American Superconductor Corp /De/ Q1 FY2020 Earnings Call

Good day, and welcome to the American Superconductor First Quarter Fiscal 2020 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.

Thank you, Ella. Good morning, everyone, and welcome to American Superconductor Corporation's First Quarter Fiscal 2020 Earnings Conference Call. I'm John Heilshorn, from LHA Investor Relations, AMSC's Investor Relations agency of record. With us on today's call are Daniel McGahn, Chairman, President, and Chief Executive Officer; and John Kosiba, Senior Vice President, Chief Financial Officer, and Treasurer. American Superconductor issued its earnings release for the first quarter of fiscal 2020 yesterday after the market closed. Those of you who have not yet seen the release, a copy is available on the Investors page of the company's website at www.amsc.com. Before starting the call, I would 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, 2020, which the company filed with the SEC on June 2, 2020, and subsequent reports that the company has filed with the SEC. 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 income loss before stock-based compensation, amortization of acquisition-related intangibles, changes in the fair value of warrants, other noncash or unusual charges, and the tax effect of adjustments calculated at the relevant rate for the company's non-GAAP metric. Non-GAAP operating cash flow is defined by the company as operating cash flow before the China settlement, net of legal fees and expenses and other unusual cash flow items. The reconciliation of the non-GAAP measures to the most directly comparable GAAP measures can be found in the first quarter of fiscal 2020 earnings press release that the company issued and furnished to the SEC 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 Chief Executive Officer, Daniel McGahn. Daniel?

Thanks, John, and good morning, everyone. I will begin today by providing an update on 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, 2020, and provide guidance for the second fiscal quarter, which will end September 30, 2020. Following our comments, we'll open up the line to questions from our analysts. We are growing and diversifying our business. Revenue for the first quarter of fiscal year 2020 came in above the top of our guidance range and grew by more than 50% compared to the year-ago period. Our grid segment revenue grew nearly 80% compared to the year-ago period. In fact, this was the largest grid quarter we have reported in nearly a decade, which is how long we've been reporting on the grid segment. All of our grid product lines, D-VAR, VVO, SPS, and REG, contributed to the strong growth in the quarter. We ended the first quarter with more than $62 million in cash. Our grid business was driven by stronger D-VAR, VVO, and SPS revenues. With our very strong start to fiscal 2020 and a robust grid backlog scheduled for the remainder of the fiscal year, we believe that our grid segment is on track for yet another record-breaking year. We made shipments against our order from our Korean partner, Doosan Heavy Industries, for our 5-megawatt class electrical control systems, or ECS, during the first quarter of fiscal 2020. We expect to complete shipments under this order this fiscal year. Our growth through grid strategy is working. Our record backlog of D-VAR projects is expected to ship this fiscal year. The first quarter of fiscal 2020 was the largest D-VAR revenue quarter in about a decade. Grid is driving revenue growth, and D-VAR has been the foundation of our grid business. Our business development and manufacturing teams are working very hard. The D-VAR product is currently focused on addressing renewable energy installations and industrial installations, like a mine or semiconductor fabrication. The majority of our D-VAR revenue comes from the interconnection of renewable energy generation plants to the electricity grid. First-quarter D-VAR shipments were for wind farm connectivity applications in Australia, the United States, and the United Kingdom. We anticipate strong D-VAR shipments to continue in the second quarter of fiscal 2020. As you know, D-VAR is a power transmission level product, whereas our new Volt/VAR Optimizer, or VVO, product addresses the power distribution market. Our sales team has done an excellent job of educating utilities about our VVO product, and we are encouraged by the utilities' positive reaction to our solution. Our team had a strong start to fiscal 2020, shipping our first multi-unit order of VVO product to a utility in the United States. We expect a higher volume of VVO shipments this fiscal year. We are beginning to see multi-unit orders from multiple utility customers. We expect VVO to contribute to our grid growth in fiscal 2020. Our SPS business with the Navy is gaining significant momentum. AMSC's ship protection systems are also known as degaussing systems. At AMSC, we refer to them as SPS. In July, we announced our third SPS order for the San Antonio Class LPD platform. This latest order will be for deployment on LPD 31. I want to take a moment to recap developments with our SPS and the Navy. The SPS is designed to manage the magnetic signature of a ship, which can thwart an undersea mine's ability to detect and damage the ship. AMSC has worked with the U.S. Navy to develop a lighter weight, more power-efficient version of this degaussing system. The high-temperature superconductor SPS is now being sold to the Navy. AMSC's SPS became the baseline design for the San Antonio Class and VVO's warfare ship or LPD platform. The Navy's plan is to build 15 additional San Antonio class ships starting with LPD 28. We have an order for SPS for LPD 28, an order for SPS for LPD 30, and we now have an SPS order for LPD 31. Our expectation is that our next SPS order will be for LPD 29. Our SPS team is very busy and focused on continuing to expand the business while we deliver our first systems. We are working closely with the Navy and our supply chain to ensure timely delivery of our three ship system orders. From a capacity perspective, we have been planning for the concurrent manufacturing of multiple SPS orders. We have implemented safety protocols, including social distancing on our factory floor. The San Antonio class is our first design win with the Navy. Other potential platforms include, but are not limited to, destroyers, aircraft carriers, frigates, and Littoral Combat Ships. SPS contributed to our strong grid segment revenues in the first quarter of fiscal 2020. We have reached a new revenue threshold for SPS. We're working closely with the Navy to understand the program timing for LPD 29. Last month, in July, we announced that ComEd, a unit of Chicago-based Exelon Corporation and one of the nation's largest electric utilities, has begun construction on its Resilient Electric Grid, or REG, system. The REG system is expected to become a permanent asset within Chicago's electric power grid. We have been establishing our REG manufacturing and product delivery systems for this project, and we are on schedule for delivery of the system in 2020. ComEd's first REG system is expected to be operational in 2021. We continue to work with major utilities on specific projects, which we believe show a lot of promise. We are diversifying our wind business. We made shipments against our order from our Korean partner, Doosan Heavy Industries, for our 5-megawatt class electrical control systems, or ECS, during the first quarter of fiscal 2020. In fact, Doosan has been our largest wind customer for the past four quarters. We anticipate delivering additional units of the 5.5-megawatt ECS in the second quarter of fiscal 2020. As part of South Korea's Ministry of Trade, Industry, and Energy strategy, renewables are targeted to generate 20% of South Korean electricity by 2030 and at least 30% by 2040. According to the publication Business Korea, the South Korean government is promoting that its offshore wind power generation will reach 12 gigawatts by 2030. South Korea intends to become one of the world's top five offshore wind power producers, and we believe Doosan is well positioned for a very high market share. To date, there are approximately nine large-scale offshore wind farms in the development pipeline, totaling nearly nine gigawatts of wind capacity. We understand Doosan will supply wind turbines for the southwestern offshore wind project and the Gunsan offshore wind farm. In 2019, global offshore wind power generation reached about 29 gigawatts. By 2030, global offshore wind power is expected to increase sixfold to 177 gigawatts. South Korea, Japan, and Taiwan are expected to contribute to the development of offshore wind power farms. Our team is working closely with Doosan, and we look forward to potentially penetrating the global offshore wind market with this important partner. In India, we are encouraged by Inox's stated desire to lower the levelized cost of energy through a new, larger wind turbine design. Inox has publicly announced its expectation to transition to a 3-megawatt class turbine by next year. However, we have not yet signed a 3-megawatt ECS supply agreement with Inox. Inox has indicated that a new turbine is an integral part of its long-term strategy to deploy wind power in India. We have seen and still see uncertainty in the Indian wind market and at Inox. We stand ready to support our partner in India as they need assistance commissioning new turbines or need new stock of 2-megawatt ECS. We have been in constant communication with Inox. Inox has paid some outstanding amounts on some of its contracts. Inox is working diligently to regain compliance with the 2-megawatt supply contract. We are using the capabilities of our contracts with Inox to help bring the situation to a positive resolution for both parties. We believe we are well-positioned to support any expansion of Inox's business. Now I'll turn the call over to John Kosiba to review our financial results for the first quarter of fiscal year 2020 and provide guidance for the second fiscal quarter of 2020, which will end September 30, 2020. John?

Thank you, Daniel, and good morning, everyone. AMSC generated revenues of $21.2 million for the first quarter of fiscal 2020, compared to $13.8 million in the year-ago quarter. Our grid business unit accounted for 84% of total revenues, while our wind business unit accounted for 16%. Grid business unit revenues increased by 80% in the first quarter versus the year-ago quarter, due primarily to higher D-VAR and SPS revenues. Wind business unit revenues decreased 11% in the first quarter versus the year-ago quarter as a result of fewer ECS shipments to Inox. This was partially offset by increased ECS shipments to Doosan during the period. Looking at the P&L in more detail, gross margin for the first quarter of fiscal 2020 was 24%, compared to 11% in the year-ago quarter. The year-over-year increase in gross margin was primarily driven by revenue growth within our grid business. The increased revenue resulted in a favorable product mix and increased factory absorption, both contributing to the year-over-year margin improvement. R&D and SG&A expenses for the first quarter of fiscal 2020 were $8.1 million. This was up from $7.7 million for the same period a year ago. Approximately 17% of R&D and SG&A expenses in the first quarter of fiscal 2020 were noncash. Our non-GAAP net loss for the first quarter of fiscal 2020 was $2.4 million or $0.11 per share, compared with $6.2 million or $0.30 per share in the year ago quarter. Our net loss in the first quarter of fiscal 2020 was $3.4 million or $0.16 per share. This compares with $3.5 million or $0.17 per share in the year ago quarter. Included in our first quarter of fiscal 2019 net loss was a $2.9 million noncash gain associated with the change in the fair value of warrants, which favorably impacted the year-ago results. Please see our press release issued last night for a reconciliation of GAAP to non-GAAP results. We ended the first quarter of fiscal 2020 with $62.2 million in cash, cash equivalents, marketable securities, and restricted cash. This compares with $66.1 million on March 30, 2020. Our operating cash burn in the first quarter of fiscal 2020 was $3.1 million, which came in stronger than our previous guidance of a $4 million to $6 million operating cash burn. As mentioned in previous calls, our working capital for the business fluctuates from quarter to quarter depending on working capital requirements for individual projects. Looking at our cash requirements over recent quarters, our working capital tends to average out any quarterly variations. Over the last four quarters, our non-GAAP operating cash burn averaged approximately $3 million a quarter on an average quarterly revenue of $18 million. Each quarter, our cash flow requirements may be higher or lower due to changes in our working capital. We believe the operating cash burn in the first quarter of fiscal 2020 was well within the range of where we would expect our cash requirements for the business to operate. Now turning to our financial guidance for the second quarter of fiscal 2020, we expect that our revenues will be in the range of $17 million to $21 million. Our net loss on that revenue is expected not to exceed $6.5 million or $0.30 per share, and our non-GAAP net loss is expected not to exceed $5.5 million or $0.25 per share. The company expects operating cash flow to have a burn of $4 million to $6 million in the second quarter of fiscal 2020. We expect to end the second quarter with no less than $55 million in cash, cash equivalents, marketable securities, and restricted cash.

Thanks, John. As we discussed last quarter, the emergence of COVID-19 has created both operational challenges and macroeconomic concerns for all businesses. AMSC has demonstrated that it can operate effectively through times of uncertainty. We were early to implement physical separation protocols at our manufacturing sites, and we have not missed a beat in production. We have instituted cleaning protocols for our offices to help keep everyone safe and healthy, which is paramount. We are focused on our people and our parts supply for our products, as well as on strong customer service and product quality. We have been operational throughout the pandemic. We have started fiscal 2020 on a very strong note. Grid represented over 80% of our revenue in the first quarter of fiscal 2020 and is our strongest grid quarter in nearly a decade. Our D-VAR business is clearly very strong. We are delivering VVO to the market, developing our pipeline, especially for repeat customers or customers seeing the need to purchase multiple units. We have SPS orders for deployment on LPD 28, LPD 30, and now most recently, LPD 31. We are in production of ComEd's first REG system. We are supporting Doosan's efforts to penetrate the offshore wind market with our 5.5-megawatt turbine. We are executing against our goals, and that is to the credit of our employees due to their hard work and dedication. Our resilient people are focused on our resilient products. I look forward to reporting back to you at the completion of our second fiscal quarter of 2020. Operator, we'll now take questions from our analysts.

And we will take our first question from Philip Shen with ROTH Capital Partners.

First one is on D-VAR. You saw some nice growth there. This quarter, you see more ahead. Daniel, I was wondering if you could talk about how long you expect this to sustain. I know you're seeing strength in renewables, in wind specifically. And I think you talked about going to the U.S., U.K. and Australia. So to what degree are you winning business in other countries beyond these three? And do you think you can continue to just grow with the overall wind industry as your— it seems like your—the value proposition of your offering seems to be a nice winning formula compared to the competition.

Thanks, Phil. Let me start a little bit bigger with just grid. I think what we've shown today is that we clearly have a backlog to support grid growth for the year. That's obviously driven by D-VAR. We did say we anticipated a surge in the business. I believe we're seeing some of that now. It's very hard for us to look out into the fall and into the winter, given the pandemic and the fact that the U.S. will go through an election. So I don't really know what the market demands will be. What we have seen, though, is our sales team already looking at sales for next year. They're looking at projects that are probably now as many as six or seven quarters out in the future. That pipeline remains very robust. But that doesn't necessarily mean, Phil, that macro market effects won't slow things down. We're in a position to continue to deliver at these kinds of levels. But I think, clearly, I want you to understand that we have seen an acceleration in that part of the business. We'll see how we go forward with the next few quarters. We certainly have guided what we think will be a nice quarter again for the second quarter. But beyond that, it becomes probably even more difficult than typical years to prognosticate what the future holds for us.

Okay. As a follow-up there, can you talk about whether or not you're potentially bidding or winning new orders in new countries? So we talked about—or you actually highlighted the three earlier. Is there an expansion of reach as well?

It's going to depend on some of our partners. So our typical core markets are the U.S., Canada, and the U.K. We sometimes see some business in Australia. We're obviously seeing that right now, but it doesn't necessarily mean that we'll continue. In the past, we've demonstrated orders in Latin America, Continental Europe, and the Middle East. At this point, all I can say, Phil, is, stay tuned as we announce orders. I don't know what's going to close next. I know the pipeline is very much focused on our current core markets: U.S., U.K., Australia. We do have a healthy pipeline for renewables but also for industrial. Industrial could also be in Asia or North America. So we try to manage risk by having multiple shots on goal for the product. Having that diversity hopefully allows us to continue the rhythm that we're on today.

Great. Shifting gears to VVO. It sounds like you're having some nice success there as well. Can you talk about the number of utilities that are doing multiple orders? And then also how many utilities are you selling to today? How many do you think you could expand that to in 2020 as well as '21?

I think either in the next call or the call after that, we'll probably go through a more detailed update on VVO. I think this is an important year for it. We did mention that we're planning on making a certain number of units this year. We're trying to put them in the hands of what we think will be utilities that will buy bundles easily, ideally leading to deployments that use multiple systems. I really don't want to get into specific numbers at this point, Phil. I think as we see the year progress, we can provide more color on the product. I'm very pleased with where we are. We provided some indications in the prepared remarks about this idea concerning multiples, but we're still in the early stages of it. I believe as we look forward to 2021, one, with VVO, we expect to see a stronger performance there and beyond. However, we think 2020 is a very important year for delivery of VVO and making these customers happy enough to buy multiple systems either this year or in future years.

Great. Congrats on the success you're seeing in the grid.

Thanks, Phil.

We'll take our next question from Eric Stine with Craig-Hallum.

It's Aaron Spychalla on for Eric. Maybe first, on the Navy business, congrats on the order for LPD 21. Can you just kind of discuss the timing on the first two ships? Are those still expected to be delivered this fiscal year? Any more color on the efforts to expand into other areas? I think last quarter, you mentioned the Navy has identified the next class of ship. Any other updates on potential sizes or timing? Also, just any more color on capacity there? I know you mentioned multiple ships, but any additional insights would be great.

Yes. It's difficult to provide a lot more detail or predict the next order until we announce it. However, to give you an idea of how the revenue profile works, we had two systems going into the quarter. Now we've added a third. The best way to think about it is that we're basically delivering a system this fiscal year. We should be positioned to deliver one next fiscal year. The timing for LPD 31 means we'd likely deliver the following fiscal year. When we said new revenue threshold, we meant that we're at a regular rhythm now where we can deliver one ship system a year. I also want to clarify that we have the capacity for more because we're expecting growth. As we get wins, we'll certainly announce them.

Understood. And then maybe next on customer diversification. Could you provide an update? It really sounds like on D-VAR, and just broadly in the grid, you're really starting to see that. I think I saw another new significant customer in the queue. Could you talk about the pipeline and how that's growing?

Yes. We're seeing an uptick in some larger projects in D-VAR. It does not mean that all are, but the number of large projects that we see on the horizon looks promising for us. This translates into potential customers that could be a 10% plus client for any quarter. I believe in this quarter, we have the same customer as last quarter at 10% plus and an additional one. It's interesting that all of our 10% plus customers are coming from the grid side, specifically for D-VAR. One is a project in Australia, and another is a project in the U.S.

All right. And then maybe lastly for me, you've discussed your supply chain efforts in the past. Could you provide more detail on what you've done there and how you view that as important moving forward?

Yes. To update on the supply chain, we've seen changes, which makes sense given risks and disturbances in other markets. Some of our suppliers have improved their timing. We are now looking at multi-sourcing for essentially everything within the systems we're delivering, for instance, for D-VAR and for ECS. So while we still face supply chain challenges, they're now occurring weekly instead of daily as they did in the spring. It's a series of efforts with our team to ensure that we're able to get parts on time and in the quantities that we need. We have seen lead times shorten for some key components, which is encouraging.

All right. Congrats again on the quarter.

Thanks, Aaron.

We will take our next question from Colin Rusch with Oppenheimer.

It's Joe on for Colin this morning. Can you provide a bit more color on visibility into the Korean wind market and when we could see some revenue? Also, any insights on the scale of revenue coming from that market?

Yes. One positive aspect is as we see potential in that market opening up, Doosan would advocate, and we would support it, that they believe they will gain superior market share locally, as it appears to be set up that way. To reach the 12 gigawatts now projected and I've seen some estimates as high as 14 and 16, the latest figure we could mention is this 12-gigawatt one. It implies they will need to achieve a rate of about 1 gigawatt or more a year. We have discussed our content being between $50,000 and $100,000 per megawatt, with the same applying for Doosan. So doing the math, the opportunity in Korea alone is in the hundreds of millions of dollars for us. It may not quite reach $1 billion across the total market, but it gets fairly close. I think the challenge and the question will be what share Doosan will be able to capture. We believe they will excel due to their technology, which we know is superior to many offerings currently available. We think we are the only one out with such a substantial alternative as a local Korean manufacturer. So we're cautiously optimistic at this point in 2020 that Doosan has a bright future ahead. I don’t know if that will show impact in '21, but certainly in years beyond that, we consider them an important customer, not just this year but for many years to come.

At this time, we have no further questions. I will now turn the conference back over to Daniel McGahn for any closing comments.

I want to thank everyone for your attention today. It has been challenging getting through the pandemic. The good news is the numbers indicate that the business is really thriving. We're at the level that John discussed with the numbers, right, where we aimed to be, both from a revenue standpoint and from a flow-through standpoint. We're getting good leverage in the business. We see gross margins this quarter being very promising. A lot of the questions people asked us last quarter were addressed today with the results and information shared on the call. Looking ahead, we have significant work to continue the growth trajectory in the grid sector. We also highlighted promising signs from India based on some of the comments we made. We anticipate strong results again in the next quarter, given the guidance, and we are committed to working hard to ensure we can achieve that. There may be some lumpiness in business occasionally, but I cannot predict today what impact the election or the fall and winterof COVID will have. Nonetheless, we want to ensure we are positioned to capitalize on every opportunity that arises. Thank you, everyone, and we'll talk soon.

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