American Superconductor Corporation (AMSC) Q2 2016 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to AMSC's Second Quarter 2016 Earnings Conference Call. This call is being recorded. [Operator Instructions] With us on the call this morning are AMSC President and CEO, Dan McGahn; Executive Vice President and CFO, David Henry; and Manager of AMSC Investor Relations, Brion Tanous. For opening remarks, I would like to turn the call over to Brion Tanous. Please go ahead, sir.

Thank you, Priscilla, and welcome to our call to discuss our second quarter fiscal 2016 results. Before we begin, I would 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 those -- such forward-looking statements as a result of various important risk factors, including those discussed in the Risk Factors sections of our annual report on Form 10-K for the year ended March 31, 2016, which we filed with the SEC on May 31, 2016, and subsequent reports that we may have 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 will be referring on today's call to non-GAAP net loss or net loss before stock-based compensation, amortization of acquisition-related intangibles, consumption of 0 cost-basis inventory, change in fair value of derivatives and warrants, noncash interest expense 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.

Thanks, Brion, and good morning, everyone. I'll begin today by providing an overview of our financial results for the second quarter of fiscal 2016, which ended September 30, 2016. Dave will then provide a detailed review of our financial results and guidance for the third fiscal quarter, which will end December 31, 2016. Following Dave's comments, we will provide an overview of our activities and future expectations. After that, we'll open up the line to your questions. Second quarter revenues came in modestly above our expectations. In our Wind segment, we anticipated a back-end loaded quarter for ECS shipments to Inox during the second quarter, which is exactly what transpired. And we were able to grow our Grid revenues year-over-year. While the first half of the year was challenging, we expect stronger revenues in the second half of the fiscal year, including sequentially higher third quarter revenues, while keeping our cash burn to a minimum. We continue to be optimistic about the Wind market in India. Our partner, Inox Wind, has announced several new wind turbine orders, and we believe we are well positioned to support any expansion of Inox's business. In addition, our Gridtec segment continues to have its sights set on growth. I'll discuss our progress later on this call. But first, I'll now turn the call over to Dave to review our financial results for the second quarter of fiscal 2016 and guidance for the third fiscal quarter, which will end December 31, 2016. Dave?

Thanks, Dan, and good morning, everyone. AMSC generated revenues of $18.5 million for the second fiscal quarter compared to $19 million in the year ago quarter. Total revenue for the second fiscal quarter was modestly down year-over-year to the lower Wind segment revenues during the period as a result of lower development revenues and lower spare parts revenue in China. As we noted in our last earnings conference call, Inox has been dealing with working capital constraints. This negatively impacted demand primarily in the first quarter. Shipments to Inox were flat compared to the same period a year ago. However, the shipments all occurred in the back half of the quarter. In total, we experienced a 4-month gap in shipments to Inox during the first half of the fiscal year. Wind segment revenues represented 69% of total revenues for the second quarter of fiscal 2016. Grid segment revenues for the second fiscal quarter increased 3% year-over-year as a result of higher superconductor project revenues, including revenues from the joint development effort with BASF, partially offset by lower D-VAR revenues. 12-month backlog at September 30, 2016, was approximately $86 million, which is unchanged compared with the 12-month backlog at June 30, 2016. Looking at the P&L in more detail, gross margin for the second fiscal quarter was 11.4%, which compares with 15.8% in the second quarter of fiscal 2015 and 6.5% in the previous quarter. The year-over-year decrease in gross margin in the second quarter was primarily due to lower Wind revenues, including 100% margin and royalty revenues in the prior year period that did not recur in the current year period, and an unfavorable revenue mix in our Grid segment. R&D and SG&A expenses for the second quarter were $9.2 million. This was down from $9.8 million for the same period a year ago, primarily driven by cost reductions. Approximately 13% of this R&D and SG&A spending in the second fiscal quarter was noncash. Below operating loss, in the second quarter we incurred a mark-to-market gain on our outstanding warrants of $1.2 million compared to a gain of $700,000 in the year ago quarter. The higher gain in the second quarter of fiscal 2016 was due primarily to a greater reduction in our stock price in the current year period compared to the prior year period. Our net loss in the second quarter of fiscal 2016 was $7.3 million or $0.53 per share. This compares to $7.7 million or $0.57 per share in the year ago quarter. Our non-GAAP net loss for the second quarter of fiscal 2016 was $8.2 million or $0.60 per share compared with $8.7 million or $0.64 a 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 fiscal quarter with $26.6 million in cash, cash equivalents and restricted cash. This compares with $36.6 million as of June 30, 2016, and represents a cash burn of $10 million for the second fiscal quarter. Recall that we forecasted a greater cash burn in the second quarter compared to the first quarter. The higher-than-normal burn in the second quarter was driven by the Inox shipment gap I mentioned earlier, which created a collections gap during the first half of the quarter. This collections gap was exasperated by payments we made for inventory purchased under POs committed before we were informed of Inox's working capital constraints. In addition, we paid the annual employee incentive payments in the second quarter. We are still operating our ECS factory in Romania at a reduced activity rate and expect to further reduce inventory in the third quarter. As of September 30, 2016, the principal balance of our debt arrangements, excluding the debt discount, was $2.2 million compared to $3.2 million as of June 30, 2016. The debt represents 2 term loans with Hercules Technology Growth Capital. The first term loan has a remaining principal balance as of September 30, 2016, of $700,000 and was paid off in full on November 1, 2016. The second term loan has a remaining principal balance of $1.5 million. We're paying interest only on a monthly basis until maturity on June 1, 2017, when the entire outstanding amount will be repaid in full. Turning to our financial guidance. ECS shipments to Inox have returned to a more normal run rate, and we expect to ship a large D-VAR order in the third quarter. As a result, we expect sequential revenue growth in both business units in the third quarter. We expect that our revenues in the third quarter will be in the range of $23 million to $25 million. After we bring inventory down to a more normal level early in the third quarter, we expect to ramp up ECS production in Romania later in the quarter, which, combined with higher revenues, is expected to result in a higher gross margin in the third quarter compared to the second quarter. However, we do expect an increase in operating expenses in the third quarter due to higher product development spending. This is all expected to result in an improved bottom line performance in the third quarter. We expect that both our net loss and non-GAAP net loss for the third fiscal quarter will be less than $8 million or $0.57 per share. In last quarter's conference call, we said that we expected a lower cash burn in the second half of the fiscal year compared to the first half. We are reiterating that guidance today. In fact, we believe that the cash burn in the second half of the fiscal year will be substantially lower with cash flows approaching breakeven in the third fiscal quarter. With that, I'll turn the call back over to Dan.

Thanks, Dave. I'll start today with an update on our activities within the Windtec business unit. Through our Windtec Solutions, we provide our wind turbine licensees with fully integrated Electrical Control Systems or ECS. By using our integrated Electrical Control Systems, we believe our customers' wind turbines provide higher availability, reliability and optimized energy output for their customers. Our primary market for our Wind products today is India. India is a major player in the global wind energy market and ranks fourth in the world in key [indiscernible] installations, according to industry analysts. The Indian government has announced an impressive target of having 60 gigawatts of wind energy capacity installed by 2022, which is more than double the existing installed capacity. We service this market segment through our partner, Inox Wind. After having experienced a 4-month gap in ECS shipments to Inox, we are pleased to report that we saw Inox's demand return to a more normal level in the back half of the second quarter. This is good news for our business. Recently, Inox announced several new orders totaling 350 megawatts of their 2-megawatt wind turbines, which includes a new product, a 2-megawatt wind turbine with a longer rotor diameter at 113 meters, which was designed by AMSC. Inox commercially launched its larger 113-meter rotor turbine earlier this year, which provides its customers a more efficient wind turbine in low wind speeds. Inox expects that this variant of its 2-megawatt turbine will allow its customers to continue to generate attractive return on investment despite reductions in government incentives and in the tariff regimes in certain states in India. We are pleased that Inox is generating orders for this new turbine because AMSC will be entitled to a royalty on this technology. We expect to continue to support Inox's product road map for the future while continuing with the supply of 2-megawatt ECS units. In addition, the completion of a license agreement with Inox for a 3-megawatt wind turbine design continues to be one of our corporate objectives for fiscal 2016. Inox is still talking about this publicly as well. The actual timing certainly will be determined by Inox's needs. As Dave mentioned, we do expect Inox to move to higher levels of turbine production in the second half of the fiscal year, which is expected to result in sequentially higher ECS shipments in the third quarter and robust shipments in the fourth quarter as well. Moving on to our Gridtec Solutions. I'd like to give you an update on our Resilient Electric Grid product and our efforts to establish a pipeline of projects. We will be talking about a number of projects in a number of cities today. We are working closely with ComEd in Chicago on the next phase of their project. The parent company of ComEd is Exelon. Exelon held an Analyst Day this summer and discussed our REG product as part of their advanced technology initiatives, including a map of a potential site. The map was one of many discussed with ComEd. We believe that there is a market with ComEd and with Exelon for our product over the long term. Based on our discussions, we believe the market is bigger than the initial DHS-funded opportunity. We have continued to make good progress on the project. We have completed both the high-voltage testing of the cable design and a design review of critical system components. Also, the procurement of key long-lead items for this phase has been completed. These activities are being funded by the $3.7 million from Department of Homeland Security we announced a few quarters ago. We expect to be substantially complete with our efforts under this phase of the project and be paid by DHS for these efforts by the end of the fiscal year. We believe ComEd and Exelon are committed to implementing our REG solution in Chicago, and we're proud of the relationship we've developed with them. We are working with the utility to be in the best position to move the project forward. We also made progress with other electric utilities during the second quarter. We have ongoing discussions with over 2 dozen utilities in North America. AMSC has been working with utilities that have expressed interest in better understanding the value that the REG solution could bring to its system by performing deployment studies for their electric grid. Last quarter, we mentioned that we delivered a proposal for a REG system to a particular utility. As a result of our interaction with this utility, we were able to identify a second additional REG opportunity with them. Again, as we learn more, we believe that the market for REG will expand. Our engineers are already collaborating on this additional opportunity. Pepco in Washington, D.C. has expressed interest, and we continue to work with them on system design for a REG solution to substantially increase the reliability at several key substations in Washington, D.C. Merger-related activities between Pepco and Exelon are winding down, which means that Pepco should be turning back its focus on operational challenges, many of which we believe that REG can potentially solve. We continue to work closely with Eversource in Boston. Recently, they publicly presented cost for a REG solution that were potentially 1/3 cheaper, as well as bringing additional value throughout the city. We understand Eversource has its near-term priorities, but we see REG as transformative for reliability of Boston's grid. Still another U.S. utility has released a request for proposal for a study to investigate increasing the resiliency of its urban grid in case of a major event. In fact, this utility has specifically required the study to include the evaluation of superconductor cable alternatives as a possible solution. So including ComEd, we now have 5 utilities in the U.S. that are actively engaged with AMSC in evaluating our technology to help solve resiliency issues that exist within their cities' electric grids. We believe the commercial viability of our REG product is beginning to be understood by the electric utility marketplace. AMSC's grid resiliency message is getting out not only in the U.S. but also globally. We're beginning to work with utilities in the core markets we sell D-VARs, specifically Australia and the United Kingdom, to help them understand the potential benefits of the REG system. Now I'd like to discuss our D-VAR STATCOM product. The D-VAR product addresses 3 primary end markets: renewable energy, electric utilities and industrial installations like a mine or a semiconductor fab. The majority of our D-VAR revenue today comes from the interconnection of renewable energy generation plants to the electricity grid. On Monday, we announced that we booked 4 D-VAR STATCOM system orders valued at over $5 million. These include orders for systems that will be used to connect wind power plants to the electric grid as well as to provide voltage regulation in the company's core markets of North America and the United Kingdom. Revenue from these 4 D-VAR orders is expected to be recognized in fiscal year 2016. We believe the utility sector offers significant growth opportunities for our D-VAR product, and we are positioning our sales efforts accordingly. One of our objectives for fiscal 2016 is to achieve continued growth of our D-VAR business. With the new orders we just announced, we believe we're on track to achieve modest growth in D-VAR revenues in fiscal 2016. We've made some very substantial progress with the U.S. Navy during the first half of fiscal 2016. We see 3 areas where our technology can be formatted into products for the Navy: ship protection, specifically against mines and minefields; ship power, moving shipboard power in highly efficient, highly energy dense cables; and ship propulsion, especially with the advent of electric weapons, which will create more demand for power from the engine room. Let me focus on Ship Protection Systems. Last quarter, I mentioned the substantial progress our team has made with a particular Navy program office and a shipyard in an effort to secure our contract for Ship Protection Systems on a specific U.S. Navy vessel platform. We continue to work with the shipyard and the Navy on this vessel platform, and we'll update you on further progress as soon as we have more clarity on the Navy's production schedule for this vessel. Think of this initial ship protection system product as permanent and persistent. It is a system that is embedded in the ship when the ship is being built. This is typically referred to as a ship degaussing system. We have been developing a second ship protection system product. The effort has been directed by the Navy and funded by the Navy. The second system is deployable. It is a system that can be retrofitted onto an existing ship that is already at sea. This is designed as a deployable magnet payload. This is part of a classified Navy program. We remain on track to deliver the deployable beta unit and begin qualification efforts for this product in fiscal 2016. The Navy has made it clear that it expects that superconductor systems will be deployed in the fleet. We have unique system offerings and have developed system-level understanding, system-level differentiation and system-level know-how. Our strategy is to deliver system-level value, value beyond the wire. The second quarter of fiscal 2016 certainly showed improvement over the first quarter. Importantly, we expect ECS shipments to Inox to increase in the second half of the year. We are focused on continuing to grow our D-VAR business. Our work with the U.S. Navy focuses on system-level solutions targeting specific vessel platforms. And the value proposition of our REG solution is resonating with U.S. utilities. We talked about 5 of those utilities today. Our strategy of creating value beyond the wire is getting the attention of our target markets. ECS, D-VAR, REG and SPS are all systems. This is the new AMSC we've been building. People don't buy technology. They buy what it does. And we are positioned to deliver system-level value. We are executing against our goals, and that is to the credit of our employees for their hard work and dedication. I look forward to reporting back to you at the completion of our third fiscal quarter. Priscilla, we'll now take questions from our audience.

[Operator Instructions] And we'll go first to Philip Shen with Roth Capital Partners.

First, on REG here. Looks like you're making some good progress. I was wondering if you could share, if at all, any sense of timing as to when ComEd -- you may be able to pull the trigger on something bigger or approximately [ph] with the other utilities that you're in discussions with. And then also on the international front, any sense of timing on either one of those countries, Australia or the U.K.?

Okay. So with timing, it's always hard to predict with a new product. I think we're very happy and pleased to be able to report a substantial progress in a bunch of cities, and we continue to try to drive more into the pipeline, and we try to mature those conversations till we have discussions. So we talked about turning conversations to contracts. I think we're very close with Chicago. I think we have to be respectful of them and their process. We have been very happy with the working relationship. I think clearly, there's a strong desire for both companies to move the program forward. And when that happens, certainly we will come back and be able to talk about that progress. On the international stage, we're just beginning. So we've just started the effort to socialize the resiliency message that's worked very well in the U.S., in Australia and the United Kingdom. Our hope is that leveraging our channel to market that we have today for D-VAR, we'll be able to get that message out and be able to better understand how the market would develop for REG in the U.K. and Australia. But at this point, it's really hard to prognosticate what the future may hold. I think the good news is, every time we interact with a utility, we learn of more demand and larger potential market for the REG solution.

Great. Now shifting gears to the D-VAR. There's lots of opportunities in wind these days. One of them -- and one of the things I'm hearing and seeing is on the potential for repowering in the U.S. wind industry. After the PTC was extended last year, it seems like it might be economic. Do you think you guys might be able to participate in that repowering opportunity here in the U.S.?

Really where the D-VAR solution gets sold is when the wind farm is initially built. Perhaps there's a potential if -- going through the repowering effort in a wind farm, if that forces that wind farm to come out of compliance with grid codes, then certainly there may be an opportunity for D-VAR. We tend to focus on new wind farm construction, and there are some macro changes that are happening where the FERC has issued a new order, which means that really the whole U.S. has to comply with standards in the future that are very consistent with the feature set that D-VAR offers to the market. So we're going to push forward in -- to utilize that market dynamic. But if -- certainly, if a situation presents itself where the repowering of turbines would affect grid code compliance, then certainly D-VAR could be implemented to allow that wind farm to continue to operate and move its power on to the electricity grid.

We'll go next to Colin Rusch with Oppenheimer.

As you look at the grid opportunity and you look at the decision making process, is there a point at which the sales cycle shortens out for you? You've done an awful lot of spade work here and a lot on education, and you clearly have some value to offer these folks. But is there a point where you start seeing kind of a group think where a lot of folks start implementing some of these solutions in a more robust way?

Yes, that's the positive risk that exists in this business, and we think that's persisted in how utilities think, that once the product is derisked, which is why Department of Homeland Security is involved, they want to aid in the derisking of the product to allow broadscale adoption nationally. What we are trying to do is we're trying to put together a pipeline of projects in parallel with Chicago to allow for that market to move very quickly. And, as we said today in the comments, we go in and we find 1 problem, and that problem turns into 2 or 3 or 4 within a single utility. And what we're learning is as utilities get comfortable with the solution and they understand the risks of placing an order, that, that demand, hopefully, in the future, should start to stack up. So we go from doing one city to several cities hopefully. And that's the kind of inflection point, I think, that people that have been interested in our company for a long, long time have been waiting for that inflection point to come. We think it's there with REG. We think that looking at system value, not just the wire but the whole entire system, enables us to take full value and be able to accelerate the market and market adoption very quickly.

Okay, great. And then can we talk a little bit about the working capital? You guys made some progress on that a bit this quarter in terms of bringing down inventories. And can you just talk about what your expectation is as we go through the next couple of quarters in terms of cash collection and generation out of the balance sheet?

As it relates to certainly on the wind side of things, nothing has changed really with how we collect cash. So as it relates to Inox specifically, we don't ship anything until we have a letter of credit in place. And so we're assured of collection when we ship. And then after we ship, we will typically discount that letter of credit and -- so that we will generally have the cash within 4 to 5 weeks of shipment. So when you look at our DSO, our DSO is -- I think, actually this quarter is somewhere just under 50 days, which is pretty good. So I think we do a good job managing collections. And as a result, this quarter, what we saw in the -- I mentioned the collections gap in the first half of the quarter and then we were buying inventory based on a higher production run rate than we ultimately ended up having. So those things combined to have a greater cash burn in the second quarter than we would normally expect to see. But we did say that we expect -- that is being sort of flushed out of the system now, and that's consistent with higher revenues in the second half of the year. We expect a minimal cash burn in the second half of the year and a cash burn that's substantially lower in the second half compared to the first. And that, by the way, is consistent with what we experienced last year as well, if you recall. If you look back, we actually generated cash in the second half of the fiscal year last year. So we're -- the revenues are returning to a more historical level, specifically on the Wind side, and the cash situation and the cash burn is returning to the more normal seasonal levels as well.

We'll go now to Carter Driscoll from FBR.

Nice job on a rebound quarter. First question is, when you signed the Inox contract late last year, I think a lot of us kind of straight-lined the contribution for this year. Obviously, you had a 4-month gap, and they worked out their working capital issues. Is it reasonable to assume kind of a -- 2/3 of that assumption from a revenue contribution perspective where you expect kind of a catch-up in the back half to try and get a better sense of the magnitude of the rebound in the latter part of the fiscal 2016?

Yes, the -- in terms of Inox, I think we said last quarter, and I think it's true, I mean, the fact that we started shipping under the new contract this -- in the second quarter, was a bit delayed compared to what we originally thought...

And originally what we were told, which is why the working capital suffered such, because they communicated kind of too late in the cycle. What we're saying with the shipments for this year, it's certainly going to be stronger. I think the thing that we want to be careful with is we don't want to make a promise to people about how the Inox revenues are going to come in. Linearly probably is one way to look at it. If you look historically with our revenue to them, it's usually good in December, better in March, weaker in June and then okay in September. It kind of goes through a seasonal cycle. Inox certainly externally is talking about growing their business. We talked a bit today about the 113-meter rotor product that's helping them expand their business and going to wind regimes that are low wind speed. That's a bit of a unique offering for them in the market, hopefully should be able to get them to continue to build market share. So the growth, we believe, is coming, but I think it's hard. And it will be hard for Inox to predict, it'll be hard for us to predict because so much of it is determined by their ability to collect from their customers.

Yes. So if I follow correctly, they had about 180-plus new orders last quarter and they kind of more than doubled that in the current quarter, if I have my numbers correct. So, I mean, it would seem like it's -- at a minimum, their backlog seems to be improving.

Yes, they -- well, they did actually. They reported their second quarter results here a few days ago, and they actually -- they did report an increase in their backlog. So from a modeling standpoint, on an annual basis, it's really going to depend on Inox's ability to increase their share, I suppose, and to capitalize on what seems to be a growing Indian wind market. And then within the years, like Dan mentioned, you should model that seasonality, sort of a stronger fourth quarter and then a weaker first quarter, which then builds as you move through the year. I think that's probably a good way to look at it.

Thanks for the color. I think you mentioned in the prepared remarks a potential for some royalty revenue from the new design. Is that something you're expecting in the second fiscal half of the year?

Yes, look, if you go back to our model, our model is to license the technology. We do that for some upfront fee and we -- and then we have some ongoing royalty relationship for any new product. I think the timing of those royalties are going to be determined on how much product they get out in the market with that low-wind-speed turbine. I think at this point, we're simply trying to predict what the sets are going to be to make sure that we can meet their demand, particularly if that demand is growing. The royalties are going to come as they come. We had a very good relationship with Inox where they do pay all royalty payments. So we first -- focus first on making sure that we will collect and the timing is, at least initially, secondary.

Okay. Maybe changing gears a little bit. I think you had also mentioned that you've identified some additional opportunities with ComEd. Is that within the scope of what you're doing in the cost sharing program with the DHS? Or it's something additive to what you've done and having further discussions about maybe move that project forward?

I think that really is to be determined. We're focused very singularly with them on moving the DHS-sponsored program forward. We want to get assets in their grid. They want to be able to utilize those assets on an ongoing basis. So we're gearing up to position ourselves really as a commercial supplier now for the product, and I think that's well in advance of what -- if you asked me 2 years ago, I think it's well in advance of what our internal expectations were. What we're trying to telegraph is that as we look at their system, we've done a lot of work with them. They've been very open. They've been -- they have spent a lot of dollars on their end in doing critical work on the engineering side, and we're very, very appreciative of that. But I think it's clear that the market even within Chicago is potentially multiples of the DHS contract, and that's the point we're trying to make. It isn't that, that market is going to be realizable within the DHS tool. But in the future, as things progress, we want to be selling a commercial system and this program is helping us to be put in that situation.

And then maybe just laterally, has the scope of the discussions changed from what your initial idea of how REG would function within the utility system change superiorly...

I'd say the basic concept of being able to share existing assets on the grid hasn't changed. We've looked at a variety of locations within their grid. There's trade-offs that have to be studied in each one. And ultimately, what they want to do is manage their risk. And I understand that. I mean, the utilities' charters, they want to keep your lights on. So they want to work with us in a way where we're not increasing their risk, and we want that to be what the focus of the DHS program is. And we look forward to being able to report back more information. They looked at a lot of sites. We looked at a lot of sites with them. When we're able to report back that we've agreed to move forward with the next step, we'll try to be as clear as we possibly can in what that next step is. But it's hard for me today to -- I don't want to make a promise. And then if things are slightly or substantially different, I don't want people to feel let down by that. Progress with them on getting an asset in their grid is ultimately what they're after and we're after because that derisks the commercial viability of REG.

And then just last question. On the -- shifting to the Navy. Do you think the retrofit opportunity is obviously closer than the new boat opportunity? Maybe you could kind of compare and contrast the size between the 2 and then...

I didn't think the retrofit is closer.

Okay.

It's -- actually, we're talking about delivering a beta system here this fiscal year. We delivered a beta system in degaussing several years ago, and we've already done at sea trials. We have operational experience, and we already have an order for systems on our books, as you know. I think the hard part -- to be very blunt, in dealing with the same size or bigger than the degaussing, the permanent system, and I know that doesn't make your life easier in trying to predict revenues, but in the near term, we're trying to get the permanent solution on yet another ship platform. We're trying to get the portable solution through beta, go through qualification and do all the testing. And then at that point, it's probably the right time to ask that question again, which is now that you understand really the functionality, can you talk about the size of it? From a value standpoint, the deployable system certainly is not on the size of the large ships, but it's in the range of a small ship, let's say. If you do simple math, the surface fleet is just north of 200 ships. If they're building new builds of 8, 10, 12 a year between now and 2040, it means we're only getting at a fraction of that surface ship market. So the hope is this deployable solution will help be able to get value in the fleet faster. And when I say faster, I mean, let's say, in the first year, they build 10 ships and say there's 200 in the total fleet, right, so we have 190 still that we don't have addressable, but they become open with this deployable solution. So when you go out in time, the hope is it doesn't take us 10 years to get the technology in the whole surface fleet. We can do that faster with a permanent plus a deployable solution. And that's what the Navy's after, and that's why they've funded us to do the second product, this deployable solution.

We'll go now to Sameer Joshi with Rodman & Renshaw.

Most of my questions have been answered. But related to Gridtec, I think the September quarter revenue was $5.6 million compared to June quarter revenue of $7.7 million. And I did hear you say that the second half is expected to be stronger than the first. On an annual basis for the Gridtec, are you expecting a higher revenue compared to fiscal 2015?

Yes, we are for the full year. And within that, you have the product lines, and what Dan mentioned in his remarks was that we expect modest growth in the D-VAR revenues in fiscal 2016 as well.

Oh, okay. So the second half of fiscal 2015 was vertically strong with $8.5 million and $7.6 million. You would expect something like that in the second half for Grid overall?

Yes, we said that we would have -- we had a large D-VAR order shipping in the third quarter. But in terms of the year-over-year comparison, we're not giving guidance on that right now other than to say, I think, we expect the full year revenues for Grid to be higher year-over-year. And then within that, within D-VAR, we expect modest growth in D-VAR revenues in fiscal 2016.

The promise we made is we want to grow Grid and we want to grow D-VAR. The other answers Dave has given is try to help give you color to answer the question of how the growth is going to come in.

Right, right. Moving on to the operating expense side. It was that $9.3 million, $9.2 million, was lower certainly sequentially and year-over-year. And I also heard you say that you expect the second half cash burn to be much better. Is that because the operating expenses are going to stay at these levels? Or is it because that your top line is expected to improve much?

More the top line, I think.

More the top line, yes.

But we try to do the best job we can to control expenses. So every quarter, we try to contain costs as best as we can. I think one of the things that we're telegraphing, I think, a little bit here is, when revenues grow quarter-to-quarter, that will have an effect on how the business is run. So we're going to do the best we can to continue to contain costs, but we want to grow that top line because that's, I think, what everybody's looking for.

; Okay. And I think there was -- just one topic that may not have been covered during the call was, any progress on the legal proceedings with the Sinovel and China-related legal proceedings?

Yes, there's a little bit of news out of the court. One of the sites -- one of the people involved, I think the name is even out there if you search it, the amount of evidence -- and this is a witness for us -- the amount of evidence that he turned over was substantial. And I don't want to -- because it's e-mails and all this. I don't want to get into the challenges that we have with the current election and e-mails and all that. But it's similar in that he turned over a lot. There are probably ones that he may not, looking back, probably was able to turn over. So they're sorting through all of these e-mails. I guess it's a full-time job for the DOJ, for everybody, it seems like. So that's going to take some more time. The court hasn't come out definitively and said a new date, so I don't want to prognosticate. But this a good thing for us because they're taking the time to make sure the proper evidence is there. And we know the evidence is overwhelming. I think the challenge is it literally is overwhelming DOJ right now. So if new timing comes out, we'll certainly make that known.

[Operator Instructions] We'll go now to Jeff Osborne with Cowen and Company.

Almost everything has been asked. But just on ComEd, you've -- I guess in that -- for Navy, you've given us a good sense of what the revenue opportunity is for different classes of ships in the past. Just referencing Anne's [ph] presentation in August, can you just talk about what potentially the revenue opportunity for a site like that in defense for a substation would be, just to put it into perspective?

When I get an order...

When I get the go-ahead and an order, I'll tell you. I have to answer that question exactly. I don't want to -- I don't know what Anne [ph] said specifically because I wasn't there. I know that there was a map that was presented.

It was actually webcasted, Dan, and she said that they were evaluating it as part of the -- I can't give you the exact quote, but -- anyway, it was the utility as a future project and said that they were evaluating superconductor opportunities for potential sites. So you can still listen to the webcast on their website. But are we talking a couple hundred thousand dollars, tens of millions of dollars? Any type of horseshoes and hand grenades numbers would be helpful.

Yes. So it's -- what she showed -- because she only showed one point on the grid. That's the other challenge. If you think about REG, I mean, REG is a tens of millions of dollar solution regardless of what you do, right? So there's no hundreds of thousand dollar order for REG. When we even talk about smaller systems, they're in -- they probably start at $20 million, $25 million and they go up to -- what we're learning is $250 million, $400 million depending upon the scope. So let me leave it at that. I don't want to put words in Anne's [ph] mouth. We respect her greatly and Terry Donnelly and all the folks at ComEd that are working hard on this. We ought to make some decisions with them over the coming time period. And when we make those decisions, we're going to get back and get everybody with the same information. What we're trying to say -- and I think the fact that she's out talking about this clearly shows that at the top, they're looking at REG as a viable solution for solving these problems on the grid. I hope I gave you enough color to not be dodgy with that.

No, no. That's what I thought the answer was. I just wanted to double check that nothing had changed. Could you give us -- you mentioned BASF as an item driving the Grid revenue in the quarter from a modest perspective. But can you just give us an update on how that venture and collaboration is going?

I really can't. We signed non-disclosures and things. So it's their business and it's really up to them. We provide support and they pay us for technology and for that support. In the future, they are potentially an additional source for wire. And again, if we enter into some broader collaboration with BASF, we certainly would probably announce that.

Makes sense. I think you talked about, and also in the prepared remarks, the Q4 period for Wind being up. Robust, I believe, was the word you used. How should we think about the sequential improvement in particular for Wind in the March quarter? I get the fact that most likely, the Grid piece would be down just given this substantial order that you have for December that you highlighted. But I just want to get a sense of modeling for March so that you don't get jammed on numbers.

Yes, we try not to give guidance too far ahead. Dan and I have sort of set the expectation.

We debated. We gave kind of qualitative with the words that we use, stronger and robust. I think, unfortunately, we're going to have to leave it at that.

I'm striking out today on questions. Maybe the last one, just the Australia blackout last month. I'm not sure if you saw that, but that's been a D-VAR market for you in the past. I know you highlighted that many of your deployments are more for new sites. But have you seen any inquiries post that dramatic event that they had?

Yes, we have.

And I'm showing we have no further questions at this time. This does conclude our Q&A. I'd like to turn the call back to our presenters for any closing remarks today.

Great. Thank you, Priscilla. In closing the good news is Inox is back and things are moving forward. I think that's a big relief within the company and certainly for everybody that holds stock in the company. We have a very good relationship with the folks at Inox, and I think we're very happy to get through this bump in the road for them and continue to work together closely. The D-VAR product, we talked about it in the release. So on Monday we're -- we've been able to secure orders now that translates into year-to-year growth for D-VAR, which we think is great. On the REG side, I think we gave more color today than we have in a very long time. We're talking about 5 cities today, a lot of progress, realizing that the value here is substantial and we want to go deliver on that value. And with the Navy, the Navy is coming along, and we continue to be very optimistic based upon the feedback that we're getting from the different ship platform teams as well as the different shipyards that build these platforms that superconductor solutions are going to be deployed in the fleet here in the very near term. So we've spent a lot of effort over the past several years in rebuilding this company. And the fruits of that are going to be borne here in the relatively near term. We talked about the strategy of the value beyond the wire. It's really getting the attention of our target markets, the fact that we're talking about systems. ECS is a system. D-VAR is a system. REG is a system. SPS is a system. People don't buy technology, they buy what it does. And what we're trying to do is to capitalize on that value and increase the value in this company. So we appreciate everybody's support. We appreciate the good questions that we're able to get today. And we look forward to getting through this quarter and through December and being able to report back to you all on additional progress for the company. Thank you, everybody.

This does conclude today's conference. Thank you for your participation. You may disconnect at any time.