Capstone Green Energy Corp (CGRN) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter fiscal year 2009 earnings conference call. I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions). I would now like to turn the call over to Ms. Jayme Brooks, Vice President of Finance and Chief Accounting Officer. Please proceed, ma'am.

Thank you. Good afternoon, and welcome to Capstone Turbine Corporation's conference call for the fourth quarter and fiscal year ended March 31st, 2009. I am Jayme Brooks, your contact for today's conference call. Capstone filed its annual report on Form 10-K with the Securities and Exchange Commission today, June 15th, 2009. If you do not have access to this document and would like one, please contact Investor Relations via telephone at 818-407-3628 or e-mail IR@captoneturbine.com. Or you can view all of our public filings on the SEC website at www.SEC.gov, or on our website at www.capstoneturbine.com.

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 in obtaining profitability, the ability to reduce costs and improve inventory turns and contribution margins, continued growth in current market conditions, the availability of a line of credit, the success of the C200 and C1000 products, compliance with certain government regulations, and increased government awareness of our products, increased opportunity for the sale of our products in the Obama administration, the success of our factory protection plans, opening new markets for our products and attracting large customers to our products, increased product parts commonality between the C30 and C65 products, new applications for our products, 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 the low cost of ownership of our products and the expansion of production capacity and manufacturing efficiency.

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 initiatives and relationships may not be sustained, and may not reach increased sales. We may not be able to reduce costs to improve customer satisfaction. The growth in our backlog has significantly exceeded our internal forecasts. In order to meet this increased demand we may need to raise additional funds to meet our anticipated cash needs for working capital and capital expenditures during the next 12 months. The current recession can make it difficult or impossible for us to raise necessary funds and for our customers to buy our products.

We may not be able do realize our line of credit. We may not be able to expand production capacity to meet demand for our products. We may not be able to obtain sufficient materials at reasonable prices. Our release of new products may be delayed or new products may not perform as we expect. We may not be able to increase our sales and sustain our increase in profitability in the future. We may not be able to obtain or maintain customer, distributor and other relationships that are expected to 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, predicted or implied in such statements. We refer you to 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 of 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 over the call to Darren Jamison, our President and Chief Executive Officer.

Thank you, Jayme. Good afternoon and welcome everyone to Capstone's fiscal 2009 year end earnings call. With me today is Ed Reich, our Executive Vice President and Chief Financial Officer, and Mark Gilbreth, our Executive Vice President of Operations and Chief Technology Officer.

Today I will again start the call with a review of our fiscal 2009 and then Ed will review the specific financial results. Ed will then turn the call back over to me and I will discuss our progress towards our strategic objectives and review developments in some of our key market segments, and then finally talk about what we hope to achieve in the new fiscal year, before I open the call up to questions.

For Capstone, fiscal 2009 was a year filled with many challenges, achievements and milestones, as Capstone continued to build strong market adoption despite the severe global recession and collapse of the worldwide financial markets. And fiscal 2009 may best be summarized as Capstone's year of growth, as we achieved significant growth in many facets of our business.

In fiscal 2009, Capstone increased revenues to approximately $44 million, for a 40% increase over fiscal 2008's revenue of $31 million. We accomplished this growth in a turbulent global economy and added to our fiscal 2008 growth of 49% over 2007. Capstone increased backlog to $61.5 million, or 120% increase over fiscal 2008's backlog of $27.9 million. This growth was on top of fiscal 2008, which was a year of 458% growth over 2007 levels. The majority of this backlog relates to the new C200, C1000 products, the greater portion of which is scheduled for delivery in fiscal 2010, as Capstone continues the production ramp and roll-out of this exciting, game-changing product.

In addition, we recently announced that our factory protection plan, or FPP's service contract backlog was in excess of $11 million. The broader global market is beginning to see the advantages of this unique factory-backed service product as customers can now lock in product life cycle costs for a minimum of one year and a maximum of 11 years. This is a program that is unmatched in our industry, and will provide not only value and benefit to our customers but reoccurring revenue with good margins for Capstone. Our FPP contract attachment rate should continue to increase as we ramp up the C200 and C1000 production volumes.

In fiscal 2009, Capstone broadened its family of ultra low emission, highly reliable, state-of-the-art power generation products from the original C30 and C65 products, with the commercialization of the C200 and C1000 family of products. This enables Capstone to compete in the multi billion dollar one to five-megawatt distributed generation space.

Capstone grew into additional market verticals by making product modifications of the C65 product during fiscal 2009. Capstone released a liquid fuel 65 product, focused primarily on the telecom market, and received early adoption from Japan's leading telecom provider, NTT DoCoMo. Capstone also released a C65 secure power product for applications in data center markets. Capstone received initial orders for both its upsource and hybrid UPS products for installation at Syracuse University and the prestigious Homeland Security data center.

In addition, in the first quarter of fiscal 2010, Capstone confirmed its focus on growing the electric hybrid vehicle market, with the announcement of the successful integration of a C30 into a Ford vehicle. With the support of Capstone, Langford Engineering designed and modified the Ford S-Max, a seven seater crossover vehicle into a series hybrid plug-in vehicle with a C30 under the hood. Langford records the Whisper Ecologic Car gets up to 80 miles per gallon in early demonstration testing. Using the C30 as battery charger, range extender sets it apart from major hybrids now available from the automotive manufacturers, which use conventional engines to provide both drive and battery charging.

The early performance numbers are extremely encouraging as Langford reports achieving not only 80 miles per gallon but the ability to drive 40 miles on electric power before the turbine generator starts up and begins to charge the batteries.

Going forward, Capstone will assist Langford in the marketing and demonstration of this plug-in and electric hybrid vehicle in hopes of further development of this concept with a suitable automotive partner who could commercialize this product for the US and capitalize on a portion of the Obama administration's $2.4 billion outlined in the stimulus fund to get more electric vehicles on US roads.

In fiscal 2009, we continued to increase our global distribution network. We strengthened our US channel with new partners in Alaska, Texas, New England, and the Southeast. Capstone's most exciting growth potential however, came internationally where Capstone added new distribution partners in the Caribbean, Chile, Ecuador, India, Thailand, Trinidad, Venezuela and Vietnam. These areas of growth have strengthened the viability of our Company, and have helped drive Capstone toward achieving our near term goal of cash flow positive.

I look forward to meeting the goals of the global economy and the need for green distributed energy as countries look to both lower their carbon footprint and yet supply clean, reliable and energy efficient electricity.

At this point, I would like to turn the call over to Ed to review the fiscal 2008 financial results. Ed?

Thanks, Darren. Good afternoon, everyone. I would like to provide you with our results for the fiscal year ended March 31st, 2009. Revenue for the year ended March 31, 2009, was $43.9 million, increased 40% from the $31.3 million reported last fiscal year.

The gross loss for the year was approximately $5.3 million, or 12% of revenue, compared to $3.8 million, or 12% of revenue from the last fiscal year. The increase in gross loss is primarily due to increased manufacturing costs, because of the product launch of C200 and C1000 series systems. These manufacturing costs were offset by higher margin product mix, primarily because of increased sales of C60 series systems and reduced warranty expense.

R&D expenses for the year were $8.1 million, improved $800,000 or 9% from the prior year. R&D expenses declined as a result of increased benefits from cost sharing program with United Technologies, offset by increased spending for supplies, labor cost, consulting and facilities expense.

Selling, general and administrative expenses for the year were $28.6 million, an increase of $3 million or 12% from the prior year. This increase was primarily related to increased labor costs, travel expense, marketing and professional services including accounting, legal and insurance expense, which was offset by a decrease for a change in estimate of legal accrual, reduced supplies and consulting expense. The increase in labor and travel reflected the continued effort to develop worldwide distributors and the launch of the C200 and C1000 series systems.

Our net loss for fiscal 2009 was $41.7 million, which increased $5.6 million, or 16% from last year. Loss per share for the year was $0.25. The loss per share remains flat year-over-year on higher shares outstanding.

As of March 31st, 2009, cash and cash equivalents were $19.5 million. Cash balances at the end of the year decreased by $23.1 million from the beginning of the fiscal year. The Company completed a registered offering of its common stock during the second quarter, resulting in net proceeds of approximately $29.5 million. Backlog at the end of fiscal 2009 was $61.5 million, increased 120% from the prior year.

Now let me turn the call back over to Darren.

Thanks, Ed. Revenues for the year were somewhat lower than we had targeted, as we experienced shipments being rescheduled 30 to 60 days as customers worked to better match product shipments to project schedules and better manage cash flows in today's difficult financial environment. Accordingly, Capstone ended the year with approximately $3 million of finished goods inventory sitting on the dock. Despite these delays, total revenue for the year was still at $44 million, which is a 40% growth over last year.

During fiscal 2009, we experienced an excellent new product order rate with over $66 million in new product orders. That outpaced product shipments of $32 million for the fiscal year. It is important to note that we still are not experiencing significant order cancellations and we're still seeing quarter-over-quarter growth in new product quotation activity and total product pipeline.

I attribute the quotation success to our new C200 and C1000 products continuing to gain market share as we again market these efforts in innovative new products. As I said, fiscal 2009 is best described as Capstone's year of growth, while fiscal 2010 will best be described as Capstone's year of cost reduction, working capital improvements, and positive cash flow.

We took significant steps recently to right-size our human capital. And reduced our professional staff by 41 and eliminated 16 open positions. This was approximately 20% reduction of Capstone's overall workforce. These reductions were in the face of 40% year-over-year growth in revenue and 120% growth in product backlog. Capstone has begun to lower its operating expenses with a target of at least 10% by the end of the current fiscal year. We have already seen progress in lowering expenses through the first two months of our new fiscal year. In addition, we strive to achieve improved product margins and drive toward a 35% to 40% gross margin, again, by the end of the fiscal year.

This reduction will be achieved by reducing direct material costs for the new C200 and C1000 systems by over 30%. Capstone has purchase orders in place today for a majority of the parts identified for the reduction program, and firm quotes from qualified vendors for the others. Over this new fiscal year, we will move through the first article and new part qualification process, and phase in these new lower priced components, and start to see the direct material cost savings hit the gross margin line.

In last quarter of fiscal 2009, the first reductions began to flow into our inventories. In addition, it's important to realize we have implemented two C200 and C1000 price increases over the past 14 months. These two price increases total 6% on the C200 and a 14% increase on the C1000 product.

Many of the C200 and C1000 units shipped in Q4 were orders received before either of these two price increases. More of these orders will ship in Q1, and then in Q2 and beyond, we'll begin to ship product with the benefit of both the lower material cost and the orders at higher selling price. These pending shipments that benefit from higher average selling price combined with lower operating expenses and the identified material cost savings, lowers the number of units required by Capstone to reach profitability in a given quarter, from 280 to 200 based on product mix. This is a reduction from 280 to 200 demonstrates the dramatic impact that 10% lower operating costs, 30% improved gross margin and 14% higher average selling price on the C1000 have on the viability and profitability of Capstone's business.

We built approximately two C200s per week in the last quarter of fiscal 2009 and are well on our way to a plan of three per week in the current quarter. I understand that many investors are anxious to see the higher production levels and the associated revenue. However, I'm committed to growing the C200 and C1000 product lines in a responsible, and orderly fashion, using a stair step production ramp, that not only delivers growth but also assures the higher quality, manufacturing efficiency, and lowest possible unit cost.

The stair step production ramp allows Capstone to focus on manufacturing efficiencies, product cost reductions and parts and vendor quality. It also allows Capstone to validate and optimize the product design, based on actual field experience from fleet leading units commissioned early in the production ramp process.

Capstone committed to produce one C200 per week in the first quarter of commercial production, two units per week in the second quarter, and three units per week in the current quarter.

We also recently announced that we finished the scheduled UL testing for the C200 product. This not only enables us to receive our C200 listing, allowing us to ship product in North America but also completes the final milestone payment in the 12.8 United Technology C200 development program. The final payment was recently received from UTC, thus closing out the successful C200 development program with UTC or UTX.

Speaking of UTC, they continue to transition the PureComfort product line from UTC Power to Carrier, their global air conditioning division. This process has been approached in a very deliberate and methodical manner by Carrier management. With Carrier's 130 US sales locations, the benefit of leveraging the Carrier channels of market and associated brand recognition, is considerably more attractive than what UTC Power was providing historically.

Now I'd like to take some time and update you on the progress in several of our key markets and discuss what you should expect to see from Capstone in the new fiscal year. The European and Russian markets continued to show growth from last year and have been enthusiastic early adopters of the new C200 and C1000 products. We recently shipped our first C600 to Russia. And have several C1000s and C800s scheduled to ship there in the coming months.

In addition, incentives in markets like Germany, France, Spain and Italy continue to drive Capstone's products into biogas, landfill and waste water treatment plants. We look for our distributor in Germany to gain additional momentum in the coming months as they capitalize on success of several farm based methane projects installed over a year ago.

We are pleased to announce we have commissioned several of the first C200s this quarter, and successfully commissioned the first C1000 in Spain. We will be commissioning a C1000 in France and the Dominican Republic in the next several weeks.

We expect to see the European and Russian markets continue to grow as we get positive results from our customers on the new C200 and C1000 installations. The market in the Mid-Atlantic, including New York, continues to be a prime opportunity for Capstone's products because of its need for clean and reliable power solutions. Our new distributor, E-Finity continues to make positive inroads working with Philadephia Gas, and has developed several shovel-ready products, seeking Obama's stimulus funding.

Our transit OEM partner, DesignLine, continues to ramp up production and has delivered the first hybrid buses, not only to Disney World in Florida, New York's MTA and most recently to Baltimore Transit. We plan to ship busses to UC San Diego and Antelope Valley in California later this year.

DesignLine is seeing increased quotation activity and hopes to see stimulus funding that will provide additional capital for their state-of-the-art, EcoSaver IV hybrid electric transit bus. California remains a significant market opportunity now that Capstone has our CARB certification. Our California distributor, Collicutt Energy, continues to gain momentum and we look forward to continued growth in this key market, close to home.

Capstone is actively lobbying a bill for microturbines to be included under the California Self Generation Incentive Program, or SGIP program. This program provides an incentive up to 30% of the installed cost of equipment and long-term maintenance program, these costs not to exceed $1,000 per kilowatt. Senator Kehoe is sponsoring this bill, SB-412, and it has passed through all Senate committees and full Senate vote with only one no vote reported. The bill now proceeds to the Assembly Committees before a full floor vote. Capstone has invited key assembly members to visit local area Capstone installations. Our goal is to see this bill passed in late summer or early fall.

We continue to make significant inroads in Asia, with the primary focus on the markets in China, Korea, Japan, India and most recently Thailand. We recently announced the sale of three C1000s to be installed in a 330,000 square foot China Southern grid dispatching building. This high profile project with a major Chinese utility will serve as a pilot program to show the benefits of microturbines in a combined cooling heat and power application. The project also is designed to illustrate how CCHP projects can easily and safely connect to the Chinese grid. This is important as China does not currently have a standard grid interconnection policy for distributive generation. If successful, this project will allow the Chinese government to develop new technical codes and incentive programs to support market development of CCHP, and combined heat and power projects.

In addition, Capstone recently announced that it has named Aqua Nishihara as its distributor in rapidly expanding Thailand. Aqua Nishihara, headquartered in Bangkok, designs and manufactures waste water treatment systems. In addition to selling Capstone microturbines for wastewater treatment systems, they will focus on opportunities in landfills, oil and gas operations, offshore rigs, agricultural biogas and combined heat and power.

As many of you know, water pollution is a key issue for Thailand, especially in the popular central region, where high levels of industrial and domestic wastewater exist. The Thai government has implemented a strategic plan for renewable energy development to increase renewable energy share of commercial primary energy to 8% by 2011.

Capstone continues its focus on the worldwide oil and gas markets, and has recently shipped parts and/or units to PEMEX, Petrobras, Petronas, Gazprom, El Paso Gas, Saudi Aramco, and Origin Energy in Australia. However, one of the most exciting new markets for me is the green data center market. Where Capstone recently announced that Rudolph/Libbe Companies and its subsidiary, BHP Energy, are building one of the world's most energy efficient computer data centers for Syracuse University. The data center is expected to use 50% less energy than a typical data center today, making it one of the greenest computer center operations worldwide.

The data center will make its own heat and air conditioning. Waste heat from microturbines will be linked to absorption chillers, which will use heat energy to make cold water to cool the computers. During the winter months, waste heat from the Capstone microturbines will be used to make hot water for an adjacent building. This is a unique installation, computers will be cooled with water instead of air. The on-site electrical trigeneration system will allow the green data center to operate completely off grid.

As we look forward, one of the keys to our nation's economic recovery is President Obama's stimulus package and upcoming energy bill and new environmental programs. Capstone is extremely encouraged by the President's vision and is looking forward to playing a part in recovery initiatives related to green building, energy efficiency, and government installations. Both the House and Senate are pursuing climate change legislation, but today, it looks like the Markey-Waxman bill out of the House Energy and Commerce Committee will be the likely vehicle.

The Waxman bill calls for 17% reduction in emissions from 2005 levels by 2020 and 80% by 2050. If passed, the government would use carbon revenues to make over $100 billion in new investments in renewables, energy efficiency, clean vehicles, plus more emphasis on carbon capture and storage. This bill also emphasizes a carbon and cap trade program and mandates new energy efficiency standards for buildings, appliances and industry.

I expect to see new and increased federal tax incentives. As you know, today, Capstone microturbines and CHP are both eligible for a 10% investment tax credit. The remaining asset can be depreciated on an accelerated basis, and are eligible for bonus depreciation of 50% in year one.

Capstone, along with the US Combined Heat and Power Association, are lobbying for a 30% investment tax credit for highly efficient systems of 75% to 80% or a 30% tax credit for technologies that meet ultra low emission standards, such as California's CARB rules. We look forward to the passing of these new bills and a comprehensive new environmental entry plan as it surely will focus on lower emission rates, higher efficiency and an overall reduction in the carbon footprint of our country.

The President's stimulus program is starting to move forward and we are excited by the announcement of the $156 million DOE grant program for CHP release in early June and the subsequent $240 million DOE program for efficient trucks released last week. The CHP program provides project grants and awards of $1 million and up and Capstone is currently working with distributors to file applications under this DOE program by mid-July. In addition, we're seeing signs of municipal and waste water and landfill funding starting to trickle down into state coffers.

Capstone is taking an aggressive, proactive approach on potential project funding and working many different DOE and federal opportunities. One such opportunity that Capstone and DesignLine are jointly working on is to gain enhanced subsidies for transit properties to buy new hybrid electric buses.

Capstone has also directly submitted several proposals for R&D funding from the Federal Government for development of high efficiency turbines, the ICR turbine, and a new fuel flexible turbine that can operate on both hydrogen or syngas. We are also renewing our training and focus on GSA, our government sales program and have opened up a GSA opportunity to all of our US distributors.

As I look forward I expect to see a new renewable energy standard in the coming months. This will be a national standard requiring utilities to supply a set amount of electricity from clean energy and is a key provision of the energy policy in 2009. The House version of the plan requires 15% from renewables by 2020 and 5% from energy efficiency by 2020, with CHP being considered an energy efficiency measure. The Senate version has similar requirements and CHP again is also eligible for energy efficiency. Capstone's government team is deeply engaged in the current debate on how to measure and credit CHP and CCHP systems under these new exciting programs.

Regardless of the final outcome, Capstone's ultra low emissions, high electrical efficiency and ability to operate on renewable fuels will surely position Capstone well under the nation's new energy bill. As I mentioned in the last call, in response to the stimulus program, Capstone has doubled its lobbying efforts on the Hill in Washington, DC and will continue to make sure microturbine-based solutions are given full consideration.

In closing, as I reflect back on fiscal 2009, I will remember it as a year of substantial growth for Capstone. Not only growth in our revenue, but growth in our backlog, growth in our products, growth in our markets, and most importantly, growth in our key distribution partners worldwide.

Now into the first two and-a-half months of our fiscal 2010 year, I look forward to making this our year of cost reduction, working capital improvements, and finally, generating positive cash flow. I am very confident that this is -- Capstone's management team is correct, that we have the right plan to deliver and to execute the objectives of reducing operating expenses at least 10%, and a C200 and C1000 product cost reduction of at least 30% by this fiscal year end.

The team and I are incredibly focused on making Capstone cash flow positive and then profitable by the end of this year, and to start delivering earnings from a stable, and fast-growing Company.

At this point, operator, let's open the call to questions.

(Operator Instructions). Please stand by for your first question. Your first question comes from the line of Mr. Sanjay Shrestha, with Lazard Capital Markets. Please proceed, sir.

Great. Thank you. Good afternoon, guys. Couple of quick questions. So kind of sort of tying your comments here about upcoming fiscal year being the year of focus on reducing cost, working capital, cash flow, so how should we think about the revenue, sort of the top line performance with the robust backlog, $62 million plus $11 million, if you would? I mean, how should we think about year on year growth, or is it really going to be more about sort of cost saving rather than the top line growth year-over-year?

Sanjay, great question. Obviously it's a year of both. We've already achieved tremendous top line revenue growth and our backlog really ensures we have revenue growth again this year. So management's focus is to lower our operating expenses despite that growth and improve our efficiencies, which we've done. As I mentioned, we're already seeing those lower costs come through the P&L in the first two months of the year. But the primary focus is to get the C200 and C1000 costs down to our original targets if not below, and to move that through our P&L and move toward profitability.

As I mentioned, the C200, we're at three units per week this quarter. We'll take that up to four or five per week next quarter and start continuing to burn down that backlog. But it's very important that we take a methodical approach, and that we get some hours on those early machines to make sure that we don't have any issues. We're already learning a lot of valuable lessons on the product in cold weather, high humidity, high altitude, a lot of stuff it's very difficult for us to test here at the factory but we get great feedback for our engineering group as we get this product in the field.

As you mentioned, the backlog of $60 million does not include service revenue and parts revenue and training. Last year out of our $44 million, I think $32 million was products, so you can get an idea of how much more you're going to see in product, service and parts revenue.

Got it. So kind of a follow-on on that, Darren. So when you talk about -- obviously you guys give us a good sense as to how you plan to reduce your OpEx. And one thing I was hoping if you could clarify a bit more for us is you talked about -- I didn't get to write all of it down. You were talking about pricing going up, both for C200 and C1000 I think by like 14% and then you're taking costs out by 30% and then sort of breakeven cash flow being at 200 units. Can you go through that sort of, the numbers one more time, slowly and help us understand as to what type of a revenue number are we talking about to get to that cash flow breakeven during the upcoming fiscal year?

Yes, Sanjay. First of all, it's important to note the C200 and C1000 product, we sold much more -- had much better market adoption than we anticipated, so in light of that we took the opportunity to do a price increase and then a follow-on price increase. So the C200 has gone up 6% since it was launched, I think 3% each in two price increases, and the C1000, we've taken the liberty to bring that product up 14% because the value proposition on that product is extremely well positioned against the competition.

So if you look at a product, the first C1000 we sold, versus a C1000 we're going to sell in Q2 or Q3 -- or deliver in Q2 or Q3, you're going to see a 14% higher selling price and a 30% lower cost. So you talk about 40% difference in margin on a product that sells for close to $1 million. These are big numbers you're talking about. So as we flow through the lower costs and we bring in the higher average selling price that's already in our backlog, that's why we're very comfortable we're going to get to cash flow breakeven or even positive by the end of the fiscal year.

Got it. Got it.

Let me say about the units, I think originally we came out and forecasted a unit breakeven of 250 units. We then raised that to 280 as we saw the C200 costs coming in higher than anticipated a couple of quarters ago. Now that we have the lower costs in sight, we have not only identified with purchase orders or in process of bringing the parts in or have qualified quotations from our vendors, our internal auditors and external auditors have all validated those numbers so that allows us to take that number down to 200 based on those additional cost savings and lower operating expenses. So very excited about that number. You can see with the units we shipped this quarter, you can get an idea what kind of revenue levels we need to be at for 200 units a year -- a quarter.

That's fair. Now, guys, a couple of follow-ups then. In terms of your cash balance and the anticipated burn, how should we sort of think about the linearity of that on a quarter by quarter basis? Just so that there is no wide variations, from a modeling standpoint how should we think about it on a sequential performance basis? Is it again, more of a second half, fiscal '10 kind of an uptick? It sounds to me like that. How should we also translate that from a burn standpoint? So the burn will go down but gradually in the first half of the year and potentially getting breakeven by the end of the year, is that sort of how the model should work?

Sanjay, it's Ed. We burned $5 million in Q4. Exactly as you said, it should trail down from there and then turn positive.

One last question then, guys. This recent announcement with Ford, certainly got a lot of attention and how should we quantify, think about that opportunity near term to long term?

Near term it's more of an opportunity to find the right automotive partner to commercialize this product. Obviously the C30 at about a $30,000 price tag today would have to be manufactured at much lower levels. But obviously I think we built just over 100 in the last fiscal year, automotive volumes you would be looking close to 100,000. So we need to change the product as well.

The C30 is an industrial grade, stationary product. It's designed for 80,000 hours of life. In an automotive application you're looking at a 6,000 hour life. So not only do we look at high volume manufacturing, more like a turbo charger to get much lower cost, as well as the fact that we would go to different design materials for shorter life and obviously less expensive materials.

So today, working with Langford, they're kind of working in Europe, in Asia, to look for partners. We're handling the US market for partners. Hopefully we'll get that car over here later this summer, definitely in time for the US auto shows in Detroit and here in California. But basically it's trying to find -- select the right partner so they can help us bring this to market and figure out the next stage for this development. Very exciting. Obviously you know that the C30 went under the hood of cars years ago. Mark and his team have not seen such a beautiful integration and professional integration as we got out of Langford.

So the product looks great. The car runs tremendous. They took maintenance into consideration. Really did a great job in a relatively short period of time.

Okay. One last thing then, guys. So backlog obviously is going to burn here, helping the growth, both top line and reduce the burn. And how does the order pipeline or the project -- the bookings outlook, given the overall environment that we're in right now, are we sort of looking at burn this backlog, flat backlog? Talk a bit about the book and burn business during the upcoming fiscal year.

We continued the last at least four quarters to book more than we burned or close orders more than we shipped. That needs to reverse itself here. Obviously as we bring C200 production up that will help, but we can't continually sell more than we deliver; that's unsustainable.

The overall pipeline continues to grow. We hope that the way that we get past shipping more than booking is by shipping more, not booking less. We're very encouraged by again the C200 and the C1000. I realize the first C1000 just went into commercial operation. It was basically an artist rendition on a cut sheet. We have 22 in backlog already. So very excited about that product and the value proposition it brings to customers. And we look to continue to grow that backlog and just as we ramp up the C200 every quarter start to burn it down from higher revenues.

Okay. Great. Thanks a lot, guys.

Thanks, Sanjay.

Great questions. Thank you.

Your next question comes from the line of Mr. Eric Stine with Northland Securities. Please proceed, sir.

Good afternoon, guys.

Hey, Eric. How you doing?

All right. How are you?

Good.

Good. First, let me just touch on what Sanjay was asking. Just on bookings, and just trying to back into a number here quickly before the call, it looks like they were about $14.3 million.

That's correct.

Okay. I mean, in the current environment that seems to -- I mean, it has held up well. Given the progress that you had in your end markets, adding distributors, should we kind of think of that as kind of a trough number?

It's really hard to forecast that, depending on what happens. We're watching some of our key markets to see if there's softness. We haven't seen it yet. But oil and gas we thought we may see some slowdown. We have not seen that, but that could be a timing issue. The hotel markets you think would slow down or some of the more commercial areas, have not seen it yet but that may again be a timing issue.

Our goal is to continue to build out the distributor organization, continue to penetrate as many markets as possible, and if we do see softness in one or two markets because we're so diversified, be able to continue to grow the business regardless of some softness. Each new distributor, depending on their capabilities, typically you're looking at nine to 18 months before you see real deal flow, so each one of these is kind of an annuity that we have to get up and going. The good news is of our 65 distributors, about half of them have been on board at least 18 months or longer, are delivering very nice deal flow, the other half were working on training and getting them up to speed.

This is Ed. Just to add to that, generally it takes 18 months, so right in there is when they start placing orders.

If you track how many new distributors we've added in the last 18 months and start charting when you expect to see actual project flow from them, that's another thing that's obviously adding to our backlog. Because not only do we have new products and new markets, but new distributors coming online, being effective from a sales generation perspective.

I would think another thing to counteract if there is any potential slowdown is that -- UTC orders now that you've got -- you have met the testing and I would think certification comes somewhat shortly, have you had any discussion with them, what their plans may be now that you have that -- you've met that testing?

Well, what's interesting, let me say, you look at our $14 million in bookings, I don't think one of those orders was from UTC this quarter. UTC as they moved the business from UTC Power to Carrier had a transition phase so we've not seen a lot of orders from UTC. That's the bad news. The good news is we still had great bookings without one of our biggest customers contributing.

So as UTC comes back online with Carrier with 130 some odd locations in the US, we expect them to again be one of our top three customers. So that's definitely is the good news. I think Carrier's going to take a very methodical approach and make sure they simplify their offering to the customers. But when they do, the leverage they can bear is going to be tremendous and we're very excited about supporting in that effort.

Okay. Let's see. Just touching on backlog, it sounds like you've continued -- and this has been for the last few quarters -- continued to have some push-outs. Have you noticed any difference? Is that less than quarter-over-quarter, accelerated or any color there would be great?

It seems the last couple quarters it's been about $3 million worth of reschedules and push-outs. Obviously we're trying to touch our distributors as often as possible and reconfirm order dates. We've moved to a production slot format so we feel a little bit like the airline industry where we're trying to have 200 seats and have 220 booked passengers just to make sure that every seat is full when the plane pushes away from the gate. So that's a change we've implemented this last quarter.

We'll see in Q1 if we can cut down on the amount of unshipped units. Again, when they do push out, it's usually 30 to 60 days but obviously when we take four snapshots of the business a year, if you miss one of those snapshots it impacts the business. So hopefully our new production process will alleviate that. But it's just a challenging market. Still the financial industries are difficult, opening an LC for our international customers is much more difficult than it was six months or a year ago. And just project financing is not gone but it's much slower, and customers are working very hard to match timing. So if a building permit gets delayed or a construction process gets delayed, they don't want to take our product until the pad's ready and the building permit's in place.

Okay. And let me just switch gears here a little bit, just production, and I guess this is a question for Mark. Can you just talk about maybe some of the bottlenecks in the production process that you have addressed? And then also I know you've got pretty good visibility as far as input costs and maybe when we should start to see that benefit.

Yes, as far as production throughput, a lot of it was just -- for us I'll speak specifically to the C200 -- it's mostly just ramp-up. We have switched our floor to a pure con bond method to reduce our overall inventories. As we deplete our inventory, we'll get suppliers to deliver right to our line. That's helped our efficiencies internal with material and eventually will help us to reduce inventories overall.

As far as cost reduction goes, we are taking a look at over the next two or three quarters, to have continued cost reductions in about the 30% region that Darren talked about. I don't think that there will be any one big step along that path but something that we should see gradually come over that time period.

And as far as the C200 ramp-up itself, that's mostly just been getting our suppliers on line to deliver materials, getting them flush with raw materials in-house, going through -- Darren mentioned some of just the learning curve of building a new product and us wanting to make sure that the quality was correct and making sure that we get good product in-house. And so I think we've spent a good couple months since the launch of the product overcoming that. And as we move forward, we should look to hit the build schedule that Darren has mentioned.

Okay. And then just a last question, then I will jump off the line here. Just on the service contracts, can you just give a little bit of detail on the feedback as far as the C200, C1000, having contracts for those, and how that compares to your historicals for the C30 and 65s?

The C200 and C1000, we've got a much more aggressive campaign to get FPPs under those units. Because it's a new product, I think customers are more interested in making sure they guarantee the performance of the product. In a way it alleviates some of their potential risk in buying the product. We've seen very good attachment rates, much better than we have on the 30 and 60. But overall, we're getting more traction with FPPs on new product.

Going out to existing customers that have the product, we've tried but if you haven't had a failure in three years, take 1350 Avenue of the Americas, Joel Wilson, that site there I think is 99.6% or 99.4% uptime. It's really hard to go sell somebody a service contract when they haven't had a failure for a couple of years. But for new product, and specifically the 200 the 1000, we expect to get very good attachment rates.

I think people don't realize, selling a nine year FPP on a C1000 is more than -- it's a couple million dollars, if you have a couple units. So the C1000 equals like 300 C30s. From a revenue perspective, C1000 FPPs are worth a lot more than a C30 FPP. Very excited about it. It's the traditional sell the razor and make money on the blade, the same kind of concept. We're not only going to make good recurring revenue quarter-to-quarter, but obviously service revenue is tremendous gross margin.

But we also stay close to the customer, and make sure their product is running well. And our engineering team learns from monitoring the system and seeing what issues we do have to the service department. So my background at Stewart and Stevenson is very service oriented. We targeted service contracts heavily at Stewart and Stevenson and routinely got 65% to 70% margin on those contracts. Great area for margin, great area for cash flow and a major focus for Capstone.

Okay. And is it fair to think that of your backlog, the C200 and C1000 backlog, that the majority of those do have FPPs or will?

I think it's fair to say the majority will. A lot of the FPPs don't get put into place or executed until it is commissioned. So until the product actually gets out in the field and gets commissioned, we normally don't sign the FPP. (multiple speakers) is our intent to have the majority under FPP, correct.

I just wanted to add to that, Eric. It's like Darren said, cashwise, it's a stream of cash for us because generally the majority of the FPPs are paid quarterly in advance, so it's a nice flow of cash over a 10 or 11 year period.

Okay. Thanks a lot.

Great, thanks, Eric.

Your next question comes from the line of Ms. Meghan Moreland with Ardour Capital. Please proceed.

Just two questions. Did you experience any order cancellations in the fourth quarter? And second, of the $61.5 million in product backlog, what does that translate to on a unit or megawatt basis?

Yes, let me answer the first one. No significant order cancellations, knock on wood. We're very happy with that. As far as the backlog in megawatts I believe it's --

It is 72 megawatts.

That $61.5 million was indeed just for products?

That's just product, yes. Total megawatts is 72 and that's just product, absolutely.

605 units in total, $62 million, 72 megawatts.

Then the FPPs were about $11 million?

Correct. That was as of May 31st.

Okay. That was it. Thanks.

Thank you, Meghan.

With no further questions in the queue, I would now like to turn the call back over to Mr. Darren Jamison for closing remarks. You may proceed, sir.

Great. Thank you. Again, I just want to say that the team is very happy with fiscal 2009 with the growth we've achieved and we're very excited about the current year. We believe we've got a great plan in place and have identified what we need to do to get the Company back to cash flow breakeven. Very excited about what's going on in the US with the Obama administration. I think we're going to see some shovel-ready projects come through to fruition for some of our distributors, leading to orders for us.

As I mentioned, we have three proposals into the DOE today for the high efficiency engine, the ICR product, as well as a multiple fuel turbine to run on syngas and hydrogen. So we're very excited about that.

(inaudible) is also helping our partners like DesignLine, to get more funding for their business. Overall, we believe that the economic winds are blowing in our direction and that the move towards green energy, energy efficiency, renewables, all plays very well for our strengths and very well for our product and we look forward to a very good year. And we'll talk to you next quarter. Thank you very much.

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