Capstone Green Energy Corp (CGRN) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Capstone Turbine Corporation earnings conference call for the first-quarter fiscal year 2016 financial results ended on June 30, 2015. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference call is being recorded.

During today's call, Capstone management will be referencing slides that can be located at www.capstoneturbine.com under the Investor Relations section.

At this time, I would like to turn the call over to today's host, Miss Clarice Hovsepian, Vice , Human Resources and Corporate Counsel. Please begin, ma'am.

Thank you. Good afternoon and welcome to Capstone Turbine Corporation's conference call for the first quarter of fiscal year 2016 ended June 30, 2015. Capstone filed its Quarterly Report on Form 10-Q with the Securities and Exchange Commission today, August 6, 2015. If you do not have access to this document and would like one, please contact us by email at IR@capstoneturbine.com. Or you can view all of our public filings on the SEC website at www.sec.gov or on our website at wwwcapstoneturbine.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 and diversification of our end market, strength in distribution channels, ongoing new order flow, reduced cash usage, growth in revenue, gross margin and backlog, obtaining profitability, adequacy of liquidity and capital resources, improved operating leverage and organizational efficiency, new product development, product liability, shifts to larger market for our products, benefits from our cost reduction initiatives, performance in light of macroeconomic headwinds, continued NASDAQ listing, implementation of new Capstone finance business, collection of reserve accounts receivable, continued opportunities in Russia, improved brand equity and product recognition, and leveraging of lean manufacturing practices.

Forward-looking statements that may be identified by words such as expects, objected, intends, targeted, plans 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 materially different from any future results expressed or implied in such statements.

Because of the risks and uncertainties, Capstone cautions you not to place undue reliance on these statements which speak only as of today. We undertake no obligation and specifically disclaim any obligation to release any revisions to any forward-looking statements to reflect events or circumstances after the date of the conference call, or to reflect the occurrence of unanticipated events.

I will now turn the call over to Capstone President and Chief Executive Officer Darren Jamison.

Thank you, Clarice. Good afternoon and welcome everyone to Capstone's first quarter of fiscal 2016 earnings call. Joining me today is Jayme Brooks, our Chief Financial Officer and Chief Accounting Officer.

I will begin today's call with a brief overview of our highlights for the first quarter and then I will hand the call over to Jayme to review our quarterly financial results, after which I will return and discuss our overall business strategy and give a brief update on some of our key initiatives. As the operator mentioned during the opening remarks, we will be using presentation slides that can be found on Capstone's website under Investor Relations.

Let's go ahead and turn to slide 2 and slide 3. Both of these slides illustrate the highlights for the first quarter. Let me first say I am extremely pleased to report that we had the second strongest first-quarter revenue in our 20-year history, with revenue increasing more than 16% over last year's first-quarter revenue to $27 million.

Our gross margin subsequently increased more than 200 basis points to 17% compared with last year's first quarter.

We also reduced our net loss to $6 million, which compares to $6.8 million in the year ago first quarter. However, I would like to point out that the $6 million net loss for the quarter includes one-time charges for severance and other termination expenses, totaling approximately $600,000. These strong revenue results were driven by execution of our corporate strategy, devised by our leadership team and executed by our very dedicated team of distributors and sales professionals.

We achieved these improved financial results by diversifying our vertical markets as well as our geographical footprint. This quarter, we witnessed a rebound in our oil and gas industry as Horizon Power was our leading all over other distributors in new orders and product shipments for the quarter. After Horizon, the next four distributors rounding out the top five in orders were: RSP Systems in New York, E-Finity in Philadelphia, E-Quad in Germany and Vergent Power, all of whom benefited from the continued strong growth from the combined heat and power or CHP market.

Bookings improved over Q4 levels and we finished with a 0.7 to 1 book to bill ratio below our target of 1 to 1 but over Q4's book to bill ratio of 0.6 to 1. Our backlog ended June 30, 2015 was $160.5 million, down from $175.2 million as of June 30, 2014. Jayme will give you more details on the specific backlog during her presentation.

In terms of market verticals, the greatest portion of our backlog is still in the oil and gas market, but the CHP market is growing, and growing steadily every quarter. We believe that our revenue increased this quarter is a positive sign in light of the continuing macroeconomic headwinds, and that this quarter's revenue did not have any product shipments to BPC in Russia for the first time in the last nine years.

Historically, as you know, BPC has been one of our largest contributors to revenue. For the first quarter of fiscal 2016 we recognized approximately $500,000 in total revenue from BPC, which is less than 2% of our total for the quarter while the first quarter of fiscal 2015 was approximately 13% of revenue. So we have even more reason to be particularly proud of our results, given the low revenue contribution from the traditionally biggest customer, BPC.

On a geographical basis, as you can see on slide 4, the North American, European and Asian markets were the largest components of our revenue in the quarter. But we saw some growth from South America and we are making inroads into Africa and the Middle East. I am very confident they will contribute more soon.

In addition, we continue to receive orders for new parts of the world. We recently obtained our second order from Puerto Rico and some of our first orders in Portugal, Lithuania and Finland.

For the first quarter of fiscal 2016 revenues from our accessories, parts and service business increased $1.1 million or 19% to $6.8 million from $5.7 million for the first quarter year ago. Our product development and reliability programs are going extremely well, and we achieved 95% of our internal R&D goals for the first quarter as we continued to improve the reliability, the performance, and the cost of the flagship C200 and C1000 series product.

Distributor and employee morale are at all-time highs with great levels of cooperation, empowerment, engagement as we continue to gain market acceptance of our innovative Capstone products and services. With that, I will take a break and turn the call back over to Jayme and let her discuss Q1 financial results.

Thanks, Darren. Good afternoon, everyone. The first quarter of fiscal 2016 was characterized by higher revenue in megawatts shipped, compared to the first-quarter fiscal 2015. The revenue improvement was primarily from a rebound in the global oil and gas market, coupled with continued strong revenue from the CHP market.

We also benefited from an increase in revenue from the Asian and South American markets as a result of our continued efforts to improve our distribution channels in these developing regions.

However, the macroeconomic headwinds experienced in fiscal 2016 continue to be a challenge. These include the continued softness of the global oil and gas market over historical levels, a strong US dollar which makes our products more expensive overseas, and the ongoing geopolitical tensions in Russia, North Africa and the Middle East.

Please turn to slide 5 for the financial results for the quarter. Revenue for the first quarter of fiscal 2016 was $27 million, a 16% or $3.7 million increase from last year's first quarter of $23.3 million. This, as Darren mentioned earlier, was our second strongest first-quarter revenue in our Company's 20-year history.

Product revenue was $20.2 million for the first-quarter fiscal 2016, which compares to $17.6 million in the first quarter of fiscal 2015. We shipped 20.8 megawatts during the first quarter of fiscal 2016 which compares to 17.9 megawatts in the first-quarter fiscal 2015. The increase in product revenue and megawatts shipped in the first quarter of fiscal 2016 over the prior year was a result of a shift in product mix as we sold a number higher number of our C1000 series systems during the first quarter of fiscal 2015.

Revenue from accessories, parts and service was $6.8 million for the first quarter of fiscal 2016 as compared to $5.7 million for the first quarter of last year. Gross margin for the first quarter increased to $4.7 million or 17% of revenue compared to $3.4 million or 15% of revenue for the same period last year. The 200 basis point improvement in the year-over-year gross margin was primarily driven by the shift in product mix that I mentioned earlier and by revenue recognized during the quarter without any associated direct material costs.

This revenue is related to a portion of the $0.5 million of revenue recognized from BPC during the quarter that was for products shipped in the fourth quarter of fiscal 2015, for which revenue was not recognized at the time of shipment due to the uncertainty of collectibility.

As a reminder, during the fourth quarter of fiscal 2015 we recorded an accounts receivable allowance of approximately $7.1 million for BPC. Since that time, BPC has now agreed to payment terms of cash on delivery, at which time the revenue will be recognized, plus a premium which will be applied to their past due balance that has not been fully reserved.

R&D expenses for the first quarter increased slightly to $2.4 million compared to $2.3 million in the first quarter a year ago. SG&A in the first quarter fiscal 2016 increased $0.3 million or 4% to $8.1 million from $7.8 million in the first quarter fiscal 2015. SG&A in the first quarter of fiscal 2016 included $0.5 million of the total $0.6 million charge for severance and other one-time termination costs related to the flattening of our organizational structure that we announced in April 2015.

If you recall, we expect this change, charged to our organizational structure, to result in annual savings of approximately $2 million once netted with the one-time costs.

Operating loss for the quarter of fiscal 2016 decreased approximately 15% to $5.8 million compared to $6.7 million for the first quarter of fiscal 2015. Net loss for the quarter decreased 12% to $6 million from the $6.8 million for first quarter a year ago. Net loss per share was unchanged from the prior year at $0.02 per share.

Now I will provide some comments on our backlog and balance sheet.

Our product backlog as of June 30, 2015 was $160.5 million compared to $165.7 million as of March 31, 2015 and $175.2 million as of June 30, 2014. The year-over-year decrease was $14.7 million or 8%. This decrease in backlog was primarily a result of the macroeconomic headwinds experienced throughout fiscal 2015.

Our FPP service backlog contract backlog of June 30, 2015 achieved a new record level of $63.2 million compared with $61.2 million as of March 31, 2015 and $49.3 million or June 30, 2014. These increases over the past periods reflects our growing installed base in MicroTurbines as well as the ongoing efforts of our more mature distributors to sell our FPP service contracts, which enables the end-user to achieve a lower cost of ownership.

Our receivables as of June 30, 2015, net of allowances were $16 million compared to $13.1 million at March 31, 2015 and $24.2 million a year ago. DSO was 54 days during the first quarter of fiscal 2016, a decrease of 41 days compared to the first quarter of fiscal 2015. The improvement in the year-over-year DSO was largely due to accounts receivable allowances recorded in fiscal 2015, for BPC and EMI. As a reminder, during fiscal 2015, we also recorded an accounts receivable allowance of approximately $2.6 million for EMI.

Inventories were $26.4 million as of June 30, 2015, up from $25.4 million at March 31, 2015. And inventory turns were 3.4 times compared to 4 times at the end of fiscal 2015. The increase in inventories were primarily the result of not fully achieving our planned number of product shipments due to the continuation of the headwinds I mentioned earlier.

At June 30, 2015 we had cash and cash equivalents of $22.4 million and $5 million in restricted cash related to our Wells Fargo credit facility for a total of $27.4 million compared to $32.2 million as of March 31, 2015. Our cash used in operating activities for the first quarter of fiscal 2016 was $6.9 million as compared to $9.1 million in the first-quarter fiscal 2015. We spent $0.9 million in capital expenditures in this quarter compared with $0.2 million in the first quarter of fiscal 2015.

Lastly, on June 18, 2015, we received approval from the NASDAQ stock market to transfer the listing of our common stock from the NASDAQ global market to the NASDAQ capital market. In order to regain compliance, the minimum bid price per share of our common stock must be at least $1 for at least 10 consecutive business days before December 14, 2015. If we fail to regain compliance during this grace period, the Company's common stock will be subject to delisting by NASDAQ. Therefore we have requested stockholder approval of a potential reverse stock split at the Company's upcoming annual shareholder meeting to be held on August 27, 2015.

That concludes my remarks and I will now turn the call back to Darren.

Thank you Jayme. Now let's turn our attention to slide 6 and also slide 7 to review some of our key business strategy and provide updates on progress we've made during the quarter to achieve those goals, and our overall goal of becoming a world-class distributor generation solutions company.

At Capstone we strive to build the highest quality products in the distributed generation industry with the goal of achieving 99% customer uptime and 14,000 hour mean time between failure or MTBF. We continue to focus our efforts on making the C200, C1000 series, our flagship series product, achieve these world-class reliability target that are more mature than C30 and C65 products already achieved.

In July we completed several reliability programs that have pushed the C200/C1000 series MTBF from the historical approximately 6,500 hours to a projected 9,158 hours. That is an outstanding, amazing 40% increase in reliability. This is achieved through multiple improvement of the engine, the filtration system, the stater, the electrical system and a comprehensive new software release.

However, we are not done. We are not satisfied. We will continue to work and improve until the flagship product reaches our goal and what our other products already have achieved, which is 14,000-hour mean time between failures.

In order to gain additional recognition in the global marketplace, we are working on building our global brand and our product recognition. As part of those efforts, we recently launched our new website at our 2015 Capstone Global Distributor Conference in Palm Springs, California. This intuitive platform is easy to use and features a more modern look intended to serve more as a primary resource for market product and service information. The new design, content and features will help facilitate higher level of end customer and distributor interactions with an increase in the use of marketing asset, project case studies, social media.

Additionally, potential end use customers will be able to find most of the information they are looking for in three clicks or less.

Improving the efficiency and effectiveness of our global distribution channel is certainly key to our continued growth and success. In support of this objective, we recently rolled out a new distributor key performance indicator program or KPI program. This program is a better measure and manage distributor performance, and help us focus on improving lead generation, improving product development, customer relationships and, most importantly, improving quarter close from today's approximately 11% to a world-class 20% and beyond.

If you remember, we have $1.5 billion in identified project leads, therefore every 1% of close rate improvement in project close rates equals $15 million in additional revenue. As part of our focus on leveraging lean manufacturing processes and practices, we keep operational costs flat while continuing to leverage the business with topline revenue growth.

We have taken several steps recently, including finishing a new leaner C200/C1000 series manufacturing layout in our Van Nuys manufacturing facility. That new facility now has new engine build, clean room, upgraded test cells, new emission testing equipment, and very much improved manufacturing visual work instructions. These improvements have already led to higher engine yields and lower overtime expenses.

However, lean does not only apply to our manufacturing processes. We recently flattened our organizational structure to lower operating costs and increase adaptability as well as foster additional innovation and creativity. We eliminated three top-level executive positions that will save the Company and estimated $2 million annually as Jayme discussed earlier. These costs were expensed in Q1, therefore we will begin to see the benefits of this new leaner cost structure, starting Q2 and beyond.

Capstone now has fewer layers of management and employees today are more empowered at taking on a wider range of responsibility. With our organizational efficiency enhanced, our overall response times to meet product development deadlines are improving during the quarter and substantially improved our performance by achieving 95% of our stated R&D goals during the quarter.

In order to provide world-class products, we are continuously developing new product improvements and enhancements to improve the use of customer satisfaction and our competitiveness in the global energy market. We recently finished the cut ends of several C200 and C1000 series product improvements, not to mention a few, just including C1000 improved package improvements, new C1000 Marine grade paint, new improvements in the overall system flexibility and control architecture.

One of our biggest competitive advantages is our strong and loyal global distribution channel. Through trust and innovation we have established our distributor network of one of the top competitive advantages in differentiators from other new distributed generation technologies. Our now 90 distributors and nine OEM partners provide the vital link between Capstone and end-use customer base by collaborating with us to provide the highest quality products and services in the industry.

Our refined distributor network extends our present workforce of approximately 225 Capstone employees by adding another 740 distribution employees across 152 locations worldwide.

At our recent Global Distributors Conference, our distributors committed to grow their sales force by 100 salespeople across the global channel by the end of 2015. Again, 100 new salespeople across the channel by the end of the year -- 170 days. We are obviously very pleased with this commitment and we are collectively targeting and advancing the pursuit of growing distributed generation markets and how best to use -- best ways to use those new assets.

Our global reach is increasing with our 10 new distribution partners we signed in just the last year. We are focusing on emerging market regions set to quickly contribute to our growth. New distributors in France, Jordan, Kuwait, The Netherlands, Republic of Moldovia, Saudi Arabia, Trinidad and Tobago, Turkey, and a couple in the United States joined our ranks as part of the Capstone crusaders.

Capstone's unprecedented long-term FBP service offering sets us apart from other companies with our five year and nine year, all-in, bumper-to-bumper lifecycle cost guarantee program. We are actively working with our authorized service providers or ASPs to strengthen this offering and fine-tune our FPP program to provide higher availability through a more comprehensive, customer-focused service package.

In addition, we continue to strive to limit customer downtime by decreasing unit diagnostics and repair times. To this end, we recently rolled out a new tech share diagnostic software program that provides our ASPs a continuously learning and improving failure analysis diagnostic tool that can be utilized real-time in the field five by technicians to troubleshoot down units faster and more accurately to reduce the meantime between repair and the number of trips required to prepare the unit. We believe this will not only improve customer satisfaction, but improve customer uptime, but it will also lower the future cost of our FPP service contracts for Capstone and hence margins of those contracts.

As we build our business, we are focused on delivering our market -- diversifying our market verticals and expanding our geographic footprint in areas that we believe give us the greatest near-term potential. Capstone received several significant orders this quarter which represents our successful diversification of our market verticals.

These orders included a groundbreaking C600 in the Midwest for Open Access Technology International. That is a new data center for us and an office facility, an order for 25 C65 MicroTurbines from an existing oil and gas user that intends to use them in numerous facets of shale oil and gas production process, includes two orders for C1000 MicroTurbines for energy efficiency projects or CHP in New York. One is that the New York University Research Center and Learning Facility, and the second is the River Park Towers which is a residential complex in the Bronx.

In addition, we recently received an order for a C1000 MicroTurbine for a power generation facility, owned and operated by Kineticor Research Corporation, a Canadian energy services company will utilize it for flare gas utilization.

Providing customers with competitive and creative factory-backed financing program is another critical element to our growth and ability to compete in a larger, more traditional Company like Caterpillar and GE. Therefore, we are embarking on developing a new Capstone finance business to provide the necessary solutions to help grow the topline revenue. We are continuing to make significant progress and will have more information on this initiative at our annual shareholder meeting in August, on August 27.

In summary, Capstone had a great first quarter. We achieved our second-highest first-quarter revenue in the last 20-year history. The only first quarter that was better was back in FY 2013 at $28.8 million. We diversified our business, both geographically and by market verticals. We have commitments from our distributors to add 100 new salespeople to our network.

We have become a leaner, more nimble organization from top to bottom. We're succeeding despite what some have termed a perfect storm of macroeconomic headwinds and we have a strategy in place to become a world-class distributed generation solution company. I want to thank our employees and our distributors for their efforts in the first quarter to make it so successful, and we look forward to welcoming the new members of our global sales force as we add 100 additional salespeople in the months ahead.

I also look forward to seeing everyone who attends our annual shareholder meeting. Guests will get a chance this year to not only ask questions about the business, but see the Capstone-powered Walmart WAVE truck up close and in person.

Operator, at this time we would like to open the call up for questions from our analysts.

(Operator Instructions) Eric Stine, Craig-Hallum.

Thanks for taking the questions. Congrats on the quarter. Maybe first on the health of the backlog, as we look at the rest of the year, can you just talk about that whether you're seeing any push out in timing, or any cancellations there?

We've seen very little cancellations. I think, if you notice, there's probably two C1000s that disappeared this quarter for one project that got canceled, but still we are seeing some pushouts, which is what plagued this last year and last fiscal year.

I think the growing market, though, we're seeing in South America, Mexico, I think Europe is going to be stronger. Australia is going to have a nice quarter. So I think we're going to see the new order flow especially from the CHP distributed energy side of the business that is going to make up for some of that oil and gas softness that we are continuing to see.

Okay, good. And then you talked about BPC a little bit. Can you just give a little more color there on status of collections and outlook for the rest of the year with them?

Yes, no, I think they traditionally are about $20 million in revenue for us. As I mentioned before, we're pretty happy with the fact that we put up the second best quarter in Q1 Company history without BPC contributing significantly. However, it would be even better if they would contribute. We are expecting them to be 3 megawatts or 4 megawatts in the second quarter, which obviously means we will have to make some payments to get them through past-due balance as well as pay for the product upfront. So that will help us from a cash flow and revenue perspective.

They are anticipating their business to be down about 50%, 5-0, year over year. We are forecasting a number a little bit lower than that. But we are staying very close to it. We are talking to them on everywhere basis. Jim and maybe I -- both of us will be over there in September as well as trips to Africa, South America, Jim is in Australia today.

So we're really spending a lot of time with our distribution channel, especially as they have these 100 salespeople to get much leverage and get the revenue growth engine back up and going.

Good, thanks. And then maybe lastly on CHP, obviously you guys are seeing some nice strength there. Can you give us a little bit of update on the related companies and what you might be seeing there for the rest of the year?

Yes, you're going to have a banner year for us[ if you look at all the CHP going on in New York, that market is really starting to open up for us. I think we are up to 14 megawatts, 70 locations in New York. We've done everything from different kind of clients, from affordable housing projects, high-rise residential buildings, retail buildings, office buildings, hotels, hospitals, universities, manufacturing facilities. Obviously we've got related with Hudson Yard, 7 Bryant Park. For the manufacturing side we have Lexion Pharmaceuticals, Firestone, Aster Chocolate. From affordable housing you've got Third Avenue in the Bronx, Fordham Housing Project, Fox Point.

Hotels -- obviously New York Palace was one of gems of our installed base. We have the Marriott downtown, Archer Hotel, Memorial Sloan-Kettering is a nice situation for us. And then universities, there is The New School, NYU, Beecher Road School, so we've really got a nice 70 locations in New York and we think New York will be one of our shining stars for the US for CHP this year.

Thanks for taking the question.

Matt Koranda, ROTH Capital Partners.

I just wanted to start out with end market shipments. I think you guys usually have applied presentation that breaks out shipment by end markets, so oil and gas, CHP, and that sort of thing. Could you just run through that for us real quickly?

Yes, while Jayme looks for the number, it should be in the Q, but I think again, roughly -- typically we are usually 60% to 70% oil and gas. That number has switched as CHP has grown, and oil and gas has slowed down a little bit. I would say the number is probably closer to 50-50 today. I think we are going to see the rest of the year oil and gas continue to be somewhat soft.

Now we did see Horizon have the very best order quarter and shipment quarter of any of our distributors which is a great sign, and that is oil and gas projects throughout the US.

Matt, we had 55% was in our natural resource applications, 35% in our energy efficiency, and then 10% in our renewable energy.

Okay, got it, that's helpful. Maybe you could also just help us understand in terms of how the pipeline is shaping up, I would assume that it's quite a bit more skewed toward CHP and energy efficiency type projects at this point in time. But you talk about the mix as it pertains to your pipeline of opportunities that's out there?

Yes, I think the pipeline is very similar to what you see and shipment order. We are seeing a tremendous growth of CHP opportunities globally, not just in the US. Obviously the US is very strong. We are seeing CHP projects in the Midwest, like I mentioned. Mexico CHP is doing extremely well. Our distributor there, DTC, is having a banner year and should do even more next year.

We are seeing a lot of opportunities in Brazil. I've been to Ecuador twice recently. There is opportunities down there, both oil and gas and CHP, same with Brazil.

But the Middle East got opportunities in oil and gas, Africa have got opportunities in oil and gas, CHP in oil and gas both in Australia. So I think the reality is there is still in oil and gas opportunities. I think it's going to be a smaller portion of our business, one because it's softer and because of the low price. And two, because the CHP business going to continue to grow for us, especially in some of the more developed markets. So I think the 50% oil and gas and 35% CHP or 40% CHP is probably what you're going to see going forward.

Okay, helpful. Maybe we could just talk about bookings here. Book to bill looks like it bounced back a bit quarter over quarter. Maybe you could just comment on sort of trend and order flow through the close of the quarter, what has the environment been like in July? Have you seen any sort of acceleration to lead you to believe that that to bill is going to continue to improve sequentially?

As you know our target is one-to-one. I think we will get closer to that in Q2. I'm not sure what will get all the way back to one-to-one. I think in the second half of the year, Q3 and Q4 will get back to one-to-one or even more. We still have a lot of very large pending orders that could move those numbers faster.

We are still chasing about 50 megawatts in Ecuador, 30 megawatts on one project. We've got a robust pipeline in Brazil. I said Mexico has got a good pipeline as well as most of our US distributors; Africa, Middle East, lots of new opportunities to develop A-plus business for us.

Australia should have a very nice second quarter. They've got a 4 megawatt project they are very close the clothing as well as Origin looking to hopefully buy some more C30 so that Australia can see a nice pickup, especially in the second half of the year. So I think we conservatively will say we will probably have an 8 to 9 to 1 in Q2, but I think in Q3 and Q4, we are going to come out the other side of this.

And again, I think BPC will get back on track in the second half of the year. I think if they can do even half of what they projected in Q2, I will be happy with that. But I think they'll get back on track in Q3 and Q4.

Okay, great. One last one for me and then I will jump back in queue. I thought it was interesting you guys mentioned potentially being able to double your close rate in slide 6. Could you just give us a little additional color on what you think standard industry close rates are like? How does your 11% currently compare? Is that below average and you can you can bring it up because it's below right now? Or are you talking about improving close rates to better than peer average? Just a little color around the thinking there.

If you look at our pending pipeline, read salesforce.com, all of our distributors have seats and they portal in. All of our price books are in salesforce. So we are getting -- we've been using salesforce for years. We are starting to get pretty good analytical what works and doesn't work and what good distributors can do and what more mature distributors can do.

Our better, more effective, more mature distributors, like E-Finity is a good example, their close rates are north of 20% and growing. So I think as distributors get better, they are better at targeting projects, they are better at solving problems, they are better at getting around customers' expectations or what customers' roadblocks. So I think we usually can see 20% close rate.

World-class is probably 20%, maybe 25% for these type of industrial projects. Obviously each market is a little different, based on the economic but I think 11% is what our average is today and the cycle is fairly long. So anything we can do to improve distribution, training, maturation, sales tools, the website, everything we can do to make them more effective to get that close rate up and the cycle times down so that we can close more projects faster.

And again, we've identified plenty of projects. $1.5 billion is a pretty robust opportunity list. It's really about how do we close more and how do we close faster.

Got it, very helpful and I will jump back in queue.

(Operator Instructions) JinMing Liu, Ardour Capital.

First is a question regarding your new distributor performance indicator program. So I'm just wondering what are you going to do with that program? What kind of incentive for (technical difficulty) put in place to enforce the lead information you generate from that program?

Yes, so what we do is all of our distributors have planned sales for the year. When we build our budget or our capital plan for the year, all of this comes from information we get from our distributors. So we look at their project portfolio of pending projects and current projects and backlog.

We look at how many new orders they put in place. How many new orders become leads in quotes and negotiation, and the close rates. How they perform at tradeshows, both locally and large-scale tradeshows. So it's really a kind of comprehensive kind of report card, almost like going to your doctor every quarter to check how your cholesterol is and your blood pressure.

We do the same thing with our distributors. And if there's an area that we see that they are underperforming or could be performing better, we vendor diagnostics to figure out what's wrong there, whether it's a sales issue or it's marketing issue or some effectiveness, or maybe just be general market conditions have changed. So really it's a tool to help us help them, because we want to manage them to be as good as they can be.

Obviously we can run analytics and say, based on the number of units you have in the field, you should have this many technicians. Based on how many utility rate users you have in your territory and population and here's how many salespeople you should have. So it really helps them manage their business better, make sure they are doing all the right things and they are sized appropriately.

If you look, we had our international sales conference and the distributor mood was very good, despite share price and a few other questions they had overall. They are very excited about the product. When we talked to them about the challenge of adding salespeople, they came back as a group and said they would add 100 salespeople in 170 days. You don't do that if you don't feel good about the technology in the markets and the growth of the industry.

Okay. Let's reach to the CHP market. Are you currently still only working with your distributors or do you work with [ESCO] companies?

We do work with ESCO companies but in partnership with the distributors and so -- what we've hired some national salespeople in oil and gas. We have another one on the CHP side. Even when we are calling on a customer at a high level, at a C suite level, we still bring the local distributor. Even if projects cross multiple distributor lines, we try to have all the distributors participate.

If a customer wants to buy direct, they can. But it's going to be at list price and we will rebate the distributor their discount. So there's no pricing advantage for customer to buy direct. And frankly, the customer needs their local distributor for FFP service and start-up and commissioning and support, plus balance a plan.

So we really want to sell at the local level as well as the corporate level. We want to make sure the distributor is part of the process. So it's very much, I think -- there is a lot of things people don't understand about our business. But the value of our distribution channel over the next several years will become more and more evident to the industry.

If you look at Caterpillar, they probably have the best distribution channel in the world and it's probably their biggest competitive advantage. Anybody can reverse engineer your product. They can steal your customer, they can steal your employees. It's hard to steal somebody's distribution channel, especially when it's large and it's global and it's dedicated.

Okay, got that. Thank you.

Ladies and gentlemen, this does conclude today's question and answer session. I would now like to turn the call over to Mr. Jamison for any closing remarks.

Thank you. I appreciate all the questions from the analysts, good questions as usual. I know it's a busy earnings season and you all are jumping from call to call, so I appreciate your taking the time and asking great questions.

As I look at the quarter again, it can always be better. But I am happy that this is the second best revenue in Q1 we've had in Company history. If you look back last year, I think we were roughly $23 million. FY 2014 was about $24 million. We were very close to the record of $28.8 million in fiscal 2013. Again, this was without our biggest partner, BPC, contributing.

So I think if you look at what we've done despite the macroeconomic headwinds we have in oil and gas in the strong dollar, and obviously Russia specifically, we've actually put up some pretty nice numbers. I know everybody is frustrated about the current share price. I am too. I get it. Rest assured, no one is more frustrated than me and Capstone employees, and many of our distributors that are Capstone shareholders.

However, the share price in my opinion has never really been this disconnected from the performance of the Company. I look at the Company today, and we are the strongest we've ever been. I think our employees feel that way and leadership team and the Board. We are off to a great start to the fiscal year.

The depressed oil prices are giving us an opportunity in some ways to get in and actually talk to oil and gas users that were all drill, drill, drill the last several years and getting their attention for new technologies was difficult.

Now, we are having a lot of conversation, and lunch and learns, because oil and gas companies are more focused on operating costs than they are drilling.

If you look at flare gas, it's a huge global opportunity for us. I mentioned the one project just did up in Canada. But most of the opportunities out in Ecuador and South America are flare gas as well as the Middle East. Using flare gas as an on-site fuel to generate electricity with the turbine not only makes economic sense, from an operational standpoint, but it makes environmental sense. So it is truly one of the best win-win situations you're going to find.

When oil prices do recover, and they will, it is cyclical. It always does -- you talk to folks in Houston and they just see this as another cycle they have to go through. Capstone, we are better positioned for success and growth than ever before.

We are closer than ever to solving our pump jack or high cycle load issues. We got a couple different paths on that and are working both of them. Hopefully we will have some new products available soon to really broaden our market opportunity in the oil and gas when that the market does return.

If you look at it, a lot of people don't see that the energy efficiency evolution or revolution is going on. But as I mentioned, New York is a great microcosm. Five years ago we had four or five sites. Today it's 70 and 14 megawatts and this is all picking up speed, picking up momentum, and as I mentioned, so many different opportunities whether it's a hospital, hotel, mixed-use property. And that's just New York; that's just one city.

We are seeing the same thing -- I was recently in Puerto Rico. You got almost 30% price per power down there. You look at all the pharmaceuticals, most of the projects I visited in the week were less than two-year payback. So CHP is something they've never done but they are very excited about doing it and that story is getting more and more similar around the world.

So I look at it as CHP is going to continue to grow and it's going to go faster and it's going into spread more and more countries.

If you think about it, buying power from your local grid probably 10 or 20 years from now will be about as strange as having a landline in your house or going to Blockbuster and renting a movie. Buying power the way your parents and grandparents did just because you have to is not the case anymore.

If you look at our distribution channel, it is growing, it's maturing. We are up to 90 distributors. It takes time to build a distribution channel. Caterpillar has been building theirs for almost 100 years. We've come a long way in eight years. And we've got a dedicated, motivated entrepreneurial group of folks that are putting a lot of effort and their own money into growing our business.

Again, if you think about the fact we have 225 employees here at Capstone and almost 750 in the channel, it's amazing the leverage we have as a team.

We are in 73 countries today. That list is continuing to grow as we mentioned. As I said, the 100 salespeople that we are adding in 170 days is going to yield a lot of benefits in the next couple of years.

Our flagship C200/C1000 series product continued to sell well. You see for the quarter C65 sales and C30 were down but the C1000 sales are doing very good, very solid.

That product just got 40% more reliable. What is that going to do for our customers? Make our customers more money, it's going to make them more excited. Our customers like our product today, but they are going to love it very soon. And when they love the product, that's when we are really going to get some more growth.

We continue to add new features, new benefits to the C200 and C1000. I know the folks are hungry for the 250 and 370, but we need to make this 200 and the 1000 the best it can be before we move onto the next architectures. And we are not done, not by a long shot.

We are leaning out our manufacturing process, we are leaning out our management team, we are flattening the organization, we are empowering employees like never before and morale is at an all-time high. Very excited about that, and we are doing a lot of great things just even from an employee development perspective and an HR perspective that I think is pretty cutting-edge.

We have a tremendous new website. If you have not visited, please do. I think it's excellent. Customers can learn more about the product, they can watch case studies. A video case study of a customer similar to you is the best sales marketing tool you can ever have. If you are a hospital in you can see another hospital using our product, and the same kind of application that you have making money with reliable power, green power, that is a great tool, very powerful tool.

We are putting tools in place to better measure and manage our distributors to help them run their business more effectively to be more efficient. As we said in the Q&A period, every 1% improvement in close rates is $15 million in annual revenue.

So that's where we need to focus, is how do we get more efficient, how do we close more, how do we build a better distribution channel, how do we get more customers comfortable with our brand and our technology.

Our service business continues to grow. As Jayme said, we are up to a record level of FPP contracts. Service business is up year over year. We've got more units running in the field than ever. The population is aging, which is going to mean more spare parts. We are putting more tools in place to maintain those products more efficiently, more effectively, quicker. That is going to help customer satisfaction and lower our cost for FPP.

But probably the most important, most exciting thing despite everything else we are working on is launching of our new Capstone finance business. We really need to take care of customers that are good customers, that have great projects, IRR is north of 25% but don't have the capital dollars to do it. Or priorities limit them from doing that.

So I'm excited about talking about that at theJ next opportunity, which will probably be at our annual shareholder meeting.

Again, feel terrible about our recent share price performance, apologize for that. But everyone related to oil and gas, anybody who has been doing business in Russia, anybody who is a strong exporter like we are, they are suffering heavy selling pressure.

My opinion is the selloff is way overdone. But that's typically how our market works. Most companies in our space of trading at or near their all-time lows like us. However I firmly believe at Capstone we are doing all the right things. We are making the business better. We are diversifying our business both from a vertical and a geography.

We have great products, we have great partners, we have great customers, so I look forward to adding to my position next time I can whenever the lawyers let me, when the windows are open. But I think we've got a great product and I'm very excited. We had a great start to the fiscal year and I look forward to talking to everybody in August. Thank you.

Ladies and gentlemen, thank you for attending today's conference. This concludes today's program. You may

now disconnect. Everyone have a great day.