Capstone Green Energy Corp (CGRN) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to Capstone Turbine Corporation earnings conference call for first quarter and fiscal year 2011 financial results, ended June 30, 2010. My name is Stacey, and will be your conference moderator for today. At this time all participants are in a listen-only mode. We will conduct a question-and-answer toward the end of this conference. (Operator Instructions).

During today's call, Capstone will be referencing slides that can be located at www.CapstoneTurbine.com, under the Investor Relations section. As a reminder, this conference call is being recorded for replay purposes. At this time I would like to now turn the call over to your host for today, Ms. Jayme Brooks, Vice President, Finance, and Chief Accounting Officer. Please proceed.

Thank you. Good afternoon, and welcome to Capstone Turbine Corporation's conference call for the first quarter ended June 30, 2010. I am Jayme Brooks, your contact for today's conference call. Capstone filed its annual report on Form 10-Q with the Securities and Exchange Commission today, August 9, 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 Web site at www.SEC.gov, or on our Web site at www.CapstoneTurbine.com.

During the course of this conference call, Management may make projections or other forward-looking statements regarding future events or financial performance of the Company, within the meaning of the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995. These statements relate to among other things, future financial performance in obtaining profitability, the ability to reduce costs and improve inventory returns and contribution margin. 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 of our product. Growth in the oil and gas, office buildings, biogas, UPS and hybrid electric vehicle markets. The successful integration of Calnetix Power Solutions Micro Turbine business, revenue growth and increased sales volume, our success in key markets, our ability to enter into new relationships with channel partners and other third parties, and the successful implementation of those relationships. 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 economy 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 the 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 material 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 in revenue. We may not be able to comply with all applicable Government regulations, we may not be able to obtain or develop distributors in our targeted markets, in which case our sales would not increase as expected. We may not be able to integrate the required Calnetix asset and achieve productive relationships with its distributors. And if we do not effectively implement our sales marketing service and production 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 risks. 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 the call over to Darren Jamison, our President and Chief Executive Officer.

Thank, Jayme. Good afternoon and welcome everyone to Capstone's first quarter fiscal 2011 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 again I will start the call with the general overview of our first quarter results and then turn the call over to Ed ,who will review the financials. 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 towards our strategic objectives of positive gross margin and positive cash flow. As the operator indicated, we will be using slides in our presentation today, which can be found on Capstone's website under the Investor Relations section.

The first quarter was another productive quarter at Capstone as the Company continues to build positive momentum and execute against our business plan. During the quarter, as you can see on slide two, we continue to expand our distribution channels by reaching into territories where we have not had a presence in the past, such as Hong Kong, Turkey, Pakistan, Indonesia, the Netherlands, Denmark, Slovenia, and Croatia. In addition we recently announced the sale of our first UL-certified C600 to one of the largest natural gas producers in the United States for installation at the Marcellus shale play. Capstone recently delivered the C600, and received a follow on order for five C65s for another compression station at the same shale play. The substantial end use customer is producing natural gas from six key reserves, or plays, across the United States, that will use electricity produced by the C600 and the C65s to power compression stations at the Marcellus shale play, labeled the supergiant oil field, that spans Northwest Virginia, Pennsylvania and southern New York.

Air, for many, has become a major concern for gas developers and producers, and Capstone's clean and green low emission micro turbines can serve a key role in insuring natural development of the natural gas-rich shale plays. Because micro turbine emissions are considerably lower than in internal combustion engines, and they do not vary based on system or site load, it is much easier to developers to meet and stay within increasingly stringent local and federal emission standards.

Capstone already has experience in the mid Atlantic area, with Dominion Gas Transmissions, an interstate gas transportation company with 46 Capstone micro turbines located in various gas transmission stations. Dominion recently covered 46 of their fleet with the Capstone factory protection plan. Dominion has experienced the US Environmental Protection Agency's Clean Air Act, strict requirements for emission levels and natural gas sites. The EPA reviews stationary equipment and wellheads, and compression stations along pipelines to insure they meet federal requirements.

The six very large shale formations that I mentioned earlier can pave the way for a new century of natural gas abundance, and stable natural gas prices that would further drive CHP and CCHP projects around the US. This is a great opportunity for sales of our Capstone micro turbine technology, in new compression stations and along new natural gas pipelines. Overall, the oil and gas business has been a good market for Capstone, and I view the shale play opportunity to be similar, if not greater than our current oil and gas opportunities in Russia with Gazprom, and in Australia with coal seam gas producer, Origin Energy.

As we turn to the Asian market, Asia continues to develop nicely for Capstone. We plan to commission 17 explosion proof oil and gas C1 Division 2 units between now and December, including nine C65s, and three of our new C200s for Petronas in Vietnam and Malaysia, and five units for Apache in Western Australia. Our offshore business is solid, and we should continue to see for demand our C1-D2 products in the region, and around the world. In other parts of Asia, China continues to promote CHP, and the central government has established a four part policy to encourage the installation of CHP on an energy service company or ESCO model basis. This policy includes no tax for the first three years, followed by reduced tax obligation after that.

Additionally, the Government will advocate special loans for ESCOs based on CHP accelerated depreciation, and one-time payments of 500 RMB for each ton of coal displaced in the power generation process. In Shanghai, there's an additional CHP incentive of 1000 RMB per kilowatt at a special natural gas price for CHP that is approximately 35% less than the regular standard natural gas price.

Also in China, the process for grid interconnection is definitely becoming more transparent and more available to Capstone's products. Capstone C200 CHP project for China's southern grid is now commissioned and is being showcased to several new and perspective customers. In China, Capstone currently has three ESCO model projects underway, one is operated by Sun Energy using a C200 and a CHP application, and two are C65 ICHP products operated by Shanghai Aerospace Energy.

In other oil and gas news, we consolidated distribution for oil and gas in Indonesia and Brunei under our recently acquired Calnetix distributor. Server has worked for years with key oil and gas companies in Indonesia and Brunei. The natural gas market in the region is extensive, which translates into many opportunities for Capstone to provide power solutions to both onshore and offshore drilling sites. In Australia, the first C200 digester gas project was successfully commissioned at Surbiton Park, and our C30s and C1000s are performing well in coal seam gas fields. In India, our new distributor, CIBC, continues to be very active, and we expect to see our first orders from India very soon.

Another area besides oil and gas I expect to see strong future growth, is the electric vehicle market, and it continues to expand and we continue to position Capstone to be a player in the electric vehicle range extender market. However, range extenders are not just limited to cars and trucks, as we recently commissioned our first hybrid electric boat in The Netherlands, which is now operational and providing customer demonstrations. In other marine news, Reagan Equipment, Capstone's partner in the marine market, plans to showcase a kilo-pack C65, water cooled marine version of our product at the Fort Lauderdale International Boat Show October 28 through November 1. We hope to make inroads to the marine power generation that is looking for lower emissions and increased reliability. If we receive even a fraction of the attention and interest generated at the LA Auto Show last year for the CMC 380, I will be extremely pleased in the Fort Lauderdale Show.

We also recently announced our first electric class 8 truck micro turbine range extender application with the US 1 industry and CalMotors. They are currently integrating the micro turbine with a range inhibitor which we plan to show case at the upcoming annual stockholder meeting, being held at our headquarters at Chatsworth on August 26th. We also recently announced that Capstone has initiated a demonstration project with a major US manufacturer of class 5 to class 8 heavy duty trucks, that would utilize the Capstone C65. The micro turbine is a clean, efficient, range extender, and a hybrid electric drive system. This truck will be the first to take advantage of the complete new line of Capstone Drive Solutions, which includes the Capstone micro turbine, along with the liquid cooled power electronics, permanent magnet traction drive motor, and vehicle power control system. The Capstone Complete Drive Solution will make it easier for vehicle manufacturers to integrate micro turbines into a serious hybrid-electric drive train.

As part of our recently announced joint development agreement with CalMotors, the Capstone HEV product offering will now include inverted drives, traction motors, and vehicle power control modules, which will seamlessly integrate the C30 and C65 micro turbines. These inverters and traction motors are mobile ardent versions of the proven Parker-Hanson Industrial motor drive products. HEV micro turbines are able to operate on traditional liquid fuels, such as diesel and biodiesel, and can also utilize alternative fuels such as natural gas, without sacrificing efficiency or reliability. This makes Capstone Drive Solutions suitable for a wide range of electric vehicle applications.

Other hybrid electric demonstrations are ongoing with companies like Grupo Plaza, a bus manufacturer in Argentina. And LincVolt, the LincVolt is a 1959 Lincoln Continental owned by legendary musician, Neil Young, that is being converted into an HEV by Johnathan Goodwin. The goal of the LincVolt is to inspire a generation by creating a clean automobile propulsion technology that serves the needs of the 21st century, and delivers performance as a reflection of the driver spirit. Neil Young intends to do a tremendous amount of marketing around the LincVolt, and Capstone is proud to be involved in this creative, innovative project.

As you may know, Capstone micro turbines are already operating as range extenders in electric buses in New York City, Charlotte, Baltimore, and now as I mentioned, moving into electric boats, trucks and eventually cars. Capstone continues its product development efforts and product certification activities, as we recently completed and released our California Air Resource Board, or CARB, C200 for divester applications, our C65 CARB product for wellhead gas applications, and our C30 CARB liquid fuel for transit bus applications. We also recently completed our independent third party emission testing, and submitted our C30 Natural Gas, or CNG, product to CARB for certification in transit bus applications. This natural gas certification will open up the California transit market for our bus OEM partner DesignLine. DesignLine recently hired a new President and expects to close another round of funding shortly, and I very much look forward to DesignLine ramping production, and building a record number of buses for several years to come.

It is important to note that we are not only meeting the world's lowest emission standards, without expensive and unreliable exhaust after-treatment, but we are blowing away the current impending emission standards, as illustrated on slide three. As shown on slide four, we not only have superior emissions for piston engines, but we have electrical efficiencies similar to Ford and Cummins products, that are available in the market today. As we turn to slide five, it highlights the advantages of Capstone product as an electrical vehicle range extender and these advantages include obviously ultra low emissions, the ability to operate on alternative fuels, very low SAN levels, virtually no vibration, very light weight, very low low maintenance requirements, easy integration with our full line of drive systems, the ability for the OEM to aerodynamically optimize the design, getting rid of the radiator, and competitive overall system efficiency.

It surprises me that many people don't consider the additional emissions that will be generated from market adoption of electric vehicles. Plug in electric vehicles are not zero emissions, as the batteries are charged by a local utility grid with much higher emission profile than Capstone's ultra clean micro turbines. Therefore, not only is the Capstone micro turbine a reliable range extender, but as shown slide six, a Capstone micro turbine emits lower NOX emissions using typical US utility grids or even California's state-of-the art, very clean grid.

During the quarter, we continued to integrate our strategic acquisition of the Calnetix Power Systems TA-100 micro turbine, and the 125-kilowatt waste heat recovery generator system. I am very pleased to report that we have shipped ten more TA-100s during quarter and have taken orders for 14, 125-kilowatt waste heat recovery generators for a total of $2.9 million in future revenue that is now included in our current product backlog of $84.6 million. We expect to begin shipping heat recovery units during the current quarter for installations in landfills in Europe. If you remember, Capstone has a world wide exclusivity on the zero-emission, 125-kilowatt waste heat recovery generators for micro turbine applications, and access to this similar technology was a critical part of the Calnetix transaction. Slide seven shows a picture of the Calnetix waste-heat recovery generator unit that will be shipping shortly.

Another key for us is the focus on building our parks and service business, and we are aggressively selling our industry unmatched five-year and nine-year factory production plans. As I mentioned earlier in the call, we signed a comprehensive fleetwide factory protection plan with Dominion Transmission. That FPP alone will cover the entire transmission micro turbine fleet, and that fleet currently includes 46 micro turbines providing more than 3 megawatts of onsite electricity at ten compressor stations throughout the eastern United States. The addition of the Dominion units represents more than 5% of our total FPP fleet today. Capstone now has well over 600 units under FPP, with the total long-term service backlog of approximately $21 million.

Capstone continues to work hard to attract and sign new distribution partners, release new micro turbine products and features, certify to the world's most stringent relevant emissions standards, pursue only the most beneficial DOE grants, execute new factory protection plans, and successfully integrate our strategic acquisition of the Calnetix Power Systems TA-100, 125-kilowatt waste heat generator. However, most importantly, Capstone continues its work to complete the material cost reduction plan while also increasing our average selling prices. Ed will review or progress on this extremely important initiative of increasing our average selling price, and improving direct material costs and margins in his portion of the presentation.

Unfortunately, during the first quarter of fiscal 2011, we continue to experience orders shifting to the right and ended the quarter again with approximately $3 million of finished goods on the loading dock. We have had approximately $3 million of finished goods for each of the last four quarters, so management must assume that this situation is not a one-time event, and will likely not improve until the economy significantly improves. Therefore, we will adjust our production thoughts down to appropriately reflect this current condition.

If you remember last quarter, Capstone experienced higher than usual product warranty charges, as we made product upgrades to C1000 in the field. These improved operations at extreme high and extreme low temperatures, and are in place in undersized break resistor and cable are used to take load, when the turbine is at low or no load conditions. These warranty charges did not reoccur in Q1, and the bulk of our new product issues should be behind us now. However, we will continue to closely monitor all new products in the field, and we will always take a very aggressive approach to any issues with new products, because each new product in the field is highly visible, and will send hundreds of customer's expectations and have a dramatic impact on Capstone's brand.

Over all when I look at the quarter, I am pleased with the first quarter results for fiscal 2011, as we surpassed first quarter fiscal 2010's revenue of $13.7 million. As shown on slide eight, we continue over and over to demonstrate our strong revenue growth over the prior year same period results, for 12 consecutive quarters. Remarkably that is almost three years of same period revenue growth over the prior year, during an extremely difficult environment.

New bookings for the quarter softened a bit to $11 million, but it still gives us $64 million of new backlog, not including parts, service and accessories, in just the last three quarters. Slide nine shows the continued momentum of our product backlog and the strength of the new C200 and C1000 series products. Capstone's robust $84.6 million in product-only backlog sets the stage for another year of revenue growth in fiscal 2011. The gross loss for the first quarter was only 3%, which is a substantial improvement over the same period last year of 21%, and much improved over Q4's 15%. This is evidence that we are continuing our progress towards positive gross margins.

Capstone's overall operating expenses came down nicely in quarter to $8 million, down from $9.8 million in Q4, and we plan to remain at these levels or the balance of 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 our financial results, but more importantly to give you transparency to Capstone's progress on our critical cost reduction program, so you can accurately see how we are progressing on lowering our product direct material costs, and increasing product averaging selling prices. He will also explain our changes in working capital for the quarter, and what impact it had on our cash balances.

At this point, I would like to turn the call over the Ed. Ed?

Thanks, Darren. Good afternoon, everyone. I would like to provide you with our financial results for the first quarter of fiscal 2011, which ended June 30, 2010.

Let's begin with a recap of the major items on our balance sheet. The major sequential changes from the Q4 fiscal 2010 balance sheet to the Q1 fiscal 2011 balance sheet were as follows. Accounts receivable increased in the first quarter to $24.5 million, from $18.5 million last quarter. It was the result of heavy end of quarter shipments again, and the timing of cash collections. In the current economic environment, we've been experiencing a longer cash cycle than in the past, and I would like to mention however, that as of last Friday, we have collected $6.3 million of the June 30 accounts receivable balance.

Inventories were similar to Q4 levels at $23.3 million, with turns at about 2.6 times per year. Going forward with we expect to continue to make progress in reducing our inventories to appropriate carrying levels, benefiting from their conversion to cash, with the goal of four turns per year or better. Accounts payable and accrued expenses were $14.7 million, down slightly from the Q4 balance of $15.3 million, mainly due to payables for legal and accounting fees incurred in the fourth quarter as a result of our Calnetix acquisition. Cash balances, including restricted cash, were $31.8 million at the end of the first quarter, compared to $47.3 million at the end of the fourth quarter of fiscal 2010. It was a change of $15.5 million.

The change in cash as reported in our first quarter 10-Q was broken down into the following categories. We used $13.4 million in operations, $5.4 million in investing activities, and $1.7 million in financing activities. Please note though, that of the $5.4 million reported as used in investing activities, $5 million of that was a reclassification from cash to restricted cash on our balance sheet as a new requirement by the amendment of the Wells Fargo credit agreement. Of the $15.5 million cash that we used in the quarter, $6.6 million was due to changes in working capital, mainly accounts receivable increased $6 million, as I mentioned earlier. We expect the negative impact from working capital to reverse over the next two quarters, and return to the cash to our bank accounts.

Sequential changes from the Q4 fiscal 2010 to Q1 fiscal 2011 income statement were as follows. Total revenue is $16.1 million, as Darren mentioned, down slightly from Q4's $16.3 million. Product revenue decreased 5% to $12.8 million in the quarter, versus $13.5 million in the prior quarter. Our unit shipments also decreased by 61 quarter-over-quarter, although with the significantly higher average selling price in Q1, the difference in revenue was only $700,000. Accessories, parts and service revenue increased by approximately $500,000, to $3.3 million for the quarter versus $2.8 million the quarter before. The higher revenue was attributable to seasonality in parts sales in Q4, and improvements in FPP service revenue during Q1.

We have made significant progress over the last six quarters in reducing product materials cost, as you can see on slide 10. Material margins have improved significantly as the average selling price per unit has increased, along with the corresponding decrease in average material cost per unit. As seen on this slide, we have achieved approximately 29% improvement in average product margin per unit from the end of fiscal 2009, and almost 4% in improvement between the fourth quarter of fiscal 2010, and the first quarter of fiscal 2011.

Our gross loss was $500,000, or 3% of revenue. This improvement in gross loss from the fourth quarter is $2.4 million or 15% of revenue, was due to more favorable revenue mix, with a higher average selling price per unit, and higher sales of better margin accessories, parts, and service. In addition, production labor and overhead costs returned to planned levels, and we did not incur the material inventory and warranty charges that we experienced in Q4. Moving to R&D, we spent $1.5 million in the first quarter, which was $500,000 less than what we spent the quarter before. The reduction in R&D was primarily due to lower labor-related costs. Our selling, general and administrative costs were $6.4 million for the first quarter, this is $1.5 million lower than the prior quarter because of reduced travel, professional fees, and labor-related costs.

We reported net income of $392,000 for the first quarter, with $0.00 per share, compared to $12.9 million loss or $0.05 per share for the fourth quarter. This net income was the result of the adoption of Accounting Standards Clarification 815, derivatives and hedging, which affects our warrants with antidilution with solutions. So we recorded a non-cash benefit of $9.2 million to warrant liability in the income in the first quarter of fiscal 2011. Capstone would have had a net loss of $8.8 million for the first quarter before considering the non-cash warrant liability charge. Please refer to slide 11 for a GAAP to non-GAAP reconciliation.

Backlog at the end of the first quarter was $84.6 million, which was down slightly from the fourth quarter's $86.3 million. That concludes my comments on our Q1 fiscal 2011 results, and I will now turn the call back over to Darren.

Thanks, Ed. We are seeing some encouraging signs in the economic recovery, and we continue to see quotation activity grow around the world in all four of our market segments with our 95 plus distributors as reflected on slide 12.

I continue to be most excited about the activity in the oil and gas, office building, bio gas, UPS and hybrid electric vehicle markets. I believe our continued capturing of market share despite poor economic conditions is a good indicator of what will happen after the financial markets fully recover and project financing becomes more readily available, and companies' capital budgets are now reinstated. Over the coming quarters, I look to see increased activity in the US market with key partners like UTC Carrier, Office Power, PowerTherm, Wesco, and DesignLine.

As it relates to UTC, we again did not have any new orders with UTC Carrier during the quarter, but I am more encouraged by the fact that we are now seeing activity, working sales leads in New England, New York, and are starting to see activity in Texas because of some recent legislation changes. Carrier was recently specified for a five-unit pure comfort system for a high school in New York State as part of a larger Carrier bid. They're also working on two data centers in New York City, as well as an office building for multiple Pure Comfort C390 systems, and a factory in Connecticut for either a Pure Comfort C260 or C325. I very much look forward to UTC Carrier again returning to one of Capstone's top five strategic customers.

PowerTherm and Wesco recently held another caravan event with executive joint sales calls over three days. Wesco personnel met with approximately 85 universities and building owners in that three-day event, and look forward to seeing them become more of a strategic partner for us again in the coming quarters.

We continue to plant seeds with every installation of our new products, including the C200, the C1000 series, our new HEV products, and our new UPS product. During the quarter, Capstone continued its strategic talks with multiple companies to develop electric trucks with Capstone range extenders for delivery vehicles and refuse trucks. The plug-in electric HEV market continues to be a very small portion of Capstone's revenue, but the revenue should grow as product demonstrations turn into product orders and new low volume OEM agreements are negotiated and executed.

As we turn our attention to the passenger vehicle market, Capstone is targeting the automotive OEMs, via strategic drive train partners as mentioned on last quarter's call. Capstone is currently collaborating with two Fortune 500 automotive drive train component manufacturers to build a high volume, lower cost, about 10,000 hour automotive version of the C30 and C65 product. As mentioned earlier, both companies have finalized their cost and design analysis on the new automotive product, and Capstone has executed an MOU with one of the two partners. Each company is, interestingly enough, taking different approaches to the Capstone range extender opportunity and the electric vehicle market. One company is integrating the C30 into an electric crossover vehicle, to then demonstrate technology to automotive OEMs worldwide. When they generate enough interest in the micro turbine technologies as a range extender, they will then execute Capstone's proposed MOU and move to negotiations on the manufacturing and license agreement.

The strategy of the second company is to manufacture lower cost, micro turbine products for Capstone's current industrial product, while we concurrently work together to engineer and develop a lower-cost, shorter-life automotive product. Work with this strategic partner has progressed very quickly after execution of the MOU last quarter, and I anticipate having them on line as a strategic parts supplier for several of our C30, C65 and possibly C200 hard parts by the end of this fiscal year. Make no mistake, this would give us further cost reductions over and above our current 30% cost reduction program. It would also add to Capstone's overall manufacturing capacity and integrate automotive quality and reliability into today's industrial products currently being sold.

Cost reduction is obviously critical to our success, and a third round of cost reductions we have planned will come from our new C370 DOE program. As illustrated on slide 13, the next generation of Capstone products will increase output of our successful C200 product, to 250-kilowatts and electrical efficiency of 35%. As a result, it will only take four C200s or the new C250s to make the C1000 product, thus lowering its size, weight, and direct material costs. We will then further develop the new C370 product by combining the C250 and the C65 as illustrated in slide 13. That product will make Capstone more first cost competitive with the antiquated internal combustion engines of today, and provide Capstone with a first cost similar to that of an engine, but with lower CARB certifications, lower life cycle costs, higher reliability, and as good or better overall system efficiency at an incredible 42%.

Capstone is working very hard to be a cutting edge industrial clean tech company that continues to grow revenues, continues to reduce material costs, maintains operating expenses, all while increasing market share in all four of our vertical markets worldwide as customers and governments look for more cost effective and energy efficient clean tech solutions. We will continue to work with the US Department of Energy to be a leader in new clean tech product development, providing low emission solutions and building high-efficiency energy systems. Slide 14 Graph B shows what we see as Capstone's clear path for a short term goal of positive gross margins, followed by the near term goal of profitability. As important as these near term goals are to Capstone, its stockholders and employees, we must not take our eye off the future, and must continue to be technology leaders in our industry worldwide.

Slide 15 illustrates the future Capstone as we release new, agricultural syn-gas products, HEV complete drive system products, the high efficiency C250 and 370 product, and the externally fired microturbine that was recently successfully integrated and tested in Israel with our partner, HelioFocus. The demonstration was conducted with a Capstone C65 micro turbine by HelioFocus and Capstone on a fixed optical tower using Heliostats, at the Weissman Institute in Israel. This unique, renewable solution offers higher solar conversion efficiencies over traditional solar photovoltaic systems. In addition, the increased power density of this system should reduce the amount of land required by traditional solar photovoltaic systems. The test scaled to all capsule micro turbine products from the C30 to the C1000 series, generating 30-kilowatts to a potential 5 megawatts of electricity. In addition, we believe the commercial concentrated solar product should compare favorably in costs to today's photovoltaic systems.

In conclusion, the Capstone management team is committed as ever to continue to deliver solid year-over-year revenue growth, ever-improving operational efficiencies, lower direct material costs, ever increasing average selling prices, as we cycle through our older, lower-priced backlogs and benefit from our recent product price increases, and continue our strategy of just in time and combine manufacturing to improve management of our inventory to four turns and beyond. At this point I would like to open the call up to questions from our analysts. Operator?

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

Great, thank you. A couple of quick questions, here guys. So when we look at, Darren, one of your comments about some of the revenue getting pushed to the right, given the environment we are in, and then the pretty robust backlog of the $84 million in product and 30% savings on top of that, suggests and supports a pretty good visibility, but how should we think about your backlog converting to revenue given the high level comments that you just made in your prepared remarks?

Yes. I think, Sanjay, when you look at it, the current market conditions are making it still slow to get financing, and these projects are moving slower than we've seen prior to the economic downturn. If you look at the last two years, the total revenue for the year was similar to the backlog we entered the year with. So based on that, looking forward, I would say that total year revenue your expectations should be that we deliver the backlog we entered the year with, so $85 million to $95 million is kind of a fair number that we should be looking at for the year. Now, if you look at all of that backlog, that's all considered current, which is delivered in the next 12 months, and we are working very hard to increase our FPPs in our service and parts business, but I think from an overall expectation, you should expect us to deliver all of that backlog in the next 12 months.

Got it. That's very helpful. So in terms of some of the MOU that you guys talked, so there is two Fortune 500 automotive type companies that you guys are talking to, can you give us any more detail on how big that opportunity you expect to be here, over the course of the next 12 months, or is it more of a long term opportunity, can you talk about that in any more detail, I recognize there might be some sensitivity given the timing of it, but whatever you can tell us will be great.

Yes, the biggest sensitivity is obviously, we are under NDAs with both companies.

Absolutely.

But the short term expectation should be demonstration vehicles, smaller OEMs that we can convert. So maybe 50 to 100 pieces a year, for the next year, full integration in an automotive platform, by the time we get through PPAP, crash testing all of the different applications, we are probably looking at three years. That being said, as DesignLine ramps up, some of these marine opportunities and demonstration opportunities, we could easily do a couple of hundred units a year in the HEV space, which for Capstone, would be a fairly significant piece. But real big numbers, obviously, would be tens of thousands, but you're looking two to three years out for those kind of numbers.

Got it. Two last questions, pretty good progress on your gross margin side on a sequential basis, so obviously you guys did talk about mix as one other factor there. But should we expect that this gross margin is going to trend better going forward from this point here, or could there be a quarter here where you could see it get below what the Q1 performance was?

I think the answer is we are always lumpy and subject to mix. The trend line though should be improving, as Ed showed you, our direct materials costs are going down, our average selling prices are going up. We anticipate positive gross margin in the next one to two quarters, it could drop negative again, but then overall, go back positive. So, we feel very good about the progress we are making, and Mark, I don't know if you want to mention anything on the cost reduction side, I think last call we said we are at about the fifth inning of that original 30%, and I think we still feel very good on that progress, and I'll let Mark make a couple of comments there.

We have been making good progress on our cost reduction activities. Again the primary method that we are going after is either volume with a current supplier, putting multiple parts into a same qualified supplier, or to find suppliers that have improved manufacturing methods that can get a sustained cost out of the product, and it is not just a one-time deal we are executing. So we have been very positive with that. We still have a number of items on the list. So, there's still more room for cost reduction as we move forward, and that's pretty exciting.

The one last question, so with the shale gas opportunity, how should we think about that turning into a big bookings opportunity for you guys, and with now backlog being much larger than what it has been for the Company in the past, how should we think about your book to bill ratios, how much of a lumpiness can we expect, and how should we think about that, give us guidance, so there is no concern or overexcitement on a lumpiness on a quarter to quarter basis?

Again, I hate to keep using the term lumpy, but we are quoting projects and Jim can jump in here, two years ago, a megawatt was a big project for us. Today we are quoting ten megawatts, five megawatts, three megawatts, seven megawatts everywhere from Asia to South America, and even here in the US. So, easily you can see quarters where we range from $10 million to $30 million in bookings, depending on how many of those big projects hit, and timeliness of those projects. So overall, if you look at the last three quarters, we're averaging close to $20 million a quarter of product revenue, our breakeven on an EBITDA basis, once we hit our cost targets, about $25 million all in for the quarter. So we need to be at about the $20 million to $21 million range of product revenue to achieve that. So I feel good with the backlog we have, and the bookings we are seeing.

We had a good first month for the quarter, and bookings this quarter, so I expect that trend to continue going forward. I think part of it is we are still not hitting on all cylinders, not to use a reciprocating engine comment there, but we really need to get the US market going, Carrier you can see needs to get going, Wesco needs to get going, our new distributor in California needs to get going. DesignLine needs to continue to ramp, Office Power needs to come up to speed, last year, almost 80% of our sales were outside the US. We need to see the US pick up and carry their share. All of that being said, you should see, average about $20 million a quarter in new product bookings, is what we are looking for. Jim, I don't know if you want to add anymore to that.

I think you covered it pretty well, but we are getting the opportunity to look at a lot of bigger projects that we historically hadn't been given the opportunity to look at. So I think we will continue to see that trend.

The nice thing is we do have some flexibility in our manufacturing capabilities, and with some orders moving to the right, with the shale gas opportunity, we did pull that C600 order out very quickly, which is part of what made us more competitive to get that project. So with every cloud has the silver lining. If one order moves to the right it is an opportunity for a short cycle sale, especially for new customers and new opportunities.

I guess real quick, one of the motivations for the C600 for the Marcellus project was also emissions. With all of the diesel engines, both mechanical drive and gensets and other gas engines that are going into the region, the local air quality district and environmental quality management group is looking at emissions much harder than they had in the last few years, which will favor us considerably.

That's great. Thank you a lot.

Thank you, Sanjay.

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

Hi, thank you for taking the question.

Thank you, Eric.

I was wondering if we can just touch on the finish goods sitting on the dock. First of all, just looking at the number of shipments, pretty noticeable decrease in C65 shipments, should we assume that is what was on the dock, and what was on the dock, is that primarily one order or is it multiple orders?

Similar to last quarter, we had two or three offending customers. We had a little bit of both C65s and C1000s, and I think our challenge is we need to try to better match our manufacturing slots each quarter, not to have the kind of finished goods. We are not happy, obviously, with our working capital needs last quarter, and part of that is getting our inventory levels down. So our inventory levels did not come down very much in the quarter, and we would like to see that correct itself in the next two quarters. So we have substantial AR in the balance sheet that we need to turn to cash in the next two quarters, as well as inventory that can come down several million dollars. Last year, we grew revenue 40%, took $7 million out of our inventory. We are looking for similar type results again this year.

Okay. Of that $3 million, can you just provide any color as to whether that is shipped or anything along those lines?

I would say all of that will ship this quarter, I think again, it's not an issue of it being canceled, it's an issue of it sliding out of the end of one quarter and into the beginning of next.

Okay. Fair enough. And maybe we can just turn to data center opportunity. You mentioned UTC working on the two data center projects. Good that there's movement there. Can you just talk about IBM, and maybe what their plans are beyond the Syracuse installation?

Yes, I will let Jim handle that. He is working closely with our distributor, as well as IBM on their go-forward strategy.

From an IBM Syracuse standpoint, over the last few months, we have been working to validate the performance of the system, and are pretty well through this process, so the customer is pleased with the performance of the package and how the system operates from a reliability and a power quality standpoint. Our distributor, BHP, has been working closely with IBM and has several projects in their pipeline that they're hoping to move forward on yet this year. So we will see a gradual growth in that segment, both with those customers as well as some new customers looking at the product.

I think it should be pointed out that IBM Syracuse was a fairly small data center, a lot of the applications we are looking at now are four to five megawatts or much larger than the Syracuse site.

Can you remind us, is BHP exclusive to IBM, or how is that relationship set up?

BHP and IBM have some sort of working relationship but I am not sure that they have announced what it is yet. So I don't know that I would know specifically, nor if they're talking about it yet. So, we should probably look for something from BHP or from IBM on that relationship.

But they're working together on these projects.

Yes. It's beyond just the micro turbines. BHP, as a turn key supplier, provided design for the, the building and all of the infrastructure to stuff the data center into. So the building, the chilling, the heating, all of the power quality was all supplied under an agreement between IBM and BHP.

So we will allow BHP to work with IBM outside of their standard territory. So other data center opportunities would be non-IBM opportunities with other distributors we are working on.

Okay. That's helpful. And switching gears to Origin Energy, can you just remind us where things stand getting through that initial order, and maybe remind us what the size of the next order could be?

Yes, the initial order was for approximately 130 C30s, the last two containers will leave this quarter, in fact one has already left, one will leave this month. So that will finish that first purchase order. Obviously not all of those were in the field, about two-thirds of those have actually been commissioned so we should see another order, knock on wood, probably minimum 100 units, upper end could be a thousand or more. We are guessing it will be somewhere in the several hundred unit range, but it really depends on price and how fast they need the machines. We also have three C1000s that are in the field operating very well today. There's a fourth slab for that one individual site, three more slabs for additional C1000s, so we look at Origin as a key partner and Aquatech was a large distributor last year. There's a lot of other oil and gas opportunities with Apache, and obviously other coal seam gas applications. But we are very excited about Australia and that market.

Okay. One last question and I will jump back in the line. The SEP agreement with Dominion, in the past, you have talked about that, given the reliability and very low maintenance, it was a tough thing to get C30 and C65s that were in the field signed up for an FPP. Is this more because of application or what was different in this that allowed you to sign that up?

I would give credit to our distributor, in this case he did a great job selling the customer and it took him nine months to convince them. I said before, selling FPPs to new customers on new products is much easier, selling FPP to customers who have not had failures and the product is running great, is a much harder sale. But I would give credit to Jeff Beiter at E-Finity for pulling that off, because as you said, Eric, it is really hard to sell FPPs to happy customers.

For the C200 family of units, I mean can you disclose the percentage that have FPPs with those or is that a, is that a number you don't give?

We haven't disclosed it. I would say that our target would be north of 50%. We are not there yet but pretty good. I would say most of the sites out there we are in dialogue on or have FPPs already in place.

Okay. Thank you for taking the questions.

No problem. Thank you, Eric.

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

Good afternoon.

Good afternoon.

Most of my questions have been touched upon as far as the backlog and stuff sitting on the loading dock and all of the other fun issues of running a business. But I would like to talk about your balance sheet just a little bit. Obviously, the cash number is down, I know you pulled some over into restricted. What are you going to be looking at as far as the burn over the next couple of quarters?

We are looking to reduce the burn, Walter. We burned $50.5 million this quarter, but $6 million of that was tied up in receivables, as I mentioned, so we are looking to get our receivables back down, lower the inventory and get the benefit from working capital and do as best as we can at averaging out the two quarter burn, the first two quarters to where we wanted to end up in the first place. So I think it is just critical at that we hit the receivables down and continue to march the inventories down towards four turns.

And how are you going to go about getting the receivables down? I mean are you going send, Ed out there with the baseball bat or what?

Yes, that's not too good these days, but what we do is, we're tightening up on credit policies, on some customers that have had credit before, they're going to be a COD going forward, it's risen to Darren's level, where we'll go out, we'll make phone calls to collect cash. So the cash is coming in. It is just it comes in slower these days. It is harder to get people to pay. And so it is just a matter of convincing them that they need to if they want to go forward with us.

And some of this, Walter, is a little misleading, we had a pretty good chunk of payments come in two or three days after the quarter ended. LCs are taking three or four days out of Europe, where they used to be almost overnight. A lot of this was just moving slower. So quarterly basis where you take four snapshots a year is always difficult, but we expect cash burn to be much better in Q2 and Q3 than they were in Q1 obviously.

Okay. With all of the newer markets that you have been focusing on and talking about, what do you consider to be the most near-term largest opportunity, so that you can plant your flag in a market that is going to give you a consistent recurring revenue stream, and then build off of these things that are two, three, five years down the road so we can start seeing north of $25 million or $30 million a quarter revenues on a consistent basis as you are building up these other areas.

If you look at the markets in general, oil and gas has been our most consistent market, whether that is onshore pipelines, like the shale plays we're talking about, or offshore platforms like we continue to do. The coal seam gas application obviously is exciting for us as well, that we're doing with Origin. Really, it's not only market, but it's also being diversified from a distributor standpoint. I mentioned the US market continued to lag the rest of the world, South America has never been a strong market for us. That's coming on nicely, in Venezuela, Colombia, Brazil.

Asia has always been a struggle. India, China, have not been great markets for us. We are now seeing traction in those markets and then some positive legislation moving our way. So I think more than anything else, it will be a diversified portfolio approach and really hitting on all cylinders and all markets world wide. We have added a ton of new distributors with the acquisition of the Calnetix product as well as our own internal growth, or we really have a lot of folks just now starting to hit the ground running. So I think the good news is that if you had told me two years ago, UTC would go from your biggest customer to not selling anything for almost a year, that DesignLine would have manufacturing issues, and we are still posting 40% revenue growth without some of our traditional biggest players, it is actually fairly encouraging, and when those folks come back online, we will push up over $20 million, closer to $25 million of revenue.

Okay. All right. Thank you.

You're welcome.

Your next question comes from the line of Shawn Severson with ThinkEquity. Please proceed.

Good afternoon.

Hello Shawn.

Just wanted to clarify, you said R&D should be flattish going forward? Is that correct?

It should stick around less than $2 million a quarter, between $1.5 million to $2 million.

Okay.

Yes, the real change there will be quarter to quarter depending on how much DOE billing we do in the quarter. We don't take DOE contracts or revenue like some companies, we offset our R&D spend, so it depend on how much contract offset we have each quarter. We don't anticipate hiring significantly in levels in the R&D area for the next couple of years.

Okay. It looks like the ASPs on the C1000 were a little lower than normal, or maybe that is normal, and I was trying to figure out what should we think about pricing on the C1000 going forward?

Some of that depends on the market it is sold into and the features and benefits. I wouldn't read into one quarter off of the age of the order. So if it is older backlog coming off, it does probably not the price increases. If it is a strip down base model version, it will be lower ASP than one that has all of the bells and whistles. Overall, you should see the ASPs on all the product lines going up. Also this quarter, you will notice we have some the C200 units we're selling as individuals as part of integrating a C600 to an C800 --

Unit upgrade.

Unit upgrade kits. When we originally planned the C1000 series product, one of our sales and marketing design concepts was sell a customer a C600 today and as their load increases over time, they can add a 200 to make it an 800, or two units to make it a thousand. We are now starting to realize those applications where customers originally bought C600s or C800s, and are now getting orders to stuff additional base. So they're not additional unit sales per se, but they're additional C200s going into the field. So we are actually encouraged by that. It means the customers like the products, they're increasing their loads, and they're upsizing their machines. Obviously selling that as an add-on is better margin than selling it up front.

Okay. And on the backlog, it is a question, I know it is hard to tell the timing of some of this stuff, but is there anything the backlog where you are going to have a big chunk of it in six months or nine months. Or is there any way to think of this in a linear fashion, just trying to get a better understanding of how it will come out in sequence.

Yes, I mean I would say the majority of it will come out in nine months, we are trying to, in order to optimize our inventory turns, build in production spots. So as I mentioned before ,we will try to get away from having product on the dock at the end of the quarter, so the fairest thing to do is take that number and divide it by four, would be the simplest, but in reality, most of that should come out in nine months.

Okay. Yes. So it is not like you are expecting a pig in the python nine months down the road or anything.

No. We would like to see obviously the perfect world, revenue growth every quarter, but I think it should be, we definitely do not have a hockey stick in our plan. We would like to see a $16 million, $19 million, $22 million, $25 million, kind of $2 million or $3 million a quarter in a perfect world. We will do our best to manage those shipments accordingly.

You said on the C200 with the automotive partner there's a possibility they could be doing components for those as well. I mean, what would possibly stop you from wanting to do that, or trying to do that? It would seem to be a very effective contract manufacturing relationship, and I assume they can do it at significant lower costs than you can, even on the 200s as far as part sourcing and manufacturing.

You absolutely hit the nail on the head. We are thrilled with the concept they're taking, in fact to have two Fortune 500 companies taking two very different approaches is actually wonderful. One is taking a very marketing centric, let's put it in a car and take it around, and show it off to people, and get a buzz and excitement going. The other one is taking a more old school approach of -- let us become one of your most key vendors, let us build product for you for today's industrial product at a low price. Let's get to know each other and work on a automotive version, but we are thrilled today have them on board, thrilled to have them as suppliers as you said, cost reduction should be significant. Their ability to ramp production really makes our ability to produce more products even that much better. So Mark you want if you want to jump in and give us some components. Mark has been leading that charge for us. They have been to the factory several times, we are at their factory here, working on pricing in those components, sourcing those components, it is something that we think might happen here by December, but probably the end of the fiscal year is a more conservative expectations.

We have had a very good relationship with this partner, as Darren said in his earlier dialogue, we have since the MOU, things have been moving very, very rapidly. They already have all of our drawings. They have been out quoting with their suppliers and we are meeting on a weekly basis with them to make sure that the information exchange is flowing well. So we should have a meeting here with them shortly to look at some of the parts that we begin to convert and move forward. So I think the timing that you mention, Darren, is pretty accurate.

The nice thing is if we get them online, and Origin Energy or New York MTA comes in, and somebody wants to place a three or four thousand unit order on us, it gives us that much more capacity to handle an order like that, which legitimizes us to be able to pull somebody like that to the table to negotiate those orders, so lots of flexibility, additional cost reduction, I know all of our shareholders are looking for positive gross margin, which we're on the cusp of, and even positive EBITDA, but that's not the end. That's another step up the mountain, we need to get profitable, and then put good numbers on the bottom line after that. So I really look at our three cost reduction activities going forward over the next couple of years of being critical to our success.

Can you get any idea, are you talking like maybe 30%, 40% cheaper, 10%, just trying to get an idea of the scope of what they're initially coming back with their first look at everything.

Yes, obviously our product contains engine components and electrical components, as well as the packaging components, the partner that we are working with is primarily focused in the engine area right now. So I think that they will definitely be able to drive some significant costs out of the engine portion of the building material, and as we move forward, maybe, maybe similar to some of the cost reductions that we're looking at on the overall product. Yes. I would say a 30% number is a fair number, some components may be better, some may be worse, obviously volume will drive that as well. But, just their volumes of being the automotive manufacturer, drive train manufacturer really leverages what they can do for us. The good news is the automotive business is off a little bit, so they've got some additional capacity they can fill.

Great. Thank you.

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

Great. Thank you, everybody for tuning in to the call. I think we had a good first quarter, good start to the year. The whole management team, as I mentioned, is very committed, very excited about the business, and we are looking forward to delivering another tremendous year with some significant achievements for the Company. Very happy with the revenue number for the quarter and we look to continue to grow revenue each quarter this year going forward and deliver a nice revenue growth like we have the last two years. Obviously we are very focused on margin and margin improvement, direct material cost improvement, average selling price improvement. We continue to focus on that and drive our margins as high as possible, as fast as possible with the only limiting factor being our quality, we cannot put an inferior part in our units and risk any kind of quality issues. So we are moving as fast as we can without having some sort of a quality issue.

Our overall manufacturing costs and efficiencies, if you look at our number of employees that we have today, when I joined the Company, we were around 250 employees, we are down to about 185 today at dramatically higher revenues, and our sales per employee, revenue per employee, overall efficiency has improved dramatically, but we are not done, we will keep looking at getting more revenue out of the same number of employees.

Cash for the quarter, working capital was a disappointment to us, but we know that most of that is in our balance sheet and we will get that back. We will focus on it if it requires a baseball bat and some airline tickets, we will do that as well, but we will get the accounts receivable down, and continue to work the inventories down. From a sales and marketing standpoint, Jim and his team have done a great job, continue to do a good job for us going forward. We look at continuing to grow our revenue, adding new distributors in new markets, and really leading and feeding the distribution channel.

As you see from the slide in the presentation, besides Africa, most of the world is pretty well saturated and covered, but that doesn't mean we are done, we need to manage the distributors, make sure they're performing, help them perform if they aren't performing, or upgrade distribution if necessary, and obviously, paying your bill in a timely manner is one of the metrics we will use for judging distributors, and if they can't achieve that, we will look at upgrading, where necessary.

I mentioned the US market as being key. Performance from Office Power, from Carrier UTC, from Wesco, from PowerTherm, for our new distributor in California, performance in the shale play here in the US, all drive for stronger US market and we need the US market to be stronger. We will be meeting with US politicians as often as possible. In fact we are meeting with Mr. Waxman here shortly.

We need to make sure that the US market is focused to become one of our key markets, as we're a US company providing green jobs. The new product development side, as I mentioned, we are very focused on short-term goals of gross margin, positive, and profitability, but we can't take our eye off being an industry leader with new exciting products, and continue to move forward. We cannot rest on our laurels, and must continue to be a leader in this industry.

We look forward to a great second quarter, and hopefully people can come out to our stockholder meeting here at the end of August. Hopefully we will have not only the US One truck, but maybe the maybe the LincVolt out here as well. We will also have tours of the Stag facility, where the recuperators are manufactured, and the C1000 and C200 product goes together. Even if you came out last year, you will get to see some different products at a different facility this year. So we look forward to meeting any shareholders that can come out. That will end the call. 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.