American Superconductor Corporation
Q3 2018 Earnings Call Transcript

Published: 6 Feb 2019

[Operator:]

Good day, and welcome to the AMSC Third Quarter Fiscal 2018 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. John Heilshorn. Please go ahead, sir.

[John Heilshorn:]

Thank you, Ian. Good morning, everyone, and welcome to AMSC’s Third Quarter Fiscal 2018 Earnings Conference Call. I’m John Heilshorn, partner at LHA, AMSC’s IR agency of record. With us on today’s call are Daniel McGahn, Chairman, President and CEO; and John Kosiba, Senior Vice President and Chief Financial Officer. AMSC issued its earnings release for the third quarter fiscal 2018 yesterday after the market close. Those of you who have not yet seen 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 today’s call will contain forward-looking statements as defined by the private securities litigation reform act of 1995, concerning AMSC’s future expectations, plans and prospects that involve numerous risks and uncertainties. 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 Factor section of the company’s annual report on Form 10-K for the year ended March 31, 2018 and filed with the SEC on June 6, 2018, and quarterly report on Form 10-Q for the quarter ended December 31, 2018, which was filed with the Securities and Exchange Commission last night, other reports that we have filed with the SEC and factors outlined in third quarter fiscal 2018 earnings press release. 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 AMSC 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 non-GAAP financial measures, non-GAAP net loss or income and non-GAAP operating cash flow. Non-GAAP net loss or income is defined as net loss or net income before sale of minority investments, stock-based compensation, gain on Sinovel settlement, net amortization of acquisition related intangibles, changes in fair value of warrants and contingent consideration, non-cash interest expense and the tax effect of adjustments. Non-GAAP operating cash flow is defined as operating cash flow before the Sinovel settlement, net of legal fees and expenses, and the tax effect of adjustments. Company believes that these non-GAAP measures assist management and investors to compare results of operations in the current period to prior period results on a consistent basis by excluding these non-cash, non-recurring or other charges, and it does not believe are indicative of the company’s core operating performance. A reconciliation of the non-GAAP to GAAP measures can be found in the third quarter fiscal 2018 earnings press release issued first to the Securities and Exchange Commission last night on Form 8 and in Form 10-Q For the quarter ending December 31, 2018. With that, I will now turn the call over to Daniel. Good morning, Daniel.

[Daniel McGahn:]

Thank you, John, and good morning, everyone. I’ll begin today by providing some positive news on our cash balance. John Kosiba will then provide you with a detailed murder review of our financial results for the quarter that ended on December 31, 2018, and guidance for our fourth fiscal quarter, which will end in March 31, 2019. After John’s review, I’ll come back and take you through our growth opportunities and our goal of creating greater revenue predictability and reducing variability in our results. We’ll then open up the call to your questions. Let’s begin. We generated nearly $1 million in operating cash flow in the third quarter of fiscal 2018. This does not include the final settlement payment from China of $25 million. We ended the quarter with over $80 million on the balance sheet. Let’s not get ahead of ourselves. We still have to pay taxes and legal expenses on the $25 million payment. We said we thought we would net about $20 million. John will guide you through the details of our payment, which was received very late in the quarter. Also as we went through our cost controls, we deliberately aligned expenditures with orders. In other words, we were not allowing expenditures without orders in hand. To date, we have not invested in the capability of delivering a Ship Protection System or SPS order. This past week, we received instruction to the deliver and are excited to ramped up the factory for our Ship Protection System product. We plan on investing approximately $5 million over the next year to create the capabilities to deliver on the anticipated revenue growth from the Navy. So with that in mind, consider an expected pro forma cash balance of about $70 million. We’ll walk you through our details around next year’s capital expenditures during our next conference call. Some of you have asked why we received the settlement early. We received it, because we asked for it. The terms of the settlement were that Sinovel had to pay by May 6, 2019. Given the macro dynamics between China and the United States, we suggested it would be in everyone’s interest to make payment as soon as possible. They listened. We got a nice Christmas gift. Now, let me now turn the call over to John Kosiba for his review of our financial results. John?

[John Kosiba:]

Thanks, Daniel, and good morning, everyone. AMSC generated revenues of $14.1 million for the third quarter of fiscal 2018, compared to $14.9 million in the year ago quarter. Wind business revenues of $7.3 million increased by 178% versus the year ago quarter. This growth is a result of increased ECS shipments to Inox. Grid business revenues of $6.8 million decreased by 45% versus the year ago quarter. This decrease is due to lower D-VAR shipments. Our Wind business unit accounted for 52% of total revenues for the third quarter, while our Grid business unit accounted for 48%. Gross margin for the third quarter of fiscal 2018 was 26% compared to 34% in the year-ago quarter. Gross margin in the year-ago period benefited from a favorable product mix, particularly within our Wind business, which includes royalty payments. Research and development and SG&A expenses total $7.8 million for the third quarter of 2018. This was down 8% from the same period a year ago, primarily driven by lower overall compensation expense. Approximately 17% of R&D and SG&A expenses in the third quarter of fiscal 2018 were non-cash. We recorded net income of $17.3 million or $0.85 per share for the third quarter of fiscal 2018. Included in our net income is a gain net of taxes and fees of $22.8 million related to the Sinovel settlement. Excluding the gain on the settlement, the net loss for the third quarter of fiscal 2018 would have been $5.5 million or $0.27 per share. This compares to a net loss of $4.2 million or $0.21 per share in the year-ago quarter. Included in our net income for the third quarter of fiscal 2018 was a $2.5 million non-cash expense associated with the change in the fair value of warrants. Our non-GAAP net loss for the third quarter of fiscal $2.3 million or $0.11 per share compared with a non-GAAP net loss of $3.4 million or $0.17 per share in the year ago quarter. We ended the third quarter of fiscal 2018 with $80.2 million in cash, cash equivalents and restricted cash. This compares with $56.3 as of September 30, 2018. We generated $900,000 in non-GAAP operating cash flow in the third quarter, which excludes the cash benefit associated with the settlement. The third quarter operating cash flow includes a working capital benefit of approximately $4 million, resulting primarily from inventory reductions associated with increased shipments to Inox in the quarter. We believe we have reduced our Wind business inventory to appropriate levels and are not expecting to forecast any further working capital benefits. Absent this working capital benefit, operating cash flow on a non-GAAP basis would likely have been a burden in a range of $3 million to $4 million based on the third quarter revenue profile. With respect to the cash impact of a settlement, we experienced net proceeds after expenses and taxes of $23.3 million. As Daniel mentioned earlier, we have approximately $5 million remaining to pay in legal expenses and income taxes related to the settlement. We expect the legal expenses to be paid in the fourth quarter of fiscal 2018, while the income taxes are expected to be paid in fiscal 2019. Turning to our financial guidance for the fourth quarter of fiscal 2018, we expect that our revenues will be in the range of $14 million to $16 million. Our net loss for the fourth quarter of fiscal 2018 is expected not to exceed $6 million or $0.29 per share and our non-GAAP net loss is expected not to exceed $5 million or $0.24 per share. We anticipate an operating cash burn exclusive of any legal fees and tax payments related to the settlement to be a burden of $2 million to $4 million in fourth quarter of fiscal 2018. We expect to end the fourth quarter of fiscal 2018 with no less than $76 million in cash and cash equivalents and restricted cash. This concludes my review. I will now turn the call back over to Daniel. Dan?

[Daniel McGahn:]

Thanks, John. For those of you who are new to AMSC and we’re finding that many people are, and for those of you who are reacquainting yourself with the company, from our perspective fiscal 2018 represents the beginning of an expected transition in our revenue mix. We believe that the business is moving towards a more predictable recurring revenue base from our Navy product line, as we get designed into additional platforms, and eventually, increase our content per ship. Additionally, we’ve diversified our Grid product offerings as well as our Wind customer base. This transition in our revenue mix corresponds to changes made over the past three years in our product line expansion and customer diversification efforts. Today, we’ve grown our voltage management business. We’ve grown sales from the renewable sector and expanded the business to include the industrial sector. We are also expanding sales in the transmission market with D-VAR to the distribution market with VVO and REG. We have released three new products in three years. These products include our Ship Protection Systems or SPS, our Resilient Electric Grid systems or REG, and Volt VAR Optimizer or VVO. All of which demonstrate unique value to our customers. Our strategy is to deliver value, differentiated by our proven technologies through the development of full and complete systems. Three years ago, we set out to triple our total addressable market, while erecting high barriers to entry that enable us to derive more margin and greater value per installation. I want to spend a few minutes on today’s call to highlight the macro trends we are leveraging with our products to further penetrate our key markets. Let’s look at our ship protection system product in detail. Beginning with the Navy and our opportunity in support of its fleet electrification program, defense spending has increased over the past two years, as the U.S. Military moves to rebuild and retool for competition against other powers, the new multi-threat reality. In fact in the spring of 2018, the Department of Defense submitted the Navy’s 2019 shipbuilding plan to Congress, covering government fiscal years 2019 to 2048. That, if fully carried out, will represent the largest naval build up since the Reagan administration in the 1980s. In September 2018, the Navy’s fleet numbered 285 ships. The Navy’s requirement as stated in its 2019 shipbuilding plan is to build and maintain a larger flee of 355 ships. The Navy shipbuilding plan has increased by approximately 25%. The Navy has probably stated that HTS is an enabling technology in its path to create an all electric ship and is initially adopting our ship protection system. The Navy’s mission to electrify the fleet presents us with opportunities for growth for many years to come. Our high temperature superconductor or HTS based ship protection systems have been designed into the San Antonio Class platform commonly known as LPD. Starting with LPD 28, a total of 13 LPDs were procured between the government’s fiscal years 1996 and 2017. We are designed into LPD 28, for which long lead elements have already been recognized as revenue, and for which last week, we announced the delivery contract awarded for the rest of our system for integration into the ship. We expect to recognize revenue on the balance of the order as we procure and manufacture additional subsystems. We expect to begin delivering initial sets of hardware on LPD 28 by the late fiscal year 2019, and into fiscal year 2020. The Navy expects to need our SPS to be delivered and operational during calendar year 2021. Turning to LPD 29, this is a ship that’s been funded by Congress. The ship is expected to be built about a year after LPD 28. We still need to enter into a delivery contract with the Navy prior to beginning work on the SPS for LPD 29. This may come as all one instruction or order. We believe to be well positioned to support the Navy’s requirements and production schedules for LPD 29. Moving to LPD 30, we won an order for the long lead elements in November of 2018. We expect to procure the materials to build the long lead elements for LPD 30 in late fiscal year 2019, and to begin building subsystems for the SPS throughout fiscal year 2020. We await further instructions from the shipyard on the timing of delivery of subcomponents for LPD 30. We expect that unlike LPD 28 and LPD 29. The LPD 30 hardware will be inserted by the shipyard earlier in the build cycle for the ship. We believe we will be well in position to deliver on multiple ships during our fiscal years 2020 and 2021. Please note that this is the first time we’re able to provide such a detailed timeframe publically. With the beachhead established on the San Antonio Class, our strategy is to expand to additional ship platforms first and foremost, and over time, grow content per ship. In that vein, we are continuing to work to expand our systems into the fleet through a variety of applications for power delivery, power generation, and of course protection equipment. Let’s talk next about our voltage management products. We are transitioning our revenue mix towards what we expect to be a more predictable and reoccurring revenue base with multiple prospects for growth. D-VAR to date has been the foundation of our Grid segment growth. We believe growth in the renewable market and product diversification into industrial markets should also drive predictable revenue growth. D-VAR utilizes our smart voltage management technology. In the renewable segment, D-VAR connects utilities scale wind farms to the transmission grid. In the industrial segment, D-VAR connects industrial customers like semiconductor fabs that require clean, reliable power to the grid. We’re seeing more and more repeat customers in both the renewables and the industrial market segments. We’re anticipating growth in D-VAR sales in fiscal 2018, which represents our third year of consecutive Grid growth. We anticipate entering fiscal 2019 with a strong backlog and a strong pipeline of D-VAR projects. Our VVO product takes advantage of today’s macro market trends such as increasing residential solar power and the proliferation of electric vehicles or EVs. VVO expands our voltage management opportunity onto the distribution grid. VVO is also based on our smart voltage management technology and as the outcome of our listening to and learning from our customers. VVO takes advantage of utilities move towards more solar at the home and more EV charging. We have executed on multiple pilots this current fiscal year and are in position for a targeted commercial launch next fiscal year. This is where we plan to be with our VVO product. On REG, let me give you a quick update on DHS. We have been in communication with them. We will announce once we get approval. Given their priorities, I am today unable to say where we sit on their to-do list. We’ve been led to understand that the DHS modification process is very straightforward. Hopefully, you will hear from us soon, assuming the government stays open. Turning to our Wind business, today we have generated over $200 million in revenue as a preferred partner to Inox Wind on their 2-megawatt platform. Inox is making progress on SECI-1, and we will continue to monitor their progress. Inox recently announced a 500 megawatt or more than 150 units set order for the 3-megawatt class platform from Adani Green Energy for a wind power project in Gujarat, India. Adani is one of India’s largest independent power producers of renewable energy with a renewal portfolio of exceeding 2.2 gigawatts. With Adani’s new order in hand, Inox’ auction-based wind order book capacity is approaching 1.5 gigawatts. Many of you have also seen that Inox Wind announced an agreement with AMSC. For the launch of a new 3-megawatt class wind turbine design, the 3-megawatt class turbine will have a larger rotor diameter and a higher hub elevation, which allows Inox to achieve a lower levelized cost of electricity, and which should create a competitive advantage relative to other manufacturers in the market. Before the 3-megawatt class turban contract with Inox becomes effective. There are payment conditions of predetermined milestones. These payments have not been received as of today. We plan to formally announce this new opportunity once our agreement with Inox becomes effective. We hope to report back to you on this in the very near future. We are diversifying our wind business with Doosan, the Korean government is developing a local wind industry with several offshore projects in South Korea. Currently there are over 4 gigawatts of offshore projects in the pipeline. Doosan may get significant market share for those local projects. We are the exclusive ECS supplier for Doosan’s 5.5 megawatt offshore wind turbine. Doosan plans to get certification for their 5.5 megawatt offshore turbine design in this spring. This certainly puts us in position for a potential order in the near-term. In conclusion, we have completed three of our five stated objectives for this fiscal year. These objectives include moving forward with a contract for a REG system project, the delivery of our 5.5 megawatt ECS units to Doosan for offshore wind and the completion of a long lead time order for LPD 28. The other two objectives for this year are about Grid and Wind growth year to year. Our wind and grid businesses have seen growth year to date. Our D-VAR business is strong and we are delivering VVO units to the market. We have seen continued traction with our SPS solution with the recent orders for LPD 28 and LPD 30. We have the resources to invest in our capabilities for our Navy products. We are engaged with DHS and look forward to announcing progress soon. With that, we will now take questions from our analysts. Ian?

[Operator:]

Thank you. [Operator Instructions] We now take our first question from Eric Stine of Craig-Hallum. Please go ahead.

[Eric Stine:]

Hi, Daniel. Hi, John.

[Daniel McGahn:]

Hey, Eric. How are you doing?

[John Kosiba:]

Good morning.

[Eric Stine:]

All right, well, so I just wanted to start with Navy. Thanks for the details there on what you can handle now and especially given it looks like your just kind of normal course of business that you’re going to be part of this platform and doing those going forward. But as you think about, obviously, expanding to new platforms, more content, can you talk about longer-term approximately how many ships per year you could handle? And then, as part of that, just color on – you mentioned $5 million in CapEx for that Navy business, is that capacity? Is that tooling? Maybe just details there, that’d be great.

[Daniel McGahn:]

Sure, give me a little bit, and we’ll talk probably more in the next conference call. But as you know we made the move to air. When we made that decision we made sure that we weren’t over investing in things that didn’t yet happen to order. So we wanted to be able to telegraph to the market that some capital spending was coming, and not to be alarmed because it’s normal course as you said and we believe should be expected. From a capability standpoint, they Navy won’t allow us to talk about what our capability is. But for those of you that have been to air and have seen what we’re doing, this is an installation that we’re designing to be able to meet all of the Navy’s need for the Ship Protection System business. We’ve estimated the market somewhere between $70 million and $120 million annually, assuming we get all of the [service] [ph] fleet. So we want to be able to make sure we have the capability to serve all of the U.S. Navy’s needs. And over time, hopefully, we’ll begin to export and we’ll be able to serve those needs. All we believe out of air, that doesn’t mean that there won’t be incremental capital. But as we’re kind of telegraphing today, it’s on the order of a few million dollars to build capacity. The Navy won’t let us say definitively what capacity the building can do. So I’m sorry I can’t give you a direct answer on that.

[Eric Stine:]

No, I understand. All right, that’s helpful. Maybe just turning to REG, I know you’re waiting on the DHS approval, but is that something where now that Chicago has made their move, I mean has that changed conversations with other utilities or do you think that that is something where you need to get it put in the [rate base] [ph], go through that process, get approval, and that that needs to take a few steps forward before other utilities make their move as well?

[Daniel McGahn:]

I think, Eric, it’s somewhere in between. So I don’t think we need to go through all the steps to get all the utilities to start to look to move forward. We are working, as I said on the past few calls, with a number of utilities. There seems to be clear and present real need for the product. And we’re trying to work through those discussions. We’ve done a lot of work on the civil engineering side on multiple projects. And we’re trying to prime that pipeline, so it can all come relatively rapidly in conjunction with the project in Chicago. So definitively, what I’ve said is many of these projects don’t need Chicago to go forward. But certainly, the project in Chicago will help de-risk it in the mind of many utilities. And I think in a lot of ways, the lines of utility with us to market the compelling need. And I think that’s a tremendous benefit to our company.

[Eric Stine:]

Okay, got it. And maybe last one just for John, just gross margins, obviously, nice number this quarter, just some thoughts on. If you’re able to how we should think about that over the next couple of quarters.

[John Kosiba:]

So we don’t guide to gross margin in the future. But this quarter we did have a strong gross margin at 26%. And you can see in the scripts, a big chunk of that revenue was from Wind. So when we have a revenue profile of a good product mix, I think you can assume gross margins in a similar range. Since we haven’t guided to the product mix in the future, it’s difficult for me to try to give you an answer one way or the other. But what I can say is on this revenue profile this is a margin that we feel pretty comfortable of.

[Eric Stine:]

Okay, thanks.

[Operator:]

Thank you. We’ll now take our next question from Colin Rusch of Oppenheimer & Company.

[Colin Rusch:]

Thanks so much guys. Can you talk a little bit about the OpEx spending you’re going to need to invest in to support the growth trajectory and the Grid and the Navy business?

[Daniel McGahn:]

Yeah, Colin, what we said specifically today has to deal with the Navy. So remember, it’s not just delivering wires, it’s delivering the whole system. So we’re going to put in the tooling to be able to fabricate the complete SPS system. As you can see from what we’re saying today, that is on the order of low-single-digit millions of dollars. So we didn’t want to invest in any of that till we have the order. We now have that order. I think one of the things that people will keep asking is, okay, what’s your revenue capability given the CapEx spending. And we certainly probably need to be more transparent with that as we look at our FY 2019 plans and beyond. Today we wanted to be able to signal that there will be some spending coming. But we also wanted to really highlight the revenue profile, on how we see the revenue coming, which we tried to do in the prepared remarks.

[Colin Rusch:]

Yeah, maybe my question was understood. I’m trying to get a better sense of the OpEx spend going forward in terms of your overhead and how much operating leverage we’ll get as we you grow revenue.

[Daniel McGahn:]

I’m sorry. I heard you say CapEx, I apologize. So from an operating spending this is at a low level compared to where we’ve been. If you back out the cash level, it gives you a breakeven still with scenarios like we’ve said. We don’t see OpEx having to grow in line with revenue growth, meaning that we believe there’s a lot of OpEx leverage. When we look at programs like SPS or some of the newer products most of the spending around realization of those revenue comes from cost of goods sold. So we’re not looking at ratcheting up in any way operating expense overall. There’s not a need to expand the sales force or expand what we’re doing in R&D. If we saw any change, with flat to may be incrementally higher. But at the end of the day it may be noise in the system. We’re trying to design the businesses to get good gross margin and operating margin levels at current operating expense levels. So hopefully, with incremental revenue we should see great leverage [pit fall] [ph] through from those revenue dollars. That [indiscernible].

[Colin Rusch:]

Okay. That’s super helpful [indiscernible].

[Daniel McGahn:]

Thanks, Colin. Sorry about hearing CapEx instead of OpEx. I guess I got CapEx on my mind.

[Colin Rusch:]

Sounds good. Thanks a lot guys.

[Operator:]

Thank you. We now take our next question from Philip Shen of Roth Capital Partners. Please go ahead.

[Philip Shen:]

Hey, guys. Thanks for the questions. First one is on Inox, with that 500 million – or sorry, megawatt, the order with Adani, well, the one that Adani has with Inox Wind in turn that you can service. I know there are still some milestones that you guys have to meet. Can you can talk through – it sounds like you could get through that quickly. Just give us a little bit more color on what those milestones are, are they letters of credits and just kind of making the upfront payments or is there something deeper? And then, I believe the project is expected to be delivered over a 15-month period, so how do you expect the revenue recognition on your end to be spread over that 15 months? Do you expect it to be front-end loaded or could it be spread evenly among the quarters ahead? Thanks.

[Daniel McGahn:]

Okay. So I’ll try to be as direct as I tend to be with everybody. I think, we’re in a difficult situation. Here we have a customer that needs a product in the 3-megawatt class. They’ve gone out and they’ve done an order for it, which is great, because de-risks business for us. But as of today, there are certain prepayment conditions that make the contract go active, and we haven’t met them. And we’re trying to do is to make sure that as we operate, particularly in the Wind business, that we get security of cash flow. It would lead you to believe that there really is a compelling need for the product if they’re able to go and secured orders for it. The 15 month timeline is what they’ve disclosed. That bodes well with some of the SECI projects that Adani has already won. So a large part of that is up with one of their initial demand. So I think it’s a big win for Inox, but we need to do is to get them to execute the payments then we’ll go forward and do the work to be able to deliver the turbine design. We will have to go get certification for it. But net-net when we look at electrical control system demand, we tend to lead delivery of the turbine by, call it, three or four months, typically with a 2-megawatt platform that’s we’ve seen. But we’re going to have to do some work on the turbine design. So from a revenue profile standpoint, it’s not going to be early, it’s going to be later in that cycle. But at this point in time, Phil, I don’t have payments for the 3-megawatt design, and I don’t know have an order for 3-megawatt ECS. So when we look at orders we look at what the complete construction is from the customers and their ability to pay and their payment history to really understand what we think is really in order. So we’re in a challenging situation here where it’s hard for me to give you very concrete answers until the customer pays for the technology and then the customer puts in place an order for ECS.

[Philip Shen:]

If you were to provide a probability on that, I mean, did you – is it 80% probability that two of you get past the current hurdles? Or is it a less than 50% probability?

[Daniel McGahn:]

In everything we’ve done with Inox, we’ve been able to have everything work out positively for both companies. So not in the past is necessarily a complete way to look at the future. But the companies work very well together, and we know they really need to and want to move to this platform and we want to be there to help them. But they need to make sure that they’re paying their bills on time. Obviously, it’s been a couple of months here between when they announced in today. So we’re working very closely with them to get that project kicked off, and get it really started.

[Philip Shen:]

Is there a chance another ECS supplier can step in? I mean, is there a realistic kind of substitute supplier? Or what’s your thought on that?

[Daniel McGahn:]

I don’t want to speculate on any of that given what the company’s been through in its past. They’ve announced that they have a deal with us. They’ve announced that they’ve signed a deal with us. That’s all true. In order for the agreement to become effective, they simply have to pay and we look forward to being able to announce soon that they paid.

[Philip Shen:]

Great. Okay. Shifting gears, this one might be more for John. I know earlier to, I think a question to Eric, he may be asked about product mix, I know, you don’t guide to that. But if there’s could – if you could share any color on the mix of segments in Q4 between Wind and Grid that would be helpful? And do you see something similar to what we had in Q3? Or do you expect want to kind of take to be more dominant in Q4? That would really help in terms of modeling terms.

[John Kosiba:]

Sure. We don’t guide specifics on the breakdown between the segments. What I can tell you is, we are shaping up that were stronger Grid quarter than Wind quarter. So the revenue mix will change. I’ll just leave it at that. We should see a stronger Grid quarter.

[Philip Shen:]

Okay. That one is really helpful. Thanks, John. As relates to REG, and I’ll pass it on. I know, Dan, you touched on that. But I was wondering if you could comment specifically on has the number of near-term opportunities increased? What do you think could happen in fiscal 2019 given slow utility scale development? That whole process in general. And has anything progressed meaningfully at a PUC or with a specific utility. How is the Exelon overall opportunity shaping up, I know, you have a relationship with ComEd, but it extends I think into Exelon as well. So if you could just provide a little more color on a REG overall? That would be great. Thanks, Dan.

[Daniel McGahn:]

Yeah, I think, on the last call, we went through a lot on the pipeline. All that remains true and it becomes stronger, every day we show up to work with, we’re moving the ball forward on the REG. I think everybody today is focused on when we’re going to move forward with the DHS modification, which is why we tried to focus the prepared remarks around that. I don’t want to go back to fill in and redo the last conference call, I don’t think that would be helpful for anybody, but basically to say, hey, we still feel very strongly that you have a plethora of projects here in that $25 million to $75 million range that we could be in position to deliver within one year. So the revenue ramp from REG certainly is possible. I think, we are hearing from the company, however, is we need to move forward with 3-megawatt. We need to move forward with DHS. We need to move forward with SPS capability. In the near-term, the next few quarters we have to focus on those things to make the revenue growth happen for those parts of the business if we’re able to deliver on an order for REG in the near-term. We think that’s just a great accelerator for the business and good news for everybody. We keep working on it and when we have something to announce we will.

[Philip Shen:]

Okay, Dan, thanks very much. Thanks, John. I’ll pass it on.

[Operator:]

Thank you. And we will take our last question from Carter Driscoll of FBR Riley. Please go ahead.

[Carter Driscoll:]

Thanks. Good morning, guys. First of all, congratulations on moving towards commercialization of the naval business, I know, it’s been a long arduous process, so congrats for finally getting that business more towards a newly like structure. So my first question, Dan is could you talk about since the scope of the 3-megawatt design seems significantly to have a larger dollar content and effectively a much different design than 2-megawatt. We anticipate the license fee to be different than 2-megawatt, and you could qualify?

[Daniel McGahn:]

Yeah. When we’ve done license agreements, we really have not announced the economics. What we said typically is these are in the millions of dollars or millions of euros. This is not necessarily different than that. There’s a royalty basis to it then there is the ECS supply chain. So I wouldn’t see this agreement being substantially different than what we’ve done in the past.

[Carter Driscoll:]

Do you anticipate that assuming you work out all the economic details and Inox is forthcoming with payments for that it could have a similar type of total dollar content for what you did for the 2-megawatt? Meaning – go ahead.

[Daniel McGahn:]

Yeah, what we said is we’re going to ask for – particularly when we’re looking at Doosan turbines and another turbines, whatever we’ve said typically between $50,000 and $100,000 of value per megawatt, and that will hold true for a 2 and 3, a 5.5 whatever size. We think that’s the value that we command that we want to try to get that kind of pricing from our customers.

[Carter Driscoll:]

Okay. So obviously to having Doosan helps with the diversification, assuming that the ramp for 5.5 will be relatively muted in this fiscal year. You talk about maybe some other potential designs they might be looking at for offshore, I mean, you’ve seen some of the competitors in the double digit megawatt size, you guys had obviously a – see tightening years ago. Maybe just talk about the opportunities that there is offshore seems to be getting some legs worldwide, particularly in Korea.

[Daniel McGahn:]

Yeah. I think with the macro trend the movement of larger turbines and offshore, it really is in the wheelhouse of ASMC. That’s where our technology does even better, and as you comment we even have other drive trains that we can do larger turbines for us. As the market moves there, and particularly our established partners or maybe new partners, as they need technology to get a larger turbines. We have a very unique set of turbine designs. That can allow somebody either to expand their product line or enter the market as a new entry. Right now the strategy is to go offshore through South Korea. If the direction changes if there are other partners present themselves with other sizes. That was certainly be something that we would talk to everybody about. The general feeling in South Korea is that the 5.5 megawatt turbine, I think, is one of the top 10 largest designs in the world. There’s a supply chain that has been in development for that size or class turbine. Getting larger there is a number of makers after the putting up prototypes of larger sizes, when our partners need that technology. We have it we don’t have a lot of development work between what we’ve done to date versus what we need to be able to transfer to a customer in South Korea they’re talking already about market terms. Certainly we want to make sure that Doosan is successful with 5.5. That will put us in position as they expand their product line. It gives us the potential to deliver other technology and other content to a maker like Doosan or somebody else that’s active in offshore.

[Carter Driscoll:]

Switching gears, could you – is your way to quantify the dollar content of the long lead time items versus what you think an entire system would be per ship? I know, you’ve given very specific per ship ranges or dollar content just remind us again maybe what percentage long lead time is in range relative to total dollar opportunity per ship?

[Daniel McGahn:]

Yeah, I don’t think for LPD 30 we put anything out there and there’s nothing in the remarks today. But to give you a sense of what we’ve already said on LPD 28, is when we got those orders and represent about 20% of the value. And we’ve already recognized revenue for that amount for LPD 28. We don’t see the next ship LPD 30 as being that much different probably that that helps you. The only thing, we tried to signal in the prepared remarks for other ships. So we talked about LPD 29, which we’re kind of hinting at, we think if we get an order will be directly from the Navy. We probably don’t need to be in that situation where we have such a long lead, because we’re now kind of getting more in the steady state production. So I said in the prepared marks we expect that that may comment one instruction or one order. I think same thing if we look out to LPD 31. There’s a lot of initial work with LPD 30 that will be accomplished with the shipyard that won’t have to be done again as we go to the next ship called LPD 31. So we’re trying to telegraph that there may be a segmentation of revenue in time, we’re maybe integrating over a large longer period for LPD 28 and LPD 30. But we tried to signal very directly we’re going to see a ramp in fiscal 2019 in the back end, and we’ll see as basically working on multiple ships in 2020 to 2021.

[Carter Driscoll:]

Okay. All right. So it’s very characterized this is both investments you’re making in your renewed facility along with a quicker potential adoption of those long lead time items at the shipyard level both of those should bring a smoothing effect, and as you add more platforms, bringing more annuity like revenue structure to that business. Is that fair characterization?

[Daniel McGahn:]

Yeah, I think you’ve got right at the crux of the call. We’re trying to telegraph. We’re trying to bring not only growth, but predictability to that growth. And we see that coming in late 2019 and certainly strongly in 2020 and 2021.

[Carter Driscoll:]

Okay. Here is last one for me, and I know you don’t – you’ve been asked is different ways, in terms of the margin expectations. But traditionally, Wind had been a higher margin business, but is it not fair to assume that as the Navy contributes a larger percentage of that, that Grid overall could meet or even potentially exceed what historically has been your Wind margins?

[Daniel McGahn:]

I think to give some of things we said in the past is inside the Grid business you have historically unabsorbed or under-absorbed fixed [ph] factory, relating specifically around the superconductor technology. The move to air, we signaled specifically what that reduction would be, we’ve been able to realize that reduction. So that means incremental margin happens at lower revenue dollars in Grid. So that’s one point. The second point I think as we’ve looked at the military, as we get into some scale here, which is not much as we’re telegraphing through 2020 and 2021, that the potential for military margins usually outweighs commercial margins. So as we release these products, the idea is not only to grow revenue, but grow operating leverage and to grow gross margin for the business.

[Carter Driscoll:]

Okay. I appreciate that. Maybe just last question for me is, given that you may face a bit of a transition routes [ph] from Inox, the 2 to 3 megawatt obviously assuming in your confidence that that will occur in the near term. Have you set up the same – have you had the ability to set up the same supply chain dynamics for 3 megawatt versus 2? Is there any different components or supplier that you need to alter from that? I wouldn’t imagine so, but just want to get your commentary on that.

[Daniel McGahn:]

Yeah, I don’t think – I think one of the analysts talked about it as being very different. I think the design is different in that it’s bigger. But it leverages the same basic components. We’re still talking geared systems. We are still talking essentially the same supply chain. What we’re trying to get is the more leverage to get into the 3 and the 5.5 megawatt turbine that you get leverage with bigger turbines as well. So as all that comes what it spells is hopefully some growth for us. When you look at what India has said, what Inox has said, I think the challenge that you’re pointing at, which is that transition to the 2 or 3 may cause some temporal dislocation in demand again in the short term. But if you look at the longer term and you integrate all their demand. It’s a lot of revenue for us. And we hope to – we’re already into 200 million plus that we delivered already. The prospects here that, people who are patient think quarters to years, not weeks to quarters. Their backlog continues to grow. The order with the Adani I think is a great feather in their cap to show more stability in their business. But I think the overall tailwinds or [precedent wind] [ph]. I think the challenge will be – and I think you get at it with the 15-month timetable that was described in Inox’ announcement, we got a lot of work to do in the next year. And if we’re able to execute on that and additional orders, you should see continued growth trajectory that we’re on in Wind.

[Carter Driscoll:]

I appreciate and thank you [indiscernible].

[Operator:]

This concludes today’s question-and-answer session. I would now like to turn the call back to Mr. Daniel McGahn for any additional or closing remarks.

[Daniel McGahn:]

Thanks, Ian, and thanks everybody for joining us today. We are executing on our plans. We’re in a great cash position. We’re beginning to grow. We’ve diversified our Wind and Grid businesses. We’ve expanded our Wind product line with a larger offshore ECS product. And we’ve expanded our Grid business with our VVO product. We are demonstrating the ability to monetize our ECS technology investment into a very significant SPS and REG opportunity. Our SPS product line is expected to create greater revenue predictability, as we deliver on our systems order. We believe that we are on a path towards predictable revenues and growth over the long term. If I look in the very near term, in the coming weeks and the coming quarters, hopefully, we’ll see and update to you all on the 3 megawatt contract with Inox. Hopefully, we’ll be able to update you on the process of the modification to the existing agreement with DHS. And then we’re certainly telegraphing that we should hear more on LPD 30, and more on Doosan. So we think we’re at a very nice position for the company, where we’ve introduced these new products, we’re getting traction and all indications that we have multiple pathways to growth and we have the ability here to be able to support that growth. Thank you everybody for your attention. And we look forward to talking to you again when we report the results for the full fiscal year, which will be in the next few months. Thank you.

[Operator:]

This concludes today’s call. We thank you for your participation. You may now disconnect.