Capstone Green Energy Corp (CGRN) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Capstone Turbine Corporation earnings conference call for fourth quarter and fiscal year 2010 financial results ending March 31, 2010. I will be your conference moderator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. (Operator Instructions) During today's call, Capstone management will be referencing slides that can be located on www.CapstoneTurbine.com under the Investor Relations section. As a reminder, this conference call is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Miss 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 for fourth quarter and year-ended March 31, 2010. I'm 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 14, 2010. 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 at 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 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 and the ability to reduce costs and improve inventory turns and 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, new products and technologies, compliance with certain government regulations and increased government awareness and funding 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 hybrid electric vehicle markets, the successful integration of the Calnetix Power Solutions microturbine business, revenue growth and increased sales volume, our success in key markets, our ability to enter into new relationships with channel partners and distributors and other third parties, the energy efficiency, reliability and low cost of ownership of our products, 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 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 this increased demand, we may need to raise additional funds to meet our anticipated cash needs for working capital and capital expenditures. The current recession could make it difficult or impossible for us to raise 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 a failure to meet a 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 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 and 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 assets 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 we 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'll now turn over the call to Darren Jamison, our President and Chief Executive Officer.

Thanks, Jayme. Good afternoon and welcome everyone to Capstone's fourth quarter and fiscal year-end March 31, 2010 earnings call. With me today are Ed Reich, our Executive Vice President and Chief Financial Officer, Mark Gilbreth, our Executive Vice President of Operations and Chief Technology Officer, and Jim Crouse, our Executive Vice President of Sales and Marketing. Today, I will start a call with a general overview of the fourth quarter and fiscal 2010 annual results, and then turn the call over to Ed, who will review the financial results. Ed will then turn the call back over to me and I will discuss what is happening in some of our key markets and update you on our progress toward our strategic objectives of positive gross margin and positive cash flow.

As the operator mentioned, we'll be using slides today in our presentation that can be found on the Capstone website under Investor Relations presentation section. We've had another extremely busy quarter as the Company continues to build positive momentum. Slide two and slide three of our presentation summarize some of the recent events as we have signed up new distributors in Japan, Nigeria, Pakistan and in the US. Specifically in the US, I'm very pleased with our new distributor Western Energy Systems. They will be covering most of California, Oregon, Alaska and Hawaii. Western Energy is a very experienced company, with a proven track record for selling and servicing GE and [Bio Natural] gas and internal combustible engines and the combined heat and power, and biogas projects.

The market adoption of our new C1000 product continues to accelerate. During the quarter, with the first C1000 being sold to Italy, Korea, Mexico and most recently, Venezuela. Capstone has now sold C1000 all over the world including Russia, France, Germany, Poland, Spain, Australia, Mexico, Brazil, Columbia, Venezuela and Canada and of course, the United States. Capstone recently announced the UL listing of the C1000 product, for a lot has not only delivered the C1000 for the US markets that are already in backlog, but also allow Capstone to more aggressively market the C1000 product in the US.

As the electric vehicle market continues to expand, I'm positioning Capstone to be a key player in the range extender market by operating a complete line of hybrid electric drive solutions, as announced minutes ago. We also recently announced the first hybrid electric boat demonstration project in the Netherlands and our first Class 8 tractor-trailer truck application with the US 1 Industries here in California. Capstone Turbine's are already operating as range extenders and electric in Buffalo, New York, Charlotte and Baltimore and I'll talk more about electric vehicle strategy and product offering later in this call.

Capstone's also had many product development firsts recently. As we sold and shipped our first C1D2, explosion-proof, C200 offshore oil and gas product and our first liquid fuel C200 units to China in the last couple weeks. We also recently completed and released our California Air Resources Board, or CARB, C200 for digester applications, our C65 CARB product for wellhead gas applications and are awaiting our C30 CARB liquid fuel for transit bus applications. These three additional CARB certifications further prove that Capstone is a world leader in clean energy microturbine technology as CARB is the world's most stringent environmental standard.

We also received notice of award on another product development grant from the US Department of Energy to develop our next generation microturbine that we rated at an estimated 370 kilowatts with an incredible 42% efficiency. These are in addition to our two other DOE and BIRD foundation grants for development of an agricultural and biogas product and a solar concentrated product. These three new DOE grants and BIRD foundation grants will help Capstone develop the next generation of products. They are an integral part of Capstone's future product development path. So I'm very pleased with our team's ability to win government funding to help ensure that Capstone continues to be the world leader in microturbine technologies for years to come.

Also during the quarter we successfully integrated a strategic acquisition of Calnetix Power Systems TA100 microturbine product and the 125-kilowatt waste heat generator OEM product. I'm pleased to report that we shipped 11 TA100s during the quarter and recently received orders for our first two 125-kilowatt waste heat generator systems for installation on Capstone product and landfills in France. As I said earlier, it has been a very busy quarter, signing up new distribution partners, releasing new microturbine products, certifying to different CARB standards, winning the new DOE grants, listing the CL1000 to the UL listing. All while integrating our strategic acquisition of Calnetix Power Systems.

During the fourth quarter, we continued to experience the trend of order shifting to the right and finished with approximately three million of finished goods on the loading dock here at Capstone. We experienced higher than usual charges to cost of sales as we made fueled upgrades to C1000s currently in the field to improve operations at extreme high and extreme low temperatures and upgrade and undersized brake resistor and cable that are used to take load when the turbine is running at no load or low load conditions. Capstone is taking a very aggressive approach to any product issues with the C200 or C1000 family of products, at each unit in the field is highly visible and will set hundreds of potential customers expectations on Capstone's brand and performance. As much as I hate air freighting parts around the world and fixing units that have not yet failed, I cannot and will not sacrifice Capstone's brand for the sake of saving money or improving quarterly performance.

Overall, I continue to be very pleased with our direction of the Company and the results for fiscal 2010. As we said, new Company highs in both annual revenue and new orders. Our revenue for the year was an amazing $61.6 million which easily beats last year's $43.9 million in total revenue. That is a 40% year-over-year revenue growth with $73.5 million in new product orders in the face of the worst economic condition in decades. If you analyze the bookings, we added another $22 million on Q4 on top of the $31 million in Q3, to finish the year with $53 million in new orders in the last two quarters. That is truly remarkable and gives us a great momentum going into the fiscal year.

Obviously, it's very difficult to judge an early stage Company like Capstone on a quarter-by-quarter basis. Therefore, if you look at slide four, it shows you the progress of Capstone from fiscal 2005 to fiscal 2010 just completed. As you can see from the chart, Capstone has grown from $17 million revenue back in 2005 to the $61.6 million in revenue today. Gross margins came down from negative 51% to negative 14%. And if you look, our analysts are anticipating $102 million in revenue in fiscal 2011 with 13% positive gross margins.

R&D expenses have dropped from 69% of sales to 11% of sales while SG&A has come down from 122% of sales to 46% of sales. EVen though we have a lot of work to achieve our profitability goals, you can see the operating loss has dropped dramatically from negative 242% to negative 71%. However, sometimes it helps us to step back and look beyond the numbers. If you look at next side, slide five, you will see the Capstone of yesterday, or I can say circa 2007. The Capstone, when I began as CEO, had a very limited product family with only a C30 and a C65 product and the Company was actually in the process of phasing out the C30 product. Capstone only had 25 distribution partners and more importantly, only eight had repeat orders the previous year.

Back in 2007, we had tremendous confusion of the market channels with limited distributors exclusivity, one-year distributor agreements and the Capstone factory often selling direct to customers, obviously undermining the channels to market. The Company had poor product documentation and no CRM system. Even worse, Capstone had all but abandoned the dream of electric vehicles and the Company only offered the C30 in the HEV marketplace. The previous management did do an excellent job in fixing the product's liability issues but Capstone had a very weak service organization. The Company had dramatically improved mean time between failures, or MTBF, but it had a 38-day mean time to repair, MTTR. Therefore, losing customer good well up to the first product failure in the field.

Also, when I joined the Company, we did not offer a long-term service solution like today's very successful factory protection plan, or FPP. The primary focus back in 2007 was on the New York market and we really had no green marketing or branding strategy. Capstone had very limited CARBON UL certifications and only liquid fuel was available in the C30 product. As I said, that was in the process of being phased out. However, the most disturbing issue when I came CEO was the 38% annual employee turnover rate, which essentially gave Capstone a new work force every couple of years and obviously, it was totally unacceptable.

To go to slide six, and how our Capstone is today, circa 2010. As Capstone now features a broad product family with the C30, the C65, the newly acquired TA100, the C200, C600, C80, and C1000 product. Today, we have approximately 95 distribution partners worldwide of which 60% had multiple orders in the last fiscal year. We are in the process of adding a handful of new distributors, but for the most part, we are in what I call, and Jim called the weed-and-feed phase of channel development. We are working diligently to upgrade, not phase out, the C30 product with new hardware and new certifications. We've not only improved the MTBF but also dramatically improved the MTTR for all of our products worldwide.

We now offer an industry unmatched five-year and nine-year comprehensive factory protection plan and have over 648 units under long-term service agreements at the end of March. Today, our distributors are our business partners, not our competitors, as we work shoulder-to-shoulder to build our businesses together. Distributors have exclusivity by territory or market vertical so they can justify investing their capital in additional sales people, engineers, factory-trained technicians and facilities. We have greatly improved our distribution training programs and have a very robust green marketing and branding strategy.

Today, Capstone is a leader in CARB UL and CE certifications and now has more fuel options available across the product range, including the C30, C65, C200, and C1000 series, for diesel, biodiesel, kerosene and propane. We have innovative new products like the hybrid vehicle drive systems announced today, the hybrid UPS systems, the hybrid marine systems. In addition, we launched the factory rental program early last year. However far and away, the most important improvement to Capstone is our employee turnover, which is now less than 6%, as we are now holding on to the most critical aspect any technology company can have and that's our valuable employees.

Turn to slide seven, Capstone continued to demonstrate strong revenue growth year-over-year for the last 11 consecutive quarters. I would venture to say this is a result not matched by many companies in today's market. And I offer this is proof of our growing market share and market adoption of our new ultra-clean and energy efficiency products. And slide eight illustrates how Capstone's product backlog increased substantially as a result of the record $53 million in new orders over the last two quarters. Total product backlog, not including parts, service, accessories, FPP contracts, at the end of fiscal 2010 was $56.3 million. Capstone's incredible product backlog represents a full year's worth of shipments at a healthy growth rate and sets up another tremendous year projected double-digit revenue growth in fiscal 2011.

Our growing revenue and backlog will drive our Company to our near-term goal of positive gross margins and profitability as long as we continue to execute our cost reduction programs. I will now turn the call over to Ed to review the specific financial results but more importantly give you some additional transparency in to Capstone's progress on those critical cost reduction programs, foreign product direct material costs while simultaneously increasing product average selling prices. At this point, I'll hand the call over to Ed.

Thanks Darren. Good afternoon, everyone. I would like to provide you with our financial results for the fourth quarter and full fiscal year ended fiscal 2010 which ended on March 31, 2010. I will begin with a recap of the major items on our balance sheet. Significant sequential changes from the Q3 to Q4 2010 balance sheet were as follows -- inventory decreased in Q4 to $23.2 million to $25 million in Q3, with inventory turns at about 2.7. I'm pleased to report that inventory decreased $7 million from the prior year on revenue growth at 40%. Accounts receivable increased in Q4 to $18.5 million from $13.9 million in the prior quarter as a result of heavy end-of-quarter shipments, accounts payable and accrued expenses also increased to $17.1 million in Q4 from $14.4 million in Q3, again, mainly due to higher payables as a result of the heavy end-of-quarter shipments.

Cash increased to $47.3 million in Q4 from $15.7 million in the prior quarter. The increase was due to $42.5 million in net cash proceeds from our equity financing completed in February of 2010 and was offset by $10.5 million of cash used in operations during the quarter. Sequential changes from the Q3 to Q4 income statement were as follows -- total revenue increased 2% sequentially to $16.3 million, product revenue increased 9% to $13.5 million in Q4 versus $12.4 million recorded in Q3. Units shipped increased by 37 sequentially, although the average selling price per unit was down in Q4 as a result of both product revenue and pricing mix. Accessories, parts and service revenue decreased approximately $800,000 to $2.8 million in Q4 from $3.6 million in Q3. The majority of the decrease was a result of some seasonality in parts and lower FPP service revenue.

We have made significant progress over the last five quarters of reducing material costs, as seen on slide nine. Note that material margins have improved significantly, as average selling price per unit increases along with the corresponding decrease material cost per unit. As you see on the slide, we saw over 25% improvement in average product margins per unit from the end of last year and a 2% improvement between the third quarters and fourth quarters of this fiscal 2010.

As you see further on slide ten, despite the 2% improvement in product material margins, for the quarter, we reported a gross loss of $2.2 million greater than the Q3 loss on similar revenues. Q4 margins were affected by $300,000 in unfavorable revenue mix, higher unit sales, lower average selling price per unit and decreased sales of higher margin accessories, parts, and service. Also related to revenue was a product mix effect on margin of $0.5 million, or $500,000, related to the Q3 sales of nine C1D2 offshore units with no such sales of such units in Q4.

As mentioned earlier we experienced heavy end-of-quarter shipments during the quarter which caused us to incur overtime in the factory along with higher payroll-related costs, as our fourth quarter begins on January 1 when payroll taxes are just resetting for the year. The combined impact of this on margins was approximately $200,000 along with about another $200,000 of lower overhead absorption to finished goods this quarter. We incurred $700,000 in incremental scrap, inventory adjustments and material re-evaluations during the quarter that we expect to curtail as we move to Tier 1 suppliers. With regard to scrap and inventory adjustments and have less impact from material re-evaluations as we reach our target materials costs. Finally, margins were affected by incremental warranty costs, primarily related to field upgrades on the C200 and C1000 series products.

In an effort to bring the [fielded] units up to current factory specs. We also expect these costs to decrease over the coming quarters. The total impact of these costs, as you can see on the slide, was $2.6 million and after adding them back to cap margin, you can see an approximate 2% margin improvement between the two quarters. We spent $2 million in the fourth quarter on research and development, which is slightly less than the $2.1 million in the same period last year.

We spent less on salaries and other departmental costs, which was offset by the completion of the UTC C200 development program that had benefit from the prior year comparable quarter. SG&A costs were $7.9 million in the fourth quarter. This is up $1 million from the same quarter last year because of higher professional fees that increased insurance costs. Our net loss is $12.9 million for the fourth quarter with $0.05 per share compared to $12 million or $0.06 per share loss for the same period last year.

Now I would like to review the year ended March 31, fiscal 2010. Total revenue grew 40% from the prior year to $61.6 million. Product revenue increased 50% from fiscal 2009 levels to $48.7 million. We had unit shipments this year of 499 which were almost flat when compared to 494 last fiscal year because of strong shipments of our C200 and C1000 series products and the start of TA100 shipments. As a result, megawatts shipped increased by 55% to 52.8 megawatts.

Accessories, parts, and service revenue grew 12% to $12.9 million from fiscal 2009. Gross loss was $8.4 million, or 14% of revenue during fiscal 2010 compared to $5.3 million, or 12% during the last year. The increase in gross loss was as a result of higher warranty, inventory charges and change of product mix by selling more of new C200 and C1000 series in fiscal 2010, which currently have a lower margin in our overall average margin mix that we experienced in fiscal 2009. This is offset by a decrease in our production service overhead spend for the year of $1 million. R&D expenses were down 14% to $7 million from $8.1 million during the same period last year. And that decrease in R&D expense of $1.1 million was from lower salaries and department spending and offset by reduced benefits as a result of us completing the UTC funding for the C200 development.

SG&A expenses were essentially flat, decreasing $200,000 from the prior year. Capstone's net loss of $67.2 million for the year at $0.34 per share, an increase of $25.5 million from the $41.7 million loss or $0.25 per share reported for fiscal 2009. The higher net loss was primarily attributable to the results of the adoption of accounting standards, Accounting Standards Codification 815, which is the standard for derivatives and hedging accounting in with our warrants. It affected our accounting on our warrants with anti-dilution provisions. We recorded non-cash charges of $22.9 million to warrant liability expense during the year.

Capstone's net loss for fiscal 2010, before considering these non-cash warrant liability charges, would have been $44.4 million compared to the $41.7 million, or $0.25 per share for fiscal 2009, which did not have any warrant liability expense. Please refer to slide 11 for a reconciliation. Backlog at the end of the fourth quarter was $86.3 million, up $24.8 million from the same period last year. That concludes my comments on Q4 and fiscal year-end 2010 results. Now back to Darren.

Thank you, Ed. It's an encouraging sign in the economic recovery, we continue to see quotation order activity grow on all four of our vertical markets which are reflected in slide 12. Multiple markets provide us a balanced and diversified portfolio, as you look for opportunities in these markets and geographies worldwide. Over on (inaudible) activity on oil and gas, office buildings, CCHP, biogas, the UPS product and the hybrid electrical vehicle markets. Looking back and looking at the size of the overall vertical markets, it is important that as impressive as our $83.6 million in backlog is, it is still less than one percent our total market opportunity across our addressable markets.

As you see from slide 13, Capstone's addressable markets are an estimated to be in excess of $14 billion annually. We continue to plant seeds around the world with every new installation of our exciting new products, whether it is our C200 or C1000 series or hybrid vehicle market product or our UPS products. I'm amazed by the opportunities of our US transit bus customer, DesignLine, who has over 500 buses in backlog for New York, Baltimore, Charlotte, Denver and several California transit properties that are now able to take product with our CARB certification on the C30 product. In addition, we are also working with the bus OEMs in Italy, Russia and most recently, South America. Capstone is developing a multi-pronged HEV strategy to capture market share in the fast growing electrical vehicle market.

One of our strategies, as outlined on slide 14, is a target Class 3 to Class 8 new trucks and select retrofit vehicles with the new Capstone-branded complete system solution as shown on slide 15 and slide 16. As the press release announced today mentioned, Capstone is partnering with CalMotors here in California and Parker Hannifin Drive Systems in North Carolina to develop this new solution. As part of this complete HEV drive solution, Capstone will provide the entire system except the batteries. Capstone and CalMotors are developing an automotive grade water cooled inverter system that replaces the existing Capstone entry control module and battery module as shown in the next slide, slide 17. This new water cooled version of the inverter is 88% smaller and lighter, which obviously is extremely beneficial for over-the-road automotive applications.

Capstone is in talks with several companies to develop electric trucks with Capstone range extenders for delivery vehicles and refuse trucks. The plug-in hybrid electric vehicle market continues to be a very small portion of Capstone's revenue in fiscal 2010 which would continue to grow as product demonstrations turn into product orders and new OEM agreements are signed and come online. For the passenger vehicle market, Capstone is targeting the automotive OEMs via strategic drivetrain partners. Capstone is currently collaborating with two Fortune 500 automotive drivetrain companies that manufacture and build high volume, low-cost 10,000-an-hour automotive version of the C30 and C65 product. Both firms have finalized their cost and design analysis on the new automotive product and Capstone has executed a detailed MOU with one of the two potential partners.

The strategy is for one or both of these partners to manufacturing lower cost microturbine parts of our current industrial product. We'll work together simultaneously to engineer and develop a new lower cost, shorter life automotive product with a target selling price less than $5,000. The green market will continue to utilize our standard industrial-grade product, with minor modifications for the marine environment. This product is being offered through sale to new boat OEMs and retrofit shipyards. The microturbine will be used as a marine auxiliary Gen-sets, prime-powered diesel electric, for use as a range extender for pier electric boats. Capstone will also offer this current industrial HEV solution in the construction and off-highway equipment and the military markets.

Earlier in this call, I talked about the Capstone of the past and the Capstone of today. But let me take a minute and talk about the Capstone of tomorrow. We have the products today to drive this Company to several hundred million in revenues, and reach our operating target of 40% gross margins, 15% operating profits and north of five inventory turns. However, we cannot stand still. We must continue to develop new innovative energy products and slide 18 illustrates the next generation of Capstone products of tomorrow. All these products are in development and have various amounts of outside third party funding.

First, we will increase the output and efficiency of our very successful C200 product to 250 kilowatts and 35% electrical efficiency. So, it will only take four C200s to make the popular C1000 product, thus lowering the size, weight, and cost of the C1000 product. Next, we will develop a new C370 product by combining a C250 and C65, as illustrated in slide 19. That will make Capstone more first cost competitive, with the internal combustion engines of today and provide Capstone with a first cost similar to that of the engineer, with lower CARB certified emissions, lower lifecycle costs, higher overall system reliability and as good or better overall system efficiency at an outstanding 42%. When I look to the future, I see a cutting-edge industrial clean tech Company that continues to dramatically grow revenues and market share in all of our vertical markets worldwide as customers and governments look for more cost effective and energy efficient clean tech solutions.

I see a Company with support from the US Department of Energy continuing to be a leader in the new clean tech product development, low emissions solutions and high efficiency energy systems. I see a Company that's committed to broadening the range of microturbine applications until Capstone is a household name and microturbines an integral part of everybody's everyday business life and personal life. I see a future where Capstone, with strategic automotive partners, becomes a major force in the new electric vehicle movement that will surely shape the next generation of car consumers. I see a new agricultural syngas product used on farms around the world to take non-food cop waste and turn it into much needed renewable green energy to help countries meet their growing power demands and lower their carbon footprint.

I see a future where fuel combustion energy inside the microturbine can be replaced by external energy sources such as solar energy, like products, like HelioFocus, as shown on slide 20, 21 and slide 22 or energy from the fuel cell stack like Capstone did with fuel cell energy years ago, or maybe even energy from a biomass combustion system. I see these products that principally use thermal energy but they can switch to fossil fuel combustion systems at night, during cloudy days, or when thermal energy is not available for a 100% reliable base loaded system. I don't see these as dreams but as the next generation of products that are now in product development by Capstone. With help from our strategic partners and critical funding support from the DOE, these products can and will be successfully developed. Just as Capstone developed the C200, developed the C1000, developed the hybrid UPS, liquid fuel, HEV and marine products.

By 23 and 24 graphically show what I see is Capstone's clear path to our short-term goal of positive gross margins, followed by our near term goal of profitability. As important as these goals are to Capstone, to stockholders and employees, we cannot take our eye off the future. Every journey that is worth taking has its unexpected twists and turns, unforeseen bumps in the road. But good companies, good products, good management teams overcome those obstacles and find a way to deliver continued revenue growth, improved operational efficiencies, lower direct material costs, increasing average selling prices and improved managing of inventory. Capstone is doing all of those things today and more to make sure the Capstone of today is sustainable so the Capstone of tomorrow can provide the next generation of innovative, efficient and clean energy solutions that the world wants and needs right now. At this point, I would like to open the call up to your questions from the analysts.

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

Thank you. Good afternoon, guys. A couple of quick questions here. In terms of the backlog of $86 some odd million, is that all 12-month backlog? Or how should we think about how much of that is 12 months and what will that number look like when you put the service contract in the mix?

Yes, Sanjay. This is Darren. Most of that backlog is considered short-term or 12 months. There is a small portion of it that would be probably five quarters out -- sorry, four quarters and five quarters. But all of that, for the most part, will be in the next year. As you know, parts, services, and accessories is about another $15 million to $20 million in revenue with long-term service agreements. So, overall, if we delivered all that backlog with parts and service, you would be north of $100 million for fiscal 2011.

Okay. Perfect. And I know you went through a lot of short term, long term opportunities -- focused on profitability and near-term gross margin positive dynamics. I mean, when you guys are thinking about it strategically, right? Help us to understand from a priority standpoint, what are the near-term markets you guys are going after? What is the near-term top priority of the Company while positioning it while for the massive long term opportunity?

Really, we are taking a diversified portfolio approach. Obviously renewables has been a mainstay of the Company. We continue to look at waste water treatment plants, landfills, cow manure, pig manure, agricultural waste, all that is being core to our product today. The oil and gas sector continues to be very strong. We are doing the [Amal] pipeline in Siberia, we're doing a lot of coal seam gas in Australia, plus some opportunities here in the US. So, I'd say oil and gas and renewables are the backbone of our backlog today and our primary focus.

The HEV market that I mentioned is growing. It is a very small piece of our revenue but I would say, and Jim can jump in, but it is probably taking 20% of our focus today because we had to figure out how to approach the market, select our partners, and work with our strategic partners on a long-term automotive solution. But short-term definitely, it's combined heat and power, gas, and the renewables.

Got it. One more follow-up from you guys and I'll hop back in the queue. So on the combined heat and power market, it seems like you guys have been able to increase pricing and cost is going down, so that should translate in to better margin profile. What does the current spot price of natural gas mean for you guys within that segment?

I will let Jim jump on that one. He's sitting right next to me.

Hi Sanjay.

Hey. How are you?

Good, good. The price of natural gas certainly drives interest in our products. And I think long-term stability is the most important factor. I think, gas, between $4 and $8 makes most US markets have a relatively attractive [large] spread. It justifies the installation of our type of equipment.

Yes, I think as Jim said, the biggest issue was gas and stability. Because when folks are trying to analyze a project, if gas is moving around a lot, they are not sure what numbers to put in to their financial performance. As long as gas stays very stable in the range Jim mentioned, the economics look very good. Our biggest challenge on the CHP side has really just been tight financing and people's capital budgets being slashed. As the financing comes back, and capital budgets come back, we've got several projects out there that we think will move forward that are out in the pipeline.

Okay. And then one last thing then, guys. As we think about the profitability in your existing backlog versus the year that you just closed, what would be the order of improvement given the -- you guys have been able to do the right thing from the pricing, everything is going in the right direction and then from the working capital and the cash flow standpoint, how should we think about fiscal 2011?

Let me take the pricing first. As you know, our backlog -- we have three price increases baked into that backlog. Total is 21% on the C1000 product. What's critical is we had a great Q3 booking, which was -- new orders, which was right in front of our latest price increase at 6%. That makes the $22 million in Q4 that much more impressive that, that was -- people that didn't pull orders up that were actual orders that came in at Q4 after the price increase. So, we are seeing for the most part with the exceptions of oil and gas, orders moving the numbers around. We are seeing ASPs go up every quarter. As Mark and his team execute on the cost reduction strategy, we're seeing our material costs go down every quarter. So we should see, as the older product burns off, and more and more of the $50 million booked in the last two quarters come through, we should continue to see our ASPs to go up and our DMCs go down.

Okay. And on the cash flow front?

As far as cash flow, Sanjay, we expect -- we need to keep focusing on the DMC reductions, right? It's critical to the Company in this coming year, in driving cash as well as leveling out shipments during the quarter. But we expect the burn to continue to decrease over fiscal 2011, giving us sufficient cash balances along with our line of credit from Wells Fargo to get us through the year.

Okay. That's great. Thanks guys.

Thanks Sanjay.

Your next question comes from the line of Eric Stine with Capital Market. Please proceed.

Hi everyone. Thanks for taking the questions.Did I hear correctly that you had $3 million in product sitting on the dock at the end of the quarter? And if that is the case, could you just talk about the product specifics, what the application was for and whether that shipped in this quarter?

Yes, it was multiple customers. A little bit in Europe and a little bit in South America and a little bit in Russia. Our Russian distributor had been a contributor to product on the dock three quarters in a row. The good news is we are seeing that trend reverse itself and he's getting -- he is doing very well in this quarter. Our South American folks are still a little bit slow in getting their payments in. We are hopeful that all that product that was on the dock last quarter will ship this quarter. So, I think it is a trend. I don't want to say it is our standard course of business, but I think with the economy, that's something we have seen as the financing's gotten tighter and projects schedules moved to the right.

I think as our -- more of our backlog and we get better production slots and the economy improves, I'd like to think that over the next couple quarters, that will decrease and hopefully by the end of fiscal 2011 you won't see the situation. We will have very much product on the backdoor at the end of the quarter. But I think during the recession or depression it has been a challenge to figure out which financing and which projects are going to come through. And frankly, we could have probably loosened our credit standards and shipped some of that product but Ed and his team have been pretty good at keeping us honest. And making sure that this stuff is truly ready to ship and that we are protected from a credit standpoint.

Okay. It sounds like an ongoing problem but a majority of that $3 million has shipped?

Yes.

Okay. And then just on the subject of the shift to the right that you talked about. Based on that and the shipment schedules you see with your customers, how should we think about the linearity of revenues especially in fiscal year 2011?

We'd like to see every quarter build on the prior quarter. That doesn't always happen in our business, but I think it'll look something like that. I think we'll start with a solid Q1. I feel very good about the first quarter and continue to build through the fourth quarter of this year. I think If you look at what the folks on the street, I think were all around $100 million in revenue for the year. That's obviously a nice growth from even our 40% growth this year. But we look very good -- the year looks good and we are very happy with the bookings especially the last two quarters.

And that $100 million level -- It sounds like you are pretty comfortable with that?

As comfortable as I can be in the first quarter of the year, yes. Now if you look at our backlog of $86 million, if you assume assume the majority of that backlog comes through, you assume 15%-ish parts and service, that seems like a very reasonable number. We are watching the Euro very closely. A lot of the product in our backlog is for Europe. A lot of our distributors have hedged those orders. But we could see in Q3 or Q4 some softness out of them if the Euro continues to lag. So that is probably the biggest risk factor we are closely monitoring is the Euro.

Okay. Maybe turning to gross margin. And you did spell out the items that went into that. Can you just talk about how we should think about Q1 since we are almost all the way through the quarter?

Yes, let's see. I guess the first thing is, hopefully some of the slides showed you where the ASP was going and where the DMCs were going and how the product contribution margin, or product margin, was improving. We think sometimes, with other things that hit in that margin part of the P&L, it gets disguised, so we want to make sure that folks realize we are continuing down our cost reduction plan. I'd say we are in the fifth or sixth inning of that program and we still have the two to three quarters to finalize it and win the game. That's not counting anything we do from an automotive standpoint with our strategic partner. Obviously the inventory or warranty charges we took we think with the C1000 and the C200 are both fairly mature in the marketplace. We have taken a portion of that reserve, which is forward-looking for product yet to be upgraded.

We are very happy though today with the C200, C1000 product. After the modifications we've made, it is working around the world very well. Some of the other issues are related to repricing of inventory as lower-priced inventory gets purchased, there is some repricing that goes on of inventory that is on the books. Obviously, that appears as a negative but that is a positive thing. We want to continue to do that. Some of the other things were related to scrap. We are moving to more Tier 1 suppliers every day. We will have less scrap, the more Tier 1 suppliers we have. So if you look at Q3 -- a big difference in Q3 and Q4, we would like Q1 to look more like Q3. It'll probably be somewhere in between the two and Q2 should be pretty clean as we get the most of these issues behind us. Ed, I don't know if you want to add any more to that?

No, Darren. I think that was an accurate statement and obviously the revenue mix had -- the product mix had a good effect. We mentioned we had nine offshore units that were sold in Q3, so can't talk about where we might be in Q1 but those were important to the margins, so --

Parts, services and accessories were down in Q4 and Q3. We think that will bounce back in Q1 as well, so --

Seasonality in some of the parts shipments from one of our customers that we expect to pick back up in Q1 and then we had a decrease in FPPs. We had some older short-term FPPs expire in the quarter, but we re-signed some and have added new ones since. So we expect that to come back as well.

Okay. So it sounds like a breakeven as we should think about in Q1 and then Q2 is where we see a pretty healthy jump?

I think -- I don't want to answer that specifically, or else we are in the middle of a quarter. But I would say something similar to Q3 more than Q4 absolutely.

Okay, fair enough. It was worth a shot.

Our shareholders are applauding you I'm sure. Just turning to the C1000, can you just talk about -- certainly, that's been a limiting factor.

You have some in backlog but limiting as far as addressing the market opportunity? Can you talk about what the pipeline looks like?

As far as in the backlog or --

No, just -- you've got a handful in backlog but what is out there that you really have not been able to go after because you didn't have UL or people who have told you they would order it but they are waiting on it.

Okay. I misunderstood you. So you are talk being the difference with the UL before and after. Definitely the UL was holding back at least four units in New York, the Helmsley building, the MetLife building, the Daily News building, we had some units sold in Philadelphia and Chicago. So there is definitely some pent-up demand for the C1000 product that we can now deliver. I think more importantly, not having UL certification in the US market is a real challenge. Trying to convince the building department, or the customer to buy a non-UL listed electric product is very difficult to do.

So, Jim and his team -- in fact, we've got the North America's Distributor Conference here this week. They really can now take the gloves off and get after the US market. And so, as I mentioned in the call very excited about some of our new distributors and we think that California and the East Coast are going to be great markets for us for the C1000.

Okay. Just one last one bookkeeping question and I will jump off the line here. The TA100, can you just give a dollar amount and backlog, just trying to get an idea of what your organic backlog growth was?

About $4 million in the backlog now for the TA100 and we sold a little over $1 million of it in Q4.

11 units. So, the current number is about $4 million.

Okay. Thanks a lot .

Your next question comes from the line of Walter Nasdeo with Ardour Capital. Please proceed.

Hi, good evening gentlemen. This is Shawn Lockman for Walter. I was just wondering if you could take just a second to walk us through a little bit, geographically, how your markets are playing out at the moment?

Geographically for the year, the biggest markets were Russia and Australia. Russia has been our greatest market for the last couple of years. Australia actually beat them out this year, which is a good event for us. Both are very strong, though. Europe continues to be very strong but I would say, and I will let Jim jump in here -- the Americas is seeing a lot of growth recently. We are seeing orders out of Brazil, Venezuela, Argentina, Mexico proper. So, I think North America and South America are going to see some nice growth this year and compete with Europe and Asia.

This is Jim. One of the things we've seen in the last few quarters is our pipeline continues to grow in the Americas. And so we expect that to eventually translate into shipments and orders for the Americas. So, it is becoming more balanced. We would like to see the Americas be a bigger portion of our business and it looks like we're headed down that path.

Also Asia. Why don't you talk a little bit about some of the growth we've seen in Asia?

Sure, I think as Darren mentioned previously, we shipped our first C1000 to Korea. It will be installed and started up over the next few months. That should give us a good foothold for larger projects in Korea. China, we shipped C100 to China this last year. Those projects have been started up. And with Shanghai Expo 2010 kicking off a few weeks ago, we've had quite a few visitors, both Chinese visitors and international visitors go by the installation that was with China's Southern Power Grid. We continue to see strong growth in the Asian market oil and gas -- Vietnam, Thailand, Malaysia, Indonesia, even the west coast of Australia. We've gotten recent orders for oil and gas projects that we hadn't seen before in the last 12 months.

Great. You talked a little bit about the efforts the Company is putting into products for HEV development. Can you give us a little bit more specifics about how you see the timeline for that playing out in terms of significant order flow from that, or should we start thinking about that 2011, 2012, or 2013 or what's a good way or at least how you guys are looking at it at this point?

This is Darren. Let me take the first swing at that, and the I'll let Jim clean up for me. I think what you're going to see DesignLine continue to grow their shipments. They're building more buses for Baltimore, they're building more buses going to New York. They've got some products going out to Denver and then out here to California. They have several other bids that are very close to awarding. Probably another 200 to 300 vessels on top of the 500 they already have.

As we mentioned recently, we've got several demonstration projects going on with Class 8 trucks, Class 3 and 4 trucks. We have some small OEMs we are in negotiation with. So I think you will see nice growth in 2011, and maybe even 2012. The biggest explosion though obviously would be getting a lower price automotive version of the product to really get into either automotive OEMs or truck OEMs. And I'll turn it over to Jim to give maybe a little more color.

I think that's pretty consistent. The seeds we are planting today will take a couple years to grow. But I think this was all kicked off by the CMT-380 we had at the LA Auto Show last year. Since then, we have had a lot of interest and inquiries across the spectrum from automotive to Class 3, 4, 5, 6 as well as Class 8 trucks. A lot of marine inquiries. Marine is an area we've been working on for the last 18 months or so. We are starting to see some of those opportunities come to a realization. So, it is really a much bigger cross-section than just one OEM or one particular market vertical like buses. The European bus manufacturers continue to trickle orders in. South America, we've got a bus OEM that's looking to build buses in Argentina. So all of these become very additive and will eventually make a significant difference.

Great. One final one. You talked a little bit about the constraints that you had seen in recent quarters on financing. Can you talk a little bit about the progress that you might be seeing there? Or if things are still a little tight in your end markets and or if things are loosening up a bit?

This is Jim. Things still seem to be pretty tight. Darren mentioned currency, the exchange rate and strengthening of the dollar makes our business in Europe and some parts in Asia more challenging. But from a financing standpoint, we thought we were through the woods, and with the problems in Greece, financing in Europe is still challenging. National oil companies are still taking profits from oil operations and using it to try and lessen the recession on their own economies. So we're still seeing things be quite challenging from a project finance standpoint.

I think -- this is Darren. The excitement I have is to have the bookings we've had the last two quarters and frankly, keep the revenue growth going despite the tightness and everything Jim's talking about. Really gets you excited about when the market does come back with all the seeds you planted, all the hard word our distribution channel has done. We can see some exciting explosive growth once financing gets more readily available.

Okay, that's it for me. Thank you, gentlemen.

And your final question from the line of Shawn Severson with Bank Equity. Please proceed.

Thank you. Good afternoon gentlemen. I just wanted to dig in a little bit on your product development road map. Should we expect any incremental costs that are from you in terms of R&D or on the manufacturing side as you go forward or do you think that these are minor tweaksi n the various scheme of things that won't require a lot of cash?

This is Darren. I will make a quick statement, and hand it over to Mark. I think one thing that is important to notice is that we have developed a lot of product in the last three years. In fact, I would venture to say more product in the last three years than Capstone did in the first 17 years. We have about 175 to 180 employees today. That's almost a [100 less] employees than when I got here. Our sales per employee has gone from roughly $30,000 a head to almost $400,000 a head and beyond. So I think Mark and his team have done a tremendous job at developing product with strategic partners, subcontractors, and key personnel at Capstone and his charter is to continue to do that in the most cost effective way possible. So, not to influence his answer but I tee it up to him and let him answer it from there.

I think one of the things that we are really happy with is, is that we have a product road map that we have had in place for some time. This took us through some of the products that Darren mentioned in his message there. As well as taking us out into the future into the C250 and the C370. And I think we are just very delighted that in all of these products that we have been able to combine where we were going with some of the Department of Energy programs that were out there, so my expectation on our spending with the assistance of the DOE should be relatively the same or down as we go forward.

Okay. In terms of manufacturing strategy. Do you think that the status quo as it is now is going to be sufficient for your development road map or do you foresee a need to make some adjustments and (inaudible) who is doing the manufacturing outside of the potential for the automotive OEM product?

I think as we look at larger markets and as we grow, we will always continue to look at our supply base or our manufacturing. I think as far as facilities, we have more than facilities to take us forward. As far as suppliers, a lot of our suppliers are converting to Tier 1. They're taking more on themselves. As we move into the realm of the automotive market space, we will -- there will be some new suppliers that we will need to identify as we move into that type of volume.

Okay. Is there any margin targets for these products as well or is it a little too early to think that far ahead? I'm just trying to understand as the mix maybe moves towards that what happens to margin profile and especially in the HEV market?

I think all of our product we are targeting a direct material cost that yields us 40% gross margin. So, obviously a DMC perspective, it would have to be a little bit more the 50% to yield the 40% gross margin. If you look at the C250, not only does that help us manufacture prices in kilowatts, not in pounds or actual costs. So the 250 will help us from a margin perspective and efficiency perspective. And really, the C1000 which is one of our biggest drivers, and we think it's going to be our biggest driver for several years in the megawatt class. To be able to go from five units to four units, it really cut 20% of our costs instantly and offer the customer higher system efficiency is great. If you look at the C370 we are leveraging what will be C250 and C65. Maybe Mark could walk through that, that architecture and little bit you saw in the presentation, but again that's also lower cost, higher efficiency. So that's the target for all of our products is improved margins and then better product, project economics for the customer. Mark, why don't you walk through the 370 architecture just real quick for us?

If we -- the next step for the C200 is to go to a C250 where we will both see a 25% improvement in power and a couple efficiency points improvement as well. Really that's just from up flowing the compressor wheel but the majority of the parts on that system stayed the same. So, 25% power increase with maybe just 1 or 2 percentage points of direct material costs increased. That's very similar to what a lot of larger turbine manufacturers do as well with their product line over time. I think then we get into the next step of our product road map which is the 370. That is a 370 kilowatt, 42% efficient product.

That's a real exciting product in the marketplace when you look at combustion technologies be at reciprocating engines or gas turbines. But by combining a C250 in a low-pressure spool, you don't need the recuperator, so we are able to lose about half of the direct material cost of that component and then we would use for the high-pressure spool something very similar to the C65. Now that it has three times the pressure that it normally sees coming into it, it will see roughly about three times the power output for the same cost. So, we are really leveraging the components that we already have and combining them in a unique way to not only increase efficiency but also to reduce our costs by getting more power out of those same components.

Great. Thank you and just one last question. The US market and you expand your US distributor opportunities in the US, where do you think some of the best short-term and then intermediate term market opportunities are going to be, we're talking about, hotels and (inaudible) application? Or digesters? Just some color on where that growth will come from in maybe a three-month to six-month basis? And then maybe more like a 12-month to 18-month basis?

This is Jim. I think, as opposed to market verticals, I'll take it regionally. I think we will see some new growth in California with new distribution. Our distributor in southern California is delivering more orders in his tenure than his predecessor did. The new distributor in northern California, we've been working with them and they've got a good pipeline started. I think we will continue to see growth in the northeast, New York, mid-Atlantic area. And I think it's across the different market segments. Digester gas applications continue to be strong. We see good deal flow in the RFP space there. In the [sports[ spread continues to be good and customers are interested in improving efficiency and reducing their energy costs.

I think you've got a combination of customers looking for better economics, increased efficiencies. You see a lot of people that are -- realize that natural gas prices have been low for a long time and appear to be low for the foreseeable future. But then you have the Obama (inaudible) and some of the other stuff trickling through a lot of municipality and city governments that are doing infrastructure projects and a lot of waste water treatment plants.

Sure. We are starting to see some orders around the corner from some of the Marcellus Shale activity that is going on and I think that, that will grow into a good business in the next couple of quarters.

Okay. And is there anything on the legislative front or pretty much the same as it was a couple of months ago?

It is similar. We continue to push and are making good progress with the increase in the 30% or the 10% to 30% ITC for CHP and we continue to work the California Energy Commission to reinstate us into the SGIP Program. Unfortunately, in California with workforce reduction and Furlough days, the process is taking considerably longer than it should and we have been told directly that we should feel lucky they are even working on it. So I don't have a lot of optimism for anything around the corner. The good news is we're selling projects independent of the incentive and the rebate which is really the business model we're trying to drive to.

Okay, thank you.

Thanks Shawn.

You're welcome.

And at this time, I'd like to turn the presentation back over to Darren for closing remarks.

Well, I know we have had a long call today. We have covered a lot. I think the exciting thing for us as we look at the last year, continued revenue growth, continued cost containment. We have done a lot of product development. Launched a lot of new exciting products and I think the new slides that Ed put together are showing that average selling prices are increasing. Average direct material costs or product costs are decreasing. The service side of the business continues to grow revenue. So, I'm very excited with the progress the Company has made. The strategic partners we have are getting better. As I mentioned, we are the weed-and-feed. Jim mentioned we replaced a distributor in California. We are doing that in some other places in the country and in the world but we're really moving to the point of filling in the very small holes we have in the map and then managing the current distribution base. If you look at it today, we have the same number of sales people we had when I joined the Company yet revenue is five times what it was in the past and the product pipeline continues to grow. So, despite the economic conditions, despite the tight financing, we are very happy with the deal flow and the revenue targets that we have for the next year and all that will only get better as we get better adoption of the products and financing becomes more available. So, a very good fiscal 2010. our team will look forward to an even better year in fiscal 2011. So, with that operator, we'll end the call. Thank you.

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