Good day, everyone, and welcome to AMSC's Third Quarter 2016 Earnings Conference Call. This call is being recorded. [Operator Instructions]. With us on this call this morning are AMSC President and CEO, Daniel 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, Katherine, and welcome to our call to discuss our third quarter of 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 purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, including those discussed in the Risk Factors section of our annual report on Form 10-K for the year ended March 31, 2016, which we filed with the SEC on May 31, 2016, and subsequent reports that we 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 don't know if you were able to see the Super Bowl last night. I have to say that I related a lot to the emotions of that game. I think a lot of our long-term investors can relate as well. It really had a lot of parallels to our business here at American Superconductor. We were once written off in our first quarter, at halftime and it felt like for more than 3 quarters. What you will hear today is years in the making. I am very proud of the people that I work with, the people that I work for. I am so grateful that our company has responded so well. I'll begin today by providing an overview of our financial results for the third quarter of fiscal 2016, which ended December 31, 2016. Dave will then provide a detailed review of our financial results and guidance for the fourth fiscal quarter, which will end March 31, 2017. 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. Third quarter revenues came in above our expectations. In our Wind segment, ECS shipments to Inox were very strong during the third quarter, improved from both the first and second quarters of this fiscal year. We expected Inox to move to higher levels of turbine production in the second half of this fiscal year and that is exactly what we're seeing from our largest customer. We expect strong ECS shipments to Inox to continue in the fourth quarter of fiscal 2016. In addition, our Gridtec segment continues to have its sights set on growth. Our Grid business has grown year-over-year for the past 8 quarters. In case anyone missed it, the business is growing independent of Inox. We advanced our Gridtec initiatives related to our Resilient Electric Grid, or REG product, in Chicago, while our work with the U.S. Navy on Ship Protection Systems advanced on a number of fronts, which I will discuss later on this call. We introduced these 2 new products over the past 2 years. I could not be happier with the market response we have seen. We clearly have solutions that are unique and necessary. Last week, at the DistribuTECH utility industry conference in San Diego, we announced our third new product in 3 years, D-VAR VVO, to 11,000 people from the utility industry, a new product that expands our D-VAR product line from transmission to distribution and more than doubles the available market for our FACTS products. Our aim is to diversify our revenue base, and we have been focusing on making this happen. I'll now turn the call over to Dave to review our financial results for the third quarter of fiscal 2016 and guidance for the fourth fiscal quarter, which will end March 31, 2017. This was a great quarter for us. Dave?

Thanks, Dan, and good morning, everyone. AMSC generated revenues of $27.1 million for the third fiscal quarter compared to $25.8 million in the year ago quarter. Both our Wind and Grid segments generated higher year-over-year revenues during the period. In our Wind segment, demand from Inox for our ECS increased sequentially consistent with what is now typical seasonality. We expect ECS revenue from Inox to be strong in the fourth quarter as well. Wind segment revenues represented 67% of total revenues for the third quarter of fiscal 2016. Grid segment revenues for the third fiscal quarter increased 4% year-over-year, primarily as a result of BASF project revenues in the current year period. 12-month backlog at December 31, 2016, was approximately $75 million, compared with the 12-month backlog of $86 million at September 30, 2016. The majority of our 12-month backlog is for Inox, which is denominated in euro and was negatively impacted by the stronger dollar in the third quarter. Looking at the P&L in more detail, gross margin for the third fiscal quarter was 18.6%, which compares with 25.3% in the third quarter of fiscal 2015 and 11.4% in the previous quarter. The year-over-year decrease in gross margin in the third quarter was primarily due to less previously written off inventory consumed as we have already consumed the highest volume items as well as an unfavorable revenue mix including royalty revenues recorded in the prior year period. R&D and SG&A expenses for the third quarter were $9.1 million. This was down from $9.8 million for the same period a year ago, primarily driven by lower SG&A expenses. Approximately 13% of this R&D and SG&A spending in the third fiscal quarter was noncash. Below operating loss, in the third quarter, we received the final payment associated with the sale of…

Thanks, Dave. Let me start with an update on our activities within our 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 cumulative [ph] installations, according to industry analysts. The total installed capacity of Wind energy projects in India was nearly 30 gigawatts as of the end of calendar 2016. 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. Shipments of our 2-megawatt Electrical Control Systems were strong in the third quarter, consistent with typical seasonality. And as I mentioned earlier, we expect strong ECS shipments in the fourth quarter. We are fully committed and prepared to support Inox's product road map for the future, while continuing with the supply of 2-megawatt ECS units. Inox is currently focused on the rollout of a new 113-meter rotor variant of its 2-megawatt turbine, which was designed by AMSC, and looks to be quickly gaining market acceptance. That is good for us because we are entitled to a royalty on sales of these Wind turbines. We also expect to collaborate on Inox's next-generation Wind turbine, which we believe will be a 3-megawatt design. Inox has been publicly touting this agreement. We had been targeting to enter into a license with Inox for this design by the end of the fiscal…

[Operator Instructions] Our first question will come from Philip Shen with Roth Capital Partners.

Wanted to dig into the wind business bit. Historically, I believe the HTS wire could be used as turbines get closer to 10 megawatts in size. So I know this may not be a near-term opportunity, but with Vestas I believe unveiling a 9-megawatt offshore turbine, can you update us on what the prospects might be for using your HTS wire in wind turbines and perhaps some timing and so forth?

Yes, I think General Electric did a paper back a while ago, probably 5, 6, 7 years ago, where they looked at the efficacy of a traditional drive and that really kind of went as high as 6, 7, 8 megawatts. My understanding of the product that Vestas launched is an 8-megawatt. It has the potential to be driven to 9 megawatts in certain conditions. We said prior -- somewhere around the 6, 7, 8-megawatt level is when a superconductor drive starts to have commercial viability. So I think the market trend of going to offshore has been something that we've been looking forward for the wind market to get to. I think the prospect of existing wind turbine manufacturing getting to that 7, 8-megawatt level is promising for our supply chain and we have the technology developed to deliver larger wind turbines than what are on the market today. So we talk a bit, and we focus our company on working with the Navy for its next generation drive. The belief is that, that technology could become the drivetrain for even larger wind turbines as that market evolves. So, Phil, I think you have it right. I think there's a potential expansion of our content that could happen in the future. I think it really depends upon the evolution of the offshore wind market, and getting to these bigger wind turbine sizes. We think that superconductor drive is maybe the only way to break an 8, 9, 10 megawatt limit on wind turbines. And assuming that the rest of the supply chain is developed, that certainly will help our partners, whoever that may be in the future that we would do even larger wind turbines with. We've gone with traditional drive in our designs up to 5, 6 megawatts and we look forward to trying to help the wind industry go further than it is imagining today.

Historically, you guys have partnered with folks in Asia, India most recently. To what degree do you think some of the partners for superconductor drive in the wind turbine business could come from the European base or even a company based here in the U.S. And have any of those discussions started at all?

Yes, I think, the whole market is open for us. I think one of the unique things about large turbines is that we continued to invest in the 2008, 2009 timeframe to get to even larger turbine designs. The strategy at that point may reap benefits in the future, where we may have developed technology already that maybe valuable to existing players, global players in the wind market. So our strategy was to enter the market in Asia, help to be able to deliver current generation technology and then invest to develop next generation technology for the global market. We haven't said those words in years. I think the market is evolving. I think the market is becoming potentially more right for us to work with an existing player, could be anywhere in the world. I think it really is dependent upon how well that market comes to fruition? How fast that market comes to fruition? But we definitely think that we have something that's unique and necessary to get to very large wind turbines.

Great. One question more from me here and then I'll pass it on. As it relates to your performance bonds required for ComEd and other projects, can you give us a sense for the amount of capital that is required? Is there a rule of thumb that's...

I think we're going to have to be more clear with that as we enter into contracts. So what we're doing is getting in position. We know in our conversations with multiple customers that the types of restrictions that will be placed our cash and we're preparing the company. We want to grow that top line. We want to grow that bottom line. We've put this tool up in place to really demonstrate and show that we have the capacity to get additional capital on the balance sheet. But I think any of those questions, we certainly need to answer and will answer as we announce future contracts.

Our next question comes from Colin Rusch with Oppenheimer.

Can you talk a little bit about the pacing of the new product introductions? I'm just trying to get a sense of the cadence on how we should see these things rolling out? And kind of what your bandwidth is to start working on new projects once you've got them out in the marketplace?

It's a great question and I'm so happy to be talking about this and not talking about challenges in our business. We are clearly trying to position the business to grow. I think you see us announcing REG and announcing SPS, announcing VVO now. We've talked already about a deployable solution for the Navy that's coming. We've talked about power cables for the Navy that's coming. We're working on a variety of products for grid customers. We do have some things in the works on the wind side. What we want to do is, we want to be able to pace the delivery of new products with the market, coupled with our financial ability to invest in these things. So we want to make sure that we are there as some new market start to emerge or our technology may be unique and necessary. But we don't want to go overboard with really trying to ratchet up internal spending. We're not looking to do that at all. So we're going to be very surgical with the shots on goal that we add. I think we're going to be -- we will use VVO as an example. We're going to be very responsible to the risk of the company. So we want to make sure that we're not out announcing a product and putting expectations where we're going to get very big changes in revenue in the next quarters. That's not what we're planning on doing. We're going to spend lightly, we're going to spend tactically and we're going to enter into contracts, particularly on the utilities side, where we mitigate and modulate the risk with our customer. And that may mean that revenue isn't something that comes early in a project, but we want to make sure that what we're delivering works. We want to make sure what we're delivering is unique and necessary to these markets. And we think in the case of VVO, based upon the feedback that we've gotten from San Diego, I think we're going to be able to hit that mark. But I'd say, stay tuned. Over time our hope is that as we get more traction with these new products, and specifically with VVO, the hope and I think your expectation would be to see the tenor and temperament coming from these calls, we're delivering on contracts that demonstrate future growth for the company and that's ultimately what we're after. We want to grow the company through grid. We want to allow Inox to be able to grow and to continue to rely on us as a critical partner for them and those things coupled with an emerging Navy business means very bright prospects for us here, not just for next quarter but for the coming years ahead.

Great. And then just specifically on the grid solutions side, what are you seeing in terms of the change in the pace of the sales cycle? I know you guys have done a lot of spade work and evangelism with a number of customers, and you mentioned the 5 that you're working with actively. But how should we think about the -- not necessarily first contact, but kind of meaningful phone call or conversation to an actual revenue event?

Let me talk kind of in general what we're doing and then how the market responds, what's happening in the market. So this is a little tangential to what you're asking and then I'll answer directly the question. One of the things we've invested in, and when I say we've invested, we've invested time, not shareholder money, is we've expanded our sales reach into utilities, principally in North America. And we did this by entering into relationships with manufacturers' reps that call on utilities today and have a pretty broad line card of products, but they may or may not have had power quality type offerings or grid resiliency and reliability solutions. So we've expanded the number of sellers that are having conversations with utilities and we've expanded that substantially. And the level of excitement we see at some of these reps, the idea of being able to work on new technology like VVO, or like REG, is really different for them and when I say different, I mean in a positive exciting way, it's not just selling the same old. So that's the way to expand the market. I think internally within the utilities, the market is evolving where more dollars are being spent on the distribution side. We see this change in North America to more residential on utility-scale solar. We see the emergence we think here in the near term of significant penetration of electric vehicles on the grid. We see other distributed generation solutions all the way down to the storage that are changing the way that utilities have to think about their distribution grid. In general, utilities spent most of their brainpower on solving generation and transmission problems. The distribution system, which is what gets us the power to keep our lights on and keep…

Our next question will come from Carter Driscoll with FBR brokers.

Just kind of taking a step back and following up on what Colin and Phil were talking about. At a high level, you put the ATM in place because you are positioning for growth capital. You talked about some of the -- obviously just released a new product in VVO. Trying to get a sense of your expectation. If you were to receive a large REG contract, would you have sufficient inventory, working capital on hand to be able to satisfy that? Or would that be -- since it's usually a multi-year process, something that, you think, you could potentially grow into without potentially doing an additional raise? And then I want to talk -- my second part is, I just want to talk about specific kind of product development. Obviously, as I just mentioned, you've just released 1 product. Are future product development focused around those core areas you alluded to, something within the wind segment that we haven't seen a lot of significant product development recently? Is that from potentially lateral expansion to other markets or growing within Inox? And then I just have one more follow-up. So -- sorry, it's a multiple part question.

Go back to the first part again, Carter? Let me answer that, and then I'll talk about the products.

So you've put an ATM in place and part of that is for the performance bonds, so the anticipation that you are going to move to the commercial side. But if you...

[indiscernible] it's anticipation of a certain level of contract and I can't get into the size or the leverage ratio. Dave kind of said it in his prepared remarks where -- we're anticipating having to securitize 100%. So what we want to do is be able to get established the flow with REG, be able to show utilities that we have access to this capital and we have the ability to be there to be able to deliver the product and deliver on the warranty provisions for the product going forward. We try to look at raising money as very serious. We would only raise money, as Dave and I have said, habitually for growth. We see that here. We see a need for that capital to grow. If there is the need to raise additional capital in the future, we want to be very clear that, that would be only for growth. And we think that's a high-class problem to have. If we get to the point where we have really taken this -- more than 2 dozen prospects for REG and we really see a lineup of large orders, we'll want to be very clear about that. And if that requires more capital, I think that's a good problem for the company to have, but it's not the problem that we have today reporting on the December 2016 results. We see in the near-term contracts that can help revenue and that's why we've used the vehicle that we've chosen to use here. On the grid site, let me just not confuse you a little bit. Let me start with very clearly. We want to grow the business through grid. Full stop. Right? And that includes the Navy as part of the grid segment. We will, if we're opportunistic…

Absolutely. And I think a lot of people have historically thought of you as more of a wind opportunity than grid opportunity. That's clearly not the picture you're trying to communicate today and I think a lot of people maybe misunderstand the opportunity and the investment you've made within this. Even with VVO, I mean, you have done -- using D-VAR has traditionally been for renewable interconnection, more focus on the wind side, but this is equally applicable to utility scale solar as well, and I think people [indiscernible] that opportunity.

And I think one of the comments that I made is that, if we look year-to-year, the grid business has grown every quarter for the past 8 years or so. And I don't know if the people are seeing that. I understand Phil's lead-off question with larger wind because it is investment that's there, markets that are turning, and we will take advantage of those as they come to us. But we are being very purposeful about investing in grid because we want to get to the point where the wind business is a smaller fraction of our total business, but the overall business is greater. How do you do that? Right? You don't do that by overinvesting in wind. You don't do that by overinvesting in Inox. We want to invest with Inox as they grow. I think we've had a great relationship with them to date, and we're very confident -- comfortable this relationship is going to continue for the future and we're going to invest with them as they need. And we're going to invest with the Navy as they need product. But we need to make sure that we grow the grid business, so that, you know, years from now, you're looking at this as a very stable, healthy sustainable business that's generating cash. And that's what we're trying to build. That's -- we've spent years putting all this in the place. We're seeing the beginning of the fruits of that labor. Now we're reporting for this quarter, Dave has hinted at what the guidance is for next quarter. Looks like it's going to be good for next quarter as well. We want to keep this beat to the business and keep things rolling.

Just really quickly then I'll get back in queue. In the discussions with the utilities, are you hearing any feedback that they are anticipating and/or expecting any type of infrastructure bill out of the new administration to incrementally drive business or is it really the changes, obviously, at the distribution level most clearly that have been in place over a number of years as renewable penetration is increased.

I think it's easier to talk about the distribution part, simply because it's a trend that's been established over the past couple of years. I think it's still a little too early to tell what the change in policy within the U.S., what that's going to mean. It looks like there is an infrastructure play here. It looks like grid is one of the 50 things that -- on the infrastructure side that the administration wants the country to invest in. It seems like and this is beneficial to us. It seems like this administration wants to do more to change the rules to allow investment in innovation, particularly in infrastructure, rather than just to subsidize directly. And I think that's better for our shareholders. The closer we're taking to real viable commercial contracts with utilities on commercial terms, the more you guys can feel very comforted that we really have a viable business for these products and that's what I hope that we continue to deliver on here.

[Operator Instructions] Amit Dayal with Rodman & Renshaw.

Just continuing on the previous line of questions. And, I guess, it looks like, and I appreciate the color today on the emphasis on the grid side of the business. Could you sort of give us sort of a timeframe for when grid and Navy combined could start exceeding wind? Is 2018 fiscal sort of too optimistic on our side? Or do you think that's [indiscernible]

I didn't hear what you said, 2014, I think that's too optimistic.

2018.

'18. Okay. I really can't tell the future. I don't have a very good crystal ball. I know if we focus on the fundamentals of this business, we're going to grow it and that growth and the changing in the financial results are going to translate into shareholder value. That's what we're trying to do. We're going to prognosticate 1 quarter at a time. I think we've been pretty good at doing that. We want to be in position where potentially if 2018 winds up being that year, we want to be there and we want to be there in spades. If it takes longer than that, we want to make sure that we continue to honor our mindset that we only want to invest for future growth and that's the position that we're in today and that's the position we want to remain in.

Understood. In regards to the guidance for the next quarter, $22 million to $26 million, could you break that down for us in terms of how much we should expect from wind versus grid?

I would say, our current view is that wind revenues will be relatively in line with the revenues you saw for this quarter with the rest coming from grid. So that would be my take on what you should expect.

Understood. And the beta version for this SPS product that was -- I think in the last quarter you mentioned you would be shipping by March, but it looks like that has been pushed out. Any color on that?

Yes, we felt like we were going to be able to deliver in March. So the customer has informed us as they don't really need it until the first quarter, so the June quarter. We take those comments from customers very seriously, so we want to make sure that we deliver when customers need things. And if that changes, our business in the short term, so be it. So we want to make sure we deliver on what the customer needs when they need it. And that's why you're right, we pushed that out a month or so here into the next quarter.

Understood. And just a final question on the SG&A side. I think you guys are doing a good job in terms of bringing these costs down. From a modeling point of view, should we at least for the near term project operating expenses at current levels?

Yes, I mentioned specifically in the call that we expect operating expenses to increase quarter-on-quarter due to higher operating spending or operating expenses primarily for product development activities. But I wouldn't say and wouldn't model those substantially just to kind of damper it a little bit. We're not trying to go crazy here spending money. We want to do it very tactically and very surgically because we want to ensure that we have the top line growth coming. We don't want to overspend or prematurely spend.

And we'll now hear from Jeff Osborne with Cowen and Company.

Just two quick ones. One on the performance bonds. I know it's been asked a lot, but I just want to be clear, each potential contract would have a bond associated with it and there's no covenants in terms of minimum cash balance that might then exclude a need for a bond?

We'll see what the terms look like when we get it. It could be none of those. It could be all of those. When we announce a contract in the future, we certainly want to be clear what the restrictions on the business are. We want to be in position to take those orders. We want to be in position to grow it. We believe, at least in the discussions that we've had with some of the earlier cities, that we would have to restrict capital to be able to go forward with contracts. And let us continue to work on that, let's get a contract behind us and then we can describe what's in that contract, and then we can describe what we think it means for the future.

Makes sense. And then, just for you Dave. Can you just remind us on the Inox receivables and the terms and letters of credit, just they reported on Friday and can continue to have a bit of a challenging time with the balance sheet there. So I just wanted -- you obviously have some comfort here in the upcoming quarter about strength there, but I just want to get a sense -- a reminder of what the policies are in place about getting paid?

Inox, I looked at their results as well. I was actually encouraged by their receivables. They grew their revenue, but their receivables stayed flat. So they're collecting something. So from that standpoint, I was encouraged by what they did. Turning to us, anything that we sell, specifically as it relates to Inox, we do so under a letter of credit. So those terms are in place and they're done with reputable banks in India. And so as a result of that, we know that when we ship something, we will have collection assured. And that -- you see that in our receivables. Our DSO for the third quarter, by my calculation, was around 47 days, which is -- that's for the total company. That's -- I think that's a pretty good DSO in relation to probably other companies that you cover. So we use letters of credit and we know that when we sell specifically with Inox that our collectibility is going to be assured.

Good to hear. And the last one. Can you just -- as you feel more comfortable with the balance sheet there, which has been an issue or obstacle in the past quarters. Can you just remind us of what you expect for the typical wind seasonality? You mentioned that the upcoming quarter would be strong seasonally, but how should we think about the summer months?

We don't know yet. We'll talk about that, I think, as we get to the next call. You can look historically as what we've done. The first quarter, the June quarter, is typically much lighter for India and for Inox overall. And that certainly has -- it sets challenges on our business. We tend to have a stronger December and a stronger March on the wind side. So I think if you look at the plot of those numbers historically, I think the past in this case will help provide some future insight as well. And I think, with that, we are out of time for questions.

Thank you.

Katherine, I'll wrap up and then we'll terminate the call. I think the good news that we see in the business is that the level of cash that we had in September versus December is about the same. That's great. I think the level of cash as we look at December going into March, we're hinting at, it is going to be about the same. So the business has gotten to a point of stability with this product lineup. We see Inox very strong here in the second half. We were able to get through a challenging first half with them. We look at D-VAR year-to-year. We're going to deliver on growth in that part of the business. We mentioned a lot of progress prior to contracts for REG and for SPS. We look forward in the future. You guys always ask me about what to look out for. Look out for future contracts coming. That's what we're working on. It's very hard to predict when they're going to come. But that's the effort and that's what we're focused on, and kind of new to everybody today is VVO and the idea this company developing and delivering new solutions for the distribution grid. That's what it's going to become more and more about going forward. So thank you for your time. And we look forward to talking to you again as we report our March results for the year. Thank you, everybody.

Again, ladies and gentlemen, that does conclude today's conference. Thank you, all again, for your participation.