American Superconductor Corporation
Q2 2013 Earnings Call Transcript

Published: 7 Nov 2013

[Operator:]

Good day, everyone, and welcome to the AMSC Conference Call. This call is being recorded. [Operator Instructions] With us on the call this morning are AMSC President and Chief Executive Officer, Daniel McGahn; Senior Vice President and Chief Financial Officer, David Henry; and Senior Manager of Corporate Communications, Kerry Farrell. For opening remarks, I would like to turn the call over to Kerry Farrell. Please go ahead.

[Kerry Farrell:]

Thank you, Tracy, and welcome to our call to discuss our second quarter fiscal 2013 results. Before we begin, I'd like to note that various remarks management may make on this conference call about AMSC's future expectations, plans and prospects constitute forward-looking statements for the 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 discussed in the Risk Factors section of our annual report on Form 10-K for the year ended March 31, 2013, which was filed with the SEC on June 14, and subsequent reports that we filed with the SEC. These forward-looking statements represent our expectations only as of today and should not be relied upon as representing our views as of any date subsequent to today. While AMSC anticipates that subsequent events and developments may cause the company's views to change, we specifically disclaim any obligation to update these forward-looking statements. I also would like to note that we'll be referring on today's call to non-GAAP net loss or net loss before adverse purchase commitments, recoveries, losses, net stock-based compensation, amortization of acquisition-related intangibles, restructuring and impairment charges, Sinovel litigation costs, consumption of zero cost-basis inventory, noncash interest expense, change in fair value of derivatives and warrants and other unusual charges, net of any tax effects related to these items. Non-GAAP net loss is a non-GAAP financial metric. A reconciliation of our non-GAAP to GAAP net loss can be found in the press release we issued and filed with the SEC this morning on Form 8-K. All of our press releases and SEC filings can be accessed from the Investors page of our website at www.amsc.com. And now I will turn the call over to CEO, Dan McGahn. Dan?

[Daniel Patrick McGahn:]

Thanks, Kerry, and good morning, everyone. I'll begin today by providing an overview of our financial results for the second quarter of fiscal 2013. Dave will then review our financial results in detail and provide guidance for our third fiscal quarter. Following Dave's comments, I'll provide an update to our business outlook. And after that, we'll open up the line to your questions. We are continuing progress towards cash flow positive, demonstrated by the year-over-year improvements that we've delivered during the second fiscal quarter. We grew revenues by 16% year-over-year, driven by higher revenues from our Wind customers in India and China, and a high-temperature superconductor wire shipment to a customer in Korea in our Grid segment. We improved our gross margin nearly threefold, and we reduced our non-GAAP net loss by over 30%. We are focused on reaching our goal of positive net cash flow on a quarterly basis by the end of fiscal 2014. However, we do see risks to our near-term growth prospects. Recent elections in Australia caused uncertainty in the renewables industry and constriction in the market. This created delays for projects in our Grid segment. The recovery of the Chinese wind market is being slowed by the continued grid infrastructure challenges. And in India, the regulatory framework intended to stimulate the wind industry was put in place 6 months after the beginning of our fiscal year, which created uncertainty. As a result, we believe there are risks to achieving our full fiscal year 2013 revenue objective. We are optimistic that these challenges are short term. The uncertainty in Australia is expected to be sorted out within the next several months. China's new installations this calendar year are on target to exceed new installations in 2012. And India's total 2013 installations are expected to be third largest globally, behind only China and Germany. And in the second half of our fiscal year, the Indian wind market could actually be busier than the first half. Given the uncertain nature of the near-term outlook for the Wind and Grid businesses, today, we announced that we are contemplating new financing arrangements to enhance liquidity. Also, during the second fiscal quarter, we implemented cost-cutting actions, which resulted in the reduction of headcount in certain engineering, selling and general and administrative functions in order to reduce operating expenses and further slow the cash burn rate. Before I discuss our business strategy, second quarter highlights and risks to our forecast, I'll turn the call over to Dave for a financial overview.

[David A. Henry:]

Thanks, Dan, and good morning, everyone. AMSC generated $24.2 million in revenues for the second quarter of fiscal 2013. This is up from $20.9 million in the year-ago quarter and $23.1 million in the prior quarter. The sequential revenue growth was driven by higher grid revenues, while the year-over-year revenue growth was driven by both the Wind and Grid business units. Wind segment revenues for the second fiscal quarter increased year-over-year, primarily due to higher revenues from customers in both India and China, partially offset by lower revenues in Korea. Grid segment revenues increased year-over-year in the second fiscal quarter, primarily due to a large HTS wire shipment to a customer in Korea. The 12-month backlog as of September 30, 2013, was approximately $60 million compared with $75.4 million as of June 30, 2013. The decline in the backlog is due primarily to a significant portion of the D-VAR pipeline being pushed out, and continued shipments to wind customers, such as JCNE and Inox, under longer-term contracts. Inox is the closest of our active wind customers to needing a new supply contract, and we have entered into initial discussions with them. Dan will go into further details on our near-term business opportunities. Gross margin for the second quarter was 6.5% compared with 2.3% in the year-ago quarter and 22.1% in the prior quarter. The year-over-year increase was primarily due to higher revenues and increased consumption of previously written-off inventory in the current year period. The sequential decline is because gross margin in the first quarter of fiscal 2013 was positively impacted by revenue at 100% margin, due in part to collections on past due receivables from certain customers in China. R&D and SG&A expenses for the second quarter were $11.8 million. This is down from $15.4 million in the year-ago quarter. The decrease is due primarily to effective cost controls and the benefit of prior restructuring actions. In the second fiscal quarter, we implemented a cost-cutting action which resulted in the reduction of headcount in certain engineering, selling and general and administrative functions in order to reduce operating expenses and further slow the cash burn. As a result, we recorded a restructuring charge of approximately $800,000 in the second fiscal quarter. More than 25% of this R&D and SG&A spending in the current -- in the second fiscal quarter was noncash. Net interest expense was $3.5 million in the second fiscal quarter, of which $3.1 million was noncash interest expense. This compares with $2.1 million of interest expense in the prior quarter, of which $1.7 million was noncash and $2.9 million in the year-ago quarter, of which $2.2 million was noncash. Both the sequential and year-over-year increases in interest expense were due primarily to the acceleration of principal, paid to the holder of the convertible note in shares of stock in the second quarter at a 15% discount to market. This discount is recorded as noncash interest expense. We also recorded a noncash gain of $900,000 in the second fiscal quarter for a change in the fair value of our derivative liabilities and warrants, which are -- we are required to mark to market each quarter. In the year-ago quarter, this amount was a gain of $3.3 million. The year-over-year decrease in the gain is due primarily to a lower principal value of the convertible note and a lower stock price compared to the prior year. Our net loss in the second quarter of fiscal 2013 was $14.6 million or $0.24 per share, an improvement from the net loss of $15.9 million or $0.31 per share in the year-ago quarter, but up from $10.5 million or $0.18 per share in the prior quarter. As a reminder, we forecasted the sequential increase in net loss, which was due to the revenues at 100% gross margin in the first fiscal quarter that we discussed earlier. On a non-GAAP basis, our net loss was $10.8 million or $0.18 per share for the second quarter of fiscal 2013. This is up from a non-GAAP net loss of $8.1 million or $0.14 per share for the prior quarter, but down from $16 million or $0.31 per share in the year-ago quarter. Please see our press release issued this morning for a reconciliation of GAAP to non-GAAP results. We ended the second quarter with $32.8 million in cash, cash equivalents and restricted cash. This compares with $39.5 million as of June 30, 2013. As of September 30, 2013, the principal balance of our debt arrangements, excluding the debt discount, was $16.2 million compared with $21.3 million as of June 30, 2013. Of the $5.1 million reduction in our debt, during the quarter, approximately $4 million was paid in stock. We are in compliance with the covenants under our debt arrangements. Turning to our financial guidance. For the third fiscal quarter of 2013, we expect that our revenues will be greater than $18 million. We expect that net loss for the third fiscal quarter will be less than $17 million or $0.28 per share. This does not factor in any mark-to-market adjustments associated with our convertible note and warrants. Net loss for the quarter includes an estimated $1.1 million for increased noncash interest expense related to the repricing of the Heights warrants in conjunction with the recently announced amendment. Our non-GAAP net loss for the third fiscal quarter, which excludes mark-to-market adjustments, noncash interest associated with our debt arrangements and other noncash items, is expected to be less than $12 million or $0.19 per share. In terms of the balance sheet, we expect to end the December quarter with more than $25 million in cash, cash equivalents and restricted cash. We continue to expect our cash burn will be reduced in fiscal 2013 compared with fiscal 2012, with a slower cash burn in the second half of the year compared to the first half. During the second fiscal quarter, we filed a shelf registration statement, which provides us with the ability to raise $30 million through the sale of our common stock. Additionally, we amended our convertible note agreement with the note holder. Under this amendment, among other terms, we now have the ability to enter into a senior debt arrangement of up to $15 million. Based on the principal balance of our senior term loan as of today, that represents an additional $10 million of borrowing capability. Combined with the shelf registration statement, this provides us with the ability to seek an additional $40 million of financing. We've been consistent in telling you that we believe there was sufficient liquidity for the next 12 months, and to ultimately reach our target of positive net cash flows on a quarterly basis by the end of fiscal year 2014 if we were executing to the forecast we outlined at the beginning of the year. We now see risks to achieving the forecasted revenue growth. As a result, we are contemplating additional financing arrangements in order to enhance liquidity. Our priorities for enhancing our liquidity are

[Daniel Patrick McGahn:]

Thanks, Dave. For those of you that are new to AMSC, our business is divided into 2 segments

[Operator:]

[Operator Instructions] And our first question comes from Carter Driscoll with Ascendiant Capital Markets.

[Carter W. Driscoll:]

First question, Dan, can you remind us again what the fiscal '13 original target or guidance was, was that year-on-year growth, is that correct?

[David A. Henry:]

Yes. What we had said earlier in the year is that we believe we would be able to see 25% growth year-to-year. I believe we delivered about 15% the previous year. So we're still seeing growth, but what we're showing today is the cautioning of some of the conditions in the market that can affect our business in the short term.

[Carter W. Driscoll:]

But still, that still portends, assuming maybe not 25% growth, but even if we said it was 10% growth, pretty healthy, snap back in...

[David A. Henry:]

That's what we're trying to drive to. We want to drive revenue growth. And what we're really singularly focused on now is getting to that end objective in 2014 of cash flow on a quarterly basis -- positive cash flow on quarterly basis.

[Carter W. Driscoll:]

Yes, okay, I just want to make sure I clarify that. In terms of the D-VAR push out, is that -- the pipeline push out, is that specifically related to what is occurring in Australia, or have there been other changes in the U.S. or the U.K. which traditionally are 2 other strong markets for D-VAR? Or has the emerging country opportunities, like Romania and South Africa, and some of the other nations you've talked about, has that changed?

[David A. Henry:]

I think, overall, the climate in the North American markets, so U.S. and Canada, is actually quite strong. The pipeline there continues to be robust. The establishment of the PTC certainly has brought clarity to project developers. There are initiatives in Canada around wind and solar, as well as mining that may have additional orders for us in the future. In the U.K. market, a lot of the move has been towards offshore, and the capture of that offshore market has, I think, been slower than what was originally anticipated. But when we look at the geographic expansion, what we're seeing is many of these countries are learning the lessons of those that have gone before them. So they're looking at models on how do you manage a grid, how do you provide stability, how do you provide reactive compensation. And they're modeling the grid codes that are the most stringent in the world, which drive towards the utilization of D-VAR. So our job now is to really focus on developing these markets, our brand awareness, get first orders. And you're seeing the beginning of that, and the hope is that we can continue to do that over the next quarters and years.

[Carter W. Driscoll:]

Just following up on that. What -- why haven't you had potentially more success with D-VAR in China, given the ongoing issues that they have with their grid?

[David A. Henry:]

It's a very good question, it's something that we've asked ourselves. I think at the end of the day, it comes down to the Chinese valuing technology. So when you think about how we position D-VAR, we position it for a certain size of wind installation. We position it to work with a certain set of response to grid codes. And we position it at a certain price level. And the challenge always in China is they want the best available technology for the lowest price. And at this point, we want to focus on some of these emerging markets where there's grid code enforcement. I mean, the challenge all along here in China over the past couple of years has been the connection of the wind turbines to the grid, is it being forced to happen on time? So there's a problem, but I don't want to make you feel like the Chinese have fully appreciated that problem. Is there a market for D-VAR in China? Yes. Have we gotten first orders for D-VAR in China? Yes. Are we out trying to actively expand that market? Yes. But I think to our shareholder base, what we want to do is to diversify our revenues to the broadest reach we can across the globe. And having additional revenue in China, although helpful, is not going to get us to where we ultimately want to be, which is a sustainable business in the long term. So we have talked about China and D-VAR in the past. There is a business there, we have gotten orders, but we're really, as a company, focused on broadening the geographic reach of the company to bring stability to the top line, and ultimately, to deliver sustainable profit on the bottom line.

[Carter W. Driscoll:]

A couple more questions. It sounds as though you've maybe a change in tone in terms of the litigation maybe being even more politicized than what it looked like within -- at least for China, a somewhat natural progression of the chain towards the Supreme Court. Is that a fair characterization that maybe the court system won't be the ultimate decider of what goes on between you and Sinovel and that it might be, as you say, resolved at some of the highest levels as a bigger issue between the 2 countries?

[David A. Henry:]

The resolution may come out through some kind of court decision. I think the challenge is in China, with the jurisdictional matter, that's gone up to the Supreme Court. You can't go any higher. We now have an indictment, a criminal indictment of Sinovel and some of their key executives of the crime that was committed and a case with the U.S. Department of Justice against Sinovel. So you've gone up to really the highest levels of the land, from a judicial standpoint. And what we're talking about today is that politically, because of the level, because of the size, because of the impact of our case, it does become quite political. I don't know how this will resolve itself. I still feel firmly committed that when you look at the evidence, the outcome is pretty straightforward. But I think the question will be how that outcome manifests, when that outcome manifests. I think the good thing for our company is this administration has stood very strongly in support of the issue, and specifically of our company, which is not something that happens very often in government. We have become literally the poster child for Western IP abuse in China. So at some point, we believe that this will get resolved. We believe the resolution will be positive for the company. But we have to go forward and manage our business, run our business and be able to grow to a level that we want to, to sustain longer-term profits.

[Carter W. Driscoll:]

And my last question is, I think I maybe misheard. I think you said you anticipated an order from the Navy for the degaussing system within what period of time? And then can we follow up about maybe some of the other opportunities you're talking with, with the Navy?

[David A. Henry:]

Yes. So the things -- the 2 things that I said is that we expect an order for resilient electric grid, which is the distribution level cable solution with the inherent fault-current limiting capability in it. It's the extension of what we've already done with DHS and Project Tiger. And in addition, we've said that we believe we'll get an order in the next 6 quarters for a degaussing system. We've already gone through full testing qualification, we've done at sea trials. And the belief within our company is we will see this order within the next 6 quarters. Those are 2 pieces to the larger story of how do we get to the levels that we want to, to sustain profitability. Those are 2 legs of the stool. The D-VAR business in the current market and expansion into the new markets is another leg of the stool. And the fourth leg of the stool is really supporting our existing wind licensees, particularly in Korea, India and China. But as you can hear from my tone, we're very focused on India because the partner is very strong, the market is very strong, and they are coming up very fast in their growth, we want to be able to support them in the proper way.

[Operator:]

[Operator Instructions] Our next question comes from JinMing Liu with Ardour Capital.

[JinMing Liu:]

First is about the Chinese wind market. I have a slightly different read on that market. In the first half, they got the total signed contract -- contracts were about over 8 gigawatts. I think in the second half, they may do a couple of that. And also, they have built another long-distance, high-voltage transmission line from all the way from Xinjiang to the heartland in -- close to the coastal area. My question is, really to your company is, what are your licensees or customers doing there, other than JCNE. Like I noticed your customer, or ex customer, CSR-ZELRI has some traction. Can you comment all your customers in China, what's the progress they've made so far?

[David A. Henry:]

Yes, we tend to highlight JCNE, particularly on this call, because they are a significant portion of revenues, and the fact that the other Chinese customers are not. We mentioned we got collections here in the past quarters. It's been some -- from some of these other Chinese participants. CSR has built a nice business, they had bought inventory in the past. They've been able to use that inventory. They're using our wind turbine design. And I think that they've made a nice position in the market. XJ has gone through their first wind farm, Shenyang Blower has gone through their first wind farms. Dongfang has put up its 5.5-megawatt with us. I think the challenge is for all of these guys, the projects that they're going after are in regions where there still is this curtailment, where they're trying to get more grid connection. So when you look specifically on where we see our customers going, the market right now is constrained. The Chinese have a propensity to talk about the market and market growth, but I don't think we're seeing it, I think Western analysts are seeing it to be at the level maybe that the government is talking. But the hope is maybe there's a stronger second half of the year, the hope is that we're finally through a lot of these issues. And as you mentioned, with high-voltage transmission being built, that hopefully, we're seeing the beginning of a turn in the market. I think, specifically, when we look at our partners and where they're trying to place their wind turbines, they're still seeing the market being constrained for them. But they're all looking forward optimistically towards growth in the future. And what we have to do is be a patient partner and be there to support them through their growth.

[JinMing Liu:]

Okay, that's helpful. Switch to India. I notice that other than domestic companies, actually some other Indian companies are teaming up with Chinese companies to bring the cheaper turbines into the Indian market. I notice a domestic Indian company are trying to get multi-gigawatts Chinese wind turbine into that market. What do you see that impact your customers in that market?

[David A. Henry:]

There's a couple of things there, I think, from a cost performance standpoint. Inox turbine, at least as they've shown to their customers, and their customers have articulated to us, is one of the best wind turbines in the world. So from a technology standpoint, we believe Inox has a great product that's out in the market. They've been able to go from 2% share up to 15% share a year. I think looking at the Chinese coming in, I think there's a bit of reticence -- reticenceness [ph] on the Indians to accept Chinese-manufactured goods. We will see what the market bears, but what we're seeing through Inox and their customers, they understand what the offerings are from Suzlon and we see Inox being able to gain share in that market. And we want to be able to make sure we're supporting them with the best available technology, the best service that we can provide, and make sure that they're being able to manage their fleet. And if they are, they're going to be a large player. And we believe, when we look at the prospects for them, they really potentially could become the #1 in India. And that's what we want to be able to help facilitate.

[JinMing Liu:]

Okay. Lastly, about the Navy -- potential Navy contract. My question is whether your liquidity situation will be a factor affecting the Navy award contract to you?

[David A. Henry:]

It broke up a little bit in the beginning, Jin.

[JinMing Liu:]

It's about the Navy contract, we try to understand whether your liquidity situation will be a factor for the Navy to decide whether to give you that contract or not.

[Daniel Patrick McGahn:]

I think the simple answer is no. What we've seen in general with customers and liquidity, they understand where we are. They understand where we've been in our history. We're a company that's been around more than 25 years. We've been able to manage through downturns in our past. We're doing that today. The Navy really looks at the superconductor as a strategic technology. And one of the things that we've done with the degaussing system is we're not just selling wire, we're selling the full system. We have intellectual property around not only the wire but all of the components in the system. So going forward, if the Navy wants to adopt this advanced degaussing system using superconductors, we believe we're in a very strong position to do that, not just from a technology, but also from the relationship that we have with the Navy.

[Operator:]

Thank you. And there are no further questions at this time. Please continue, Mr. McGahn.

[Daniel Patrick McGahn:]

Thank you, Tracy, I appreciate it, and thanks to those that asked questions. We're going through a transition here. We're 2.5 years in, and we're talking about another 1.5 years before we get back to profitability. It's the main focus of the company. And I think we've tried to articulate today the business strategy as clearly as we can. We've tried to also articulate in the short term what some of the risks are to our business. I believe we've demonstrated that we've been able to manage prudently our costs. Now what we have to do going forward is to take advantage of some of these situations in the markets and generate stronger revenue growth. We believe that this overall objective will be met of getting to the end of 2014 and being to where we want to be as a business. So I thank everybody for their time, and I look forward to talking to you again in the coming months. Thank you.

[Operator:]

Ladies and gentlemen, this concludes the conference call for today. We thank you for your participation. You may now disconnect your line, and have a great day.