Capstone Green Energy Corp (CGRN) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third 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. We will be facilitating a question-and-answer session towards 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, 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 third quarter ended December 31st, 2009. I am Jayme Brooks, your contact for today's conference call.

Capstone filed its quarterly report on Form 10-Q with the Securities and Exchange Commission today, February 9th, 2010. If you do not have access to this document and would like one, please contact Investor Relations via telephone (818) 407-3628 or e-mail ir@capstoneturbine.com. Or you can view all of our public filings on the SEC website at 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 and attaining profitability; the ability to reduce costs and improve inventory turns in contribution margins; higher average selling prices; 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; growing market share and market adoption of our products; new applications for our products; growth in the oil and gas, office building, biogas, UPS and electric vehicle markets; the successful integration of the Calnetix Power Solutions microturbine business; revenue growth and increased sales volume; 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; and the expansion of production [FASB] 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 lead to increased sales; we may not be able to reduce our manufacturing costs; the growth in our backlog has significantly exceeded our internal forecast; in order to meet the increased demand, we will likely need to raise additional funds to meet our anticipated cash needs for working capital and capital expenditures in the near term; the current recession can make it difficult or impossible for us to raise necessary funds or for our customers to buy our products; we may not be able to utilize our line of credit, for example, as a result of a failure to meet the financial covenant; 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 retain or maintain customer, distributor and other relations that are (inaudible) 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; we may not be able to successfully integrate the acquired Calnetix [apps] and achieve productive relationships with its distributors; 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 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 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 over the call to Darren Jamison, our President and Chief Executive Officer.

Thank you, Jayme.

Good afternoon and welcome, everyone, to Capstone's third quarter fiscal 2010 earnings call. With me today are Ed Reich, our Executive Vice President and Chief Financial Officer; Mark Gilbreth, our Executive Vice President, Operations and Chief Technology Officer; and Jim Crouse, our EVP of Sales and Marketing.

Today I will start the call with a general overview of the third quarter fiscal 2010 results, and then turn over the call to Ed, who will review the specific financial results. Ed will then turn the call back over to me and I'll discuss what is happening in some of our key markets, and update you on our progress toward our strategic objective of positive gross margin and positive cash flow.

For today's call, I'll be using several slides in my presentation that can be found on Capstone's website under the Investor Relations section.

We've had an extremely busy quarter, as the Company continues to build positive momentum. Slides one and two of my presentation summarize some of these recent events. We have signed up new distributors in Malaysia and Mexico, and recently OEM partners PowerTherm and Velozzi. I'm very hopeful about the PowerTherm boiler that makes electricity product, especially with a company like WESCO providing the channel to market. The customer base and marketing reach of WESCO is similar to that of UTC Carrier. The addition of WESCO to our team selling the PowerTherm product should be very positive for Capstone for years to come.

The signing of Velozzi brings us our first of what I hope is many commitments to put our microturbine technology into an automotive platform. As the electrical vehicle market expands over the coming years, I am positioning Capstone to be a key player in the range extender market. Capstone also had many firsts in the quarter, as we sold our first Class I Division 2 explosion-proof C200 offshore oil and gas product, as well as our first C1000 in the Midwest and our first C200 and C1000 sold in Philadelphia. Also recently we received notice of award on two product development grants, one from the Department of Energy and the other from the BIRD Foundation to further our microturbine technology development in both the agricultural biogas market or syngas market, and the large solar market.

During the quarter we commissioned the Syracuse University Data Center, that is one of the greenest data centers in the world. Capstone is very proud to be working with IBM as part of their Smarter Planet Initiative. We also had follow-on orders from a Texas data center, and received several new orders for our Capstone Factory Protection Plans, or FPPs, for long-term service contracts. Last, and certainly not least, is the most recent strategic acquisition and OEM agreement with Calnetix Power Solutions, that broadens our product range, our intellectual property portfolio, and adds a critical 24 more distribution channels to our market.

I am pleased with our direction result in the third quarter, as we set new Company highs in both quarterly revenue and new orders. Our revenue through the first three quarters was $45 million, which is already ahead of last year's $44 million total year revenue. Capstone is poised for another strong year of double-digit growth in revenue, and it's in face of the current difficult economic conditions.

If you look at bookings, we added $31 million in new orders, which is by far the most in the Company's 21-year history. As shown in slide three, Capstone continues to demonstrate strong revenue growth over the prior year same period for the last ten consecutive quarters. I would venture to say that is a fact that is not matched by most companies in the market today. Slide three is also proof of our growing market share, and growing market adoption of our new ultra clean and energy efficient products.

Capstone's third quarter revenue of $16 million was achieved despite our two biggest customers not taking significant shipments in the quarter. BPC, our Russian distributor, took only two C65s in the period, while leaving an excess of $2 million in finished goods sitting on Capstone's shipping dock on December 31st. UTC Carrier continues its relaunch of the PureComfort product throughout the Eastern seaboard Carrier locations and with NORESCO. We expect order flow to pick up soon, but unfortunately had no unit shipments during the quarter.

The fact that Capstone achieved the highest revenue in Company history without the significant revenue of two of its historically largest customers is, indeed, impressive. The ability to continue to grow the business without two key players proves that all of our hard work to strengthen and broaden our distribution channels is working. I realize the announcements of new distributors may seem mundane to many Capstone stockholders, but they build the Capstone brand and awareness, and channels the markets that become the future revenue stream for years to come.

Jim's here today, and he'll tell you that Capstone's goal is to nurture as many as possible of the some 90 distribution partners to a minimum level of $3 million annually. This level of revenue drives value to the Capstone franchise for our distributors, and allows them to reinvest in their business with additional sales, marketing and engineering resources. This diversified worldwide network of strategic distribution partners is critical to help us continue to grow the business at a constant and sustainable rate.

Recall when I joined Capstone just over three years ago, we were coming off a $2.9 million revenue quarter and had only $5.5 million in product backlog. In the last three years, this management team has grown revenues almost seven-fold, and backlog 15-fold, when you factor in the Calnetix acquisition. Slide four illustrates how Capstone's product backlog increased substantially as a result of the record $31 million in new orders for the quarter. Total product backlog, not including parts, service and accessories, at the end of Q3 is a staggering $78 million. Add the recent addition of the Calnetix TA100 product backlog from the strategic acquisition, and Capstone has approximately $85 million in backlog to ship over the next five quarters.

New orders received included our first orders for the ULC1000 product, and more ULC200s for the US market. Capstone started the official UL witness test phase for the C1000 product this week, and anticipates receiving UL listing no later than the end of April. Backlog also was positively impacted by increased orders from Russia, France, Poland, Germany, Mexico, and more orders from Columbia. Capstone's impressive backlog represents a year's worth of shipments at a healthy growth rate, and sets up another year of projected double-digit revenue growth.

Our growing revenue and backlog are driving the Company towards our near term goal of positive gross margins, which is the most exciting result of this quarter, and management is extremely impressed with our improved gross margins. Slide five illustrates how Capstone's gross loss improved from a negative 19%, or almost $3 million gross loss on revenue of $15.5 million in Q2, to only 1%, or a $200,000 gross loss, on $16 million of revenue in Q3. This dramatic improvement in just one quarter is a direct result of our C65, C200 and C1000 cost reduction program, combined with the effect of the new prices and past product price increases.

I believe you'll agree that this quarter validates Capstone's cost reduction programs are being effective; and now as we continue to combine improving material costs with an even higher average selling price, we will continue to drive improved gross margins and move toward profitability.

At this point, I'd like it turn the call over to Ed to review the specific fiscal 2010 third quarter results. Ed?

Thanks, Darren. Good afternoon, everyone.

I'd like to provide you with our financial results for the third quarter of fiscal 2010, which ended December 31st, 2009. Revenue for the third quarter was $16 million, an increase of 39% from the $11.5 million reported in the same period last year. Capstone shipped 122 units during the third quarter compared to 116 a year ago, although average revenue per unit in the third quarter increased to $100,000 per unit from $66,000 per unit last year. We expect our average revenue per unit to increase, as we book new orders at higher prices and continue to increase manufacturing rates on the C200 and C1000 series products.

Gross loss for the third quarter was approximately $200,000 or 1% of revenue, compared to $600,000 or 5% of revenue from the same period last year, and $3 million or 19% of revenue for the second quarter of this year, fiscal 2010. The improved gross loss reflects higher sales of C200 and C1000 series systems, resulting in an overall higher margin from the change in the product mix, progress on direct material cost reduction efforts, and lower manufacturing costs compared to the prior period.

R&D expenses were $2 million for the third quarter, a decrease of $100,000 or 5% from the same period last year. R&D expenses were lower in the third quarter because of just lower overall spending. SG&A expenses remained unchanged at $7.4 million compared to the same period last year. During the third quarter, stock-based comp to employees and consultants increased, while travel, marketing and salaries have all decreased compared to the same period last year. Our net loss is $7.2 million for the third quarter of fiscal 2010, which improved $2.8 million from the $10 million reported for the same period last year.

The primary reason for the improvement in the net loss was the result of the adoption of Accounting Standards Codification 815 Derivatives and Hedging, which affects our accounting for warrants and certain anti-dilution provisions. We recorded a non-cash benefit this quarter of $2.3 million to warrant liability expense. The net loss and corresponding loss per share before the effect of the new warrant accounting was $9.5 million and $0.05 per share respectively. Please refer to slide number six for a reconciliation.

As our stock priced decreased, as it did, from $1.32 at the end of the second quarter to $1.28 at the end of this currently reported quarter, it lowered our loss. Conversely, if our stock price had increased from the second quarter, our loss would have been higher as a result.

Our loss from operations was $9.6 million or 5% lower than the same period last year. Loss per share for the third quarter was $0.04. The loss per share for the same period a year ago was $0.06. The loss per share before non-cash benefits related to warrants was $0.05 per share, and again please refer to slide six.

As of December 31st, 2009, cash and cash equivalents were $15.7 million. Cash decreased to $8.3 million during the third quarter. Our backlog at the end of the third quarter was $78.1 million, which increased 37% from the same period a year ago, and increased $18.8 million from our second quarter of this fiscal year.

I'll now turn the call back over to Darren.

Thanks, Ed.

An encouraging sign of the economic recovery is that we continue to see quotation and order activity grow in almost all of our vertical markets, which is reflected in slide seven. Multiple markets provide us balance and diversification, as we have opportunities in markets worldwide. I am most excited with this activity in the oil and gas markets, office building, biogas, UPS and hybrid vehicle markets. I think it's important to step back and look at the size of our overall vertical markets. It's important that as impressive as our $85 million in backlog is, it is less than 1% of the total market opportunity across our addressable markets. As you can see from slide eight, Capstone's addressable annual markets are estimated to be in excess of $14 billion. I believe our continued capturing market share, despite poor economic conditions, is just a hint of what can happen after the markets fully recover and project financing finally becomes readily available.

In addition, we continue to plant seeds with every installation of our exciting new products, including the C200 and C1000 and our UPS products. As I mentioned earlier, some of the major developments during the quarter were in the hybrid vehicle market. We are amazed by the opportunities for our US hybrid transit bus customer, DesignLine, who has over 500 buses in backlog from New York, Baltimore, Charlotte and several California transit properties. In addition, we're also working with bus OEMs in Italy and Russia.

On the car front, as I said, Capstone recently announced the first automotive OEM. Velozzi, a California-based car designer and manufacturer, plans to release its electric Supercar utilizing a C65 in late 2010, and SOLO, a crossover vehicle utilizing a C30 in 2011. Slides nine and ten showcase the two new and innovative Velozzi vehicles.

Capstone is also in talks with other companies to develop electric trucks, and Capstone range extenders for delivery vehicles and refuse vehicles. The plug-in electric or HEV market continues to be a small portion of Capstone's revenue today, but continues to have strong potential upside in the not-so-distant future. Capstone's electric vehicle strategies provide microturbine solutions today based on our current industrial 80,000-hour product that car, truck and bus manufacturers can immediately integrate into their innovative plug-in electric vehicles; but while simultaneously collaborating with two key Fortune 500 automotive component manufacturers to build a new high-volume, lower cost, 10,000-hour automotive version of both our C30 and C65 product. We are in the process of finalizing the cost and design analysis on a new automotive product, and hope to have firm agreements in place with one or both of these firms in not-too-distant future.

The fact that we achieved our second consecutive record revenue quarter, the fact that we surpassed last fiscal year's total revenue in just three quarters, and the fact that we dramatically improved our gross margins from the second quarter to within 1% of positive gross margins for the first time in the Company's 21-year history, leads me to believe that fiscal 2010 will be the year of continued significant growth, significant cost reduction, higher average selling prices and improved operating expenses.

Slide 11 graphically shows what management continues to believe is Capstone's clear path to its short term goal of positive gross margins followed by profitability. The critical drivers continue to be revenue growth, continued manufacturing cost reduction, continued margin improvement, and continued management of inventory with a near-term goal of achieving four inventory turns. I believe that Q1 and Q2 proved the Capstone is well on its way to higher revenues and lower operating expenses, and improved inventory turns. But Q3 demonstrated our ability to lower material costs and improve gross margins. I believe that Q4 should see us reach positive gross margins, as we continue to execute against our strategic business plan.

Our recent strategic acquisition of the Calnetix TA100 product and OEM arrangement for the 125-kilowatt waste heat recovery generator can and will only help us move along this path to profitability. As shown in slides 12 and 16, this new strategic relationship substantially strengthens Capstone's business, with additional intellectual property, a broader product offering, and increased simple cycle efficiency, not to mention 24 new channels to market.

I know I speak for the entire Capstone management team when I say we firmly believe that we are on the right markets, with the right drivers, with the right products, with the right team, with the right incentives, with the right partners, and we are absolutely focused on all the right things. This Company has come a long, long way in the last three years, and now I look forward to what the next three years will bring to Capstone, its employees, customers and stockholders.

At this point, I'd like to open the call up to the analysts for their questions.

(Operator Instructions)

Your first question comes from the line of Sanjay Shrestha with Lazard Capital Markets. Please proceed.

Good afternoon, guys. A couple of quick questions here. First, pretty impressive progress here on the backlog slide. Kind of wanted to understand, how should we think about the possibility in this backlog versus the backlog that has been sort of flowing through P&L up to this point, with the price increase that you've been implementing with the expansion of the product portfolio? And second, I want to make sure that this backlog number does not include the contribution from the recent acquisition of the 100KW stuff from Calnetix, correct?

Correct. The backlog of $78 million is prior to the Calnetix acquisition. After that acquisition, that's going to bring the number up to around $85 million.

Okay.

I think the important is the backlog and the bookings we had for the quarter very much looked like what we'd seen in the past. Our Russian distributor was one of the bigger players in that, but the most exciting thing was seeing our Polish distributor getting orders, our German distributor getting orders, Australia, South America, and really more importantly the US market finally kicking in, especially with the larger products, the C200 and C1000.

Okay. Now in terms of sort of the price increases that you guys have implemented, is there any more room for that, and that's one of the additional factors that's going to help you sort of continue to move forward to that positive margin, and sort of cash flow positive territory, or now we're at the point where it's really more about the volume?

Really right now, we're at the point where the backlog has multiple price increases built into it. So we're still having product that ships out in the quarter that's only seen one price increase next quarter, and the following quarters you'll see two and three price increases layered in. That being said, we're still moving down the cost reduction path. I think you saw this quarter the good work that Mark and his team has done to get our cost reductions down, as we get older higher priced parts out of our inventory and new lower cost the parts into our inventory.

That being said, Jim is always working to increase the backlog, to increase orders. Even though we've raised prices, we will negotiate with the customer on a large order if we need to, or what we have to do to be competitive in the marketplace. Our goal is not to price ourselves out of the market, but to be market-based pricing and to get the maximum we can for our product.

Okay. And one last question for me, then, guys. So obviously this slide here that you guys have here about the addressable market opportunity, obviously $14 billion a big number, and for you guys sort of doing the revenue run rate of what you were doing at this point in time. So help us understand as to big near-term opportunity, things we need to see to sort of get the further appreciation of the fact that you guys are getting good traction in this market, can you sort of talk about -- you know, this is a great granularity but sort of talk through this a little bit as to what are the near-term milestones we should be looking at to get better appreciation for the good traction that you guys are getting in what is a pretty -- pretty large addressable opportunity?

Yes, I think that, you know, we've always talked about how big the market was, it was a multi-billion dollar market. Because our Company was so small and we had such small market share, it didn't make sense I think to show people hey, we're a $20 million company in a $14 billion market. As we start getting significant traction and we start opening up some of these markets, I think it's appropriate and time to say, here's how big these markets are, and as we team up with a Carrier UTC or a WESCO, or continue to get some doubles and triples -- because frankly, Sanjay, we've been hitting singles, as you know. We have not had a huge rollout at a national chain. We've had some pipeline activity, the YAMAL pipeline will have over 100 units going into that project, but for the most part it's been onesey, twosey orders, and as we look at getting substantial market share the numbers can grow exponentially, obviously.

Okay. That's helpful. Thanks, guys.

Thanks, Sanjay.

And your next question comes from the line of Eric Stine with Northland Securities. Please pro sealed.

Hey, Eric.

Hi, guys. Congrats on the gross margin numbers and the bookings.

Thank you.

Just wondering, the previous question kind of touched on this, but as far as the gross margin, can you give us a sense of kind of what inning we're in on both sides, materials and also price increases? And then also it sounds like that margin number is pretty clean, and there aren't any one-time benefits in there?

That's correct, Eric. It's what we consider a clean margin quarter.

Since Mark and his team are the ones that delivered that great gross margin, I'll turn it over to him to let him answer that question.

Yes, as far as the cost reduction is concerned, I would say that we're probably just north of 50% of the way through where we're headed to right now. So we still have a lot of cost reductions that are still to flow through as we work out some of the inventory. Darren mentioned that a little bit in his script there, but as well as we look to the future, you know, next year we're continuing to try and identify other cost reduction opportunities to continue to drive that, and that will continue to be a major focus for the operations organization.

I think it's important to note, as we look at an automotive version of the C30 and the C60, any relationship we put in place with an automotive company would include our ability to buy those components or complete assemblies back for the industrial market. So if we could have a $3,000 or $4,000 C30, or a $6,000 or $8,000 C65, and turn around and leverage that product or components out of that product back into the industrial market, that has a huge impact on our profitability, and would obviously give us some more pricing flexibility against the incumbent technologies.

Okay. So still a lot of room on both sides in the price --

Your question was what inning we are in, I'd say we're in the 4th or 5th inning. We still have a ways to go on the cost reduction side, even to just get to what we want to deliver short term. Obviously long term and for the automotive market, those are different applications.

Sounds like pricing earlier than that?

Yes, exactly, Eric. Remember it's two components. It's the average selling price increasing and the DMC, or the direct materials cost, decreasing at the same time.

Right.

So, you know, the revenue's hitting, and that's why on a quarter with $500,000 more in revenue than the prior quarter, you have a $200,000 loss, which is the $3 million loss. So we're beginning to se the results of it. You know, our goal is for the fourth quarter to be a better gross margin than the third. So, you know, even though the DMCs are, what, I guess slightly behind schedule, we still see them and we still know when the completion dates are now, and so we're comfortable with getting the whole thing done.

Okay. That's helpful. I will just switch gears to the bookings. I was just trying to go through the numbers in your filing quick before the call. It looks like the C65 and the C1000 were particularly strong. Was there a specific end market, you know, that you can point to as driving that?

Eric, this is Jim Crouse. No, I think as Darren said, we saw a little bit from a lot of different regions. We had new orders from South America, our Columbian distributor placed some orders for some bigger units, we got some C200 and C1000 orders from North America and, you know, Europe continues to be strong as well. So it was a little bit from a lot of different places, which was reassuring.

Okay. Last thing, just on the C200, can you update us on where production levels are? And you mentioned that you had about $2 million sitting in inventory at the end of the quarter. Were those C200s, and have those shipped?

The majority of those were C200s. We also had some C65s in there as well. I guess on the manufacturing run rate, I'd say that Mark and his team can build C200s faster than our customers are taking them right now. So I think the good news, we are -- the gloves are off from a manufacturing standpoint. We can, you know, do a C200 a day, if we need to at this point. So we're really matching our heart rate with the heart rate of our customers. As you know, we're a project-based business. Financing still is difficult and slow to get; but as our customers have deliveries, we have no problem building C200s and meeting those deliveries.

Okay. And so the C200 number, the C200 equivalent number in the quarter was more a function -- just down slightly sequentially more a function of just project timing and financing?

Yes, we had a couple C1000s sitting on the dock at end of the quarter, so just really a matter of timing. So the good news is if customers ramp production or, as Jim grows the business faster, very comfortable with our C200 and C1000 production line keeping up.

Okay. That's great. Thanks, guys.

Thanks, Eric.

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

Hi. Did I hear correctly that you expect an $85 million backlog to reach the top line over the next five quarters? And that's, of course, including the Calnetix backlog?

Yes, we have $78 million in backlog today, and obviously you add the Calnetix to that as well, that's $85 million. Traditionally we talk about backlog in four quarters, but to include total backlog five quarters is a reasonable number, correct, so including Q4 and then all of next fiscal year. Realize that's only product backlog. That does not include our service backlog, which last time we announced that I think it was $17 million, Ed? Then we have parts, service, accessories, training, other revenue as well.

And Meghan, there's about $4 million of the $78 million that's non-current, so by definition it's outside of 12 months.

Okay. And could you just break out what the operating cash consumption was for the three months?

The majority of it's going to be from the net loss so, you know, G&A and R&D and selling expense. You know, we had a little over $2 million of the warrant charge. That's pretty much going to be the total of it.

Cash use from operations was $7.2 million, Ed?

Yes.

Okay. Good, thanks.

(Operator Instructions)

Your next question comes from the line of Rob Stone with Cowen and Company. Please proceed.

Hi, guys.

Hey, Rob.

I just wanted to beat the dead horse a little bit more, and talk about backlog. My question is not so much about backlog, but about the composition of the ramp in terms of, is the quarterly growth a function of your manufacturing run rate ramping up? Is it customer project timing? What causes a customer to book something now that's shipping in four or five quarters? You know, help us understand the puts and takes that drive the ability, assuming you have orders in hand, to ramp up the revenue?

Sure. No, Rob, I think that's a good clarification. First of all, yes, we're to the point today with C200, C1000 production, and C65 and C30 production, that we are driven by customer requirements. And so customers will give us an order with an expected ship date, and that can be anywhere from, you know, 12 weeks to, in some cases, longer than a year. If it's longer than a year, it's typically -- DesignLine I think is our biggest one that's in there, where they've given us kind of a year's order book for their bus manufacturing. So they've got contracts with New York and with Baltimore that are multi-year contracts, and so they drop orders on us to match that contract. So obviously they can't build a year's worth in a quarter, it takes them time to ramp their production and push the buses out.

The majority of our product does ship in a couple quarters. C30 and C65s go quicker. C200s, C1000s tend to take longer, but our challenge is, and the challenge that Mark and his team have, is that a delay in financing or delay in a permit, or some sort of issue on the site, can delay a shipment --

Can even be weather.

Yes, or even weather. Yes, obviously severe cold weather, construction delays, process of getting a crane. We had an issue in Bogota, Columbia, where they didn't have a crane big enough to ability to lift it on a ten-story building for a C1000. So many things will impact it.

Obviously being a public company, a week impact or two weeks' impact at the end of a quarter can give us lumpy quarters. Obviously to our customers, a couple week delay is nominal. So that's really the issue. We're at somewhat the mercy of how our distributors can get the projects done, how the customers get the projects done. I think that's why for me one of the focuses for me has always been strengthening our distribution channel with partners with bigger balance sheets that can take some of the ripples out of the schedule, as well as a more diversified portfolio of customers worldwide. So if one project slims, another project pulls forward or fills the spot.

So I think that's really the key for us now. We were limited on the C200 build rate initially, but those days are behind us, and we're fully functional on the C200 and C1000 product line.

So should we expect, as you start to integrate Calnetix sales, and do you have visibility on a rebound from your two largest customers, that you would see more of a step-up in Q4 revenues as opposed to, you know, relatively flattish Q2 to Q3 that we just saw?

Yes, I think you're going to see -- Q4, you're going to see BPC get back online. Their biggest customer -- two customers are oil and gas customers, Gazprom and Lukoil. Both of them were managing some end-of-year budgeting issues and didn't take product in November or December, and that caused some delays. Now that the new budgeting cycle and the new year for them, they have projects that will move forward. The YAMAL pipeline, we have over 100 units going to that pipeline in Siberia for Gazprom. That pipeline project got moved back not quite a year, about nine months, so that obviously impacted us as well.

So as project schedules move around, those things happen. But in Russia, in fact I was over in Moscow two weeks ago, there's a lot of infrastructure spending going on. The government, unlike the US Government and European governments, is spending money on energy efficiency and on infrastructure projects to build-in that efficiency. So we're seeing some opportunities there outside of oil and gas that are very exciting. So I expect BPC to get back online this quarter.

UTC Carrier is a little different story. In fact, representatives from Carrier were here yesterday and today. We're renegotiating our OEM agreement that expired in December. That being said, they are rerolling the PureComfort initiative out across the Eastern seaboard, across several Carrier locations, most of New England, Boston, New York, Connecticut, New Jersey, to good success. We're seeing some deal pipelines start to fill up.

And then NORESCO is an interesting play. Carrier bought them in 2008, and from an energy services perspective there's some interesting plays we're exploring there with Carrier. So I expect Carrier to be maybe some orders this quarter ,and then some revenue in Q1 or Q2 as they start to reramp that. Unfortunately, when they decided to move it from UTC Power, the PureComfort product over to Carrier, we probably lost nine months' worth of momentum as they retooled and rerolled the product out under the Carrier banner.

And then as far as Calnetix and the TA100, yes, Darren previously mentioned that we expect probably $10 million or so in additional revenue from sales of the product, the TA100, then from sales of our product, made it up with the waste heat recovery generators that we have the rights to sell. So I'd say, you know, think of it as $10 million over the next 12 months, but slower in the beginning.

So I look at next year. We expect another solid growth year, year-over-year you should see costs continue to come down, working capital continue to be managed as closely as possible. So we want to make sure that we can fund the growth, and have the balance sheet for the growth we're experiencing.

Obviously as the economy grows, as green energy and energy efficiency and more oil and gas projects get implemented, that's going to help grow our business. And I think as I mentioned in my script, every time we have put a 200 or 1000 or any of our projects out there in the UPS market, it becomes a showcase, and new customers are going to see that. So we've just seen the kind of leading edge of that momentum with the larger product.

Final kind of strategic question, if I may, you hinted at, you know, the very large potential both directly, and then indirect benefits for the industrial business out of new automotive designs and volumes. The platforms that you're announced on so far are, you know, large bus and fairly exotic vehicle platforms, both of which equate to relatively low unit numbers compared to, say, mainstream consumer vehicles. Can you give us a sense of where you see the opportunity with these two large customers, if you're able to give any more -- or potential customers, I should say, if you're able to give any more color of what type of platform or market segment you think you would enter in?

Yes -- no, I think it's a great clarification. We're really running two strategies at one time. We're trying to get microturbine technology out there in the mainstream market, and really demonstrate and showcase the technology. So what we're doing with Velozzi, what we're doing with DesignLine what, we're doing in low volume, call it more niche markets, is showing off the technology, proving the technology. The product we have, today, though, is an industrial product. In automotive terms, it will run two or three million miles. That is way overkill, obviously, for an automotive application. So we don't need an 80,000 hour product, we need a 10,000 hour product. So we'll make changes to the design from a materials standpoint, from a design standpoint, and then make changes to how we manufacture it for high-speed, high-volume manufacturing.

That being said, you know, we've got about a 4,000 unit capacity in our current plants and equipment; that's nothing in the automotive world. So I've gone out simultaneously -- while Jim and his team have found short-term more niche applications to drive revenue today for the product, we're looking to get into the automotive space with a partner . And one or two partners that are already in the automotive space, already making automotive components, whether that's drive trains or engines, or turbochargers, or whatever they're making today for the automotive OE industry, and then have them partner with us to manufacture the product.

So how that would look would be either a royalty or a joint venture, some type of application in that perspective, with us getting a piece of the pie on the automotive side, ingredient branding on the automotive side, and then access to lower-cost, higher manufactured components to go back to the industrial side. I don't intend to take on the automotive market directly, with our limited balance sheet, limited experience and limited plant and equipment it doesn't make sense; but partnered with the right technology who's already in that market, has the high-volume manufacturing expertise and equipment, makes a lot of sense. So we've been working with these folks, each company, one for more than six months, one for about a year. These things obviously take time, to get through the automotive PPAP process takes time. So even if we reached agreement tomorrow, we're probably two years away from showroom floor, but the intent is to have a C30 in the $3,000 to $4,000 range, a 10,000-hour life, that would go under the hood of a Ford or a Chevy or a Toyota, or whatever the platform would

Great. Thanks very much.

Thanks, Rob.

And at this time, I would like to turn the presentation over to Darren Jamison for closing remarks.

Great. Well, thank you. I definitely appreciate the questions. I think you guys are all honed in on all the key issues we have with the Company.

We're very excited about third quarter results, with the record $16 million revenue. We're excited to have more revenue through three quarters than we did through all of last year, and have another positive growth quarter.

But really what's important is the gross loss improvement. Growing revenue and not having it be profitable doesn't make a lot of sense, it's empty calories. We are now growing revenue with gross margin improvement, and hope to quickly get to positive gross margin, and then hit our target of 40% gross margin eventually.

Record orders from Jim and his team did a great job, $31 million. That's staggering when you think back that, I think, in fiscal 2008 we did $31 million in total revenue; and Jim booked that, and his team and our distributors, just last quarter, not counting Calnetix. So you look at the backlog, you look at the revenue growth, and you look at the margin and cost improvements, and you can't help but be excited about what's looking to go forward.

So with that, I appreciate the comments and the call, and look forward to talking to everybody after our fourth quarter. Thank you, Operator.

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