked about these would going forward all be offered with a service contract. Is that still the plan, or it may depend?

Absolutely that is the plan with the C200. Obviously trying to get all of our new products to have service agreements, but specifically we told our distributors all new C200, C6S, 800s, and 1000s require a service contract. We are not getting a lot of push-backs on that.

Okay. As far as I know you guys as you have said are blessed with a facility that you can definitely grow into. But how flexible is your production there, as far as the C200? I know you have said that for next calendar year, 160. I mean, is that something that is pretty flexible, and you can change that to meet demand as it comes?

Absolutely. That 160 is not working three shifts. We have got enough production capacity and space, that we could increase that 160 significantly. So we are not concerned about that. We do have some capital expenditures to get the line up and running this year. We will manufacture them over at our stag facility in Van Nuys.

The 30 and 65 are on one assembly line. The C200 is on a separate, and the C1000 are on a separate production line. So lots of room to grow still. Very excited about getting to the 1,000 unit a year capacity, with a nice mix of all three products. And really the key is we want to have a complete product range from 30 kilowatts to 10 megawatts. We want to have solutions for our customers, oil and gas, biogas, landfill gas, CHP, whatever the market may be.

Okay. Thanks a lot on that. Just one last thing, just clarification. You guys have talked in the past that you have got C200 orders that call for I believe 29 to be delivered in calendar year '08. Is that still a good number to think about?

No, we are looking at 48 in calendar year '08, and 160 in calendar year '09.

Okay. So production, okay, so the 48 is not production, that is delivery in calendar year '08?

Correct.

Okay. Thanks a lot. Very helpful.

We talk about those numbers. We are talking about shipments. Obviously we will start building machines prior to September, you need to start building before you deliver them. We talk about commercial launch, that is shipments off the dock in September, 48 off the dock before the end of the calendar year, and 160 off the dock by the end of calendar '09.

Okay. Appreciate it, guys. Thanks a lot.

Thank you.

Our next question comes from the line with Abhi Kanitkar, RHO Capital. Please proceed.

Hi, congratulations, terrific quarter.

Hi Abhi, how you doing? Thank you.

So orders really showed explosive growth this quarter, up 100% sequentially, up kind of a crazy large number year-over-year. Now last quarter you talked about a new market developing in hybrid electric busses, this quarter you are talking about New York office buildings getting traction, and your order rate has really exploded higher.

Just wanted to get your perspective, because it looks like based on your C200, C1000 orders, that you have really hit a gigantic inflection point upward. Just wanted to get your perspective on sort of, is it improving your visibility to build? What kind of trajectory should we expect for the revenue ramp? Just any further color you can give us.

Sure. Sure. Well, obviously we grew our traditional standard 30/60 business almost 50% this year of organic growth. We hope to continue that organic growth. That is a pretty steep level, but we are going to continue as hard as we can to continue the 30 and the 65 growth.

The C200, if you assume $1,000 a kilowatt as an average selling price, you start doing 160 a year, that is 32 million in revenue. So the C200 alone would double our revenue over last year's numbers. So organic growth and and C200 growth, we should look for very explosive revenue going forward.

Frankly, I know we had a little miss on the EPS on this quarter. That is not our concern. Our concern is cash management, obviously additional orders in backlog, managing customer expectations, and getting the C200 to market on time, on budget, and working on the cost side. I mean, obviously Capstone has been challenged for really it's whole life, getting traction in the market, getting units in the field, getting sales and revenue up. As we now get to the top of this revenue mountain, we have really got to focus on margins.

And any further complexion you can give us on the near term revenue build-up, the analyst models assume fairly flat revenues going forward, very little revenue build-up. Based on these kind of explosive order rates, clearly it sounds like there is a great opportunity for much faster revenue build-up?

The challenge we have is that by taking over $7 million out of our inventory, we have gone from a just-in-case inventory method to a just-in-time inventory method, so ramping our short-term revenues is a little more difficult for us today than it would have been in the past. In fact, actually this quarter we are looking at parts coming in in the same month the units are going out. So that cash management strategy has limited our ability to short term ramp the business extremely quickly. But having units in backlog, having a more stable production schedule, and better parts turns, frankly, when I got here, we had 20 million of revenue, and 20 million in parts.

One turn is not a good business model. So we would like to see a little more of a stable growth. Feather in the C200, C1000, get our parts turns up to 4, and manage our cash to the best of our ability. We are very excited with the quarter from the cash perspective. To still have $42 million left in the ban,k with what we have coming up in front of us on a working capital requirement is very important.

Okay. And also as you start putting in place the elements for manufacturing of the C200, C1000 lines, have you now begun looking for bodies to add a second shift at the manufacturing plant?

We are staffing up this year. I think we will add probably 40 to 50 people, mostly in the manufacturing side. The one challenge we have, is the 200 and 1000, are a separate facility from here, in Nordhoff. We are already looking at three years out at a new manufacturing plant for higher volumes, and everybody under one roof. But definitely we are hand-building preproduction units today, and moving and setting up the manufacturing line for robotic welders, and higher manufacturing capacity going forward.

Terrific. Thank you.

Thanks, Abhi.

(OPERATOR INSTRUCTIONS). Our next question comes from the line of Jeff Osher with JMP Asset Management. Please proceed.

Hey, guys, thanks for the questions. I have a couple to throw at you guys as well. With regard to, as the previous caller was pointing out, the likelihood of a big revenue ramp, when I look at working capital, how should we think about that inventory, and if you can give us any color on the lead times. Because inventory came down again this quarter, a reflection of very good cash management on your part.

But at some point, given the fact that I may be looking at a different Street model than the previous caller, but I am showing about a 75% jump in the models for revenue which would be great. But don't we at some point need to see inventories, in other words, what are the lead times we need to build product, number one and number two source components, or raw materials? And I have one follow-up.

Great question. Our lead times vary, depending on the product. Obviously our stainless steel materials tend to be longer lead items. With what is going on in the materials markets, getting longer every day. So you will see this is probably the low water mark for our inventory this quarter. That is something we also did on purpose. We knew we had C200 inventory materials coming in, which will start in this current quarter that we are in as we build up for the September launch. So we are concerned about that, obviously.

We are very happy to have $42 million in the bank for working capital issues. But there is a risk, if this business ramps too quickly we could be challenged for working capital. Kind of like good cholesterol versus bad cholesterol but it is still something we would have to deal with.

Is that one of the reasons payables doubled sequentially?

Payables are up as a result of timings on the quarter-end check run, and increased inventory receipts that Darren was talking about, we are starting to see those inventories come in.

Again, you look at the numbers we are talking about building over 200 C200s, at $200,000 apiece, you overlay that with our traditional business, and you have to expect it to look a little bit different than we had historically. right. Wouldn't that show up in inventories, though, if you're taking on product, and you are stretching your suppliers?

Inventory would have been lower if we weren't purchasing for the C200.

Okay. That is helpful, then. And then with regard to your goal of cash flow break-even by December, is that on the P&L X working capital changes, or is that cash flow break-even from a cash flow from ops standpoint including working capital?

Including working capital.

Great, great.

Obviously if we blow the plan out, working capital could impact that.

I don't think anyone will be disappointed if that occurs.

I hope not. Again, it is a good problem. Just want to make sure, full disclosure.

Sure. And then just looking at the K, I am kind of skimming it. Who is Banking Production Center? Is that a distributor for you guys that was 18% of revs.

That is our distributor in Russia who is doing a great job for us. They continue to grow. The Russian market is a tremendous market.

They have been on board three years with us, and they have got a great reputation. Hired a lot of engineers out of the nuclear area, and so they are delivering products everywhere from Gazprom, which is mentioned is our largest oil and gas customer, trolley bus applications, they are doing chip plants, hotels, ski resorts, the grid in Russia is extremely weak, and very hard to get interconnect permits and additional capacity with, and with the price of natural gas over there, they are being extremely successful for us.

I just wanted to make sure that was a distributor. That is a perfect answer. Just one more. I know you guys don't want to give revenue guidance, and you have had a bunch of questions hinting at this, but with backlog up sequentially over 100% and revenues flat sequentially, that would suggest at some point you need to have a true-up through the income statement with a big jump.

And if the backlog when I looked at your K, it looks like the majority of the backlog growth was actually the C30 and 60s. So presumably, if those products were readily available, the analysts have you modeled for your second, third straight flattish kind of quarter. Shouldn't we see a Q1 significant uptick, given the backlog growth, and at some point that has to flush through?

It does have to flush through. I will let Ed comment here in a second. The issue is we drained our inventory down. A year ago we had 100 units in finished goods, which gave us great overhead absorption, it looked good on the gross profit line. Today that number is closer to 20 units we have in finished goods. So we could have built additional finished goods. We could have kept inventory levels higher at the expense of cash burn, to make the P&L look better.

We are managing this business on a cash basis, and to get revenue growth when customers want the products. So we have done a great job moving from tongue in cheek, just-in-case inventory model to just-in-time. Frankly if somebody wanted 100 units this month, we couldn't produce it. We wouldn't have all the parts. We are managing that part flow and scheduling these orders in a workman-like manner.

The 28 million in backlog you expect to flush through in fiscal '09?

That is correct. We are going to release C200s in September of this year.

What percentage of the backlog, I thought you guys, so there ares no C1000s, and then in your K the C200s were a pretty small part of the backlog I think, or were they not?

Unit-wise but not dollar-wise, right. And those are expected to flow flew the next 12 months, and we are going to release in September.

The best rule of thumb for an average selling price is $1,000 a kilowatt. So C30 is 30,000. The C65 is $65,000. So C200 is 200,000. Even though the numbers may be small, but the dollars are big. These numbers are March 31st backlog numbers. We have had significant orders received after the quarter, including the one we just announced today. The C1000s, C800s we got at POWER-GEN last week, we have not announced in a press release. We don't announce every order we get, especially if they're one-off orders or less than $1 million.

Thank you for taking my questions, and being so patient. Last one, what is the fully diluted share count when you guys do turn a profit?

When we are profitable what would it be?

Yes, what would the fully diluted share count be?

Of course, it depends what we add, if we add anything between now and then. We ended the quarter a little over 150 million shares outstanding. And then you would want to add, we issued 20 million warrants in which 18.5 million are still outstanding.

Those warrants are $1.30 strike price so they are obviously in the money.

Approximately another 10 million in options.

So roughly, what is that then, that is 150 plus 30, so about 180 on a fully diluted basis?

That is assuming all those warrants would come across by the time we got profitable.

Great. Thanks a lot, guys. I appreciate it.

Our last question comes from the line of Peter Castellanos with Glacier Partners. Please proceed.

Yes, hi, Darren.

Hey, Peter how you doing?

Just a couple questions back on the hybrid, the bus and the hybrid vehicle, or the hybrid busses, is the easiest marketing side for you to go with the battery companies, to hook up with a battery company?

No, we have really gone to the bus OEMs. Our challenge on this case is a lot of the biggest bus OEMs are also engine OEMs. So they make their own engines, so we have had our most success with independent bus companies, that are a little more open minded to other products.

We are very happy with the job that DesignLine is doing. They are increasing their manufacturing capacity, both here in the United States as well as in New Zealand. So they will do left hand drive at one plant, and right hand drive at the other plant. They are also looking at potential joint ventures in other parts of the world, so they could ramp their production faster.

Everywhere the demo bus goes it gets great reception. I think it is currently in Chicago. We are very excited about the product. We are also doing enhancements to it. We are coming out with a water-cooled power electronics package that will be smaller, potentially allows DesignLine to add a row of seats to the bus. So obviously a row of seats on a 12 year bus has a pretty good economic payback for this product enhancement.

I can't help but ask you about Northern Power. I notice a distributed filed, I guess chapter a week or so ago. Is there anything on Northern Power that is of interest to you?

Probably would be out of school to comment on that. Obviously they have got some great employees and some great products. We are not in a position right now I think to look at acquisitions. We have got a lot on our plate with the C200 and the C1000.

I am frankly more interested in the truck market, where Caterpillar may not have an EPA 2010 engine. Cummins has an engine that will probably have urea injection on board the truck, as well as decreasing performance. So I see the truck market, if I can get the right partner, as being a huge opportunity. I mean, that is 100,000 unit a year opportunity, and the solar market with the solar collectors, using our product in that market I think. The real weakness of solar is the ability to spot it, and the ability to run 24/7 without the grid. Those are two things we could help improve those weaknesses with our products.

Marine is really coming to us. We are getting mega yacht builders and tugboat builders coming to us asking for a marine version of our product. And Military we are getting the same thing, military integrators coming to us saying look, doing engine maintenance in the field, especially in harsh environments is extremely difficult, and your products look really good. Those are the four areas we are looking at, and that is where we will spend most of our time.

The last question I have got. Do you think we might see a deal for your air bearing technology in a parallel market, or in another vertical going forward this year?

I would say the answer is yes, but I am not sure on the timing. We are in conversations with probably half a dozen companies. Unfortunately we are under NDA with all of them. But we see lots of opportunities for our air bearings. It is the only bearing that works in a hot section of a jet engine.

So we are seeing large turbine applications, helicopter engine applications, airline APU applications, compressors, all the way down to turbo chargers. We have a team within Capstone, that is out there actively demoing our product, and working on development efforts with other companies. We are very open to that. I think the company in the past was a little more restrictive on sharing our technology, but I think the best way to keep somebody from stealing it, is to sell it to them at a reasonable price. That will not be our core business, though. That will be an ancillary product line for us.

Thanks very much.

Great. Thank you.

I would now like to turn the call back over to Darren Jamison for closing remarks.

Well, thank you, operator. Again, I am very excited about this quarter. Very happy with our employees.

I mentioned our turnover during the quarter, getting that down from 38% when I came to Capstone, to 10% today, with the new products we are bringing to market, and building long-term relationships with our vendors and our distributors, it is extremely important to have great employees like we have, and to keep them happy and part of the program.

All of the employees today are shareholders in the Company, another thing I changed when I came on board, and they are all following the right direction. Obviously we have a lot on our plate, to get the C200 launched, to get the C1000 launched, as well as our other initiatives. We need those great employees working a lot of hours this summer to get that done.

Thank you very much for your time, and we look forward to talking with you next quarter.

Thank you for your participation in today's conference. This concludes the presentation, you may now disconnect. Everyone have a great day.