Earnings Call Transcript - AMSC Q2 2024

Nicol Golez, Director of Communications

Thank you, Keith. Good morning, everyone, and welcome to American Superconductor Corporation's second quarter of fiscal year 2024 conference call. I am Nicol Golez, AMSC's Director of Communications. On today's call, I am joined by 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 second quarter of fiscal year 2024 yesterday after the market closed. For those who have not seen the release, a copy is available on the Investor page of the company's website at www.amsc.com. The earnings press release contains forward-looking statements with respect to future financial results. These statements are not guarantees of future performance. The company's actual results may differ materially from the anticipated events, performance, or results expressed or implied by these forward-looking statements, including due to the risk factors detailed in the SEC filings, which can also be accessed through the company's website. The company disclaims any obligation to update these forward-looking statements. Also, on today's call, management will refer to non-GAAP net income, a non-GAAP financial measure. Tables of reconciliation of GAAP to adjusted financial measures can be found in the company's earnings press release. With that, I will now turn the call over to Chairman, President, and Chief Executive Officer, Daniel McGahn.

Daniel McGahn, CEO

Thanks, Nicol, and good morning, everybody. We're really excited to have this call today. We're meeting some milestones that I know many of you have hoped the company would see. So we're really, really enthusiastic about where we are today. I'll begin today by providing an update and sharing a few remarks on our business. John Kosiba will then provide a detailed review of our financial results for the second fiscal quarter, which ended September 30, 2024, and provide guidance for the third fiscal quarter, which will end December 31, 2024. Following our comments, we'll open up the line to questions from our analysts. Today, we're reporting revenue of over $54 million for the September-ending quarter. Total revenue for the second quarter came in at the high end of our updated guidance range and grew by 60% compared to the year-ago period. Grid was driven by the acquisition of NWL and strong new energy power system shipments. When I talk about new Energy Power today, assume that does not include the acquisition of NWL. The remainder of the revenue came from our wind business, which grew nearly 40% from the year-ago period. Both grid and wind grew. Grid also grew organically, again, without the addition of NWL. We ended the second quarter with nearly $75 million in cash. We booked nearly $60 million of new orders, with new Energy Power Systems orders coming in stronger than we had previously demonstrated. Our new Energy Power Systems orders represent strong contributions from industrials, renewables, utilities, semiconductors, and mining. Industrials accounted for about 40% of total orders, followed by renewables at about 30%, and the remaining 30% came from semiconductors, mining, utilities, and some other applications. We ended the quarter with a 12-month backlog of over $200 million and a total backlog of more than $300 million. Our backlog is really very strong. We see lead times for the newly acquired products starting at about six months. Other products take about 12 to 15 months or potentially more depending upon the project. Our second quarter results exceeded our forecast, with recent record revenue and a fifth consecutive quarter of non-GAAP net income. Our ability to generate cash through the improved operating leverage is now built into our business at these revenue levels. We believe our company is in a much stronger growth, operating, and cash-generative position, and we have demonstrated the ability to generate cash. This is a tremendous milestone, and we're very proud of this accomplishment. We are pleased with these results and encouraged by our orders momentum. Now I'll turn the call over to John Kosiba to review our financial results for the second quarter of fiscal 2024 and provide guidance for the third quarter of fiscal 2024, which will end December 31, 2024.

John Kosiba, CFO

Thanks, Daniel, and good morning, everyone. AMSC generated revenues of $54.5 million for the second quarter of fiscal 2024 compared to $34 million in the year-ago quarter. Our grid business unit accounted for 86% of total revenues, while our wind business unit accounted for 14%. Grid business unit revenues increased by 65% in the second quarter versus the year-ago quarter. The increase in revenue was primarily driven by the acquisition of NWL and increased shipments of new energy power systems. Wind business unit revenues increased 37% compared to the same period. The increase in revenue was primarily driven by additional shipments of electrical control systems. Looking at the P&L in more detail, gross margin for the second quarter of fiscal 2024 was 29% compared to 25% in the year-ago quarter. The increase in gross margin was due to higher revenues, a favorable product mix, and the positive impacts of price increases across our product lines. Now moving on to operating expenses. R&D and SG&A expenses in the second quarter of fiscal 2024 were $13.2 million compared to $9.6 million in the year-ago quarter. This increase is primarily driven by the inherited operating costs of NWL as well as the onetime acquisition-related expenses in the quarter. Approximately 7% of R&D and SG&A expenses in the second quarter of fiscal 2024 were non-cash. We generated non-GAAP net income for the second quarter of fiscal 2024 of $9.9 million or $0.27 per share compared with a non-GAAP net income of less than $100,000 or $0.00 per share in the year-ago quarter. Our net income in the second quarter of fiscal 2024 was $4.9 million or $0.13 per share. This compares to a net loss of $2.5 million or $0.09 per share in the year-ago quarter. Included in both net income and non-GAAP net income was the release of a $5.1 million valuation allowance due to the recording of the deferred tax liability from the acquisition of NWL. This was a non-cash expense reduction in the quarter. Additionally included in net income was $2.8 million in contingent consideration expense related to the NEPSI and NWL acquisitions. This contingent consideration for NEPSI and NWL was retired in the second quarter, and we do not anticipate any further contingent consideration related to our recent acquisitions. Please see our press release issued last night for a reconciliation of GAAP to non-GAAP results. We ended the second quarter of fiscal 2024 with $74.8 million in cash, cash equivalents, and restricted cash, which compares with $95.5 million on June 30, 2024. Included in the quarter was the acquisition of NWL, which included a total cash consideration of $33.6 million. That cash consideration concluded our financial obligations under the SPA for the acquisition of NWL. We generated operating cash flow in the second quarter of fiscal 2024 of $12.7 million. Cash flow exceeded our guidance range due to a large grid milestone payment that was received in the quarter ahead of schedule. In addition to that milestone, we generated positive operating cash flow through the strength of our operating results across both our grid and wind segments. We believe the acquisition of NWL further strengthens our already strong balance sheet, and we continue to be debt-free. Now turning to financial guidance for the third quarter of fiscal 2024. We expect that our revenues will be in the range of $55 million to $60 million. Our net loss on that revenue is expected not to exceed $1 million or $0.03 per share, and our non-GAAP net income is expected to exceed $2 million or $0.05 per share. As the company transitions to the next phase of maturity, we will shift our focus and guide on revenue and profitability metrics. Due to the nature of our milestone billing mechanisms on new orders, we do not anticipate any significant changes to our working capital demands of the business. Lastly, I've been asked from time to time about our capital expenditure requirements as the business expands. As a reminder, most of our business is light assembly with minimal capital expenditure requirements. We believe that the historical run rate of capital expenditures sufficiently supports our current operating needs. As our business scales over time, we could see a need to increase our capital requirements in areas such as ERP software upgrades or possible plant expansions. Neither of those scenarios are in our near-term plans. As we reach levels of increased capital expenditure requirements, I plan to provide guidance when appropriate. With that, I'll turn the call back over to Daniel.

Daniel McGahn, CEO

Thanks, John. We delivered an outstanding second quarter. We reported higher revenue, we generated greater net income, we showed significant positive operating cash flow, and we had another quarter of strong orders. This was a remarkable and exceptionally strong quarter. I'd like to discuss a few historical years of operational results to give you a sense of where we've come from and lay the groundwork for where we intend to go. Our annual revenue back in 2017 was under $50 million annually, not quarterly. Fast forward four years to fiscal year 2021, and we doubled annual revenue to over $100 million. This is the first time in recent history that we reported revenue of over $50 million for a quarter. We're halfway through fiscal year 2024 and total revenue for the past two quarters is nearly $95 million. This means we're close to doubling revenue from our fiscal year 2021 level. It's 2024, so it's only three years later. When looking at our compound annual growth rate, this means that we grew at nearly 20% from the years 2017 to 2021 and now over 25% over the past three years. In addition, we see significant macro tailwinds for power requirements driving our growth. In fact, in the industrial space, we see demand from the reshoring of domestic industrial production and upgrading of existing industrial manufacturing. Our newly acquired products help us further expand our industrial market penetration. NWL provides immediate access to customers we did not have access to. This customer expansion in the industrial side largely resides at the factory. In the renewable space, maintaining grid resiliency for renewable connectivity and increased electrification is paramount. We serve a broad range of customers at the substation level in the renewables market. We also see opportunities for our products and services as utilities address the changing landscape of the electric grid. We are seeing this more and more. The growing power demand for AI data centers and the electrification of transportation has energized utilities and led to unprecedented power agreements. They're now even talking about bringing back power generation from nuclear power plants. Equally, we see investments in domestic mining as well as in semiconductor manufacturing, driven in part by the CHIPS and Science Act or the CHIPS Act. The CHIPS Act has allocated over $36 billion in proposed funding across multiple states and proposes to invest billions more in research and innovation. Multiple companies have already signed agreements and are set to benefit from funding under the CHIPS Act. According to the Semiconductor Industry Association, we've seen 90 new semiconductor ecosystem projects announced across the US. These projects include the construction of new semiconductor manufacturing facilities, expansion of existing sites and facilities that supply the materials as well as the equipment used in chip manufacturing. To date, semiconductor and electronics companies have announced nearly $450 billion in private investments across dozens of states. Just last week, the government announced a $325 million investment to commission a new semiconductor facility in Michigan. This is great for America. We see significant investments going into Arizona, Idaho, New York, and Texas, as well as a handful of other states. Increased fab construction drives investments by suppliers of materials, chemicals, and equipment. As a result, companies that supply the equipment and materials used to produce chips, including chemical, specialty gases, and wafers, announced plans to invest in several facilities to support increased domestic manufacturing capacity. Industrial manufacturers of these essential materials must be able to power their factories in ways that add scale without adding complexity or size. This is where we believe AMSC's products are uniquely well positioned to address market demand. We began and remain focused on strong execution for fiscal year 2024. We have solid orders momentum and robust financial results. We believe that our strong balance sheet and the addition of new customers and new opportunities position us nicely for continued growth, profitability, and cash flow generation. We believe the business is positioned to benefit from a large and growing end market driven by significant macro tailwinds. We've generated non-GAAP net income and positive operating cash flow consistently over the past five quarters. We have exceeded our notion of getting to $50 million a quarter of revenue and potentially generating net income. We only said this a few months ago that it was possible, and now it has already happened. The addition of NWL, coupled with our strong financial performance, changes the scale of our business and should place us in a strong position for continued diversified growth. We have several tailwinds generated by U.S. policies and momentum in our wind and ship businesses that hopefully will continue to drive our company's growth. We are diligently working with Urban Shipbuilding, the Canadian supplier who's constructed most of the Canadian Navy at sea today to deliver our first SPS system in 2026. We're really grateful to be contracted to provide world-class mine protection to the Canadian surface combatant as well as the U.S. platform that we're designed into. We do have a total of five SPS contracts for the U.S. Navy's San Antonio Class LPD, and we're working on our next product for our ship business, our proprietary mine countermeasure system. We see expanding opportunities, especially in the military business. Our wind partner in India, Inox Wind, is reporting their largest order book with over 3 gigawatts of wind capacity coming online in the coming years. We believe Inox is in a good position to start expanding its business with the 3-megawatt class wind turbine, which we expect will translate into an expanded order book for us. I hope to be able to talk more about that soon. This is truly an exciting time for us here at AMSC, and you can see the growing domestic investments in semiconductors may be a new near-term growth driver for us, more wind and more chips. Our future-facing technologies help harmonize the world's desire for decarbonization and clean energy with the need for more reliable, effective, and efficient power delivery. I look forward to reporting to you again following the completion of our third quarter fiscal 2024. Keith will now take questions from our analysts.

Operator, Operator

Yes, thank you. We will now begin the question-and-answer session. The first question comes from Eric Stine with Craig-Hallum.

Eric Stine, Analyst

Hi Daniel, hi John.

Daniel McGahn, CEO

Hey Eric, good to hear your voice.

Eric Stine, Analyst

Good morning. Sticking with the wind segment, you mentioned Inox's backlog exceeding 3 gigawatts. Looking back, I recall that in fiscal 2015, your wind revenues were nearly $70 million, and Inox’s backlog was just over 1 gigawatt. I’m curious if there’s any particular reason why your wind business can’t grow significantly larger. Clearly, you need to receive more orders, and there are optimistic indications for potential orders in the near term. Is it accurate to think of it this way—that you are really just beginning to supply for the 3 megawatts, and this business could evolve to be much bigger?

Daniel McGahn, CEO

I think that's a great analysis, Eric. I think you kind of nailed it. I think what we're trying to do is follow the money. I think as the customer starts to ramp, we want to make sure that they're paying, they're doing timely. They've been a great customer for us. We've been a very patient partner and supplier. We think that their business is well poised for growth. It looks like it's just about to start. And as I said in the remarks, stay tuned. I think we have more to report on this relatively soon.

Eric Stine, Analyst

Got it. That's great. Regarding the new acquisition, you've had it in your results for two months. I'm curious about market feedback and early impressions, and if there are any surprises compared to your expectations when you made the deal.

Daniel McGahn, CEO

I think the surprises and positive aspects are that we always knew it was a great company, but we continue to hear that from our customers. It's a well-run operation with a strong team that complements ours effectively. We believe this presents significant future opportunities for us. While I didn't focus much on military today, I believe the immediate outlook on the industrial side will be driven by chips. However, in the longer term, we anticipate an increase in military business, which typically operates on a longer cycle. We believe our current military operations will contribute significantly in the coming years. In the shorter term, we expect wind and chips to propel growth across the business. We are involved in renewables and semiconductors across various product lines. It's only been two months since the acquisition, and we've made considerable progress. It will take time to fully absorb everything, but we are very pleased with our observations and confident in the team’s performance and execution.

Eric Stine, Analyst

Are you seeing those new customers and the opportunities that are emerging? What has been the reaction from these new customers to your offering, which they previously did not have access to?

Daniel McGahn, CEO

Yes. I guess it's only been two months in. So I'd love to be able to give you food for thought, coming out in the coming quarters to say, here's an example of what we saw. I'd rather show you what we see than tell you what we see. I think our investors at least like our approach that we're kind of under-promise, over-deliver kind of group. I think that there are areas there where combined we can be more than these are separate offerings. But let me show you more proof. And I think I'm hinting at it pretty strongly with what I'm talking about in semiconductor.

Eric Stine, Analyst

Yes. Understood. Thank you.

Daniel McGahn, CEO

Thanks Eric.

Operator, Operator

Thank you. And the next question comes from Colin Rusch with Oppenheimer.

Colin Rusch, Analyst

Thanks so much, guys. Can you talk a little bit about the IP within the power quality space and where you're winning? Some of this has been around kind of density of power management and some of it has been around performance. I just want to get a better sense from where you're winning and why?

Daniel McGahn, CEO

If we dive into the core of our intellectual property and incorporate superconductors, we can simplify processes and reduce the size of our equipment. This enables us to position our equipment in more convenient spaces and allows for easier replacements, which enhances focus on fabrication. Retrofitting existing setups or expanding is relatively straightforward, making delivery times and permitting costs advantageous. Our work centers on thermal management and system-level controls, aiming for products that may be priced higher but provide exceptional value, making it simpler for customers to choose us over alternatives. The unique aspects of our technology are key to our success, and we intend to keep investing in our proprietary technology to maintain and extend that advantage.

Colin Rusch, Analyst

That's super helpful. And then again just as you now are a little bit bigger business, can you talk a little bit about how the mix shifts within grid and how we should think about margins as you see a little bit of growth, coupled with some mix shift from quarter-to-quarter?

Daniel McGahn, CEO

Yes. I think at the revenue levels that we're at now presenting, there is some potential variability in gross margin depending upon exactly the right revenue level and exactly the right product mix. In general, the margins in the business are all very similar with the only outlier being the ship systems business because we're not quite at scale. I think with the addition of revenue coming in the future quarters with Canada, that will help fix a lot of that problem, maybe not fully, but it will contribute more nicely than certainly it does today at the current scale. So I see this level of revenue and these kinds of margins where we've been kind of to be expected. I think, John, if you want to comment further on that, do that. I know my mission is how do we continue to grow revenues at these margins and get better leverage to improve margin with additional scale.

John Kosiba, CFO

Yes, I agree, Dan. As our revenue increases and we achieve greater scale, the volatility in any individual project should decrease. In the past, one or two projects could significantly affect our margins, but that is less of a concern today. However, we did experience some mix issues last quarter. We had a very favorable mix of products that yield the highest gross margins for us, which was a positive aspect. I believe that the fluctuations in our company’s performance will diminish over time as we take on more projects and things stabilize.

Colin Rusch, Analyst

Fantastic, guys. Thanks so much.

Operator, Operator

Thank you. And next question comes from Justin Clare with ROTH Capital Partners.

Justin Clare, Analyst

Hi. Good morning. Thanks for taking our questions. Good morning. So I just wanted to follow up on the last question here in terms of the Navy business. Can you update us on when you think the revenue from the Canadian contract will start ramping? I think we had been expecting sometime in fiscal 2025, but if you could help us understand the ramp there?

Daniel McGahn, CEO

Yes. No, I think that's exactly right. What we said before is basically zooming starts in 2025. We're delivering in 2026, the first system. There are further systems contracted for the 75, and we said basically, once we start delivering, which I think is probably the second half of next year. You can basically take the 75 and linearize it by quarters. I went through at the time, the number of years it was to deliver in the contract. I don't have that right in front of me to remind you of that. But I think the assumptions specifically, Justin, I think what you have is probably right and what you presented to us. And the market in your models. I think what we have to do is now go execute on those things. So the challenge with the Canadian contract is there is development in it. The challenge with the mine countermeasure project that we have is there is development in it. And those things, if there are challenges that present themselves, that may change the timetables. But we feel really good about both those programs where we are now, what our customers are pushing to do. The timetables seem to be intact. So we feel as strongly as we did when we announced that a few months ago that those timetables will come to bear.

Justin Clare, Analyst

Okay. Got it. Appreciate it. And so just thinking through this a little bit, next year, it's possible that we see wins, revenue ramp up. And then if you add this contracting for the Navy business, it seems like you have an opportunity for margin uplift in both of those different areas. Is that a fair way to characterize it?

Daniel McGahn, CEO

I think there is potential. We do have to be sensitive to the overall project mix. And when we talk about project mix, some of it relates to service, some of it relates to customer type. It becomes more about the scale of the project. It comes more about competition than it does about a specific product. But I think as I tried to say, and I tried to get John's help to say it more cleanly, which I think he did is that, as revenue scales, we think there'll be gross margin expansion opportunities.

Justin Clare, Analyst

Got it. Okay. And then I wanted to ask, it seems like grid congestion is becoming an increasingly challenging problem here. Transmission is a key constraint. I was wondering, if you see potential opportunities to address this challenge. Could you look at using your high-temperature superconducting wire for transmission? Is that something you're exploring? Or are there other solutions that you can bring to the market that could address these challenges?

Daniel McGahn, CEO

I think a superconductor solution is probably a year or more away to have any impact on what we're doing financially. So I think a lot of what we're trying to focus on is the macro trend. Yes, there's more investment. Utilities are going to be challenged to do more. And I think we're going to be able to supply them with what we do in new energy. NWL really is more industrial. So it's really new energy being able to solve those problems. And we think we're in a very interesting situation. The grid has to evolve over the next years to be able to allow either reclassification of traditional power sources, trying to invest in bringing plants like that back online or you think on the demand side, what semiconductor is going to drive, what data centers and AI are going to drive. This is another disruption for the grid that we think we're in a great position to solve those systematic grid problems in a way that's comfortable for be it the industrial customer or the utility. So I've said this a few times, a rising tide lifts all boats. Our tide is rising, and which means our boat will be lifted as these markets move forward. We're in a wonderful situation. Things we've talked about now for many years are now really starting to happen in the market, and we're well positioned with our sales efforts and our business development efforts to try to take advantage of those.

Justin Clare, Analyst

Okay. Great, I appreciate it.

Operator, Operator

Thank you. And this concludes our question-and-answer session. I would like to turn the conference back over to Dan McGahn, for any closing comments.

Daniel McGahn, CEO

Thanks, Keith. We had an impressive second quarter, achieving record revenues of $50 million. Just a few quarters back, we were pleased to reach $30 million and then $40 million. This growth is driven by strong organic development in New Energy and the acquisition of NWL. It's important to emphasize that our business is thriving, and adding NWL positions us well for future opportunities. We generated net income of nearly $5 million and delivered significant operating cash flow, close to $13 million for the quarter. We received nearly $60 million in new orders and reported a growing 12-month backlog exceeding $200 million, with a total backlog of slightly over $300 million. Our cash balance is approaching $75 million, putting us in a strong position as we navigate favorable macro conditions. There’s significant domestic investment in semiconductors that we are targeting, which we believe will drive our growth in the upcoming quarters and years. We're also anticipating more wind opportunities, which we hope to discuss in the future. For those interested in our growth trajectory, over the last three years, we’ve seen about 25% growth, which has accelerated from previous years at around 20%. We believe this solid platform will continue to support growth. Although I typically don't discuss guidance, we are now approaching revenue targets of $60 million, and just a couple of quarters ago, we were thrilled at the prospect of hitting $50 million. A year ago, we were excited to exceed $30 million and eventually reach $40 million. This is the first time I can remember guiding to a positive non-GAAP outlook. We find ourselves in an excellent situation, and I want you to be aware of that. We'll see how the market and election developments unfold, but this company is in a strong position. Thank you all for your attention and support, and we look forward to speaking with you again in a few months. Thank you.

Operator, Operator

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.