Capstone Green Energy Corp (CGRN) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Capstone Turbine Corporation earnings conference call for second-quarter fiscal year 2014 financial results as of September 30, 2013. My name is Philip, and I will be your operator for today. At this time, all participants are now in a listen-only mode. Later we will be conducting a question and answer session. (Operator Instructions) During today's call, Capstone management will be referencing slides that can be located at www.Capstoneturbine.com under the investor relations section. I would now like to turn the call over to 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 second quarter of fiscal year 2014. I am Jayme Brooks, your contact for today's conference call.

Capstone filed quarterly report on Form 10-Q with the Securities and Exchange Commission today, November 7, 2013. If you do not have access to this document and would like one, please contact investor relations via telephone at 818-407-3628 or email IR@Capstone turbine.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 provisions of the Private Securities Litigation Reform Act of 1995. These statements relate to among other things, growth of the oil and gas and transportation markets; increased production rates; higher average selling prices; lower direct material costs; ongoing new order flow; reduced cash usage; growth in revenue, gross margin, and backlog; attaining profitability; improvement in certain key performance indicators and strategic initiatives; the environmental advantages of our products; achievement of EBITDA breakeven before the end of fiscal 2014; reduced royalty rates; compliance with certain governmental regulations; new product development; and the success of our relationship with the Department of Energy.

Forward-looking statements may be identified by words such as expect, objective, intend, targeted, planned, and similar phrases. These forward-looking statements are subject to numerous assumptions, risks, and uncertainties described in Capstone's Form 10-K, Form 10-Q, and other recent filings with the Securities and Exchange Commission that may cause Capstone's actual results to be material different from any future results expressed or implied in such statements. Because of the risk and uncertainties, Capstone cautions you not to place undue reliance on these statements, which speak only as of today.

We undertake no obligation and specifically disclaim any obligation to release any revisions to any forward-looking statements to reflect events or circumstances after the date of this conference call or to reflect the occurrence of unanticipated events. I will now turn the call over to Darren Jamison, our President and Chief Executive Officer.

Thank you, Jayme. Good afternoon, and welcome, everyone, to Capstone's second-quarter fiscal 2014 earnings call. With me today is Ed Reich, our Executive Vice President and Chief Financial Officer. Today, I will start with a general overview of the second quarter and then turn the call over to Ed who will review the specific financial results. I will then close with some comments about markets, trends, and orders.

During our remarks, we will be referring to presentation slides that can be found on the Capstone website under investor relations. Let's go ahead and start with slide 2. For the second quarter, total revenue increased 17% year over year to $35.3 million and product revenue increased 22% year over year to $28.7 million. Following the collection and shipment timing issues we had in the prior quarter, for the second quarter we focused our priorities on getting our cash conversion cycle back on track and teeing up the second half of the fiscal year for a return to stronger revenue growth and margin expansion.

Gross margin dollars for the second quarter increased 88% year over year to $4.9 million, or 14% of revenue, up from $2.6 million, or 9% of revenue, a year ago. However, most important, is we generated strong cash flow of a positive $8 million from operating activities in the second quarter. On slide 3, you can see that the healthy margin trend line, the second quarter marked our fourth consecutive quarter of double-digit gross margins with positive gross margin in 12 of the past 13 consecutive quarters.

Last quarter, I mentioned five key areas that will be critical to our continuing success. Let's take a look at those on slide 4, and we will go clockwise. We are continuing to refine our C200 microturbine engine production efficiencies, and as the European market slowly returns, we are expecting larger megawatt opportunities that will drive even higher production rates.

Our next key area of focus is higher average selling prices, and the second quarter average revenue per unit increased to $175,000 up from $117,000 in the first quarter and consistent with second quarter of last year's results. Not only are we selling a higher proportion of larger units as part of our overall revenue mix, we are also benefiting from modest annual price increase across our production lines. In addition, we recently increased FPP prices for the first time since we began operating in 2009.

Another key to our success is low direct material costs. The year-over-year increase in gross margin for the second quarter was primarily related to the overall higher sales volume of our microturbine products, coupled with lower direct material costs. Further reductions in direct material costs as well as initiatives to address warranty expense as products reach maturity will be ongoing areas of focus as we work to achieve profitability.

Next, in ongoing order flow, total backlog increased $8.7 million or 6% year-over-year to $149.8 million. As of September 30, 2013, we had 775 units or 161 megawatts in total backlog compared to 675 units and 155 megawatts at the same date last year. The backlog was adjusted during the second quarter to remove 1.5 million in design line backlog as a result of their recent bankruptcy filing. However, it is interesting to note that it appears they have found a buyer which happens to be a former Capstone distributor in the China market.

And, finally, reduced cash usage. We used $7.9 million in cash in the operating activities during the first half of fiscal 2013 compared to operating cash usage of $9.6 million for the same period last year. This improvement is a result of our lower operating expenses and our continued focus on working capital management. Our goal is to end the year with more than $30 million of cash on the balance sheet, and we feel very comfortable that we will be able to achieve this target. At this point, I will pause and turn the call over to Ed for more details on the second quarter financial results. Ed?

Thanks, Darren. Good afternoon, everyone. Let's begin on slide 5 with a review of the second quarter. Revenue for the second quarter of fiscal 2014 was $35.3 million, up 45% from $24.4 million for the first quarter and up 17% from $30.1 million for the same period last year. Product revenue was $28.7 million, up 42% quarter over quarter and 22% year over year.

In the second quarter of fiscal 2014, revenue from accessories, parts, and service was $6.6 million as compared to $4.2 million in the prior quarter and $6.5 million for the second quarter of last year. The year-over-year improvement resulted primarily from higher sales in microturbine parts, offset by a lower microturbine service work period.

Gross margin for the second quarter was $4.9 million, or 14% of revenue, compared to $3.3 million and 14% of revenue for the first quarter; $2.6 million, or 9% of revenue, for the same period last year. Year-over-year increase in gross margin was primarily related to a $1.4 million improvement resulting from an overall higher sales volume of our microturbine products and lower direct materials cost during the second quarter of fiscal 2014.

Additionally, we also had decreases in warranty, royalty, production and service center labor and overhead expenses for a combined total of $900,000 compared to the prior year. Our warranty expenses are declining as a result of the decreasing in our reliability repair programs for our C200 and C1000 series systems as these products mature.

Also, we have mentioned in the past, we expect our royalty expense to decline as our fixed rate royalty for each microturbine systems covered by our royalty agreement was reduced by 50% during the quarter because we reached our repayment threshold level with Carrier Corporation successor in interest to UTC power. Going forward, this rate reduction will continue to benefit in future periods.

R&D expenses were $2 million for the second quarter of fiscal 2014 compared to $2.3 million last quarter and $2.4 million in the second quarter last year. The year-over-year decrease of $400,000 is primarily the result of lower supplies expense. That being said, we continue to invest in R&D as we focus on new product development, product robustness, and direct material cost reduction initiatives.

SG&A expenses were $6.6 million for the second quarter of fiscal 2014, down from $7.6 million last quarter and up slightly from $6.4 million in the second quarter of last year. Year-over-year increase was primarily due to a $600,000 increase in salary expenses, which was offset by a $400,000 decline in marketing expenses.

Net loss was $3.9 million, or a $0.01 loss per share, for the second quarter of fiscal 2014 compared to a $6.8 million, or $0.02, loss last quarter and a net loss of $6.2 million, or $0.02, for the second quarter of last year. Loss from operations for the second quarter of fiscal 2014 decreased to $3.7 million, an improvement from the $6.6 million operating loss for the first quarter as well as a $6.2 million operating loss for the same period last year.

Slide 6, you can see our first half performance comparison for fiscal 2012 through fiscal 2014. We have made good steady sustainable progress with each of these key performance indicators.

I will now provide some comments on balance sheet and cash flow activity Please move to slide 7. Cash and cash equivalents totaled $28.3 million at September 30, 2013, as compared to $21.6 million at the end of the last quarter and $38.8 million at March 31, 2013. We are pleased with our ongoing efforts to manage working capital and as a result, we generated $8 million in cash from operating activities during the quarter compared to $2.6 million of cash used in operating activities in the second quarter of last year.

CapEx through the second quarter of fiscal 2014 was $300,000 down from $400,000 for the second quarter of last year. As Darren mentioned, we are well on track to achieve our goal of more than $30 million in cash by the end of fiscal year 2014. And an additional note, subsequent to the end of the second quarter we received an unsolicited notice of warrant exercise on October 31, which was the day our report remaining warrants were set to expire. $4.7 million warrants with a 126 strike price were exercised resulting in proceeds from approximately $6 million, which we received on November 1 and which will be reflected in the third quarter cash balance. In addition, as of November 1, there are no longer any outstanding warrants in Capstone's capital structure.

Receivables were $18.4 million compared to $23.7 million in the prior quarter and $15.1 million a year ago. DSO improved on a sequential basis to 48 days for Q2 compared to 89 days in the first quarter. Sequential improvement was due to our strong cash collections in the quarter and our continued focus on cash management. Inventories were $23.8 million at September 30, a reduction of just over $5 million sequentially as we shipped the finished goods from the end of the first quarter. Inventory turns increased to 4.6 times compared to 3.3 times last quarter and 4.8 times for the same period a year ago.

Finally, on slide 8, you can see a visual record of our growth in backlog since fiscal 2007. As Darren mentioned, we ended the quarter with a backlog of $149.8 million up modestly from the beginning of our fiscal year. However, based on our current pipeline of activity we believe that our revenue growth will accelerate in the second half of the fiscal year. That concludes my comments. Back to Darren.

Thank you, Ed. Please turn to slide 9 for our second-quarter global shipment mix breakdown. As you can see, oil and gas and other natural resource applications continue to accelerate as the majority of our mix representing 67% of shipments. Energy efficiency was 19%; renewable energy, 10%; and critical power supply and mobile transportation products was 4%. As you can see, we are continuing to drive substantial penetration of the oil and gas market globally, and this market continues to perform very well for Capstone.

Turning to slide 10, in R&D we continue to focus on adaptive and disruptive technologies to ensure our products are compliant with new regulations while leading the industry in emissions, reliability, and efficiency. We have dedicated project teams that are making product improvements across our generator product family to meet these new more stringent European low and medium voltage requirements for decentralized power generation. These changes will give customers increased functionality by providing reactive power or an adjustable power factor back to the grid for improved economics, which positions our products well for future regulatory changes in both Europe and North America.

We also continue our strategic public-private relationship with the US Department of Energy on the development of the C250 and C370 products. Our DOE project team successfully demonstrated the 370 low-pressure subsystem and validated the performance and efficiency of the C250 product. Additionally, we recently achieved a critical milestone by obtaining authorization from the DOE to close stage 2 of this contract. Our next work in stage 3 will focus on high pressure developments of the new high temperature, turbo machinery components and integration into a proof of concept subsystems for further validation of the C370 performance objectives.

We are also working with the DOE advanced manufacturing office and Oak Ridge National Laboratory to develop a new class of corrosion- and creep-resistant aluminum-based steels. This has the potential to be a lower-cost alloy for the manufacture of that recuperator and may also provide higher temperature capabilities to further improve efficiency and product life.

As a side note, we are pleased to hear that our successful DOE relationship will be highlighted in an upcoming session of Congress as a success story by the DOE Assistant Secretary Dr. David Danielson. We look forward to sharing updates of our progress on future conference calls.

Let's turn to our attention slide 11. You can see from our more recent notable orders since the beginning of the second quarter. I spoke about the first two in Vietnam and northeastern US in our last earnings call, so I will turn my attention to the follow-on order in the mid-Atlantic region.

This new order is for six Capstone C1000 power packages for three separate locations and brings this customer's total fleet up to 9.2 megawatts in the West Virginia area. This new customer is an industry-leading natural gas pipeline company. They will rely solely on Capstone's clean power to meet their production quotas at these remote plans, using our natural gas field turbines to power propane stripping equipment. Our units were chosen over the local grid because availability and improved costs.

We also received another follow-on order from the large Australian coal steam gas company. This is our third follow-on order from this customer and brings our total fleet up to 248 C30 units providing reliable low emission electricity 24/7 in one of the harshest and most remote parts of the world. Pulsing gas is forming at the basis of a major new LNG export industry that will deliver substantial economic benefits to Australia, including substantial drop job creation.

And, finally, in Mexico we received an order for one C800 and one C600 for one of the key distributors of the two large industrial customers -- a large food and beverage Baxter packager and a plastics injection molding company. We are very focused on the booming industrial CHP and CCHP markets in Mexico where we can replace less efficient on-site equipment and an overburdened electrical grid with our efficient reliable green micro turbines.

Overall, we will continue to see weakness and inconsistencies in continental Europe; however, Russian market contributed significantly in revenue in the second quarter with our Russian distributor BPC Engineering having a record quarter.

In the US, we have seen some extension of project timelines, specifically in the Eagle Ford Shale region, which we think is a temporary issue. But demand in the Marcellus Shale continues to be very robust and made a very nice quarter.

In the New York City projects, several of them continue to move forward but it is typical they often take longer than expected in that area of the world. And from a market segment perspective, we obviously continue to build our global footprint in oil and gas and other natural resources. Additionally as we have seen in recent quarters, the marine industry continues to be a very attractive market for us as well as the hybrid vehicle diesel product and the heavy-duty automotive and truck industries that need to comply with high emission control standards and new clean fuel initiatives.

We are quickly approaching the halfway point to the third fiscal quarter, which is typically our best quarter of the year from a margin and revenue standpoint. Customers in the industries we serve particularly in oil and gas have remaining budgets to spend that must be used up by the end of the fourth quarter, and we have previously benefited from this pent up demand. Based on our current outlook, we expect to return sequential margin growth in the second half of fiscal 2014 as revenues accelerate and traction of our C1000 series product continues to build.

And, finally, we continue to target EBITDA breakeven in the fourth quarter of fiscal 2014. That concludes our prepared remarks for today, and thanks, everybody, for their attention. Operator, we are now ready to open the calls up to questions from our analysts.

(Operator Instructions) Philip Shen, ROTH Capital.

This is Matt on for Phil. Thanks for taking my questions and just to start off, apologize if something has been answered on the start up here. We are jumping between calls. Just wanted to start out with your distribution partners. I know you guys just mentioned the Russian partner having a record Q2. Can you talk about how this plays out for the remainder of the year and what we can expect in terms of revenue growth from your Russian partners?

Yes. No, as we mentioned last call and again this call, we started to see a rebound in Russia late last quarter, and then in Q2, we saw very nice build in his business Remember we had some product on the dock for him at the end of the quarter and had some issues with his credit line. That has all been straightened out. He has had a record quarter, and he continues to look very strong in Q3 and beyond, which is excellent. I think in the US, we had a very good quarter from E-Finity, a lot of Marcellus opportunities as well as CHP.

We saw a slowdown in shale gas out of the Eagle Ford but we are seeing a little bit of a rebound in Q3. So we are watching that closely to make sure there is no systemic issue going on in that region. California and New York both are progressing nicely. New York is a little slower that we want; California is about on track. Mexico, we have seen some nice order growth. Australia continues to do very well for us; we have two distributors down there now. Both our top 20 and doing very well.

So I think really, for us, the biggest area of focus is still continental Europe I just returned from Zurich yesterday, continuing to meet with our distributors in that area of the world. They are seeing the economy come back. They are seeing financing come back. But it is still -- customers are moving very slowly and moving very deliberately on projects. So we are still cautiously optimistic that we will see a rebound in continental Europe and Q3 and Q4.

Okay. That's helpful. And just one more on gross margins here. Could you just talk directionally about the trend for the remainder of fiscal year 2014, given that Q3 seems like one of your strongest quarters in terms of revenue and gross margins? Just give us a sense for what kind of improvement we can look for quarter over quarter and perhaps into Q4 as well.

Yes. No, it's a great question we expect directionally to see margins to increase in Q3 and Q4 both. We are expecting margins to be around 20%, 21% in Q4, which at these revenue levels would be EBITDA breakeven. Q3 was a little misleading. We had some negative mix in some cases. We had some older price projects come through so it's a little bit misleading. We also had some overhead that reversed from Q1 which benefited Q1 but was a detriment to Q2.

But overall, I think that we are happy with the progress we are making. We are seeing the DMCs come down. We are seeing the ASPs moving in the right direction. Warranty was down for the quarter, which was great to see that trend continue. We strongly believe we are on the backside of that new product maturation -- Bell curve we will call it. And hopefully new warranty rates will continue to go down.

And the other one for us, I think, is the [UT] royalty. As Ed mentioned we have now hit that next level in the royalty where that royalty rate drops in half, and we will see that benefit in Q3 and Q4 as well.

Eric Stein, Craig Hallum.

Great to see the cash generation this quarter.

Thank you, Eric. No, I think I said in my prepared remarks but for us it was really critical that as we get around that $20 million level as kind of a low water level, we want to see as a Company to be able to support the working capital that we need. So we really focused on generating cash this quarter. We are very happy with the results we had.

And just to clarify, I believe this is the case, but the $6 million you talked about the warrant exercise that is in addition to the goals that you have laid out.

Correct. Correct. It was just further (multiple speakers)

Yes. Just wanted to confirm. And just quick on margin I mean you just touched on it. But that royalty benefit, can you just remind us? I believe, I want to say it is 2%. I'm just curious. Did you get any benefit of that in Q2? I mean you should see the full benefit in Q3.

Yes. We say it's worth about [2] margin points at about $35 million in revenue where we are currently. But the royalty is running around $1 million a quarter, and today with the rate reduced in half, it would be $500,000 and that is where the 2 points of benefit comes from.

Okay. Got it. And you didn't see much of that in what you are reporting today, right? I mean that is more accretive going forward than anything else.

Right. In the current quarter we had about $900,000 in royalty and about $600,000 of that was at the old rate or the 100% rate. The remaining $300,000 was at the 50% rate. So we got some benefit, but not full.

All right. No, that's great. That's helpful. Maybe just quick for me, oil and gas, just, I know you got a long list of customers. Just curious, any thoughts on what percentage of those customers you are part of regular buying patterns? And then how you think about your penetration and I know it differs, but within each of those customer footprints, how early you are in that growth ramp?

Yes. No, this is Darren. We still think we are fairly early in that growth ramp I know the customers we have been in longer -- Anadarko, Chesapeake, Pioneer -- we are probably on our fourth or fifth order with those folks. A lot of them were up to close to 100 microturbines, but even that that relationship is 18 to 20 months old. So we still have it lot of more work we can do there. And I think a lot of cases we are leveraging what we are doing here in the US the parts of the world with the same customers, which is obviously very beneficial.

So, I would say in some cases we may be as high as 20% on some of these customers, but that is the exception. In most cases, we are probably high single digits. So lots of room to improve on the oil and gas side of the business, absolutely. If you look at Australia, we are still talking about another 200 to 300 systems over the next couple of years. We have got our third follow-on order with that customer. We are up to 248 systems, but that will -- they are just beginning to ramp up their drilling down there. So there is lots more opportunity where that came from.

Okay. Just last one for me. The opportunity or the testing you are doing with pump jacks just curious what the next milestone or maybe the timeline we should look for there. Thanks a lot.

Not a problem. No, I think the pump jack market is a huge opportunity for us as you pointed out before Eric. It is really an ability for us to get into some unsteady loads and some difficult loads for power generation equipment to handle. We have got our solution out there in the field today. We don't have a lot of hours on it. So really, for us, we probably need to go at least six to nine months with that new solution before we go ahead and release it as a product, maybe as long as a year depending on the results look like.

But, for us, our goal is to be able to serve as many loads as possible in the oil and gas space. Obviously, we were building very strong customer following and customer base. So the more we can widen net of opportunities that net in the same space and same customers, obviously our cost to acquire those orders would be very low and our penetration would be very high. So definitely a scenario we are focused on along with marine data centers and some of the other new markets we are moving into.

Colin Rusch, Northland Capital Markets.

Can you talk a little bit about the combination of technologies that you guys are pursuing now? I mean, obviously the announcement about integrating solar and the microturbines is a great solution that should have fairly long legs as you roll out across the country and into some developing markets. But are there other combinations that you guys are working on? And also you could talk about the prospects internationally for those sorts of applications.

Yes. I think when I talked about the ongoing work we are doing for Europe, with some of the new rules as far grid interconnect there, that is really driven by heavy use of solar and wind in Europe and the ability to produce electricity in the power factor there, control that power factor, export bars, all of which it is where the distributed generation world is going to as these grids have to deal with a lot of solar and wind on their grades.

I think the good news is, we are very compatible being in a inverter-based technology with solar, with wind, other power generation sources, other larger turbines or reciprocating engines. Virtually, with our technology we can parallel with almost anything and provide data-center-quality power to our customers. So I think whether it is traditional on-site generation paralleled with the grid or it is mixing with solar and wind, it is a great opportunity for us going forward. And I think the flexibility of our product and the ability to meet all the greed requirements worldwide is going to continue to be a benefit for us.

Reciprocating engines are going to have to add more hardware to meet these new European standards, which started in Germany, have now gone to Italy. Will quickly be in Spain. I am sure we will see it in Slovenia and other parts of Europe, and then eventually it will come to the US and other markets. So it is some engineering work for us that we didn't have planned for the year. But for us it is the more complex the requirements to interconnect are, the better off it is because it makes us that much more strategically competitive.

Okay. Great. And then, can you talk about the evolution of the inverter offerings and if you are going to pursue any sort of closer partnerships on the integration into the grid and the management of the power?

No, we pretty much do that in-house as far as how we design it. We are working with a new vendor and actually building our power electronics out of New Hampshire. That is part of our cost reduction activities we have going on. But our goal going forward would be to have a power electronics system that would be somewhat agnostic so we could put multiple different vendors' parts in there, especially IGBT side, which is where a lot of the cost comes from. That is kind of a phase 2 of our cost reduction effort on that side.

But I think, in general, that is part of our cost reduction supply chain strategy. We continue to focus on how to have multiple vendors and particularly in the US, if we can, to us the best price, the best availability and, frankly, the most robust supply chain we have because we continue to struggle with part shortages, especially out of Asia, which impact our ability to manufacture every quarter or lead to over time or expediting charges that we would like to get away from. So I think, in general, that is all just part of our overall strategy is improving our supply chain.

Ajay Kejriwal, FBR Capital.

So good color on gross margin. Just maybe I thought I heard 20%, 21% in the fourth quarter, so that's great. I think you also said near-term mix issues. Maybe just clarify -- how should we be thinking about the progression from here? Is the biggest improvement expected in the fourth quarter or should we expect more like a linear improvement?

Yes. I think you're going to see -- we are a lumpy business so it will depend on mix in Q3. Obviously you're going to see improvement from the royalty. That is mathematical so you should see at least $500,000 pickup there, which is going to add obviously at the margin. Knock on wood, we will continue to see the warranty rates come down. Again, warranty rates were actually down from Q1, but Q1 was only about $24 million in revenue. So we added a lot of revenue, which inherently should raise your warranty, and our warranty actually went down, which shows the fact that are heading the right way.

I think on the direct materials side, we have several new cost reductions cutting in. In some cases we are running parallel with the old vendor just to make sure we have robust supply chain so that mutes it a little bit but again by Q4 you should see the full benefit of several of those cost reductions. And then, again, the good news, we had a very large BPC or Russian contingent in the quarter. They tend to have more old price projects in the backlog. So the good news is Russia was up. The bad news is it was a big piece of our product sales for the quarter, which was a little bit of a negative mix for us, but, again, one we would definitely take.

And then as I mentioned there is some overhead from the finished goods that we had in Q1 which gave us a little bit of benefit in Q1 and that reverses in Q2. So lots of moving pieces. I think the good news is we can see the underlying improvements as Q3 rolls around, and we expect to see further revenue growth and then further maturation volumes of the things we've been talking about with -- again, Q4, we are not changing our guidance. We still believe EBITDA will breakeven in Q4 if we keep working our plan.

Great. That's very helpful. And then on revenues, obviously this quarter is your best quarter seasonally, but then you also talked about project timelines being extended. So how should we think -- tie the two comments together? And maybe also talk about the next 12 months. Historically, your backlog has been a good indicator of revenues next 12 months out. Is that -- does that still hold or should we be thinking differently?

No, I would say that still holds, Ajay. I mean, Q4 is typically our biggest sales quarter. We usually have Q1 price increases so we should get a little bit of wind in our sales there. But Q3, from a revenue margin standpoint has historically been our best quarter of the year. We hope to do that again this year and then follow up with another strong Q4 with both bookings and revenue in Q4. And then we will see.

I think growth is still challenged, I think, a little bit because of Europe. I could see growth swelling to 10% next year, but I think it is too early to really forecast that. We need to see what happens in Q3 and Q4. Obviously, the US economy has been very good to us. Mexico has been very good. South America is still coming online, so we are not sure how much revenue we will get out of South America. And probably, more importantly, we used to talk about megawatt orders as being huge, and then now 3 to 5 megawatts as being big orders for us. We are starting to actually quote 20- to 25-megawatt projects. And so as we start moving to larger load regime and getting [looked] with those types of projects, it is not uncommon or would it be surprising for us in the next 6 to 9 months to land one of those projects which obviously would be a big boost in revenue for us.

That's helpful. Then one more, if I could squeeze in. On SG&A, so you had good performance there, and I know Ed talked about $400,000 in marketing expense lower in the quarter. So is that a one time or is that more like a trend we should be baking in? This is a real nice performance on SG&A.

It is probably a little lower than that going forward run rate will be. Saying that, Q1 was higher than we would have expected. So somewhere in between the two, Ajay, you should model going forward.

But we are impressed that you look beyond margin and revenue. That's great.

(Operator Instructions) Thorsten Fischer, Natureo Finance.

I have questions regarding your backlog and the revenue split. Could you give me a little bit more color on the order intake in Q2 and perhaps figures regarding your FPP backlog in Q2.

Yes. Sure. This is Darren. The bookings for the quarter were $22.7 million.

Or $24.2 million gross if you (multiple speakers).

Correct. And I was just going to say, if you put DesignLine back in, which we took out for the quarter, it was about $24.2 million in bookings for the quarter, so a little bit lighter than Q1, better than Q3 last year, similar to Q2 last year, so I think in line. We are a little light from our 1-to-1 book to build that we look for, obviously, especially when we take out the DesignLine. As I said, DesignLine does appear to have a buyer; so it is very possible in Q3 that if that sale goes through, we will put those orders back in backlog. We felt it was prudent right now until the sale is complete to go ahead and pull that back out.

As far as FPP goes, we continue to grow the FPP backlog. I don't think we have published that right now, but safe to say we are adding contracts every quarter, much faster than any contracts are rolling off. So we are still very happy with our FPP growth. As a mentioned in the call, we just put out our first price increase in the FPP. And I think we are mature enough in that market that we are seeing enough traction that we can go ahead and ratchet the prices up a little bit.

And regarding the European and Russian share of your backlog, can you give me just a rough idea how much of your backlog is coming from Russia and from Europe?

Yes. We don't break it out, but I would say Russia is by far more backlog than Europe. Of Russia and Europe together, I would say two thirds of that would be Russia. We have very bit little backlog from France, Italy, Spain. We have some from Germany. That is probably our strongest distributor. Very little backlog from the UK. So again, our European business, which we've talked about, has dropped substantially in the last couple of years. We are very much looking for those numbers to improve, but, remember, in fiscal 2012, Europe and Russia was $47 million, and then in fiscal 2013, it was $25 million. So we are very much hoping to build on that $25 million this year and get back to some more historical numbers.

Okay. And just one further question regarding an update on the C250. Could you perhaps give me a little bit more insight regarding the timing? What do you think when the C250 market -- might hit the market?

Yes. As a mentioned before, it is running in the labs. We have hit our efficiency and power targets. We will move to beta testing here shortly and that will probably be 12 to 18 months of beta testing depending on how that testing goes. But what's really important is that we see the warranty rates on the C200 come down because 90% of that bill of material is the same as the C200. So it is partially driven by the beta testing on the C250, but it is also very much driven on the maturations of the C200. So that is really the key. So I think if everything is perfect and it is 12 to 14 months or if it is 18 to 20 months, it really depends on how that C200 performs and how those field trials go.

Ed actually gave me a note and said that we could go ahead and say what the FPP backlog is. So we are operating real-time here. That number is about $42 million in backlog. Yes. $42.6 million like Ed said. And so that is up substantially. I think last time we reported that number was closer to $30 million, and, again, that just gives you some data points in time. It's not something we are going to report on a quarterly basis, but, again, we have got several things to do on that FPP to improve the margins. And our goal on the service and parts, as you know, is to have those margins north of 50%. So we are still working that as we mature the product. Obviously, as the C200 matures, our warranty rates will go down, but also our FPP expenses also go down. So it is a double win as we mature that C200 product.

Ladies and gentlemen, this will conclude the question and answer portion of today's call. I would now like to turn the call back over to Darren Jamison for closing remarks.

I want to thank our analysts for taking the time. I know that several of them had several calls today, so I appreciate them taking the time out of their busy schedule to listen to our story and continue to follow Capstone. As I continually say, we are a lumpy project-based business, and you really need to look at us year over year to realize substantial improvement to our business. I think it is dangerous to try to look at Capstone sequentially and drive any kind of conclusions.

So if you look at year over year, second-quarter revenue is up 17%. Q2 gross margin year over year is up 88%. Gross margin percentage year over year has gone from 9% to 14%. Backlog improved 6% year over year despite the ongoing European condition. That is probably one of the things we really need to continue to monitor is how Europe comes back. R&D expenses were down 17%, despite the work we are doing on the C250 and that 370. Obviously, that is somewhat helped by the DOE offset and having a great partner like them. SG&A was up a nominal 3%, which is really just your cost of living increases. And then net loss improved 37% year over year. Most importantly, cash generated from operated operations improved from a negative $2.6 million in Q2 last year to a positive $8 million this year so an over $10 million swing.

If you look at year-to-date today performance year over year, for the six months margins have gone from 8% to 14% on really nominal revenue growth. So what does that say is that even on very similar revenues, we have driven much better margins and better performance and controlled our expenses as margins. As revenues start to increase over the back half of the year, as we predict, we are going to see even more margin improvement going forward and obviously heading for the critical EBITDA breakeven level.

As we said, margins should accelerate second half of the year. Second half 2014 we should start to see the benefits of the lower royalty expenses, as Ed outlined, lower warranty rates if we continue to see the improvement that we outlined. Obviously, improving DMCs and then past price increases moving through the P&L.

So really our largest concern for the year continues to be the strengthening of the European market, and we will allow for what is going on in the Eagle Ford market here in the US to make sure we are not seeing some systemic issues there.

We will continue to focus our expense management. As Ajay pointed out, we had a very nice expense quarter both from an R&D and an SG&A perspective. However, I think the most important thing for us is really maturing our distribution channel, continuing to weed and feed that channel and then making sure that we have enough cash on the balance sheet to grow our business. So to have Q2 generate $8 million of cash with huge strategically for us and really tees us up for the back half of the year.

So without that larger balance sheet, we couldn't have the growth we need in the second half of the year and we couldn't reach EBITDA breakeven without some sort of dilutive event. So with that, I will close my remarks and look forward to talking to everybody in the third quarter. Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation, and you may now disconnect. Have a wonderful day.