Capstone Green Energy Corp (CGRN) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Capstone Turbine Corporation Earnings Conference Call for the Fourth Quarter and Fiscal Year 2018 Financial Results Ended on March 31, 2018. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Ms. Jayme Brooks, Chief Financial Officer and Chief Accounting Officer. You may begin.

Thank you. Good afternoon, and thank you for joining today's fiscal 2018 fourth quarter and fiscal year 2018 conference call. On the call with me today is Darren Jamison, our President and Chief Executive Officer. Today, Capstone issued its earnings release for the fourth quarter of fiscal 2018 and filed its annual 10-K report with the Securities and Exchange Commission.

During the call, we will be referring to slides that can be found on our website under the Investor Relations section. I would like to remind everyone that this conference call contains estimates and forward-looking statements that represent the company's views as of today, June 7, 2018. Capstone disclaims any obligation to update or revise these statements to reflect future events or circumstances. You should not place undue reliance on these forward-looking statements because they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond our control. Please refer to the safe harbor provisions set forth on Slide 2 in today's earnings release and Capstone's filings with the Securities and Exchange Commission for information concerning factors that could cause actual results to differ materially from those expressed or implied by such statements.

Please note that as Darren and I go through the discussion today, keep in mind that when we mention EBITDA, we are referring to adjusted EBITDA, and the reconciliation can be located in the appendix of our presentation.

I would now like to turn the call over to Darren Jamison, President and Chief Executive Officer.

Thank you, Jayme. And I apologize to everybody for the delay. We had some technical difficulties. But thank you for attending the call.

I'm extremely proud to say that we continue to have very strong execution of our profitability plans and that the positive momentum continued in the fourth quarter as we set multiple records and achieved several new company milestones. When you look at the full year-over-year results at the very highest levels, you can easily see the transformation taking place in our business here at Capstone. We made solid progress in top line revenue growth for the first time in several years, and we made significant progress in our targeted gross margin expansion as highlighted in Slide 3.

Let's move over to Slide 4. You can see the improvements in both adjusted EBITDA and the overall net loss year-over-year as we successfully executed against our key strategic opportunities. However, I'd like to start the call by specifically mentioning some of our key operating highlights in the most recently finished fourth quarter. Therefore, let's turn to Slide 5.

During the fourth quarter, we continued to deliver on our strategy by achieving record gross margins of 23%, which is the highest in the company's history, together with the strongest book-to-bill ratio of 1.4:1 since Q2 all the way back in fiscal 2014. The fourth quarter was also the second consecutive positive adjusted EBITDA quarter in a row, with a positive quarterly cash flow of $500,000 from operations and a record quarterly aftermarket accessories, parts and service revenue of $9.6 million.

We also saw a record quarterly aftermarket accessories, parts and service gross margin of 45%, which helps us cover 77% of Capstone's operating expenses, excluding the onetime incentive program compensation. Details of this compensation is located in the appendix on Slide 25.

And while you're in the appendix, also look at Slide 22, which illustrates the continued progress towards our stated goal of 100% absorption as -- which is key to empowering higher levels of accelerated future product growth.

In summary, this is another successful quarter for the company, with positive adjusted EBITDA, positive cash flow from operating activities, record gross margins, record service revenue, all of which, when we add this together, is a significant accomplishment for the entire Capstone team.

Now I'd like to speak about some of the key highlights for the full fiscal year 2018. So let's go ahead and move on to Slide 6. We also happen to share that during the fiscal year 2018, we returned to annual revenue growth of 7% for the year and improved the company gross margin performance by a considerable 16 basis points year-over-year. Our accessories, parts and service revenue increased 11% to a record high of $32 million or 39% of our total revenue.

Adjusted EBITDA improved 76% year-over-year, and we saw our net loss drop 60% from $25 million to $10 million year-over-year. So let me repeat that. I think that bears repeating. Our revenue increased 7% year-over-year, but our adjusted EBITDA dropped 76% -- or improved 76%, and our net loss improved 60%. The difference between last year's net loss and this year's net loss is $15 million on just 7% revenue growth.

Our R&D expenses fell 26% year-over-year as our Signature Series products continue to mature, and cash used in operations improved 54% year-over-year.

The new Distributor Support payment program is estimated to generate an additional $1.3 million in cash for the calendar year of 2018 to support our annual marketing spend and customer acquisition efforts. It's important to point out that we saw annual revenue growth in all global regions except Europe due to the fact that Europe still has Russia and Russia continues to be a challenging market for us.

Our new bundled solutions program that we introduced during the third quarter increased FPP attachment rates in the fourth quarter and contributed to positive working capital as a result of the prepayment for the entire bundled solution, including the long-term service component. And just yesterday, we renewed and expanded our current Bridge Bank revolving credit facility from a $12 million facility to a $15 million facility and with improved payment terms in terms of the deal.

This year's been a major team effort, and the entire company and I would like to thank all of our Capstone employees, our Capstone distributors, most of our Capstone vendors and most specifically, the Board of Directors, for enabling the management team to hit our strategic goals and targets, and our shareholders for their continued support of Capstone and our clean and green energy solutions.

Now I'd like to review fiscal 2018 strategic goals and objectives, so what was our plan going into the year. So let's turn to Slide 7. As a reminder for everyone, we began the fiscal year with 4 key strategic objectives at the highest levels. First was to reach adjusted EBITDA breakeven and achieve our stated operating expense reduction target, which, at the time, was 40% through our War on Costs program. The second was to significantly expand our margin and revenue for the aftermarket service business. Our third objective was to lower our macroeconomic business risk profile by diversifying Capstone into new market verticals and new geographies. And last, we were working hard on reducing our quarterly cash burn by improving our accessories, parts and service gross margin and OpEx absorption percentage by driving toward our ultimate goal of 100% aftermarket absorption to allow the company to employ a more aggressive market-based pricing strategy to accelerate future product growth.

So now I'd like to provide you with the progress report on how we did now that the year is over. First off, during December, first quarter -- when the December quarter ended, we achieved EBITDA positive goal and Capstone was nearly net loss neutral for the quarter. As already mentioned, this is a significant major milestone for Capstone and it represents a launching point for the next stage of our business evolution. We set a goal to reduce our operating expenses back at the end of fiscal 2015 through our War on Costs program, and in general, our operating expenses, excluding the onetime leadership incentive program, are down approximately $5 million per quarter or 52% since we launched this program. Again, it is important to note that our original target was to reduce our operating expenses by a minimum of 40% in order to support the new $25 million quarterly adjusted EBITDA breakeven plan. Not only did we exceed this -- meet this goal and exceeded it, it allowed us to hit positive EBITDA breakeven at the less than $25 million revenue level.

During the second half of fiscal 2018, we consolidated our 2 manufacturing facilities into one plant while simultaneously restructuring our R&D department. And additionally, during the fourth quarter, we launched our new Distributor Support payment program to increase our global marketing and customer acquisition efforts. We accomplished all of this while still focusing on maintaining our costs and keeping our cost low.

Our second major milestone for fiscal 2018 was to drive revenue growth by expanding our aftermarket accessories, parts and service business, which includes our industry-leading Factory Protection Plan or FPP program. This is critical on a number of levels and will continue to play a major role in our long-term gross margin expansion.

In fiscal '18, we worked hard to improve our FPP and warranty programs, our special spare parts pricing programs and increased our distributor minimum stocking guidelines.

Also introduced was a new C200S and C1000 Series heat recovery module or HRM. This is reintroduced to the market as a new lineup of state-of-the-art microturbine control panels.

Our third strategic milestone was to diversify Capstone into new market verticals and new geographies, with a key focus on specifically growing the CHP, critical power and microgrid verticals. We have also been focused on new markets in Latin America, Africa and the Middle East. And last year, I'm proud to say we shipped products in many places we've never shipped in before, everywhere from Colombia, Brazil, Venezuela, South Africa, Mali in Africa, Israel, Saudi Arabia, Kuwait, Oman and Qatar.

The heavy lifting continues as we work to rebuild our Russian business and CIS business. And during the quarter, we recently received both product and spare parts orders from some of our new distributors, including Hispania International and Electrosystems. I will talk more about the specific verticals later in the call.

Lastly, our fourth strategic goal for FY '18 and what is really the culmination of all of our efforts was to reduce the quarterly cash burn by improving the accessories, parts and service gross margin OpEx absorption percentage and continue to drive toward that targeted 100% absorption, which really unlocks our future business.

At this point, I'll let Jayme discuss the detailed financial results for the fourth quarter and full fiscal year. And I'll come back after that and talk more about some of our verticals.

Jayme?

Thanks, Darren. I will now review in more detail our financial results for the fourth quarter fiscal 2018, followed by the year-end results. The highlights can be found starting on Slide 8.

Overall, we are very pleased with our fourth quarter results as we continue to see the positive benefit of our efforts to achieve our financial milestones. Total revenue for the fourth quarter of fiscal 2018 decreased $1.8 million to $21.1 million compared with $22.9 million in the year-ago fourth quarter. Product revenue for the fourth quarter of fiscal 2018 was $11.5 million compared to $15.2 million in the fourth quarter of fiscal 2017, a decrease of $3.7 million. Accessories, parts and service revenue increased $1.9 million or 25% to $9.6 million for the fourth quarter of fiscal 2018 compared to $7.7 million for last year's fourth quarter. Gross margin for the fourth quarter of fiscal 2018 was $4.8 million or 23% of revenue compared to $2.1 million or 9% of revenue for last year's fourth quarter.

R&D expense for the fourth quarter of fiscal 2018 decreased $0.3 million or 27% to $0.8 million from $1.1 million in the year-ago fourth quarter. SG&A expense in the fourth quarter of fiscal 2018 increased $0.8 million to $5.8 million from $5 million in the year-ago fourth quarter. However, SG&A expense in the fourth quarter of fiscal 2018, excluding the onetime leadership incentive program compensation, decreased $0.1 million to $4.9 million from $5 million in the year-ago fourth quarter.

During the fourth quarter of fiscal 2018, we recorded $0.3 million in bad debt recovery in SG&A from our new Russian distributor, Turbine International or TI. Under the agreement, TI had a balance due of $1.5 million by February 21, 2018. This payment was not received as of March 31, 2018. And subsequent to the year-end, we executed an amendment to the original agreement that requires 5 remaining payments, totaling $1.5 million, to be received by September 20, 2019. It's critical to note that TI is making payments against a Russian receivable from BPC that have been previously fully reserved. All cash payments for the $1.5 million from TI will be classified as bad debt recovery and already a positive to our future earnings and working capital requirements.

Total operating expenses for the fourth quarter of fiscal 2018 increased 7% to $6.6 million from $6.2 million in the year-ago quarter. However, the total operating expenses for the fourth quarter of fiscal 2018, excluding the onetime leadership incentive program compensation, decreased 10% to $5.6 million from $6.2 million in the year-ago quarter.

Net loss for the fourth quarter of fiscal 2018 improved to $1.9 million compared with a net loss of $4.2 million for last year's fourth quarter, an improvement of 55% year-over-year when you remove the onetime leadership charge for the leadership incentive program.

Net loss per share was $0.04 for the fourth quarter of fiscal 2018 compared with a net loss of $0.12 per share in the same period last year. Weighted average shares outstanding at the end of the fourth quarter of fiscal 2018 were 51.4 million compared with 34.9 million in the year-ago quarter.

The adjusted EBITDA for the fourth quarter of fiscal 2018 was positive $0.1 million or $0.00 per share compared to an adjusted EBITDA of negative $3.5 million or a loss of $0.10 per share for the fourth quarter of fiscal 2017. As a reminder, EBITDA and adjusted EBITDA are non-GAAP financial metrics. Please refer to Slide 25 in the appendix, titled Reconciliation of Non-GAAP Financial Measure, for more information regarding these non-GAAP financial measures.

Now please turn to Slide 9 as I'll provide some comments on our balance sheet and cash flow. At March 31, 2018, we had cash, cash equivalents and restricted cash of $19.4 million compared to cash, cash equivalents and restricted cash of $16.5 million as of December 31, 2017. Cash provided by operating activities for the fourth quarter of fiscal 2018 was $0.5 million as compared to cash used of $3.3 million for the third quarter of fiscal 2018. Our accounts receivable balance as of March 31,2018, net of allowances, was $16 million compared to $16.1 million as of December 31, 2017.

Inventories increased to $16.7 million or 9% as of March 31,2018, from $15.3 million as of December 31, 2017, primarily due to an increase in finished goods. Our accounts payable and accrued expenses were $13.5 million as of March 31, 2018, a 5% increase compared to $12.8 million as of December 31, 2017.

Now I'd like to turn our attention to our year to -- -end results for fiscal 2018 versus the year-end results for fiscal 2017. These results can be found on Slide 10. Total revenue for fiscal 2018 increased $5.6 million or 7% to $82.8 million compared with $77.2 million in the fiscal 2017. Product revenue for fiscal 2018 is $50.8 million compared to $48.3 million for fiscal 2017, an increase of $2.5 million or 5%.

Accessories, parts and service revenue increased $3.1 million or 11% to $32 million for fiscal 2018 compared to $28.9 million for fiscal 2017. Gross margin for fiscal 2018 is $15 million or 18% of revenue compared to gross margin of $1.8 million or 2% of revenue for fiscal 2017. R&D expenses for fiscal 2018 decreased $1.4 million or 26% to $4 million from $5.4 million for fiscal 2017.

SG&A expense for fiscal 2018 decreased $1.1 million or 5% to $19.6 million from $20.7 million for fiscal 2017. However, SG&A expenses for fiscal 2018, excluding the onetime leadership incentive program compensation, decreased $2 million or 10% to $18.7 million from $20.7 million for fiscal 2017.

Total operating expenses for fiscal 2018 declined 10% to $23.6 million from $26.1 million for fiscal 2017. Total operating expense for fiscal 2018, excluding the onetime leadership incentive program compensation, decreased $3.4 million or 13% to $22.7 million from $26.1 million for fiscal 2017.

The adjusted EBITDA for fiscal 2018 is negative $5.2 million or a loss of $0.10 per share compared to the adjusted EBITDA of negative $21.9 million or a loss of $0.68 per share for fiscal 2017. Net loss per share is $0.20 for fiscal 2018 compared with a net loss of $0.79 per share in the same period last year. Net loss for fiscal 2018 improved to $10 million compared with the net loss of $25.2 million for fiscal 2017. This is a significant improvement of 60% year-over-year.

I also want to provide you with an update on our financing and capital market activities. As Darren mentioned earlier, we amended and expanded our Bridge Bank facility from $12 million to $15 million. With this amendment, we extended the agreement for an additional 2 years to June 2021, decreasing the interest rate, facility fee and cash collateral ratio as well as eliminated the early termination fee.

On a capital market side, today, we filed an F-3 with the SEC for a new $100 million universal shelf to replace our existing $100 million shelf that expires on June 15. Additionally, we set up a new $25 million management control equity offering program. We believe this aftermarket program is in the best interest of the company and all its shareholders. It will provide Capstone with the ability to access additional capital at the then current market price without long coverage. We also believe that this type of offering when utilized will have a more favorable impact on Capstone's critical shareholder ownership shift as it relates to our valued NOL, and it will ultimately drive lower dilution than in more traditional offerings with discounts in market and long coverage.

At this point, I will turn the call back to Darren.

Thank you, Jayme. We have made significant progress on our operating expenses and margins in fiscal 2018. And although we turned to positive revenue growth in 2018 over 2017, there's clearly a lot more to do. And I'm extremely excited about our prospects of making that happen.

I'll just turn your attention to Slide 11 and spend a moment discussing our milestone objectives for the new fiscal year so you can have a clear understanding of our focus and our management activities going forward. First and foremost, it is to continue to improve our quarterly working capital cash flow and our balance sheet. Obviously, there are a number of factors that will drive these metrics, including the continuation of our sales growth objectives, continuing our focus on our expenses with our War on Costs and a continued focus on our aftermarket accessories, parts and service business growth in both revenue and gross margins. Lastly, we'll continue to work on collection of the fully reserved $5.3 million Russian receivable Jayme spoke of and returning the Russian market to more historic levels of revenue.

The second key element is to achieve double-digit revenue growth. As I mentioned earlier, we returned to single-digit revenue growth in fiscal 2018, which is excellent, but this is only the first step and we need to accelerate growth in fiscal 2019 and beyond. We will need to make some investments to grow revenue, but we'll maintain the utmost diligence in doing this. Our revenue growth will be driven by a combination of internal activities as well as what we believe are favorable end-market macroeconomic tailwinds, which are highlighted on Slide 12.

Turning to Slide 12, it lists the multiple positive business catalysts that will help to grow our business in fiscal 2018 and beyond. Many of these catalysts were headwinds in prior years.

The third business goal for this upcoming year is to continue to diversify Capstone into new market verticals and new geographies and build on what we have established during fiscal 2018. Some of the more notable drivers that are expected to help with this objective are the new product modifications for growth in the microgrid and transportation markets; a continued focus on Africa, Latin America and the Middle East; and finally, a continued rebuild and focus on our Russia market and CIS regions as we bring that region back online.

The fourth goal is to continue to increase the accessories, parts and service OpEx absorption percentage, continue to drive towards that target 100% absorption as referenced in Slide 22 in the appendix and we've talked about multiple times in this presentation. Again, we will continue to build on the excellent progress we have made in fiscal 2018 and a reminder that these key factors include items like increased manufacturing of our spare parts, remanufacturing of spare parts in the U.K. and the U.S.A., higher FPP attachment rates in the oil and gas verticals, new air bearing program, selling air bearings into adjacent products and to technologies as referenced in Slide 23 with Praxair in our appendix.

Now I'd like to address our specific market verticals. So let's flip and turn to Slide 13. The energy efficiency vertical again this year was our largest vertical at 47% of our total product revenue. It's important to note these percentages are product, not total revenue for the quarter and for the year. It's also important to note that we have expanded our penetration with large North American real estate investment trusts or REITs. Not long ago, Related Properties was really the only major REIT utilizing Capstone technology for CHP. But today, we have ongoing projects with Tishman Speyer, Brandywine Realty Trust and multiple Capreit building in Canada. In Philadelphia, the new FMC Tower is one of the newest skyscrapers in the city and has several standout features. This beautiful state-of-the-art building is adjacent to the former U.S. Post Office at 30th Street in University City, and the Capstone-equipped building is a proud LEED Silver Certified building.

However, I'm most excited about the new One Vanderbilt tower in New York that is scheduled to become the tallest office tower in New York City's Midtown. One Vanderbilt will skillfully meet the market demands of Midtown East as it transforms the city experience of the Grand Central District and as it flows through the layered architecture language of the neighboring New York City icons. One Vanderbilt will join the Chrysler Building and the Empire State building as one of the 3 point towers to define the city skyline. The tower will have 1.4 megawatts on the 59th floor.

Turning to Slide 14. The oil and gas vertical currently accounts for approximately 38% of our product revenue. This sector has faced significant headwinds over the past 3 years, with declining oil prices and gas prices. But today, we are seeing a significant recovery that we believe we are well positioned to leverage in 2019 and beyond. We have seen significant new quotation order activity with customers like Anadarko, EQT, California Resource Corporation, Williams and Pacific Coast Resources, just to name a few.

Moving on to Slide 15 and the renewable energy vertical. This market accounts for approximately 9% of our total product revenue. In the past year, our distributor partners have installed Capstone units at wastewater treatment plants around the globe, including the City of Durango, Oneida County, City of Dallas, Carmel, Tuscany, just to name a few. Also, we did several biogas to energy projects in Taiwan and in Malaysia. And if you haven't been to a pig farm or a swine or a chicken farm, you will think you really haven't lived.

Slide 16 addresses the critical power supply vertical, which is 4% of our total product revenue. With the economic issues around ObamaCare, we are seeing increase in our hospital activity, with new installations going on at the Kaiser facility here in Downey, Memorial Sloan Kettering facility in New York, Kings County Hospital also in New York, but also Dryden Hospital, Auburn Hospital and Pertimina Hospital, just to name a few.

However, the data center market continues to be slow to adopt our technology, but we've recently installed a unit at a data center for Intel and we're excited about that opportunity.

Let's turn to Slide 17. Slide 17 addresses the microgrid vertical. This is a new sector, which represented 2% of our products revenue, that should provide nice growth opportunities in fiscal 2019 and beyond. We recently installed several high-profile marquee installations with microgrids at OATI in Minnesota, Sierra Nevada Brewery in Chico in California and Goldwind in Beijing, China.

Last, we'll move to Slide 18. Slide 18 addresses the transportation vertical. This sector is still not fully commercial, but we're excited to continue our work with Kenworth on our Class 7 vehicle, which recently completed successful performance testing at the Paccar test track up in Washington and is getting ready to start a customer demonstration and validation program with Costco this fall. Information on the Class 7 vehicle is highlighted on Slide 19 in the appendix.

With that, operator, I'll now open the call up to questions from our analysts.

(Operator Instructions) Our first question comes from the line of Colin Rusch from Oppenheimer.

Can you talk a little bit about the use of proceeds for this ATM raise and how you expect that to come through? Obviously, you've been able to turn around the business. I would like to understand where the business needs capital at this point.

Yes -- no, sure, no problem. If you look at the last quarter, we actually generated cash for the quarter, paid down the bank line. And so I think we had a very good working capital quarter. The ATM expired about a week here and so did our shelf. And so we look to the fact that we wanted to have an active shelf in place, and it's always good to have an ATM in place, really, just if in case you need it. I would say, besides general working capital opportunities, probably the other thing we're really focused on is the UTC royalty. We're in process of reengaging with UTC, and we're making them an offer to hopefully buy our way out of that royalty. And so that could be a potential use of proceeds. But obviously, as the business expands and we see increased order rates, managing our working capital will be very critical and we need to make sure that we can fulfill those orders and have the proper inventory to do so. So we'll manage it very tightly and obviously, only hit the ATM if absolutely necessary.

Okay. And then in oil and gas, can you talk a little bit about the sales funnel and the velocity of activity there? Obviously, that's historically been a very good market for you guys. And with the recovery in the commodity prices, I wouldn't be surprised to see that pick up a fair amount as we go into the back half of this year and into next year.

Yes, if you look at the space we probably had in the last year, you saw a shift in our verticals, a little bit on gas is picking up momentum. But to your point, there's a very good chance that oil and gas will catch up with CHP this year and they will be neck and neck for our largest verticals. We're seeing activities, especially in the U.S. The Permian is very hot right now, but we're putting products out all over the place, and so that's very, very good for us and for our U.S. distributors.

Our next question comes from the line of Craig Irwin from Roth Capital Partners.

So I wanted to clarify and just confirm what I think I heard about your TI bad debt collection agreement. So can you confirm that you received $300,000 in the quarter and the remaining $1.5 million is going to be collected in 5 payments through the end of September of 2019? And can you maybe share with us the schedule at which you expect to collect these payments?

Yes, I'll let Jayme go ahead and answer that, Craig.

Yes, Craig, your numbers are correct, that we did receive that payment in the fourth quarter. And then the payments will start next quarter, so it's Q2 for us. And it's -- there are different amounts, but they will be quarterly payments through that expiration time of September 2019.

Yes. I think it's important to note that, that receivable is fully reserved. I think we actually reserved, as initially, it was about $10.5 million, we've worked it down to almost half of that, with TI helping pay about $1 million recently. So it's definitely been a labor of love to get that money collected, but it's fully reserved. There will be positive impact to our bad debt recovery in our P&L as we go forward.

Okay. And then second question is really housekeeping question. So after the last several quarters, you've reported the FPP backlog at the end of the quarter. Can you share with us the backlog number exiting 2018?

Yes, so the backlog on the FPP was $76 million.

Our next question comes from the line of Sameer Joshi from H.C. Wainwright.

Just a question on how the distributor, DSS program, is progressing. Are you seeing distributors participate in whatever training in the other services that you are offering?

Yes. No, that's a new program, so obviously, it took some effort to convince distributors of its merits. And -- but I think it is moving forward well. And I think we're going to see a higher level of training, especially with our distributors that are newer and don't have the capability and the deal flow and the cash flow to train their people and do the marketing efforts they want. So the real goal of the program is it essentially doubles our marketing and training and customer acquisition budget for the year. And so it allows us to use our distributor network to really leverage and turbocharge that activity, again, to try to get the product revenue growth from high single digit into double digits next year, and especially for distributors that are newer to the Capstone family and need some help getting up that torque curve. So we think it's a very critical, very unique and creative program to really help the business in the next couple of years. The nice thing about that program as well is that 2% of the prior calendar year's revenue is how much the fee is for distributors. So as the business grows, that pool of money and that marketing fund will continue to grow with it.

Understood. I was quite excited to see the air bearing sales and I realized it is to Praxair. What is your estimate of the scale of this opportunity with Praxair and then with the overall market in general?

Yes, that's really hard to forecast. I mean, we've spent 8 years working with this, with Praxair. We haven't talked about it publicly until just now, so I know it kind of caught people by surprise. There's a lot of things strategically we work on that we don't publicly talk about until it comes to fruition, and this is obviously one of them. So we're just in the initial production with one of their turbo expanders. And so as that product moves out into the field, we'll get some better information on the number and level. The nice thing is it really validates the air bearing technology, it builds a relationship with an incredible company like Praxair, which has lots of synergies and potential chemistry with them. And then we've got several of the folks that we're looking at which, as you all know in sales, getting the first customer is the hardest, everybody wants to be a seller, nobody wants to be a pioneer. So I think we can leverage that business into more. It's very high-margin, recurring revenue business. It will help support our push toward our 100% absorption, which is so critical for our business. Because when we get to the point where our aftermarket parts, service and accessories revenue covers our entire OpEx, we can then be very strategic in our product pricing and really drive top line revenue growth.

Understood. Just one last one from me. As far as -- and this just sort of like dovetails to your previous answer about the air bearing R&D, you are also looking on the transportation and expected some additional R&D dollars to go there. But the R&D for fourth quarter was actually sequentially lower from previous quarters. Should we expect to see these levels that we saw in the fourth quarter? Or do you expect some increase in R&D going forward?

So we saw increase in R&D, but it's really around certification. There's some new UL certifications we have to get specifically around inverters in California, smart inverters here in California, so that's going to drive up our expenses. UL is a great program, where in order to certify, you need to pay them to come out and witness your test. So there will be some testing out to conduct here at the factory. As far as it relates to the Kenworth truck, that truck is built. We have it here at the factory today. It just came back from Washington state from Paccar for their performance testing track. The testing went very well. The results are preliminary, but it looks like it met all of our drive cycle, emissions and performance metrics that we're looking to hit, and especially on miles per gallon and other things. So we're going to put some miles on it, beat it up, make sure it's good and robust, and then we'll be giving it to Costco here in the fall.

(Operator Instructions) And this does conclude the question -- actually, one moment, our next question comes from the line of Eric Stine from Craig-Hallum.

It's Aaron Spychalla on for Eric. Maybe first on the order front, congrats on the strong book-to-bill. Can you just kind of talk about whether that is sustainable? And then maybe just an early read on the first quarter, kind of looking at the orders you've announced to date, it seems like it might be down just a little bit year-over-year, but could you just provide some color on that, please?

No, I think, I mean, Q4 was a very good book-to-bill. I think we've had a good start to Q1. I wouldn't -- and I guess the track was probably closer than what I do when it's down year-over-year. But definitely, I'm happy with the order flow. We've got a lot of pending orders we should hopefully announce here in the next 4 to 6 weeks. So look for a continued order flow. I think the nice thing is we're seeing it in multiple geographies, in multiple verticals, so that's very positive for us. We should see some more orders coming out of the Middle East, more orders coming out of Latin America. Africa is still a little bit slow, but we continue to make work there. The U.S. market is very strong. Canada's picking up. Germany has been a down market for 2 years, but they have a new energy minister who is much more amenable to energy efficiency in CHPs. So we're expecting to have a rebound in our German business very, very soon. The U.K. market, I'm extremely excited about. We have Pure World, who's a new distributor for us, who's put about 50 units so far into leisure centers. There's thousands of leisure centers in the U.K., Ireland and Scotland. They've really focused on that market and have done a good job. They've just ordered their first big boxes from us, their first C1000, the first C200S. And so they're really getting some traction in the U.K. The Russian market was our largest market for 10 years and it went to 0. We now just got our first orders from Hispania and Electrosystems, and we're starting to get that market off the ground. And so if you look at how many markets haven't performed well recently, and we're seeing an uptick and positive outlook for the new fiscal year, I'm very excited about growing revenue double digits this year. So as I mentioned in our prepared comments, the amount of benefit to the business, a little bit of revenue growth did for us this year, and we really managed the heck out of our operating expenses in other parts of the company, so we saw huge improvements in our bottom line, but just small improvements in our top line. So I'm very excited to get back to higher growth rates and really see continued success on our lower cost structure.

Right. And then maybe second on margins. I know in the past, you talked about getting all your suppliers under long-term agreements. I think there was -- last quarter, there was maybe 5 or so that were left, but some of the bigger ones that you needed. Can you just give us an update on where you stand with those suppliers?

Yes. We've probably got one of the 5 done last quarter, it's not an easy process. The President's not helping us with the tariffs and other things he's talking about, so that adds more confusion to the marketplace. But in general, that's high in our list of things to do. Kirk Petty, our VP of Operations, had been tasked to get that done here in the next couple of quarters. Fortunately, he's spent a lot of time consolidating 2 facilities while still building product over the last couple of quarters. So that is directly in our gun sights for this upcoming couple of quarters, and we'll get that done. But definitely getting cost out of the supply chain is key. We have seen some increases in metals, like I referred to, aluminum especially. Cobalt has gone up in the last couple of years. And so another key to our revenue growth is we need to arm our purchasing folks and our strategic sourcing folks with some increasing revenues to help push back on price increases and frankly drive additional cost reductions. So that's something that again helps the business overall.

Understood. Okay. And then maybe just on kind of your view of the first quarter versus the fourth quarter. And I'm not looking for guidance, but traditionally, you've seen that down in the first quarter following the price increase in the fourth quarter. Are you expecting a similar dynamic this year? And then maybe just anything on the linearity of revs based on the current backlog for the full year.

Yes -- no, great, great point. Traditionally, Q3 is our best quarter, followed by Q4 then Q2 then Q1. And it's hard to explain why that is, but that just seems to be the way our business works out. So we're looking for Q1 to be better than Q1 last year, but I wouldn't give guidance that it will be better than Q4 or Q3. That being said, I think as long as we still see strong bookings and we start winding up the year, then I'll be excited about that. But definitely, Q1, you've got the hangover from Q4 as well as we have a lot of expenses from our annual audits and lawyer fees and just all sorts of things that seem to hit in that quarter on the operating expense side. So -- but I think, again, when I look at the year, we've mentioned kind of the 4 goals. If I want to take it even higher than that, I would say the 2 real things I want to get done this year is double-digit revenue growth and improve our balance sheet, more cash on the balance sheet and generate cash every quarter. Hitting the record margins was great, but really, I want to see that top line revenue growth and penetrate more customers, get more big REITs, get the oil and gas customers buying again, start penetrating more of the renewable space, and microgrids are an exciting new area. We need to make some changes to our product. We need to offer a DC version of our product, which we can relatively easily do. We'll get some certifications and some product modifications. But I think we can position our product better in the microgrid space, which will also dovetail over nicely to potentially transportation as well. So I think there are some areas from a product development standpoint where we can improve our competitiveness in the next year or 2.

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Darren Jamison for any further remarks.

Well, I appreciate the analysts sticking with us. I know it's a busy time, and we had some technical difficulties and started late. But overall, some great questions. Again, as I look at Q4 and the total year, I really just come away with strong execution. I couldn't be prouder of my Capstone team and the Capstone employees. We've really done an amazing job to move facilities, cut operating expenses in half, grow revenue, improve margins, grow the aftermarket, work on the maturation of our distributors. So it's really been a team effort and great work by a bunch of really dedicated people who love the technology. In terms of momentum, definitely Q3 and Q4 build momentum, we want to keep that going in Q1. Understanding that Q1 is usually not our best quarter, but I still want to see signs of that positive momentum continuing, especially in book-to-bill ratio for the quarter. And then the other, if I did a word cloud, I believe they call it, for the quarter on our prepared remarks, I think the 2 things you would see the most would be records and milestones. It was really a quarter where we set all sorts of records as far as margins and revenues and all sorts of exciting stuff and obviously, a second quarter of positive EBITDA, which is very exciting, and then just different milestones. And so the business continues to hit new highs, new levels and improve performance. And again, that's all around the execution of the Capstone leadership team. So please, I hope you keep following the company. We'll get as many press releases out as we can and look forward to the next earnings call. We have been more active on Twitter recently, both on the corporate level and on my account. So we'll try to keep you informed of new projects as they get installed, or what's going on here at the factories. We're doing good things with our Capstone employees. Also, I promised last year we would do an open-house after we got the facility merge done. We are working on that. And we don't have a date yet, but my guess, it will probably be October, November. But we'll try to get the Costco truck here at that time as well as give a nice plant tour and let people see what's going on. And so that should be a good time to get a feel for what's going on with the new year and then see how the great things, Kirk and his team, has done here at the factory. And with that, I think we'll go ahead and call it a wrap and look forward to talking to everybody on the next call. Take care.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.