Capstone Green Energy Corp (CGRN) 2010 Q1 法說會逐字稿

Welcome to the first quarter 2010 Capstone Turbine Corporation earnings conference call. I'll be your conference moderator for today. At this time, all participants are in a listen-only mode, and we will be facilitating a question-and-answer session toward the end of the conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Ms. Jayme Brooks, Vice President of Finance and Chief Accounting Officer.

Please proceed.

Thank you.

Good afternoon, and welcome to Capstone Turbine Corporation's conference call for the first quarter ended June 30th, 2009. I am Jayme Brooks, your contact for today's conference call.

Capstone filed its quarterly report on Form 10Q with the Securities and Exchange Commission today, August 10, 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@capstoneturbine.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 the 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, reduce working capital requirements, the ability -- the availability of the line of credit, the success of the C200 and C1000 products, compliance with certain government regulations and increased government awareness of our products, growing market share and market adoption of our 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 in other third parties, the energy efficiency, reliability, and low cost of ownership of our products, and the expansion of production capacity and manufacturing efficiencies.

These forward-looking statements are subject to numerous assumptions, risks and uncertainties, included in the following. Our expectations about expansion into key markets may not be realized. Certain strategic business initiatives and relationship may not be sustained and may not lead to increased sales. We may not be able to reduce costs or improve customer satisfaction,

The growth in our backlog has significantly exceeded our internal forecast. 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 twelve months. The current recession can make it difficult or impossible for us to raise the necessary funds and for our customers to buy our products. We may not be able to utilize our line of credit, for example, as a result of failure to meet a financial covenant relating to our net loss for the recent completed quarter. As a result of this, we are not in compliance, and are relying in our discussing with the lender what effect this will have on our future ability to access the line. 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 be unable to increase our sales and sustain or increase our 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 will 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 that may cause Capstone's actual results to differ materially from the future results predicted or implied in such statements. We refer you to the Company's Form 10K, Form 10Q and other recent filings with the Securities and Exchange Commission for a description of these and other risk factors. Because of these 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 revisions 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.

Good afternoon, and welcome everyone to Capstone's first quarter fiscal 2010 earnings conference call. With me today are Ed Reich, our Executive Vice President and Chief Financial Officer, and Mark Gilbert, our Executive Vice President of Operations and Chief Technology Officer.

Today I will start the call with a review of our first quarter fiscal 2010, and then Ed will review the specific financial results. Ed will turn the call back over to me, and I will discuss our progress toward our strategic objective of positive cash flow. I, however, will not be reviewing specific market developments in our key market segments, although I will cover market developments during our upcoming annual meeting of stockholders, to be held on August 27th. The presentation from the annual meeting will be made available on our website for those who are unable to attend in person. This year's annual meeting of stock holders will be held at Capstone World Headquarters in Chatsworth, California, and will showcase our new C200 product, C1000 product, C30 rental units, and a C30 powered hybrid bus from DesignLine.

As I look at the results for the Q1, I am pleased with our strong revenue of $13.7 million compared to Q1 '09 of $7.5 million, and Q1 '08 of $5.6 million. As shown in slide one, Capstone continues to demonstrate a strong revenue growth over the prior year's quarter. This is indicative of our growing market share and market adoption of our new clean and energy efficient C200 and C1000 products. It goes without saying that these revenue results are impressive against the backdrop of the global recession.

Also impressive is slide number two that shows, despite the increased revenue and poor economic conditions, we experienced only a minor reduction in our overall product backlog, from 72 megawatts at March 31st, to 67.4 megawatts at June 30th, 2009. This large backlog is not only impressive in this market, it reflects the market's acceptance of our new products. This large backlog is critical as we continue to ramp our C200 production line from three C200 equivalents per week in the first quarter of fiscal 2010 to now four C200 equivalents per week in the second quarter of fiscal 2010 and beyond.

This production ramp is shown in slide three and illustrates how the Company is successfully illustrating its stair-step launch strategy. Capstone is committed to growing the C200 and C1000 product lines in a responsible and orderly fashion using the stair-step production ramp philosophy intended to achieve the highest quality, efficiently manufacture product with decreasing material costs. It also allows the Company to validate and optimize our product design based on actual field experience from fleet-leading units commissioned early in the production process. These units today have in excess of 3,000 real-world operating hours. We recently announced that we finished the scheduled view-all testing for the C200 product. The Company believes we are very close to receiving our formal UL listings, enabling us to begin shipping product here in North America.

Also during the quarter, we received a final payment from UTC and formally closed out what was a very successful C200 development and commercialization program. This program was accomplished on schedule as it relates to the successful product launch and the program R&D spend came in under budget. You can see the impact of the final UTC payments and program closeout, totaling a $700,000 R&D expense reduction for the quarter. For the first quarter, Capstone's R&D expenses dropped from over $2 million in Q4 to approximately $800,000 in the first quarter. In addition, we substantially lowered selling and G&A expenses during the quarter as part of our cost reduction plan to be discussed further. At this point, I'd like to turn the call over to Ed to review the more specific financial results for the quarter. Ed?

Thanks, Darren. Good afternoon, everyone.

I would like to provide you with our results for the first quarter of fiscal 2010 ended June 30th, 2009. Revenue for the first quarter ended June 30th, 2009, was $13.7 million, an increase of 83% from the $7.5 million reported in the same period last year. Capstone shipped eighty units in the third quarter of fiscal quarter 2010 compared to eighty-nine in the same period last year. The average revenue per unit increased in the first quarter of fiscal 2010 to $100,000 per unit compared to $56,000 per unit for the first quarter of fiscal 2009.

The gross loss for the first quarter was approximately $2.8 million or 21% of revenue compared to $1.3 million or 17% of revenue for the same period last year. The increase in gross loss reflects increased manufacturing costs related to the product launch in the C200 and C1000 series systems, along with decreased sales of C60 series systems resulting in a lower margin product mix, which was offset by improved warranty expense.

R&D expenses were $800,000 during the first quarter, a decrease of $1.2 million or 60% from the same period last year. R&D expenses decreased as a result of lower spending for consulting, supplies, labor costs, and facilities expense, offset by reduced UTC power corporation funding benefits for the cost-sharing program. The program was completed during June 2009.

SG&A expenses were $6.2 million, a decrease of $.5 million or 8% from the same period last year. The net decrease in SG&A expenses was comprised of a decrease in travel, labor, and marketing, offset by an increase from the reversal of a loss contingency that was booked in the first quarter of fiscal 2009 and an increase in professional services compared to the same period last year.

We recorded a non-cash charge of $5.2 million to operations for the change in the fair value and warrant liability during the first quarter of fiscal 2010. Our net loss was $15.3 million for the first quarter of fiscal 2010, an increase of $5.4 million from the $9.8 million from the same period last year. The increased net loss, as I mentioned, was the result of the adoption of the Emerging Issues Task Force, issue 07-5, determining whether an instrument or imbedded feature is indexed to an entity's own stock, which affects our accounting for warrants that have certain anti-dilution provisions. Our loss from operations for the first quarter of 2010 improved $200,000 or 2% over the prior-year comparable quarter as a result of the company's continued efforts to reduce expenses. Loss per share for the first quarter of fiscal 2010 was $0.08. The loss per share for the same period last year was $0.07.

As of June 30th, 2009, cash and cash equivalents were $25.4 million. Cash balances were increased $5.9 million during the first quarter ended June 30th, 2009. We completed a registered offering of our common stock during the first quarter, resulting in net proceeds of approximately $11.2 million. Backlog at the end of the first quarter ended June 30th, 2009, was $59.1 million, an increase of 38% from the prior-year comparable quarter and a decrease of 4% from March, 2009.

Now let me turn the call back over to Darren.

Thank you, Ed.

Despite some minor reschedules in the quarter, Capstone ended the first quarter with $13.7 million in revenue, which as Ed mentioned, is 83% growth over the same quarter last year, and 145% over Q1 two years ago. It's important to note that we are still not experiencing significant order cancellations, and we are still seeing quarter-over-quarter growth in new project quotation activity and total project pipeline. I attribute the quotation success and growth to our new C200 and C1000 products continuing to gain market share as we market our efforts in these new products along with strong customer support from success of early installations. I believe fiscal 2009 was best described as Capstone's year of growth, while I believe 2010 will best be described as Capstone's year of cost reduction, working capital improvement, and positive cash flow.

We took significant steps in late fiscal 2009 to right-size our human capital and reduced our professional expense of staff by 41, and eliminated 16 other open positions. This was a difficult decision as it was in the face of approximately a 20% reduction of Capstone's workforce. These reductions were in the face of 40% year-over-year growth in revenue and 120% year-over-year growth in product backlog as of the end of 2009.

Today, Capstone has successfully implemented the cost reduction initiative to lower its operating expenses in fiscal 2010. The result of these actions are very much evidenced in our first quarter results as our operating expenses dropped to approximately $7 million in Q1. In addition, as discussed previously, we have a detailed plan in place to achieve improved product margins this year and drive towards a 30% overall gross margin by the end of fourth quarter fiscal 2010.

We intend to achieve this reduction by reducing direct material costs for the C200 and C1000 systems. We began to see C200 product cost improvements late in the first quarter. As previously discussed, our C200 cost improvements will be realized over the remaining quarters of fiscal 2010 as lower-cost materials enter the production flow. Mark will talk about the details of this program. However, I'm very confident in our ability to hit our margin targets, as Capstone has purchase orders in place for the majority of the parts identified for reduction or firm quotes from qualified vendors. Mark and his team are actively moving through first article and new part qualification processes now, so we can realize a majority of the cost savings reductions during the balance of this year.

In addition, we have implemented two C200 and C1000 price increases over the past sixteen months. These total 6% increase on the C200 and a 14% increase on the C1000 product. Most of the C200 and C1000 units shipped in Q1 were orders received before the two price increases. As these early orders clear the backlog, we will begin to ship product with the benefit of both the lower material cost and orders at a higher average selling price, which should enable positive cash flow followed by profitability.

If you look at slide four, it illustrates what management believes is Capstone's clear path to profitability and meeting our short-term goal of cash flow breakeven in the current fiscal year. As I look at this chart, the most critical drivers to me are revenue growth, operating expense reductions, margin improvement, and improving our inventory turns. I believe that Q1 has proven we are well on our way to increased revenue levels and lower operating expenses. Therefore, the two remaining critical initiatives that must be demonstrated are the C200 and C1000 cost reduction program and improving our overall inventory turns. I would like to now turn the call over to Mark Gilbreth, Capstone's Executive Vice President of Operations and Chief Technology Officer, who is leading the efforts on both these two critical initiatives.

Mark?

Thanks, Darren.

As Darren indicated, we focused on delivering the necessary C200 and C1000 cost reductions and inventory turns to get the Company to positive cash flow. Let's start with inventory turns. We have taken steps to increase Capstone's inventory turns by recently introducing fixed production slots, Just In Time Deliveries, establishing tier one suppliers, and using a CONBON production strategy. These production slots enable stable growth in revenue while maintaining control over inventory levels. Suppliers are now able to synchronize and level out their business operations to both lower costs and provide just in time deliveries. Many components are moving to tier one suppliers, who will manage the supply chain upstream, reducing long lead material stock within Capstone's inventory.

And finally, the CONBON strategy provides a double benefit of notifying suppliers of next material deliveries as well as driving the movement of raw material within Capstone factory into finished goods for delivery against customer sales orders. As you can see from slide five, the inventory turns are starting to improve as a result of these efforts. Capstone's inventory turns, which had been running from 1 to 1.5 turns, increased to 2.2 turns in the first quarter.

Our plan is to continue to reduce inventory to approximately $18 million by fiscal year end, improving turns to approximately four per year. This plan will drive lower working capital requirements and turn approximately $9 million of inventory to cash. I am pleased with the support of our internal Capstone personnel to make the necessary process changes and our suppliers for their commitment and support to improve our inventory turns.

The C200 cost reduction program is well underway. We anticipate the majority of the savings to flow through by the end of the fiscal year. The cost reduction initiative underway is similar to the launch of many new products, and is a process of maturation of the C200 buildup material.

As a product enters the initial production phase, components are produced with initial manufacturing techniques that are capable of meeting rapid design change requirements, but tend to be more costly. Alternate manufacturing techniques, such as extrusions, forgings, and castings, along with the supporting longer lead time tooling, are then put in place to provide parts at a lower cost. As these processes are implemented, we will move to offshore suppliers to provide parts at even lower costs. This strategy has enabled us to meet time to market requirements, flesh out early field issues, manage production tooling investments and ultimately drive costs towards business objectives to achieve product margins modeled to achieve cash flow positive.

Now let me turn the call back over to Darren.

Thank you, Mark.

As I reflect on the first quarter of fiscal 2010, I'm very pleased with the continued progress of the Company and specifically the following quarterly achievements. The $13.7 million in revenue is at an 83% year-over-year revenue growth from Q1 '09, it's hard to imagine today that when I joined Capstone some two-and-a-half years ago, the Company was coming up at a $2.7 million revenue quarter and had only about $5 million in backlog. We've come a long way in two-and-a-half years. I am pleased with the successful shipment of thirty-nine C200 equivalents; that is more than double last year's nineteen units and three more than our internal plan of thirty-six or three per week. I'm encouraged by the continued growth of our product backlog; it is still at 67 megawatts after a strong revenue quarter with thirty-nine C200 units coming out of backlog.

It is encouraging to see the early impact of our operating expense cost reduction plan that delivered a substantial decrease in quarterly operation expenses in Q1. I'm also encouraged by the $2.8 million reduction in inventory and the improvement of inventory turns from 1.5 to 2.2 turns as Mark and his team implement the new inventory management program. It is good to see the reduction in finished goods inventory as we work to better match customer requirements and order ship dates in the current challenging economic and financial environment.

Again, fiscal 2010 is the year management's primary focus will almost entirely be on C200 and C1000 product cost reduction, working capital improvements, including lower inventory and increased inventory turns, and the focus on finally generating positive cash flow for the end of the fiscal year. At this point, I'd like to open the call up to questions.

Thank you. (Operator Instructions). Your first question comes from the line of Sanjay Shrestha with Lazard Capital.

Thank you. Good afternoon, guys. A good quarter. Good progress. A couple quick questions. Number one, you guys went through the numbers, but I couldn't jot all of them down. Could you guys talk about the pricing increases you guys were able to implement during the quarter?

Yes. The price increases, Sanjay -- we've had two of them over the last 16 months, so as we sold C200 and C1000 product, we were able to fold in two price increase, 6% on the C200 and 14% on the C1000. I think that's even more impressive in light of the fact the dollar strengthened quite a bit over that period of time. So for our European customers, they saw a very large increase in the C200 and C1000 product and have still managed to get great market penetration.

Got it. So you guys also talked about the gross slots related to the higher component cost for the C200. How much would you say was that impact during the quarter, and how should we think about your -- if there is a way to think about, excluding the normalized gross profit line, even at this point in time?

Well, I think it's twofold, Sanjay. One we're shipping product at the original prices before the two price increases. So most of the backlog that is burning off now is the older backlog at the lower price, and then we're just now seeing the leading edge of Mark's cost reduction activities. So you're going to see over the next few quarters the 30% cost reduction come down; and on the C1000 a 14% higher ASP. So essentially, a C1000 we shipped in Q1 and the C1000 we shipped in Q4 could have a 44% difference in material costs, which is extreme, obviously.

Absolutely. Absolutely. A few other specific questions, if I may. You guys talked about also the end of the UTC relationship now, the funding that ended June of 2009, or this quarter, if you would. So how has that relationship changed going forward?

Yes. This relationship is in flux. I mentioned last quarter that we had not received an order form from UTC for a couple quarters. They have now finished re-locating the PureComfort Group from UTC Power embedded now into the Carrier organization. We've had a several meetings during the quarter with senior management and the new team at Carrier.

We did get an order during the last quarter from Carrier for another grocery store chain, not one we've used before. That's the third grocery store chain. They're very excited about the product. They had to go through their own passport process and get it into their own Carrier division. They're very focused on the East Coast, the eastern seaboard and California as being the first markets they're going to really focus on.

So I think you are going to see in the next couple of quarters going forward, the Carrier group, which, frankly, is probably a better match for our product, because it really is a combined heat and power sale. I think it's a better fit. Carrier has got some 130 sales organizations in the US alone, not counting internationally. So we're excited. The transition obviously took longer than we had hoped. The big companies don't move quickly; they move deliberately. So we are excited about the relationship going forward, and I think it will be better than it was in the past.

It's definitely been painful. UTC has been a top two or three customer. To have them disappear for a couple of quarters as they reorganize their house has been painful for us, but we seemed to weather that storm pretty well.

Yes. So -- exactly. One last question. Darren, you mentioned that this year is going to be more about cost reduction, sort of getting to that cash flow breakeven, and clearly you guys have done a pretty good job with that. So how should we think about the backlog as we fast-forward a few quarters or given the inherent lumpiness on a quarter by quarter basis? Can you talk about that a bit as to how we should be thinking about that?

Well, obviously we'd like -- as we continue to ramp the C200, we'd like to see revenues continue to build quarter-over-quarter. That being said, backlog should be flat or slightly down each quarter.

Okay.

Depending on what happens in the market.

Of course.

I don't think people realize though on the C1000, which is the majority of the units we shipped for the quarter were C1000s, not C200s, that's a completely different market. We're bidding jobs a day that are 5 megawatts, 7 megawatts. One job in specific is 5 megawatts with another 25, 5 megawatt opportunities if the first one goes well. So the megawatt space is huge from a market standpoint; and if we get good traction and good customer acceptance in that market, it's really going to drive the Company going forward.

That's great. Thanks a lot, guys.

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

Hey, guys. Just a few questions.

Hey, Eric.

I was just wondering, can you just go in depth a little more on UL certification? I know it sounds like you expect to get that shortly. Maybe your take on what the holdup is, and then, also maybe timing on testing for the C1000?

Yes. I'll lob that over to Mark, as he's very much involved in that. I'm not sure -- obviously we'd like it to go quicker; but anytime you're working with certification boards and very complicated products like this, it never goes as fast as you'd like. Unfortunately we're not certifying a toaster; the C200 is a very complicated product. But with that, I'll let Mark talk about the final certification process and then the C1000.

Yes. With the UL certification process, we had already made a public announcement through a press release on the completion of testing, and that is one of the primary components to achieving our UL certification.

The next two steps that we need to work through is all of the supply components into the product also need to be UL certified, and while we choose UL certified components primarily to shorten that process there's always one or two components that need to go through that exercise.

The final step is our manufacturing processes. We anticipate UL goes through a series of checklists to ensure that the product has been produced to those specifications, so they will be coming in here, we expect, sometime in August to approve our manufacturing processes. At that time or shortly thereafter, we should receive formal certification from UL.

As far as the C1000 product, since the C1000 product is divided of five C200 units, it's really critical, before we step into that process full bore, that we close out the C200 exercise, as much of the testing we are anticipating will be by similarity to the C200 product. So now that that's coming to a close, we're working through that test plan with UL right now, and as we get that solidified, we'll have better visibility on the schedule.

Mark, could you -- in a similar vein, can you comment about CARB certification, some of the other stuff we're doing with the C30 and the C200 as far as certification on emission standpoint?

Yes. With the C200, we've already completed the testing for both the natural gas and the digester here in-house, using our third party. That process then, as we wait for lab results to come back and then we have a formal submission that we put to CARB (California Air Resources Board).

CARB by law has a 90-day administrative cycle that they are allowed to and typically go through before they provide us formal certification. So we already completed the testing on two of those and hope to receive certification later this year, calendar year.

We're also with our C30 product, we have been working with CARB to get that CARB 2010 compliant to the heavy-duty diesel engine standard. We have passed the testing here within our own facility. Now that we've formalized the test plan that we will be going through with CARB, we will be going out to the third-party agency and moving also later this year towards getting formal certification on CARB 2010 for our hybrid electric vehicle applications, operating on liquid fuel, diesel.

Okay. That's helpful. Can you give us a sense -- do you think that the UL certification, that that may be something that's limiting -- it may be limiting orders in some markets.

Obviously -- this is Darren -- we can't sell in most parts of the US without the UL listings. It would be very complicated to sell without it. We know we have some orders in backlog. Like OfficePower has, I believe, four or five C1000s in backlog waiting for C1000 UL certification. We have some other C200s sold in New York.

So there's no doubt that our C200, C1000 sales are all going outside the US, today, our shipments are, and most of the sales are either going into backlog or waiting for this. So definitely getting that UL listing will help enable more business in the US and North American markets as well as help us empty some more of the backlog and turn that to revenue. So very critical. Mark talked about CARB certification, is very critical. We see the California market as being one of the primary markets for it as well as the leader worldwide when it comes to emissions. The C30, there's a lot of pent-up bus demand that is waiting for the EPA and CARB 2010 certification, as Mark mentioned we're working on. So all these certifications are crucial to us to be the industry leader in emissions to prove it and then lead some more orders going forward.

Okay. Could we just turn to backlog quick? I missed it in the prepared statements. It is still the same situation? No cancellations on a backlog or very minimal. Can you just go into detail on that?

Yes. No significant cancellations in backlog. Backlog went down slightly because of the ramp in the C200. If you look at the numbers, we actually shipped mostly C1000s for the quarter. A Russian distributor pulled forward a couple of C1000 deliveries and pushed back some C65 deliveries, which was fine. We accommodated that; obviously, we don't want to miss any order dates and keep our best distributors happy. It did hurt us from a mix standpoint. Obviously, the margins on our C65 product are much better than today's margins on the C1000. So that impacted the gross margin for the quarter, but I'm happy that we're able to shuffle the deck, keep them happy and continue to get the C1000s out there. So we now have several C1000s in Russia, we have got three in Australia being commissioned. We have got them in Spain, we have got them in France, the Dominican Republic, and some in oil and gas applications as well. So we're really getting a good -- seeding the environment out there with great sites that are getting good reports back; and again, it's word-of-mouth. So the more customers can go see a C1000 working in the field, see a happy customer -- in fact, I'm proud to announce our first C200 customer, which is a wastewater treatment plant in Italy, ordered to second unit. So I think as you start to see satisfied customers with the product and more word-of-mouth, you can leverage more sales off those successful installations.

Okay. Just one last question, and then I'll jump back in line. Can you just talk a little bit about what you see as far as the stimulus -- I know you mentioned some pretty large megawatt opportunities. What of those are stimulus related, or separate from that?

Yes. The megawatt opportunity I was talking about is an oil and gas opportunity. It is a 5 megawatt natural gas drilling operation. They're being squeezed for emissions and reliability issues. So we're looking at selling them a 5 megawatt plant. If that were to work, there are 24 more drill rigs that would need 5 megawatts each. So this is an oil and gas customer that did not previously use the C200 obviously or C1000 products. So very important that if we do get that order, it performs well. That's not stimulus related.

We've seen probably two or three dozen identified stimulus shovel-ready type projects, our first one in Pennsylvania was installed recently and got some press. Definitely, we're going to see business from that, although we're still on the front leading edge. I think everybody has been frustrated at the pace at which stimulus dollars are being spent, but we think this summer, we're going to see some more stimulus opportunities. So not building our business based on that, but we think it will improve, especially our US business, which has lagged our international business.

Okay. And I would assume DesignLine is involved in some possible projects as well.

Yes. I am probably remiss not mentioning DesignLine. And they may be the biggest benefactor from the stimulus package. They're looking at adding or doubling the size of the manufacturing plant in North Carolina, which would build a couple more -- two hundred to three hundred more buses next year. They're looking for stimulus help to do. They're seeing great traction with our product, or their product with our turbine in it. I mentioned at the upcoming shareholder's meeting, we'll have a bus here. We're going to have the shareholder's meeting in the morning and then we are having a large sales event open house in the afternoon. We'll probably have a dozen California transits here looking at the bus.

So getting great opportunities for New York, continuing to like the product. Baltimore is getting the product. Several California properties are ordering the product, and all the reports initially have been great. The biggest issue with DesignLine has been building the manufacturing facility, ramping up production, not that different from what Mark and his team are going through. They have brought in a new gentleman that has set up the Hummer plant from General Motors, and he is now heading the manufacturing operations for DesignLine to get that manufacturing ramp up as fast as possible.

So definitely looking for more orders going forward over the next eighteen month, and a lot of stimulus upside with them, if they get the right grant or the right support.

Okay. Thanks a lot, guys.

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

Hi. How are you?

Hi.

Are you still targeting gropes of 30% to 40% by year's end, or has that changed?

No, no change there. The target remains the same.

Yes. I think this quarter was a little deceiving because we had the high amount of C1000s in the business, but no, we definitely filled our on-target to get there by the end of the year by 30%. As I mentioned in the call, we've got -- it's not a hope or dream, we've got parts identified with cost reductions, specifically tied to those parts. In many cases, we have POs in place and we are evaluating first article parts and components. In other cases, we have quotes from qualified vendors. I know it sounds frustrating that we're not moving faster, but we can't take a non-qualified part and put it in a product. We'd really be risking our entire reputation.

And so, I mentioned the one oil and gas opportunity. If we move quickly and put a non-properly bedded part into that C1000 insulation, we're risking 24 5 megawatt projects by going too quickly and not properly vetting that part. As painstaking as it is we have a process we go through from a quality standpoint. We're not going to jeopardize that process.

Okay. And I recall, in the last quarter, you had said about $45 million of the backlog at that time was scheduled to go to the top line over the next twelve months. Can you still expect about that range for the next nine to twelve months?

It's -- if you look at the backlog table in the latest queue; it's shifted this back to sixty-four megawatts, current, out of the sixty-seven. So you can expect to see some shifting back and forth like that based on changes in customer requirements.

Yes. As I mentioned before, I think that Eric's question -- we're not seeing order cancellations, but we are still seeing customers move orders around. Some forward, but more to the right. We're trying to manage that customer shift date issues and make sure we have very little finished goods.

We did a better job this quarter, kind of like that they're overselling the airplanes, making sure that every seat is full when we take off, and so our finished goods were actually down for the quarter compared to the last two quarters. But that is still going to be a challenge, I think, in this economy.

The only product we have in long-term backlog as of the end of the first quarter is C30s.

Oh, okay. Thank you.

Thanks, Megan.

At this time I would like to the call back over to Mr. Darren Jamison for closing remarks.

Thank you, operator. I think this was a very strong quarter for Capstone. I'm very pleased with the revenue numbers we put up. Obviously it would have been a little better if we got the C30s out of backlog. But we've actually shown a nice improvement on the C200s, C1000s, and building the overall revenue growth of the Company. Backlog still remains very strong and is really one the key issues to our success going forward.

The operating expenses were tremendous. Ed and I were very happy with what the management team has done. Obviously, it is always difficult to have a reduction in force, but I think we took the right actions at the right time. As we rolled off the C200 development program, the timing was perfect to do what we did.

So, really, it's all about inventory turns, working capital, and cost reduction. And, I think we've got good programs in place; the teams are very dedicated, very motivated, and very focused. I'm happy that most of these issues we have are internal to Capstone, so we have no body to blame but ourselves for making this happen. We're working very hard to make that happen.

So, I look forward to talking to you again next quarter, and if anybody can make it out to the annual shareholders'/stockholders' meeting, you'll see an actual C200, C1000 there that you can walk around and touch and feel as well as ride a DesignLine hybrid bus and see some of our rental units. So, I look forward to seeing you if you can come out, and if not, we'll put the presentation on our website so everybody can see the update.

Thank you, operator.

We thank you for you participation in today's conference. This does conclude your presentation. You may now disconnect and have a great day.