American Superconductor Corporation (AMSC) Q4 2016 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the AMSC's Fourth Quarter and Full Year Fiscal 2016 Results Conference Call. [Operator Instructions] With us on the call this morning are AMSC's President and CEO, Daniel McGahn; Senior Vice President and CFO, John Kosiba; and Manager of Investor Relations, Brion Tanous. For opening remarks, I'd like to turn the call over to Brion Tanous. Please go ahead, sir.

Thank you, David, and welcome to our call to discuss our fourth quarter and full year 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, 2017, which we filed with the SEC earlier today, 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 the non-GAAP net loss or net loss before gain on sale of interest in minority investments, stock-based compensation, restructuring and impairment charges, amortization of acquisition-related intangibles, consumption of 0-cost-basis inventory, noncash interest expense, change in fair value of derivatives and warrants and other unusual charges net of any tax effects related to these items. Non-GAAP net loss is a non-GAAP financial metric. A reconciliation of our non-GAAP to GAAP net loss can be found in the press release we issued and filed with the SEC this morning on Form 8-K. All of our press releases and SEC filings can be accessed from the Investors page of our website at www.amsc.com. And now I will turn the call over to CEO, Dan McGahn.

Thanks, Brion, and good morning, everyone. I'll begin today by providing an overview of our activities for the fourth quarter and full year of fiscal 2016, which ended March 31, 2017. John Kosiba will then provide a detailed review of our financial results and guidance for the first fiscal quarter, which will end June 30, 2017. Following John's comments, I will then provide an overview of our activities and business goals for fiscal 2017. After that, we'll open up the line to your questions. Even if our revenues didn't reflect it, FY '16 was a year of progress for AMSC. Progress from the action we are taking to reduce our footprint and to focus on growing our Grid business, progress in working to diversify our revenues and establish a sustainable mix of Wind and Grid business for our company, including progress in our efforts to advance our Resilient Electric Grid or REG product, progress reflected in the well-received introduction of our new grid product VVO, progress in the continued year-over-year increase in D-VAR revenues and progress with the U.S. Navy to insert our Ship Protection System products into the surface fleet. Building on this progress, earlier this month, we concluded an equity offering to support our efforts to grow our business in fiscal 2017 and beyond. We raised approximately $17 million in net proceeds through the issuance of 4.6 million shares of common stock priced at $4 per share. This includes $2.3 million of net proceeds from the overallotment option, which is expected to close early next week. I am grateful that many of our existing institutional investors participated in this capital raise. We also welcome our new institutional investors. We see the interest in the offering as a positive sign that the market also believes in the growth opportunities in our Grid business. John and I believe as well. That's why we, along with some of our board members, purchased stock in the offering. I am personally very proud of the work and effort put forth by our team to make this happen. Before John reviews the fourth quarter and full fiscal year results, I'd like to say a few words about our Wind business in India. Our Wind business underperformed in fiscal 2016 as our largest customer, Inox Wind, operated under self-described working capital constraints. Then in late February, a market event in India negatively impacted Inox's wind turbine demand and consequently, demand for our ECS in the fourth quarter. Inox experienced a demand dislocation for their wind turbines, which they view as temporary, which was caused by an unexpected change in the wind power tender system in India. This change in the pricing of wind-generated power resulted from a record low power purchase tariff in the country's first national auction at the end of February. As a result, certain projects in India are seeking to renegotiate power purchase agreements in light of the national auction results. In this new auction-based market, wind developers, including Inox, are currently reevaluating their backlog of contracts and tenders won under the feed and tariff market regime. Much of this probably will be rebid under the new auction scheme. Consequently, demand for Inox wind turbines slowed in key states as projects stalled due to pricing uncertainty. This certainly presents a challenging first half for us. Longer-term, we believe there may be a silver lining in all of this. The national auction in February resulted in 1,000 megawatts being tendered to 5 wind developers, Inox's wind development arm included. In fact, in addition to the 250 megawatts won directly by Inox's development arm, Inox has secured 50 megawatts from another winning independent power producer. So, so far, Inox turbines will be in 30% of the first tender. According to Inox, the company is also in final negotiations for another 250 megawatts from the country's first 1,000-megawatt auction. So Inox may be positioned to capture potentially more than half of the initial 1,000-megawatt tender. A second auction-based tender for another 1,000 megawatts is currently underway and is expected to conclude in June. Inox is bidding on this second auction of 1,000 megawatts as well. Once the uncertainty created by this market change subsides, we anticipate a return to growth. The Indian central government is expected to auction a total of 4,000 megawatts of wind capacity this fiscal year, while the state governments are expected to auction an incremental 3,000 megawatts for a total of 7 gigawatts in 2017. Importantly, these contracts are larger than in previous years, and are expected to be executed over an 18-month period. As a result, we could see reduced seasonality in India's wind business going forward. Inox has communicated to us that they intend to return to higher levels of wind turbine production sometime during the second quarter. These near-term issues that Inox is facing demonstrate the importance of diversifying our revenues through growing our Grid business. We continue to be excited about the wind market in India and believe we are well positioned to support any expansion of Inox's business as a result of the new market dynamics being put in place there. Inox is optimistic about the wind market in India. Inox's optimism is based on the fact that the annual wind installed market in India appears to be set to double over the 3-plus gigawatts installed in 2015 just 2 years ago. On that note, I'll turn the call over to John to discuss our financial results for the fourth fiscal quarter and full fiscal year 2016 in greater detail. John?

Thanks, Dan, and good morning everybody. AMSC generated revenues of $16.2 million for the fourth quarter of fiscal 2016 compared to $27.5 million in the year-ago quarter. In the fourth quarter of fiscal 2016, Wind revenues declined 48% compared to a year-ago results, while Grid revenues were down 25% versus a year ago. Wind revenue for the fourth fiscal quarter was down year-over-year due primarily to lower shipments of Electrical Control Systems to Inox. Grid revenues were down in the fourth quarter versus the prior period due primarily to the nonrecurring portion of the license revenue from BASF which was recorded in the fourth quarter of fiscal 2015. For the full fiscal year, revenues declined by 22% to $75.2 million from $96 million in fiscal year 2015. Revenues from our Wind business were down 31% year-over-year and represented approximately 63% of total revenues. On the other hand, grid revenues grew for the fiscal year and represented approximately 37% of our total revenues. 12-month backlog at March 31, 2017, was approximately $66 million. Looking at the P&L in more detail, gross margin for the fourth quarter of fiscal 2016 was 17.5%, which compares to with 33.6% in the fourth quarter of fiscal 2015 and 18.6% in the previous quarter. The year-over-year decrease in gross margin in the fourth quarter was primarily due to lower revenues, including nonrecurring license revenue from BASF in the prior year at a 100% margin. For the full fiscal year, gross margin was 14.4% compared to 22.9% in fiscal 2015. We announced on April 4 that we intend to relocate to a new facility with a smaller manufacturing footprint, which is expected to result in lower fixed costs and accelerate gross margin improvement. R&D and SG&A expenses for the fourth quarter were $9.8 million. This was down from $10.9 million for the same period a year ago. For fiscal 2016, the R&D and SG&A expenses were $38.2 million compared to $41.2 million in fiscal 2015. Approximately 12% of our R&D and SG&A spend in the fourth quarter was noncash. Our net loss in the fourth quarter of fiscal 2016 was $6.9 million or $0.50 per share. This was up from $3.4 million or $0.25 per share in the year-ago quarter. For fiscal year 2016, net loss increased to $27.4 million or $1.98 per share compared to $23.1 million or $1.76 per share in fiscal 2015. Our non-GAAP net loss for the fourth quarter of fiscal 2016 increased to $7.1 million or $0.51 per share compared with 38 -- $3.8 million or $0.28 per share in the year-ago quarter. For the full fiscal year, our non-GAAP net loss increased to $27 million or $1.95 per share from $26.2 million or $1.99 per share in fiscal 2015. Please see our press release issued this morning for a reconciliation of GAAP to non-GAAP results. We ended the fiscal year with $27.7 million in cash, cash equivalents and restricted cash. This compares with $26 million as of December 31, 2016. Our cash balance at the end of the fourth quarter includes $2.5 million of net proceeds from the issuance of approximately 380,000 shares of common stock under our ATM facility at an average sales price of $6.79 per share. In conjunction with our equity offering, which closed on May 10, we terminated the ATM arrangement. Excluding these financing proceeds, the cash burn in the second half of fiscal year was $1.4 million. Operating cash flow in the fourth quarter was negative $700,000. As of March 31, 2017, the principal balance of our debt arrangements, excluding the debt discount, was $1.5 million, which matures on June 1, 2017, when the entire outstanding amount will be repaid in full. Turning to our financial guidance for the first quarter of 2017. We expect that our revenues will be in the range of $8 million to $9 million. The lower revenue in the first quarter is due primarily to lower wind revenues as a result of the temporary demand dislocation in the Indian wind market Dan discussed earlier. The lower revenues, coupled with lower fixed cost absorption are expected to result in sequentially lower gross margin in the first quarter. In addition, we expect up to $2 million in restructuring charges in the first quarter for severance and other costs arising from the action we announced on April 4. As a result, we expect that our net loss for the first quarter will be less than $18 million or $1.05 per share. Our non-GAAP net loss for the first quarter is expected to be less than $17.5 million or $1.02 per share. Please see our press release issued this morning for a reconciliation of GAAP to non-GAAP results. Excluding the proceeds from the recent equity offering, we expect a cash burn of $7 million to $8 million in the first quarter of fiscal 2017. We expect to end the first quarter with a balance of cash, cash equivalents and restricted cash greater than $36 million, which includes approximately $17 million in net proceeds from our recent equity offering. The $17 million includes approximately $2.3 million in net proceeds expected to be received upon closing of the overallotment option. With that, I'll turn the call back over to you Dan.

Thanks, John. I'll like to take time today to update our business goals for fiscal 2017. Our capital raising efforts earlier this month were undertaken in order to support these new business objectives, all of which target growth in our Grid business. An updated investor presentation is available on our website at www.amsc.com/investors. In fiscal 2017, our business objectives are: one, close the ComEd contract and begin the construction phase in Chicago; two, announce an SPS order from the Navy; three, announce at least one additional city to perform a REG deployment study; four, announce the first commercial orders for our new VVO product; and five, grow grid revenue year-over-year. We have set a number of initiatives in motion to accelerate growth in our Grid segment, with the strategic objective of diversifying our revenue base. Let's start at the top with our REG product. We plan to close on a contract with ComEd and begin the construction phase in Chicago. We are in an advanced stage of discussions with ComEd about how to proceed with the program. A number of projects aimed at increasing the reliability and resiliency of Chicago's electric grid have been discussed. The scope of these projects range from large and complex to some that are smaller in scale and simpler to deploy. ComEd has indicated their preference is to start with the smaller and simpler scope before potentially moving on to larger, more complex deployments of REG. Additionally, ComEd intends to deploy their system permanently in the grid and intends to include it in their rate base. This is a key point for us. As a result, ComEd has requested commercial terms with us, including provisions for liquidated damages, performance bonding and product warranty. This was not our original understanding or DHS's intent. What started out as a collaboration between ComEd, the DHS and AMSC is now becoming a commercial contract between ComEd and AMSC subsidized by DHS. We intend to use a portion of the proceeds from last week's capital raise to collateralize performance for this first ComEd project. In short, commercial terms allow ComEd to secure cost recovery of a permanent asset in the grid, which goes a long way towards preparing the product for broad deployment in other urban distribution grids. This will mature the product well beyond what we had hoped to achieve when we entered into our agreement with DHS. We have a pipeline of more than a dozen REG projects ranging from $10 million to $400 million each. Our second business goal is that we intend to announce an SPS order from the Navy in fiscal 2017. On May 1, we announced an $8.4 million contract with the U.S. Navy for engineering and technical services. This sole source contract was entered into to support the U.S. Navy's insertion of AMSC's Ship Protection Systems into the fleet. The contracts includes interface hardware for testing and training systems as well as test support related to the technology. It is important to note that our technology is appropriate for other applications for naval ships. Beyond Ship Protection Systems, we see the potential for a long-term relationship with the Navy. These applications include power and propulsion in addition to protection equipment. In fact the new contract with the Navy also provides for technical assistance related to high power test capabilities for high-temperature superconductor, or HTS power cables. This continues our efforts started in fiscal 2016 to develop HTS power cable hardware for shipboard power applications. Work will continue on this project during fiscal 2017. The Navy has publicly said that HTS is an enabling technology in its path to create an all-electric ship. We believe Ship Protection Systems provide an opportunity for the Navy to get comfortable with the technology prior to large-scale adoption of other HTS components for applications such as power and, ultimately, propulsion. We also plan to deliver the beta version of our second SPS product, our deployable SPS, to the Navy in the coming weeks. Our third business goal for fiscal 2017 is to announce at least one additional city to perform a deployment study of our REG system in an urban electric distribution grid. Recall that in February of this year, we announced that AMSC would partner with Black & Veatch to perform a study to evaluate options to improve the resiliency of Pacific Gas & Electric Company's electric grid. This announcement represents our first West Coast utility and our fourth overall utility intending to evaluate our REG system. This study will focus on evaluating REG as a potential option to backup or replace certain existing pipe-type cables on PG&E's grid. Pipe-type cable technology has been the dominant transmission cable type in The United States from the 1940s through the start of this century, with thousands of miles installed. In recent years, utilities have looked to replace these cables, which often utilize large quantities of environmentally-harmful oil, with more benign technologies. AMSC's resilient electric grid systems have the potential to help fill this market need. Looking at 2017, last week, we met this third objective, with the announcement that we secured the first deployment study of our REG system in the Pacific Northwest. With a key focus on sustainable solutions, Seattle City Light will focus on evaluating REG as a solution for a power distribution application within the utility service area. Critical to the project is increasing the load serving capacity while limiting the need for additional grid infrastructure at the site. Unique to our REG solution and the system's potential to mitigate the environmental impact of such a project, we believe our REG system is gaining traction because it's compact, efficient and cost-effective, which allows for lower land acquisition cost and has lower environmental impact. We have been working on securing our supply chain as well. Just last week, we announced that Electrical Consultants Inc. of Billings, Montana, is now a certified installer of AMSC's REG solutions in The United States. This announcement represents an expansion of our existing relationship with ECI. ECI was already a key supplier for AMSC, having performed engineering procurement and construction, or EPC services, to over a dozen projects involving our grid products. Since we intend to accept turnkey REG projects as prime contractor to U.S. utilities, having proven EPC capabilities will facilitate smooth construction and installation of the product. With a national footprint, ECI further enables AMSC to offer REG solutions to a potentially broader customer base and establishes additional channels to market in North America and particularly the Pacific Northwest. ECI is one of the country's leading transmission and distribution consulting design firms and one of the largest specialty EPC companies in The United States. For our fourth goal this year, we expect to announce the first commercial orders for our new VVO product in fiscal 2017. Our sales team at AMSC is targeting utilities in The United States. We are seeing interest in VVO from investor-owned utilities, cooperative public utilities as well as municipal utilities. Interest for the product has literally been overwhelming. The value proposition of VVO addresses some important issues for utilities: voltage management, electric vehicle proliferation, solar capacity and conservation voltage or CVR. We expect to build a backlog of commercial VVO orders in fiscal 2017. VVO doubles our addressable market for voltage management solutions. We believe VVO could be an important component to the long-term growth of our Grid business. Finally, our fifth corporate goal for fiscal 2017 is to grow our grid sales year-over-year. In April, we announced 4 new D-VAR STATCOM system orders valued at approximately $8 million. All 4 orders serve the renewable energy sector. The systems are expected to connect wind power plants to the electric grid as well as to provide voltage regulation to the transmission grids at each location. We believe these new D-VAR orders demonstrate the benefits of our solution and relationships with windfarm developers in our core geographies such as The United States, the United Kingdom and Australia as well as new territories such as the Middle East. As a result of continuing tax incentives in The United States and the Climate Change Accord in Paris, we expect the renewable sector to remain healthy in our targeted geographies. We have focused our efforts on developing a strong utility and industrial pipeline for our D-VAR products which, hopefully, will translate into future revenue growth. D-VAR bookings are off to a strong start in fiscal 2017. We anticipate D-VAR sales will be a key component of our expected Grid segment growth this fiscal year. Fiscal 2016 was a year of progress at AMSC. We have 5 important business objectives for fiscal 2017, which we have shared with you this morning. By achieving these objectives, we expect to drive growth in our Grid segment with a strategic objective of diversifying our revenue base. I am very pleased at what our team here at AMSC was able to accomplish in fiscal 2016 and look forward to a very productive 2017. I'd like to personally thank our employees for their hard work and dedication. Their hard work is paying off. We intend to generate new orders for our new product offerings and we have developed a culture of product development within the company. We enter fiscal 2017 with a strong balance sheet. We are keenly focused on the creation of a sustainably profitable and positive cash flow business. I look forward to reporting to you again following the completion of our first fiscal quarter of 2017. Now we'd like to open up your line to questions. David?

[Operator Instructions] We will take our first question from Philip Shen with Roth Capital Partners.

First one is on Inox. I think in your prepared remarks, you talked about activity could pick up sometime in Q2. Just want to make sure you're talking about your fiscal Q2.

Yes, every time we talk about a quarter, we're talking about our fiscal ones, which that'll be the one that ends in September.

Great. And then as a follow-up to that, you mentioned the gigawatt tender, and then there's a second gigawatt tender coming up, closing potentially in June. When would the -- so would it be fair to say that the 300 megawatts that they secured for the first tender, the deliveries of ECS could start to happen sometime in your fiscal Q2. And then if they win a meaningful amount of projects from the second tender, when would you expect shipments to ramp up for that -- the deliveries of that tender?

So I'll kind of harken to the words that they've used. What they've said, when asked the same question publicly, is that they believe that they'll start to see ramping starting as soon as September. There is work that still needs to be done, that's in backlog, that's not part of the national tender and that's what's going to help support some shipments here in the June quarter and into the September quarter. But obviously, we are telegraphing that we're going to have a lighter first quarter here. But it looks like it's going to set up for a very strong second half from everything that Inox is saying. I don't know specifically with the June tender what -- to guess what they might win or when those deliveries might start to happen, but I think, based upon the first tender, they certainly start within the first 6 to 9 months after the tender has been formalized.

Okay. That's really helpful Dan. Have another quick one, and then I'll pass it on. As it relates to ComEd, can you share with us what the -- you want to start construction with them sometime this year and lock down the commercial contract. Any sense of what the timing might be, calendar Q3 or 4? What and how would you characterize the timing of that?

You know, at this point, without having an agreement with them that's executed, without having an announcement, I think in that announcement I would hope that we could be more clear with whatever the timing expectations are. It's been tremendously fulfilling working with Exelon and ComEd to really mature the product, to be ready for broad scale deployment. But I can't tell you this today without a contract signed on when we would see the work to really begin. We're going to work with that with ComEd on their schedule. We characterize today that we are in advanced discussions with them. We've had work proceed with the project. As you remember, we had a $1.5 million phase of principle engineering work that's been completed, and we have a $3.7 million phase of procurement of long lead time elements for construction that we're in right now. So hopefully, that will complete in the next quarters. But we feel very optimistic based upon what we see overall in the market for REG. This is a product that's going to work in Chicago but certainly well beyond that. And that's what we're ultimately focused on, is how do we open up that larger market as quickly as we can.

And we'll take our next question from Colin Rusch with Oppenheimer.

Can you just remind us what the timeline looks like for the Seattle City Light's study, and how quickly that might get out into the public realm for folks to consider?

It's a good question, Colin. I think with each of these studies, I don't think we've ever really kind of signaled the timing. We've tried to talk kind of in general terms. It took us about a year with Chicago to get to a project design that we could start to contemplate for construction. One of the things that we do have in the current deck is, and we're a little forward leaning in this, and based upon what we know today, given the dozen-or-so conversations that we're having, given the fact that we've announced publicly with Boston, Washington, D.C., San Francisco and now, Seattle, that we think we're going to be in position to take an order in our next fiscal year in 2018 potentially for a commercial project. That would be Seattle, that could be one of the other cities. What we're trying to do as best as we can are to mature these projects in parallel, independent of the work from Chicago to try to present as big a pipeline for revenue rather than just pipeline on potential orders. And that's what the team is focused on this year to try to keep moving that forward. I can't definitively speculate on when we'll complete Seattle, but other than to say that I think things there from a electrical standpoint, coupled with an environmental standpoint, bode very well for REG. So we look at that opportunity with great optimism and we hope to be able to report more news in the future.

Great. And then looking at the Navy opportunity, what's the real bottleneck or pinchpoint in moving that forward at this point? And that's it for me.

The bottleneck has been is getting to the point where, not only have we bought -- had the Navy buy hardware sets that are ready to be deployed in multiple ship platforms, it's really getting that design change ratified on each ship platform and that's what's taken some of the time to move the business forward. Our understanding is that there is out some public information that says that the Navy intends to award another sole-source contract to us. So part of our objectives here of getting another SPS order, we feel very comfortable that, that could happen in the relatively near term here, given the fact that, that public information is already out there. So our hope is, in 2017, you really have a transition year for the Navy where we're moving out of kind of show to really a go-to-deployment phase with the Navy. I also mentioned in the prepared remarks that we're continuing on delivering the next Ship Protection System product, the deployable unit. We're also continuing to work on the next product line offering, which would be power cables, and really trying to position for the electrification of ships in the way of weapon systems next decade. And that will mean for us, dramatic expansion in content per ship. But right now, we're trying in '17, let's get these next orders, let's start to show that we're diversifying our revenues into the Grid segment, including the Navy, and we hope to get that done here in '17.

We'll take our next question from Carter Driscoll with FBR.

Congrats on finally moving the ComEd contract forward.

But we're not announcing. So let me be clear, and I was worried people would -- all we're doing is we're trying to be more transparent with everybody as to where we are, and we're setting out objectives so we're been clear on, we're trying to move this forward as fast as we can. So I don't want you to take it that we've executed the contract. We certainly have not done that. We have a vehicle with DHS, and that's it to-date.

I understand. But just to clarify, you had some -- the original agreements you had, is the cost sharing arrangement with the DHS and with Exelon, you had anticipated over multiple years maybe being sized and, if I recall correctly, in the kind of $60 million range. So what you're -- I guess, your confidence that, you are moving towards a commercial contract, reflects some of the parameters that would be required under such contract, such as the performance bonds and warranty of the product, which perhaps requires a little more financial wherewithal from -- you guys deliver to the table, but that does signal confidence. My question is, can you talk about the scope, because you talked about, maybe, them moving forward with some, a smaller scope of the original project, because it seemed like it was very expansive originally and to -- in order to rate base, and maybe that's an easier process to get through on the approval. Is that the right characterization of what you're seeing today, Dan?

Yes, I think that's exactly right, and part of what we're trying to get people to understand, because we've been in this relationship with ComEd now for a number of years. And it's hard to constantly be talking about what we're learning, because a lot of it is specific to ComEd and how they operate. You're exactly right. We're trying to telegraph today that we're not assuming that we're going to take down all $60 million of that scope that we had with DHS, and the way we are looking at now is, it really becomes -- hopefully, if we're able to close the contract, we wind up having a contract with ComEd to deliver the system and then the monies from DHS would be used to subsidize in part all of that. The DHS mechanisms still is a cost-share mechanism. But what we're seeing from ComEd is, they really want this as a permanent piece of the grid, which means putting it in the rate base, getting cost recovery, going through all those steps that -- part of what we're trying to get everybody to understand is, that was not contemplated when we went to DHS to go secure the $60 million in funding. We were hoping to get to the point we could put a scope in the grid, and then it would be up to the utility to decide what do they want to do going forward. I think, given where we are with the conversations with ComEd, clearly they like it enough that they want to put it in the grid. This is no longer science. This is now real construction and deployment, which means real terms, and that's kind of the double-edged sword with this. The terms that we have with the government are very forgiving when it comes to the commercial partners. The terms that we have with ComEd, assuming that we can execute a contract, won't be that forgiving, and that's what we're trying to telegraph today. And that's really -- when we talk about going out and raising money for growth, we are at a situation with Chicago where we want to move it forward and we needed access to additional capital to go forward, and then be hopeful to have positive conversations with ComEd in the near term here, and maybe we'll be able to announce something that everybody will be able to understand from a revenue and a timing standpoint. But at this point, I think it's premature to get to that point. We don't have a signed contract with ComEd.

Got it. And then just as a follow-up, so in terms of the Navy, so you've got a lot of different moving parts and, obviously, approval process, I'm sure is frustrating. But you just got the technical award. But you actually got a reward last year, if I remember correctly, it was on the order of $8 million. But can you just kind of characterize the difference? I mean, what do you expect this year? The SPS is not necessarily the deployable opportunity. That is an opportunity, but not what you are necessarily anticipating in fiscal '17. Is that correct?

I think we are anticipating from a development standpoint that there'll be work, there'll be revenue associated with the work on the second product for SPS, which is the deployable. On the first product of SPS, which is degaussing, which is the permanent part of the ship, that's where we're intending to get an order this year for, and that's really what the services contract is intended to support. So we got into situation with the Navy that as we get ready to start to insert this questions on manuals and testing and teaching on how to do operation and maintenance and things like that, that those are efforts that have a cost to us, and we had asked the Navy, we would like for you to pay for those, and they responded with this additional $8-plus million order. So we have 2 of these now, right? So we have $16-plus million of orders that we've secured with the Navy. This is on top of the $30-plus million that they've spent to develop the Ship Protection System product line with us. And we're starting to see a realization of some of those revenues from the first $8 million contract this year. I can't give you any comfort today on when the second $8 million vehicle, the services part. The -- I think that the first one is hardware and the second one is services. That will probably align with, if we're able to secure the next order, really to support the insertion of that hardware onto a specific ship platform.

So if you got a third order, it would pull-through more of the second order. Is that right?

Correct. I think the safe way to think about it, that's different than we had hoped or anticipated is -- and we were asked questions, "Would there be service revenue?" And our hope was kind of, once we got things going, maybe there would be some O&M work that could be done. But I think what we're kind of surprising the market with and ourselves with is, there's going to be billable revenue and profit to come from the first insertions into the fleet as well on the services side, not just on the hardware side.

Maybe just squeeze a quick one in. Do you anticipate Trump's budget in terms of increased defense spending to be galvanizing force or potentially securing a third contract or totally independent?

I think it's not totally independent. I don't think the third contract is dependent upon that. I think the size of the market will potentially expand. Maybe the rate of insertion will expand and certainly, I believe the number of ships probably will expand because they're talking about a much bigger surface fleet and overall fleet for the Navy. So I think that they are tailwinds, but they're not tailwinds required to get done what we need to get done here in '17 in the near term.

And we'll take our next question from Jeff Osborne with Cowen & Company.

Dan, I was just hoping on the REG side if you can talk about the cash implications over time, recognizing you don't have a ComEd contract signed, but just for companies such as yours that provide similar types of equipment that are permanently in the grid. Just hypothetically, if you were to be awarded say, a $50 million or $100 million contract, is there a general rule of thumb that utilities expect you to follow? That a certain percentage of the contract would have to be reserved in cash for the performance mechanisms that you talked about?

Yes, it's hard with a data point of 1 and a handful of public studies and a couple handfuls of discussions to projects, to really come up with a rule of thumb. I think one way to think about this is, is it does appear to be different when we think about investor-owned utilities in the way that they manage risk. I mean Exelon's one of the largest utilities in the country. The way that they look at risk is, maybe fundamentally different than even say a municipally-owned utility. What we're trying to do is to make sure in this project that we have the ability to help bond the work that's to be done, because ComEd is in a situation where, if for some reason we can't get this thing over the goal line once we start, they're going to have costs that they've expended, that they really don't have in a way to account for. So it's those stranded costs that we're trying to principally protect against. Going forward, I would assume that this should get easier, not harder, as we take on additional utilities. But I can't give you a general sense on a rule of thumb. We just don't have enough data to do it. But it's something as we learn more in the market and if we find ways that we can communicate back to you all, we certainly will attempt to do that. We're trying to be as transparent as we can be, and you see a lot of that here on the call. John you want to add some?

Sure. So Jeff, on our existing product line, once we get the order, it's common to have milestone billing arrangements. So the working -- other than the cost that Dan was just mentioning, the working capital throughout the project should not be substantial. We should be able to set up milestone schedules where payment reflects our cost within reason. So the real risk is the upfront risk reduction on [ I think ] the topics that Dan mentioned. And we do business...

Finally John...

With large D-VAR projects.

Yes. That is absolutely right. So this isn't atypical. I think, as we get to maturity with D-VAR -- at this point when we do, if we were doing a $10 million, $15 million D-VAR project, what would be the bonding be given the maturity is 10%, 20%...

Yes. Less than 10%.

Yes. So at some point we think that, that number goes down. I think the other part that's different with REG if I compare and contrast with D-VAR is, the construction cost is a fraction of the total project cost or relatively small compared to REG. Wherein REG it could be one-to-one hardware to construction or it could be even more than that, but I think that something else we've learned is that the hardware is effectively cheaper than the construction in many ways, which is good, I think, for the product. But it's a different way that utilities have to think about and manage their risk, because they don't have their own experience base or rules of thumb on how to manage those construction costs. So we're all kind of going into this eyes wide open and trying to work together as a team to manage those risks.

Makes sense. And then just -- and theoretically, I guess, it was new news to me that you're going to be the prime contractor on these going forward. So obviously, a high revenue potential, but there's a lot of margin pass-through. How do we think about the financial ramifications of that decision I guess?

Yes, I think that the way to think about it, and this is one of the hardest questions we get asked by existing investors and new investors, and we want to be as transparent as we possibly can be, what we're really after initially is to get the absorption in the factory. That alone is going to dramatically change the overall gross margin of the company, and that's really the first step. The second step on an ongoing basis is how do we best manage that supply chain, how do we find as much content as we can contemplate that comes from us, so we can be able to control pricing and margin. That's where we're evolving to. As being the turnkey, I'm sorry, if that's something that we haven't been a 100% clear with. When we announced REG and the contract with Chicago, we positioned ourself as the turnkey provider. When we've done each of these studies, we've positioned ourselves, again, as the turnkey provider. We might pull in an ECI or a Black & Veatch or a someone else to do the engineering procurement and construction, just like we did -- would do a turnkey D-VAR. We pull in a Nexans, who's done work to qualify the cable and the other components for REG, which we're very grateful that they've been able to work on. So what we're trying to show is, we're maturing the supply chain overall over the past couple of years and now we're in the point where, hopefully, we're going to go forward with some construction, and hopefully we're going to go forward with some more contracts for REG.

Last real quick one. Just with the intense price pressure in wind in India, is there any acceleration of the 3-megawatt development program that was out there as a potential?

I think stay tuned is all I can say with that. We want to support Inox as best as we can, and more products and more technology for them may wind up being part of the elixir that helps them to continue the strong growth that they want to deliver.

Got it. And then real quick. Is there any expectation of an inventory write-down? Obviously the inventory went done sequentially ending March, but how do we think about, about what transpired in April and May relative to the lack of demand.

Yes, there's no expectation of any inventory write-down. All the inventory we have, we expect to use.

[Operator Instructions] And we have no further questions at this time. I return the call over to you gentlemen.

Great. Thank you, everybody, for your attention. I know 2016 from a revenue and from a number performance standpoint is challenged. We do understand, given where the stock price has gotten, particularly after the last raise, we're not in the position that I think that any of us want to be in. I think today we're trying to signal more transparency, longer visibility on the things that we're working on. So you can really see the transformation that's happening in the company. We want to grow through Grid. That doesn't mean that we won't grow with Inox, we won't grow with other wind customers. But we want to purposely grow through Grid and put the company in position, so that we can be a sustainable, profitable company. That day is not that far off. I think that the level of revenue that we need to be at is an all-time low in the history of the company. We now need to execute on these milestones in 2017, and I think we're going to finally become the business that a lot of people had been dreaming about for decades here at American Superconductor. So with that, I look forward to talking to everybody in a couple of months' time when reporting on the next quarter results. Thank you, everybody.

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