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Edited Transcript of AMSC earnings conference call or presentation 7-Aug-19 2:00pm GMT

Q1 2019 American Superconductor Corp Earnings Call

WORCESTER Aug 13, 2019 (Thomson StreetEvents) -- Edited Transcript of American Superconductor Corp earnings conference call or presentation Wednesday, August 7, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel Patrick McGahn

American Superconductor Corporation - Chairman, President & CEO

* John W. Kosiba

American Superconductor Corporation - CFO, Senior VP & Treasurer

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Conference Call Participants

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* Eric Andrew Stine

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Kristen E. Owen

Oppenheimer & Co. Inc., Research Division - Associate

* Philip Shen

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

* John W. Heilshorn

Lippert/Heilshorn & Associates, Inc. - Founding Partner

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Presentation

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Operator [1]

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Good day, and welcome to the American Superconductor First Quarter Fiscal 2019 Earnings Conference Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Mr. John Heilshorn. Please go ahead, sir.

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John W. Heilshorn, Lippert/Heilshorn & Associates, Inc. - Founding Partner [2]

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Thank you, Brandon. Good morning, everyone, and welcome to American Superconductor's First Quarter and Fiscal 2019 Earnings Conference call. I'm John Heilshorn, partner of LHA, American Superconductor's IR agency of record.

With us on today's call are Daniel McGahn, Chairman, President, and Chief Executive Officer; and John Kosiba, Senior Vice President and Chief Financial Officer.

American Superconductor issued its earnings release for the first quarter of fiscal 2019 yesterday after the market closed. Those of you who have not been able to see the release, a copy is available in the Investors page of the company's website at www.amsc.com.

Before starting the call, I'd like to remind you that various remarks that management may make during today's call about American Superconductor's future expectations, plans and prospects constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, including those set forth in the Risk Factors section of American Superconductor's annual report on Form 10-K for the year ended March 31, 2019, which the company filed with the Securities and Exchange Commission on June 5, 2019, and subsequent reports that the company has filed with the Securities and Exchange Commission. These forward-looking statements represent management's expectations only as of today and should not be relied upon as representing management's views as of any date subsequent to today. While the company anticipates that subsequent events and developments may cause the company's views to change, the company specifically disclaims any obligation to update these forward-looking statements.

Also, on today's call, management will refer to certain non-GAAP financial measures, non-GAAP net loss and non-GAAP operating cash flow. Non-GAAP net loss is defined by the company as net loss before stock-based compensation, amortization of acquisition-related intangibles, consumption of 0 cost basis inventory, changes in fair value of warrants, other unusual charges or items and the tax effect of adjustments calculated at the relevant rate over the company's non-GAAP metric. Non-GAAP operating cash flow is defined by the company as operating cash flow before Sinovel's settlement that have legal fees and expenses, tax effect of adjustments and other unusual cash flow or items. A reconciliation of the non-GAAP to GAAP measures can be found in the first quarter fiscal 2019 earnings press release the company issued and furnished to the Securities and Exchange Commission last night on Form 8-K. All of American Superconductor's press releases and SEC filings can be accessed from the Investors page of its website at www.amsc.com.

With that, I will now turn the call over to Chairman, President and CEO, Daniel McGahn. Daniel?

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Daniel Patrick McGahn, American Superconductor Corporation - Chairman, President & CEO [3]

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Thanks, John, and good morning, everyone. I'll begin today by providing an update of our Grid and Wind business units. John Kosiba will then provide a detailed review of our financial results for the first fiscal quarter, which ended June 30, 2019, and provide guidance for the second fiscal quarter, which ends September 30, 2019. Following our comments, we will open up the line to questions from our analysts.

Revenue for the first quarter of fiscal year 2019 exceeded our guidance range. In fact, both our Grid segment and our Wind segment reported increased revenues for the first fiscal quarter of 2019 when compared to the same period last year. Growth in our Grid business for the quarter was driven by strong D-VAR shipments, revenue from our SPS product for the U.S. Navy and initial revenue from our REG deployment project. VVO also contributed to our grid growth in the first quarter of fiscal 2019.

Last quarter, I spoke of a record backlog of D-VAR projects expected to ship this fiscal year. This is a testament to our continued sales success. Our manufacturing team is also performing very well. Our supply chain has been able to respond to the increasing demand for D-VAR. We anticipate that D-VAR shipments should provide a strong base of grid revenues for the remainder of this fiscal year. We expect even stronger grid growth driven by D-VAR in the second half of fiscal 2019 and foresee this pattern continuing into fiscal year 2020. This is based upon a continuation of the high levels of backlog that we have for D-VAR as well as we have for the overall Grid business. In fact, we have now reported 2 consecutive quarters in which grid revenues comprised over 70% of total revenue. Our sales team is focused on building a backlog of D-VAR orders for fiscal 2020 and beyond. The strength of our D-VAR business is coming from both the renewable connectivity and the industrial segments of the grid market.

Our SPS system is now the Navy's baseline degaussing design for the San Antonio Class ship platform LPD. We anticipate our SPS has the potential for deployment on a total of approximately 15 future ships in this class. We believe our SPS for the San Antonio Class could represent approximately $10 million in revenue per vessel. This could then be expected to equate to a revenue stream of about $150 million over the remaining life of the San Antonio Class. The San Antonio Class is our first design win with the Navy. We are pursuing additional classes of vessels with the U.S. Navy. Other platforms include, but are not limited to, destroyers, aircraft carriers, frigates and littoral combat ships. We began establishing our SPS manufacturing and product delivery capabilities for LPD 28 and LPD 30 during the first quarter of fiscal 2019.

SPS contributed to our Grid segment revenues in the first quarter of fiscal 2019. We are working closely with the Navy to understand the program timing for LPD 29 and LPD 31. We are anticipating additional SPS orders for the San Antonio Class. From a capacity perspective, we are planning to manufacture multiple SPS systems concurrently. During the first quarter, we focused on putting into place the capabilities to deliver on the backlog we have already established. We believe that we are in position to get more orders in the future. As you can imagine, our production floor in Massachusetts is very busy these days.

Our new Volt/VAR Optimization system or VVO, this product addresses the power distribution market. Our sales team has done an excellent job of educating utilities about our VVO products, and we are encouraged by utilities' positive reactions to our solution. We are starting to see repeat orders from utility customers, and we are delivering multiple units to multiple customers today. We see a natural diversification in our VVO's applicability. In fact, we shipped our first VVO product to a nonutility customer during the first quarter. This industrial customer plans to utilize our VVO product to improve power quality on its distribution feeders. We are focused on getting VVO right in fiscal 2019 from the product and its capabilities to the go-to-market strategy. Our sales reps nationally are now trained on the new product. Overall, our VVO pipeline is developing nicely, and we expect VVO to contribute to our grid growth in fiscal 2019.

As you know, we are diversifying our wind business. Doosan has a license to manufacture our 3-megawatt and 5.5-megawatt turbines. Doosan recently secured type certification for its 5.5-megawatt turbine, making us the first Korean company to receive international type certification for such a large offshore wind turbine. Doosan currently has more than 150 megawatts in operation and more than 50 megawatts beginning construction. Recent news out of South Korea indicates the construction of a 200-megawatt offshore wind project. Our wind team is working closely with Doosan. We expect our 5.5-megawatt wind turbine to enter the offshore market with our Korean partner, Doosan Heavy Industries, and look forward to reporting more progress in the near future. Doosan's management has publicly stated that the turbine is significant in that it lays the ground for domestic Korean technology to play a role in the South Korean government's renewable energy policy. And that Doosan to intends to and I quote "secure a larger share of the South Korean wind power market." We hope to announce an order with Doosan in the near term.

Turning to Inox. We are encouraged by the progress made at SECI-1 and by the fact that Inox has asked AMSC for engineering and design support to facilitate lowering their levelized cost of energy for certain wind projects. We are also encouraged by Inox's stated desire to lower the levelized cost of energy even further by way of a new wind turbine design, our 3-megawatt class wind turbine. I want to be clear though, we have not yet signed a 3-megawatt ECS supply agreement with Inox. However, Inox has indicated the new turbine is an integral part of its long-term strategy to deploy wind power in India. We are optimistic about India's wind market demand for a 3-megawatt class turbine and believe we are well positioned to support Inox's requirements. We believe that as Inox moves towards the completion of SECI-1, their focus will shift towards their 3-megawatt class prototype wind turbine. The dynamics around significant competitors to Inox in India are changing, which may potentially be positive for Inox's business. We are carefully monitoring Inox's execution on the SECI-1 and SECI-2 projects. Inox has completed a significant portion of SECI-1 and we continue to ship product for SECI-2. We look forward to working with Inox to secure supply for 3-megawatt ECS to support their already growing demand for the 3-megawatt turbine.

Now I'll turn the call over to John Kosiba to review our financial results for the first quarter of fiscal year 2019 and provide guidance for the second quarter of fiscal 2019, which will end September 30, 2019. John?

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John W. Kosiba, American Superconductor Corporation - CFO, Senior VP & Treasurer [4]

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Thanks, Daniel, and good morning, everyone. AMSC generated revenues of $13.8 million for the first quarter of fiscal 2019 compared to $12.6 million in the year ago quarter. Our Grid business unit accounted for 72% of total revenues for the first quarter, while our Wind business accounted for 28%. Grid business revenues of $9.9 million increased by 10% versus the year ago quarter. This was primarily due to higher D-VAR revenues and revenues associated with the start of our recently announced REG project. Wind business revenues of $3.9 million increased by 6% versus the year ago quarter, primarily as a result of increased license and development revenue.

Gross margin for the first quarter of fiscal 2019 was 11%, which compares with 31% in the year ago quarter. The year-over-year decrease in gross margin for the first quarter was primarily due to a particularly favorable product mix in the Grid segment in the year ago period. For more recent comparison purposes, gross margin for the fourth quarter of fiscal 2018 was 19%.

R&D and SG&A expenses for the first quarter of fiscal 2019 were $7.7 million. This was down from $8.6 million in the same period a year ago. Approximately 11% of R&D and SG&A expenses in the first quarter of fiscal 2019 were noncash.

Our net loss in the first quarter of fiscal 2019 was $3.5 million or $0.17 per share compared to $4.7 million or $0.23 per share in the year ago quarter. Included in this net loss was a $2.9 million noncash reversal of expense associated with the change in fair value of warrants.

Our non-GAAP net loss for the first quarter of fiscal 2019 was $6.2 million or $0.30 per share compared with $3.6 million or $0.18 per share in the year ago quarter. Please see our press release issued last night for a reconciliation of GAAP to non-GAAP results.

We ended the first quarter of fiscal 2019 with $74.7 million in cash, cash equivalents and restricted cash. This compares with $78.2 million as of March 31, 2019. Included in our first quarter of fiscal 2019 ending cash balance was the final receipt of a $3.1 million payment from the note receivable and interest associated with the sale of our Devens factory.

Our non-GAAP operating cash burn in the first quarter of fiscal 2019 was $4.9 million. This came in stronger than our previous guidance of a $5 million to $7 million operating burn. As I have mentioned in previous calls, our working capital fluctuates from time to time due to individual projects being serviced out of our Grid business. In the first quarter of fiscal 2019, our Grid business experienced favorable working capital as a result of accounts receivable collections and milestone billings of future deliveries that arrived late in the quarter.

Now turning to our financial guidance for the second quarter of fiscal 2019. We expect that our revenues will be in the range of $12 million to $15 million. Our net loss on that revenue is expected not to exceed $8.5 million or $0.41 per share, and our non-GAAP net loss is expected not to exceed $7.5 million or $0.36 per share. We anticipate operating cash flow to be a burn of $5 million to $7 million in the second quarter of fiscal 2019. This guidance does not include any tax payments or other costs related to the settlement. We expect to end the second quarter of fiscal 2019 with no less than $67 million in cash, cash equivalents and restricted cash.

This concludes my review. And now I will now turn the call back over to Daniel.

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Daniel Patrick McGahn, American Superconductor Corporation - Chairman, President & CEO [5]

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Thanks, John. Turning to REG, we believe that our funnel of opportunities for our resilient electric grid product that this funnel is quite significant and we learn more every quarter as we go through with these customers. We are aggressively going after those opportunities. We continue to work with major utilities on very specific projects, which we believe show a lot of promise. We continue to see events bringing attention to REG and the problems it is expected to uniquely solve. We believe that the project in Chicago will serve as a proof point for utilities. We believe that our initial deployment will drive attention to and retire risk for REG. REG was chosen by Exelon and the Commonwealth Edison Company of Chicago, ComEd, to become a permanent part of Chicago's power grid. We have received approval from the U.S. Department of Homeland Security on the contract modification for the first REG system in Chicago, I said, the first REG system. I just want to make sure that's clear. The contract modification with DHS approves the scope of AMSC's REG project with ComEd and is expected to enable us to recover up to $10 million of the project cost. We began to record revenue this quarter and have been putting into place the operational systems to deliver the project. We've begun the engineering work and expect to deliver the project hardware in 2020. We look forward to the successful energization of REG in 2021.

To conclude, we expect to grow Grid revenue again in fiscal 2019. And we have the advantage of supporting our growth with the strongest balance sheet we've had in recent years. Our D-VAR business is very strong. We are now manufacturing SPS for the Navy. We are now manufacturing REG for ComEd. We are delivering VVO to the market, and our pipeline is developing very nicely. We're supporting Doosan's effort to penetrate the offshore wind market with our 5.5-megawatt turbine. We're working closely with Inox to add a 3-megawatt class wind turbine to their product portfolio. We are executing against our goals and that is to the credit of our employees due to their hard work and dedication. I do look forward to reporting back to you at the completion of our second fiscal quarter of 2019.

And at this time, Brandon, we'd like to take questions from our analysts.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question will come from Eric Stine.

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Eric Andrew Stine, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [2]

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Just starting with REG. The DHS approval for the contract modification, I mean does that in any way help the process? Because I know ultimately, you want to get this -- get the PUC to allow this to be put in the rate base or that the utility would like to do that. Does it help that process in any way? I guess, would be the first question. And then, I mean clearly, it sounds like the line of sight is first to more work in Chicago, and then also, other utilities. So do you think that taking this step with DHS helps the process, whether it's Chicago or other utilities?

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Daniel Patrick McGahn, American Superconductor Corporation - Chairman, President & CEO [3]

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Yes. I think you absolutely nailed it because it retires that risk. It allows us to get cost recovery for this overall program. And you have to remember the reason that as we understand is that the utility embarked upon this is not just to do this scope, but there's a much larger scope that they eventually want to be able to get to. So we need to make sure that we continue to deliver on what we said and what we expect. And if we do that, we do really think that we have a winner, not only with Exelon, potentially in the future, but certainly, with many, many other utilities as well.

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Eric Andrew Stine, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [4]

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Got it. And then, are you able to quantify the REG revenues in the quarter? Or is it something that, since it's the initial work we should think of it as pretty small? And then maybe as you've gotten closer, any more clarity as to how you think that plays out over -- I know it's going to be multiple quarters through 2020. Is that kind of a ratable recognition of revenue?

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Daniel Patrick McGahn, American Superconductor Corporation - Chairman, President & CEO [5]

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Yes, I think that's a good way to -- that's exactly the right way to approach it. We entered into the agreement to get the cost recovery late in the quarter. So we're able to bill some to the project in this quarter. We really want to signal to people that, hey, the project's really underway. Good work is happening, which means we're able to get the cost recovery, we're able to bill it, we're able to get revenue for that. But I think, Eric, you're exactly right, going forward into the next quarters, in '19 and into '20, you're going to see ratable might be a good word, linearize kind of revenue quarter-to-quarter as we deliver content. Now there may be surges or reductions in revenue quarter-to-quarter, but we think that it's minimally relative to the total overall business.

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Eric Andrew Stine, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [6]

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Okay. Got it. Maybe just turning to D-VAR a little bit since -- obviously, that the orders have been strong there and the results. I know that you do a lot of work with Vestas. You've talked about that. But when you think about that, I mean is there a way to think about at least over the last couple of years, what your penetration is with them? And what you -- and just use them as an example, what the opportunity is with them going forward?

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Daniel Patrick McGahn, American Superconductor Corporation - Chairman, President & CEO [7]

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Yes. I think, generally, you have to realize that we've kind of changed our approach a little bit with D-VAR. We were selling principally for renewable connectivity to developers. We continue to do that in the traditional geographies that we've been in. But we now have top-tier wind customers, and Vestas is a good example because sometimes they show as a 10%-plus customer, that as they are trying to develop more projects. And what we see is a lot of wind turbine companies getting into the project management, project development and delivery, and that's when D-VAR gets procured. So we've been able to build on the back of that with top-tier wind turbine players, and that's helped translate into growth for the product line. And additionally, and maybe similarly, we focused on industrial customers. And we've been able to see a number of large wins there. We see those continuing as well. It really changed the market and kind of the dynamics that we deal with to create what we hope will be a more predictable revenue stream coming out of grid really driven by D-VAR.

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Eric Andrew Stine, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [8]

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Got it. And then maybe last 1 for me, just turning to the Navy and this is more long term. But you mentioned the additional platforms, carriers, destroyers, et cetera. I mean how should we think about content? I know that those are still a little bit of a ways off. But when the time comes, should we think of the content the same as the San Antonio?

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Daniel Patrick McGahn, American Superconductor Corporation - Chairman, President & CEO [9]

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I think it really depends upon the size, the length and the weight and the density of the ship. So we've said in our past for a small ship, which a good example might be the littoral combat as it's shorter in length, it's a lower tonnage ship than the one that we're currently on LPD. The content there is probably in the range, call it, $2 million to $5 million for the smaller ship. And then for large ships, like an aircraft carrier, the example we traditionally give, you might see a doubling or more of the content $20 million to $25 million is the number we put out there. But typically, frigates and cruisers and destroyers and L ships are all kind of midsize ships. When we originally embarked on this, we kind of guided the revenue content would be in the $5 million to $15 million range, and then we delivered on LPD with this number of about $10 million. So that gave us a proof point that the pricing was right, the pricing was a winner and that we're able to get wins. So that gives you some color. There's a spectrum of ships. But most of the ships today that are in the fleet are that medium size. They actually call them large in Navy speak. But we know, I mean an aircraft carrier is enormous. So that's obviously a larger ship than an LPD or a destroyer or a frigate or a cruiser.

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Operator [10]

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The next question will come from Colin Rusch with Oppenheimer & Co.

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Kristen E. Owen, Oppenheimer & Co. Inc., Research Division - Associate [11]

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This is Kristen on for Colin. Just wanted to follow up on the cadence of revenues in the Grid business. It does sound like you're expecting sort of an inflection in that in the second half of the fiscal year. But can you talk about what's the lag on gross margins as some of those projects begin to deliver? And then sort of related, how are you thinking about cash preservation over the meantime?

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Daniel Patrick McGahn, American Superconductor Corporation - Chairman, President & CEO [12]

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Okay. So let me hit those and then maybe John can chime in with actual details without kind of going through kind of at a high level. So you have to understand that in the Grid business itself, we don't report gross margins by segment. But we see that business growing really based upon backlog. So we have backlog at record levels for D-VAR. We have back levels at very high levels compared to where we thought we'd be with VVO. We have the backlog for the LPD ships for the Navy, and we have the backlog for REG.

One of the challenges with gross margin within the Grid business specifically is, you got 3 new products, right? You have VVO, which is in its beginning stages, needs to get to scale to be able to get better leverage on the gross margin. Same thing with SPS. I mean we telegraph, we try to telegraph as clearly as we could, that this is an investment year for SPS. We're putting capital in place to put the systems to be able to deliver these systems in backlog. We purposely didn't spend prior to getting these orders, but that means you do have to have that spend. And that is reflected in the burn. And the same thing with REG. I mean REG is a program where we are sharing costs with DHS. We're sharing costs with the utility that on a gross margin basis, it's not going to be direct. It's not the best gross margin product, obviously, for us out of the lot.

So grid is -- you're seeing the growth coming from the strategy of having these multiple products come online, but you do have kind of a disconnect that you have a mature product that we're selling into other markets in D-VAR. And then you have 3 infant products when it comes to VVO, REG and SPS. So those margins over time, I think will improve quickly as we get to scale. You want to talk anything in any more detail about margin? Go ahead.

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John W. Kosiba, American Superconductor Corporation - CFO, Senior VP & Treasurer [13]

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I think you nailed it.

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Daniel Patrick McGahn, American Superconductor Corporation - Chairman, President & CEO [14]

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You do me well, John. And then on the cash thing, I think what you can see in previous quarters and the numbers that we're putting out is, this is kind of the expected burn level that we're going to be able to manage to. And we're clearly trying to signal, Kristen, that we see growth in the business coming principally from grid, and that's principally based upon the backlog. So as we get to higher revenue levels, you're going to get better leverage on the gross margin line and on the operating margin line. That's what we're trying to be able to deliver. And I think what you're hearing from management today is a lot of excitement that not only do we think it's going to come, we have a high degree of confidence today based upon that backlog that we're going to be able to deliver that growth and improvement on the other financial numbers as well.

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Kristen E. Owen, Oppenheimer & Co. Inc., Research Division - Associate [15]

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Okay. And just as a follow-up to that, that backlog number, that used to be something that was disclosed. Would you be willing to quantify the size of that backlog for us at this stage?

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Daniel Patrick McGahn, American Superconductor Corporation - Chairman, President & CEO [16]

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Yes. I don't have any of that in front of me, but you can kind of add up what we had with D-VAR. You know what the L ships are. You know what REG is. We've disclosed with that. You probably have a decent sense even from what you've written yourselves on where you think VVO is. I think you have the math to add together. But we will certainly take that as some feedback that we got to consider how do we construct backlog for people so they can understand and get a better picture on it.

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Kristen E. Owen, Oppenheimer & Co. Inc., Research Division - Associate [17]

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And then just a higher level, how would you categorize your sales cycle at this stage? Be it across the various product lines, either in Wind or REG or D-VAR, are you seeing any shortening in that sales cycle across any of those product areas now that you had some of these larger customer wins under your belt?

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Daniel Patrick McGahn, American Superconductor Corporation - Chairman, President & CEO [18]

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Yes. I think the simple answer is, yes. And that's probably, yes, across the board. We're seeing us being designed into repeat customers with D-VAR. We're seeing ourselves being designed in repeat customers with VVO. I think clear with SPS that, that should be some recurring business and that's going to accelerate at the rate that the Navy proliferates the technology through the rest of the fleet. So we do see sales cycles shortening, but we wanted to really telegraph that a lot of what the work the sales team is focused on, particularly when it comes to the voltage management solutions that are D-VAR and VVO. We're already now in August, trying to build backlog into 2020 and beyond. We want to make sure that this trajectory continues upward over a sustained period of time. And that's the challenge we put forth to the team and that's a challenge that they're already starting to respond to.

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Operator [19]

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The next question will come from Philip Shen with Roth Capital Partners.

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Philip Shen, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [20]

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The first one is a bit of a follow-up on some prior questions, maybe from a different perspective. You guys put in your prepared remarks that you guys expect to deliver strong grid revenue growth this year and you just talked through what the backlog could be. But just for modeling purposes and for the simplicity of others, is there any way you can quantify what that growth could be? So last year, let's say, you guys, I believe, were at $34 million of revenues. Are we talking about low double digits? Are we talking about something in the 20s, if there's any way of quantification I think that could help everybody model and see the future?

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Daniel Patrick McGahn, American Superconductor Corporation - Chairman, President & CEO [21]

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Yes. I think it's a great question. I think it's something that we struggle with because you have to understand in these projects that we do, projects can always -- once you have them and have timing, they can always accelerate or decelerate depending upon the progress that the customer is making, their financial milestones and those things. So we've tried to be very conservative on guiding what we think we're able to control, which is really 1 quarter at a time. But to kind of do it kind of semiquantitatively or qualitative, we're now talking about D-VAR, VVO, SPS and REG, all contributing real revenue and growing. So growth on top of growth spells growth but I can't give you a specific target. But to say that the strategy we think is working on delivering these multiple projects -- products into multiple projects, expanding TAM that, that should translate we think into nice growth for the business overall, and certainly, that's going to be driven from grid. But I don't want to make any news today and put out a new target other than we intend to grow grid, and we intend to grow the main products of grid, D-VAR, VVO, REG and SPS.

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Philip Shen, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [22]

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Okay. In terms of VVO, specifically, you've already given some color there. But I was wondering if you can talk through how many utilities are -- I think you said multiple but are reordering the VVO product? And do you expect this -- have you been successful in getting the utilities to buy into just kind of adding this to their product list? And do you expect this to just be a product that they'll have to get necessarily PUC approval for, but they just order off the shelf, is that process developing in the way that you had envisioned 6 months or a year ago?

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Daniel Patrick McGahn, American Superconductor Corporation - Chairman, President & CEO [23]

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Our hope is by 2020, Phil, we're exactly there. We never envisioned VVO as something that had to go to any kind of regulator. I mean this is a -- it does functionality that distribution utilities know how to manage, and the price point and the way the product is designed, it looks a lot like a transformer. So this is a thing that could be a kind of a stock product for us and a stock product utilities can carry and carry even extra so. What we're seeing is the fundamental thesis of the market, managing residential homes, having solar, electric vehicles, managing kind of power quality on the industrial side that we've done some work with D-VAR but we see now over a litany of different industries at a smaller size, which VVO becomes directly applicable for. So all the kind of wins are pointing in the right direction for VVO. So we want to make sure in 2019, we said, when we started this year is we're going to place a limited number. I'm not going to tell you what those numbers are, but we want to make sure that we get it right, that this is something we can copy over and over again. And we hope as we move on to 2020, it becomes a noticeable piece of the business. And from there, every time we learn more things, we don't want to keep coming back and updating markets and say, the market is expanding. We need to deliver on the orders. And if we deliver on the orders, the business will be there, and we'll see growth continuing to come for many years, hopefully in the future for Grid.

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Philip Shen, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [24]

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Great. Shifting over to your 10-Q that you guys released last night, I saw Micron on there. I think they were 25% of Q1's revenues. Can you talk about your relationship with Micron? And are they primarily D-VAR customer or VVO or both?

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Daniel Patrick McGahn, American Superconductor Corporation - Chairman, President & CEO [25]

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Yes. So when we talk about that size of kind of a full factory protection, that's typically D-VAR. You're seeing some new names maybe in the fold with being 10-plus percent customers, they're in a capital spending uptick now. I think the total semi market now they're spending, I think the projection is about $100 billion just capital this year. With the move to a lot of these different memory for mobile devices, these fabs are going to have to be continue to be built over the next few years. So we like our relationship with Micron. They seem to like our product and relationship with our company. So -- but it's going to be something that's going to be something we have to limit because a lot of times what we see are things that are long-term future for some of our customers. So I don't want to get into any additional detail, Phil, over kind of prognostication of growth or demand or those kinds of things.

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Philip Shen, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [26]

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Okay. And one last one for me. In terms of REG, you guys talked about -- you emphasized that this is the first REG system. Any sense as to when the second REG system in Chicago could be announced?

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Daniel Patrick McGahn, American Superconductor Corporation - Chairman, President & CEO [27]

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I think stay tuned. That's all I can say. Just begun the first one.

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Operator [28]

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Thank you. This concludes the Q&A session. I'll now hand the call back to Daniel McGahn for closing remarks.

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Daniel Patrick McGahn, American Superconductor Corporation - Chairman, President & CEO [29]

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Thanks for some great questions, and I think it was a really great quarter when we think about, particularly where we are with REG. It's clear the wind business have gone through some challenges. But we see that potentially changing maybe in the relatively near term. We're signaling pretty strong -- strongly that we see on the heels of getting certification with Doosan of this 5.5-megawatt turbine that we see orders coming. We've kind of signaled to some of the demand we even see coming in the Korean market that Doosan themselves are saying they want to get very large market share in.

We are very pleased with how Inox has handled themselves in the execution of the SECI-1 project. We've used that as a kind of an indicator for really to help the overall Wind business. So we're very proud that Inox has gotten to a point where they've been able to commission a significant fraction of this. I don't want to get too far ahead of them because I think they're going to report in the near term, but I know they're happy with their ability to execute. We're very happy with their ability to execute. And we're really happy with the relationship that when they run into challenges and these can be challenges that need to be solved in an hour or a day, our teams really work together as one to be able to approach those problems for them. And it's a very good working relationship between the companies, signaling kind of in the future, we start to see the beginning of some potential growth for Inox on the 3-megawatt. So at some point, we're saying that there should be an order there for 3-megawatt ECS, not today, but that should be coming in the near term. We do see some changes in the Indian wind market suppliers that may help put Inox in a position where they can command larger market share, which would be great.

We are clearly signaling that we see additional orders coming for SPS. We are trying to signal as best we can on the call so people understand what appears to be increasing demand for D-VAR and VVO.

On a specific REG note, we hope to be able to deliver some more news out of our REG project. We sense there's an appetite for that, for sure. There's definitely the potential there with some more pieces of this, but I think that will unfold over time. Realize that our Grid business alone has approached $10 million this quarter. So that's kind of a new milestone when thinking about the business now and hopefully, going forward.

It's really starting to get good here at the company. The employees are supercharged to be able to deliver the kinds of things we're trying to do for customers. We believe we're really in a great growth position for 2019, particularly on the grid side. And then I think John went through in the prepared remarks, we're at kind of the expected levels of cash consumption at this revenue level. But based upon the backlog today, this should see improvement over the second half, and we're trying to as directly as we can say that to you all today. We can't control everything that our customers and markets do, but we can control and putting in place our capabilities, maintaining our relationships. We do see with our supply chain that we think that a lot of the risks to growth have been retired. And that these 3 new products, VVO, SPS and REG are now being really formally birthed. It is a very new company here.

So with that, we look forward to being able to talk to you again in a few months, and hopefully, be able to report even better news. Thank you, everybody.

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Operator [30]

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Thank you, ladies and gentlemen. This concludes today's event. You may now disconnect your lines.