FuelCell Energy, Inc. (FCEL) Q4 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the FuelCell Energy Reports Fourth Quarter 2012 Results. [Operator Instructions] As a reminder, today's conference call is being recorded. I would now like to turn the conference over to your host, Kurt Goddard, Vice President, Investor Relations. Please begin.

Good morning, and welcome to the fourth quarter 2012 earnings call for FuelCell Energy. Delivering remarks today will be Chip Bottone, President and Chief Executive Officer; and Mike Bishop, Senior Vice President and Chief Financial Officer. The earnings release, as well as an accompanying slide presentation, is posted on our website at www.fuelcellenergy.com, and a replay of this call will be posted 2 hours after its conclusion. The telephone numbers for the replay are listed in the press release. Once again, for those of you listening to this call via the dial-in phone number rather than via the Internet, management will be referencing a fourth quarter 2012 slide presentation that is available on the Investor Relations section of our website at www.fuelcellenergy.com. Before proceeding with the call, I would like to remind everyone that this call is being recorded, and that the discussion today will contain forward-looking statements, including the company's plans and expectations for the continuing development and commercialization of our fuel cell technology. I would like to direct listeners to read the company's cautionary statement on forward-looking information and other risk factors in our filings with the U.S. Securities and Exchange Commission. Now I'd like to turn the call over to Chip Bottone. Chip?

Thank you, Kurt. Good morning, everyone. Happy holidays, and welcome. Please turn to Slide 4, fourth quarter 2012 highlights. We are executing on our global strategy, building a solid foundation for growth and diversifying our revenue sources. During 2012, we set the stage for our future growth, executing our strategic initiatives on 3 continents as we planned. As we embark on fiscal 2013, we are solidly positioned for growth. Our focus is on driving orders, with these initiatives serving as catalysts that are expected to accelerate order flow in our markets. During the fourth quarter, we received a 121.8-megawatt order from POSCO Energy, our Asian partner, and successfully concluded a license agreement with them. This is the largest order ever received in the fuel cell industry. It greatly increases our backlog, and guarantees a solid base level of production for several years. The license agreement leverages our partnership with POSCO to meet the growing demand under South Korea's RPS and expand the Asian market, again, without requiring a commitment of capital by us. Persistent effort to close projects in North America was rewarded with the sale of a 14.9-megawatt fuel cell park in Connecticut to Dominion, one of the largest utilities in the U.S. This milestone project involves 3 different utilities and enjoys strong support from state, local and federal governments. Other utilities or regulatory bodies are taking notice of this multi-megawatt installation, which, in many aspects, is a replicable model for other projects around the globe. We are pleased to announce recently the sale of a power plant to Microsoft Corporation using renewable biogas to power data center. We are excited to be entering the rapidly growing data center market, which we believe holds considerable potential. And we are pleased to be working with such a well-known and large customer. Our European presence is expanding in high visibility installations in major European cities. We recently announced another sale of a power plant for installation at a prestigious development project in Central London. Our pro forma products and services backlog of $450 million provides us with a stable base production level for multiple years that can expand upon with additional order flow. The 121.8-megawatt POSCO order and the 14.9-megawatt Bridgeport fuel cell park represents solid progress on our path to profitability. Our growing services revenue provides predictability and stability with annuity-like returns. A long-term enhanced royalty stream will begin flowing from our Asian initiatives, adding additional predictability to our forecasted financial returns, without requiring investment of capital by us. Positioning us to benefit from adjacent market opportunities in sub-megawatt advanced military and storage applications using solid oxide fuel cell technology, FuelCell Energy acquired the remaining shares of Versa Power Systems, a leading solid oxide fuel cell developer. Solid oxide fuel cells are a promising technology and an excellent complement to our megawatt-class carbonate fuel cell products. The Versa name is well recognized in the industry, and we are in the advanced discussions with numerous potential global partners to assist us with the commercialization process. I will discuss our results and outlook in more detail after Mike Bishop, our Chief Financial Officer, reviews our financial results for the quarter. Mike?

Thank you, Chip. Good morning, and thank you for joining our call today. Please turn to Slide 5, titled financial highlights, quarterly. FuelCell Energy reported total revenues for the fourth quarter of 2012 of $35.4 million, compared to $34.7 million in the same period last year. Product sales and revenues for the fourth quarter totaled $33.9 million, compared to $33.3 million reported in the prior year. Research and development contract revenue was $1.6 million for the fourth quarter 2012, compared to $1.4 million for the prior year quarter. The following discussion includes non-GAAP adjustments. Please also refer to the GAAP to non-GAAP reconciliation in the earnings release. For the fourth quarter 2012, a gross profit of approximately $1.3 million was realized compared to breakeven in the prior year quarter. 14 megawatts was produced in the fourth quarter leading to an annualized production volume of 56 megawatts, unchanged from the prior year period. Total operating expenses were $9.3 million for the fourth quarter, compared to $8.3 million in the prior year. The year-over-year increase is primarily the result of market development expenses in the U.S. and Europe. Net loss to common shareholders was $8.1 million, or $0.05 per basic and diluted share, compared to $8.3 million, or $0.06 per basic and diluted share in the fourth quarter of 2011. EBITDA, which is earnings before interest, taxes, depreciation and amortization, totaled negative $6.5 million, which increased year-over-year, primarily due to the increase in SG&A. Sequentially, EBITDA improved by $2.2 million from the third quarter of 2012 due to higher production volumes and associated revenue, which drove improved absorption of fixed costs. Included in fourth quarter results was a noncash charge totaling $3.6 million due to the revaluation of our investment in Versa related to the acquisition announced yesterday. Please turn to Slide 6, titled financial highlights, annual. For the 12 months ended October 31, 2012, the company reported revenue of $120.6 million, compared to $122.6 million in the prior year. For the 12-month period, gross profit of approximately $900,000 was generated, compared to a gross loss of $4.3 million for fiscal 2011. For fiscal 2012, the production volume was approximately 49 megawatts, compared to about 46 megawatts in fiscal 2011. Net loss to common shareholders for the 12 months ended October 31, 2012, was $34.6 million, or $0.21 per basic and diluted share, compared to $40.6 million or $0.33 per basic and diluted share. For the 12-month period, EBITDA improved by $4.5 million as a result of increased production volume combined with successful cost reductions. Now I will transition to Slide 7 titled financial metrics. Cash and cash equivalents totaled $57.5 million on October 31, 2012, plus a $10 million licensing fee receivable, which we received on November 1, 2012, and revolver availability of $1 million, a total liquidity of $68.5 million. Inventory increased over the prior year as we planned for 2013 deployment activity, including the Bridgeport project. Substantially complete power plants total approximately $11.3 million at October 31, 2012, and will be converted into cash during fiscal 2013. The company's product sales and service backlog totaled $306.7 million at the end of the fiscal year, compared to $210 million at the end of Q4 2011. The components of this backlog include product orders of approximately $228 million and service agreements of approximately $79 million. The company's research and development backlog totaled $12.2 million at the end of the fiscal year, compared to $15.9 million in the prior year. Including the recently announced Bridgeport project and Versa's backlog, total backlog on a pro forma basis is now approximately $450 million. Measured in megawatts, product backlog totaled 151 megawatts as of October 31, 2012, compared to 73 megawatts at the end of last year. We shipped 14 megawatts during the quarter. The Bridgeport fuel cell park will add an additional 14 megawatts to backlog in the first quarter of 2013. I would like to conclude my comments on Slide 8, titled 2013 outlook. FuelCell Energy has never been better positioned, with committed multi-year production, growing services revenue and a royalty structure that will provide a source for cash for many years to come. The 122-megawatt order from POSCO and 15-megawatt fuel cell park provides visibility to fiscal 2013 production levels, revenue, cash utilization and EBITDA. The company is currently operating at a production rate of 56 megawatts, and we are ramping to a level of 70 megawatts. At a 56-megawatt run rate, product sales and revenues will be in the range of approximately $31 million to $34 million per quarter. At a 70-megawatt run rate, product sales and revenues will increase to be in the range of $39 million to $43 million per quarter. We will evaluate ramping beyond 70 megawatts as order flow dictates. Royalty revenue derived from power plant sales by POSCO Energy is estimated to be approximately $3 million for the fiscal 2013 and will grow over time as a result of our new license agreement covering our core DFC technology. Beginning in 2013 financial results, license fee and royalty income will be classified under the revenue section of the consolidated statement of operations to aid investors with understanding the financial impact of this growing royalty stream. Higher production levels will lead to improved absorption of fixed overhead costs and declining cash use. Based on the capacity at the Torrington, Connecticut production facility, recently closed orders and expected order closures, the company expects positive quarterly cash flow as measured by EBITDA in late 2013 or early 2014 at an annualized production volume in the range of 80 megawatts. The cash balance at October 31, 2012, was $57.5 million. 2013 quarterly cash balances will fluctuate based on working capital requirements. But for the full fiscal year, we are targeting a year-end cash balance of at least $50 million. Cash used in financing activities during 2013 will be approximately $4.4 million for scheduled interest and dividend payments to preferred stockholders. Fiscal 2013 capital expenditures are forecasted to be in the range of $6 million to $8 million. The company exchanged 3.5 million shares in conjunction with our acquisition of Versa. Beyond that, no significant changes to share count are forecasted. A warrant associated with our 2011 restricted stock offering expired exercised in the fourth quarter, and there are no other warrants outstanding. In closing, the company enters 2013 with a strong sales backlog and financial position. Increasing production levels and continued order flow will lead to expanding margins and decreased cash utilization. Continued execution on our business plans will lead to profitability. I will now turn the call back to Chip for further discussion of our operations, strategy and sales pipeline. Chip?

Thank you, Mike. Please turn to Slide 9, Asian market update. South Korea's far reaching renewable portfolio standard continues to drive the growing market for fuel cell power plants in that country. Large fuel cell parks are now being constructed, demonstrating the market potential for distributed generation fuel cell power plants and the need for local manufacturing in South Korea. One of these is a 58.8-megawatt fuel cell park southeast of Seoul. Currently the largest fuel cell park in the world, it will consist of 21 DFC3000 power plants, each generating 2.8 megawatts of ultra-clean, reliable electrical power, with the heat energy to be used for district heating purposes. POSCO Energy will lead the construction of the fuel cell park and maintain and service the power plants under a long-term service agreement. Construction has commenced. This high-profile park demonstrates the attractiveness of large-scale distributed generation fuel cell projects to developers, utility companies, gas companies and investors. This and other fuel cell parks illustrate our product suitability for power grid applications. Their combination of near 0 pollutants, modest land-use needs and quiet operating characteristics make them easy to cite urban locations, mitigating the need to construct and maintain costs for distribution and transmission infrastructure. These fuel cell power projects support demand for POSCO's 121.8-megawatt order and manufacturing license agreement that we finalized during the fourth quarter. Valued at $181 million, the multi-year order for fuel cell kits nearly triples our product backlog and has triggered a planned increase in the production rate at our manufacturing facility in Torrington to 70 megawatts in 2013, increasing our workforce by 10%. The license agreement gives POSCO Energy the right to manufacture carbonate fuel cell components in South Korea, based on our direct fuel cell technology and grants commercial rights to Asian markets. The agreement harmonizes 2 prior license agreements, giving POSCO the right to manufacture the entire DFC power plant. In-country manufacturing enables our partner to fill fast growing demand and meet customer expectations for lead times and costs. The license agreement contributes directly to our profitability in a number of specific ways. First, the royalty structure has been enhanced. In addition to total payments of $26 million to FuelCell Energy, POSCO will pay us a 3% royalty for each power plant they build and sell during the next 15 years. With mutual consent, the agreement may be extended for 2 additional terms of 5 years. The new royalty is based on the selling price of the entire power plant, while the old royalty was based only on the value added by POSCO and excluded the fuel cell components that drive the value of the plants. As a result, cash impact of the new royalty is approximately double that of the old royalty. In addition, the term of the new royalty has also doubled the old royalty as the remaining term of the old royalty structure was only 7 years. These royalties will generate a consistent growing revenue stream as the Asian market expands without requiring any capital investment by FuelCell Energy. Second, our integrated global supply chain benefits. The increased volume will give us additional leverage with our suppliers, reducing material costs for FuelCell Energy and POSCO, again, requiring no capital investment by us. The same suppliers are used for both the Torrington and Pohang, South Korea facilities, and greater purchasing volume and enhanced predictability of demand will reduce material costs. And finally, because South Korea manufacturing represents an alternative source of fuel cell stack supply, we gain a second source of supply. This is very important to some customers and project investors, who value the insurance against possible disruptions in supply. For constituents like these, POSCO's sizable investment in fuel cell production validates the market opportunity for fuel cell power generation. Please turn to Slide 10, European market highlights. Our European strategy continues to gain momentum and is producing positive results. Earlier this month, we announced the sale of another stationary fuel cell power plant for a marquee redevelopment project in Central London; an environmentally advanced office tower installation, which illustrates the many advantages of on-site fuel cell power generation. Located at 20 Fenchurch, the prestigious 38-story, 690,000-square-foot building is being constructed by 2 of the U.K.'s major developers. Our direct fuel cell power plants are easy to site because of the virtual absence of pollutants, quiet operation and modest footprint. As a result, the power plant will be installed within the building complex itself. The power plant will provide 300 kilowatts of ultra-clean electricity and heat and a highly efficient Combined Heat and Power configuration, in which our power plants excel. The CHP configured power plants should obtain a system efficiency of greater than 80%, while helping the city meet its low carbon targets and fulfilling the Mayor of London's goal of making London the greenest big city in the world. Sold through FuelCell Energy Solutions, our joint venture with German-based Fraunhofer IKTS, this plant is a European solution that utilizes European design and content along with a European-based service organization. The sale of this 300-kilowatt power plant is consistent with our overall European strategy of using some select sub-megawatt installations to seed the market and demonstrate the attributes of our products. Europe's largest application-oriented research organization, Fraunhofer, recently dedicated a new green-tech campus, with the financial support from the state of Carinthia. The state has committed $9 million for the development of this campus that will accelerate adoption of fuel cells and storage technologies, with storage initiatives including research into hydrogen applications. The sizable investment commitment made in this campus underscores the interest federal and local governments have in supporting Fraunhofer's fuel cell research and deployment of fuel cells as part of their future power generation portfolio. I'm pleased with the current level of interest and pace of project development across the European served area and expect to report on additional near-term orders. Please turn to Slide 11, 14.9-megawatt USA fuel cell park. We are pleased to announce last week that FuelCell Energy is providing a turnkey distributed generation solution for the engineering, procurement and construction of a 14.9-megawatt fuel cell park in Bridgeport, Connecticut. This project will be the largest fuel cell project of its kind in North America, and has strong replication potential. We will manufacture and install 5 2.8-megawatt DFC3000 fuel cell power plants and operate and maintain them under a 15-year services agreement. The project increases our total product and service backlog by about $125 million. The Bridgeport project provides a vast list of benefits to a large number of constituents. These benefits include economic development, financial and urban redevelopment. Dominion, one of the nation's largest producers and transporters of electricity, purchased the facility. Connecticut Light & Power will buy the electricity generated by the park under a 15-year fixed price energy purchase agreement. Construction is underway. The first power plant will be installed this summer and the remaining plants installed in stages. United Illuminating, the local utility, has begun the interconnection process. The park will be fully operational by the end of 2013. A number of factors helped us close this historic project. These include FuelCell Energy's improved capital position, validation by the POSCO investments in technology and market development, the second source of supply being constructed in South Korea and our growing installed base of megawatt-class power plants that serve to illustrate our products and strengthen our company through recurring service revenue. I must also credit and thank the strong local, state and federal support for this project. This U.S. fuel cell park is attracting considerable attention in the media and among other utilities globally. Like our partnerships with blue ship -- blue chip companies around the world, our affiliation with Dominion provides intangible benefits that contribute to momentum in our markets. Please turn to Slide 12, U.S. market update. In addition to growing in our geographic markets, our business strategy includes expanding into new vertical markets such as data centers. We recently announced the sale of a stationary fuel cell power plant to Microsoft. The power plant will utilize renewable biogas generated by a wastewater treatment facility at the fuel source to generate carbon-neutral power for a data center. Microsoft data centers support more than 1 billion customers and 20 million businesses globally. Like other technology companies, Microsoft desires clean power and has committed to become carbon neutral in 2013. This project with Microsoft is a valuable first step in opening the market for carbon-neutral fuel cell power plants for data centers, which represents a large potential market for multi-megawatt fuel cell power plant installations. In October, we dedicated a 2.8-megawatt DFC3000 stationary fuel cell power plant installation at a municipal wastewater facility in California. This well-publicized ribbon-cutting was attended by the President of the California Public Utility Commission and other VIPs, highlighting the project's importance and significance. Owned by a project investor, the power plant efficiently converts biogas, a harmful greenhouse gas, into ultra-clean electricity and heat for use in power utility agencies, a municipal water district. Our power plants are unique in their ability to efficiently and economically convert biogas, a waste product, into continuous baseload power on-site and immensely absent of pollutants. The world's largest fuel cell power plant operating on renewable biogas -- on-site biogas, the plan is helping California reach its aggressive renewable portfolio standards. California enacted AB 32 in late 2012. This cap and trade legislation is designed to minimize the emissions of greenhouse gases and treats fuel cells favorably. Because facilities utilizing combustion based power generation can reduce or eliminate their compliance costs by deploying fuel cells running on natural gas or renewable biogas, we anticipate this legislation will further adoption of fuel cell power plants. The first carbon auction provided credits at approximately $10 per ton, a level that attracts attention, as it is high enough to favorably impact economics. Given the expansion of our installed base and our ability to develop projects that can offer solutions that create value, we are seeing growing interest for our power plants. Our activity pipeline is improving in quality, and we look forward to adding to our order backlog. Please turn to Slide 13, Versa Power Systems acquisition. Our advanced technologies team is focused on developing technologies that have strong near-term prospects for commercialization, one of these being solid oxide fuel cells, which is an excellent complement to our Direct FuelCells. Based on a carbon catalyst, carbon fuel cells are well suited for megawatt class installations, whereas solid oxide fuel cells are better suited for sub-megawatt and special applications such as advanced military and storage. Positioning our company to benefit from these adjacent market opportunities with complementary solid oxide fuel cell technology, we purchased the remaining shares of Versa Power Systems. The Versa technology is earning widespread global recognition. Already, this transaction has attracted the attention of numerous potential partners interested in participating in commercialization opportunities. The Versa brand represent an exceptional value in the marketplace due to FuelCell Energy's unique position to leverage our extensive experience and resources that can accelerate the product's commercialization. We anticipate developing fuel cell -- or solid oxide fuel cell markets without investing our own capital by employing our proven business model of working with suitable global partners. We are currently in advanced discussions with several potential partners. Versa technology has been deemed world-class due to high power density of the individual fuel cells, which drives its power generation capabilities. Currently, we are testing a 60-kilowatt solid oxide fuel cell stack with an electrical efficiency of approximately 60%, and with CHP capabilities that contribute to a total thermal efficiency of approximately 80% to 85%. The Versa transaction yields multiple revenue streams. These include revenues flowing from Versa's participation in -- with the FuelCell Energy and Department of Energy Solid State Energy Conversion Alliance coal-based systems program and from Versa's status as a Boeing company supplier under the Defense Advanced Research Project Agency program to develop long-range endurance unmanned aircraft. Please turn to Slide 14, summary. As promised, we aggressively executed on our global growth strategy in 2012, constructing a solid foundation for future growth. This produced historic results that are serving as catalysts for accelerated order execution and progress towards profitability. The large POSCO order establishes multi-year base production levels, while the license agreement leverages our resources in Asia. With the second source of supply, we now have a global manufacturing footprint that will contribute to further cost reduction and advance our vision of below the grid pricing, while competing with more traditional power generation sources. Other achievements include our first utility scale project in the U.S.A., which will drive utility adoption, our entry into the potentially large data center market; a second London installation at a prestigious office tower; and the Versa transaction, which positions us for sub-megawatt solid oxide fuel cell opportunities. These milestones have garnered favorable worldwide attention that will lead to new opportunities to continue our growth. We enter 2013 with a record $450 million pro forma backlog, supporting multi-year committed production and ensuring the growth of our installed base. We are generating multiple revenue streams from diversified sources, including product sales, our growing services business, constructions and royalty income and solid oxide fuel cell contracts. These accomplishments would not have been possible without a tremendous effort by our team of talented associates. As always, I want to thank our investors for their continued loyalty and support. Operator, we'll be happy to take questions at this time.

[Operator Instructions] I have a question from Sanjay Shrestha with Lazard Capital Markets.

A couple of question. First off, congrats on this Bridgeport project. But the question on that, though, is given that price of fuel is a pass-through and the PPA is already in place, seems like there is a debt component, which is long-term in nature. How should we think about pricing and profitability in that project for you guys?

Sanjay, it's Mike. What I would say about this project, like all projects, we look for anything that we put in backlog to be profitable, both at the product sale level, as well as the service agreement level. We don't comment specifically on individual projects. But for the company to get to EBITDA net income positive, we would expect overall gross margins to be in the teens.

Okay, okay. So maybe if you could help us with this a bit more. Would you consider -- I know you guys won't specifically comment on the projects. But would this be more profitable than, let's say, what your backlog was at the end of the fiscal year? Would this project be more profitable than the current backlog?

Well, this project is obviously a complete power plant, an EPC construction turnkey project. So if you look at the backlog that we had coming into Q4, it's primarily kits [ph] to POSCO. You didn't have the company power plant. So certainly, this is the complete power plant, along with a 15-year service agreement.

Okay. So now a few follow-up question, if I may. Now when we look at sort of this $450 million in pro forma backlog for you guys, right, and sort of taking a step back and maybe just thinking about fiscal '13 for you guys, right, you've talked about that 55-megawatt clear visibility and things like that. How should we model sort of the shipment from a megawatt standpoint service revenue for you guys? And is fiscal '13 the year, by exiting that year, we will actually see you guys get to that EBITDA breakeven, given the visibility that you have now?

Right. So based on the visibility we have right now, Sanjay, we've said that we expect to get to EBITDA positive at a annualized run rate of 80 megawatts. We're entering the year at 56-megawatt run rate, and we are ramping right now up to a level of 70 megawatts. We would expect to achieve that early to mid-2013. Beyond that, order flow will dictate how much further and when we go beyond 70 megawatts. As far as revenue during the year, I commented in my script that at the current production level, product sales and revenues are basically where we were this quarter. So we will increase from there at a 70-megawatt run rate. Product sales and revenues are in the range of $39 million to $43 million a quarter. And then you would also add R&D on top of that. R&D would certainly increase over this year as we bring Versa on. Versa has a backlog of about $6 million, most of which will be recognized in 2013. And we continue to grow our current advanced program backlog as well.

Got it. One final question then, for me guys, so 2-part. One, so cash will come in the door, given the amount of the finished goods inventory, right? And that -- just one point of clarification. And where does this cash take you guys? Can this get you to that cash flow breakeven level or not? And two, obviously, it's been such a nice win for you guys really on Asia and both U.S. How do you think about sort of a pipeline of business that are out there? And what are some of the other large-scale projects or things that we should be tracking over the course of next 12 months?

So Sanjay, let me take the first piece of that on cash, and then I'll turn it over to Chip. So what I said in my script is we're comfortable with the cash balance that we ended the year with, $57.5 million. You also add to that a $10-million payment that we got right in the beginning of the fiscal year. That cash balance and expected cash flow from the orders in backlog and working capital usage is sufficient for the year. We are targeting ending next fiscal year end with at least a $50-million cash balance. And that includes making capital expenditures during the year of $68 million and also dividend payments. So expect positive operating cash flow and certainly, strong ability to manage the current backlog that we have right now.

Sanjay, this is Chip. To maybe just answer the second part of that question. I think you were talking about future order flow adding to the backlog. I think if we reflect on the last quarter's call, we kind of signaled that certain things would happen. And I think those things have happened. I think I mentioned it a couple times that, that is a huge catalyst to not just U.S. but Europe. So our strategy, as you have heard many times, is really to sell larger projects, which, as Mike said, have higher margin and things like that, which is great. And more revenue streams opportunity from that as well. So I feel pretty good about both the East and the West Coast. This is a big boost to -- this Bridgeport project is a big boost to the credibility for financing because a significant portion of the opportunities require financing. And I think we have a great story and a great answer. So I guess stay tuned is the answer, but I would expect to turn more volume on, like we've been able to close here recently.

Our next question comes from Jacob Hughes of FBR. Jacob W. Hughes - FBR Capital Markets & Co., Research Division: I just had a quick question. With this POSCO deal about done, what's the strategy in Asia going forward? I mean, is there a jumping off point beyond Korea in terms of additional licensing fees and additional recurring revenue?

Jacob, it's Mike Bishop. So what I would say there is POSCO is our Asian partner. They are growing the Korean market rapidly. They can certainly grow beyond Korea. They're looking at other regions in Asia to grow that will, by nature of our license agreement, certainly grow our royalty revenue and cash flow streams from POSCO. We work very closely with POSCO as they enter new markets, leverage our combined resources. So it is a royalty model for us in Asia. But as you've seen with the past order closure, we expect it to grow significantly here over the 15-year term of this core technology license agreement.

Jacob, this is Chip. Just to add to what Mike said, I mean, they're currently planning to build a building for 140 megawatts. And then we're going to basically build it out equipment wise at 70 megawatts. So it kind of signals how big they think the opportunity is. So with the, I would call it, enhanced royalty payment, it's a win-win for everybody. There's also some other opportunities for revenue streams. I mean, we work closely with these guys. It's not autopilot. I kind of like -- they got a strong balance sheet. Obviously, they're a big company, lot of contacts in a lot of places. They just installed their first system in Southeast Asia. We're looking at Japan. I think there's a lot of stories around that. So yes, I think we've got a good partner there. And I guess it's a win-win. Jacob W. Hughes - FBR Capital Markets & Co., Research Division: Okay, great. And I just had one follow-up question. I know there was another question on this. But on the guidance where you're ramping the 70 megawatts. I mean, how should we think about that? Is that in the second quarter? Or is that more towards year end?

Well, we've ramped in the past. We entered -- previously, going into 2011, we're about 22 megawatts. We ramped up to 56 megawatts. That was about a 6-month process. So we have -- we certainly have the experience of that. We have the capital in place. It's not a matter of adding capital. It's really a matter of adding staffing, making sure that they've gone through proper training, that you've ramped up the supply chain, that you have the materials. And as I said, we're already in the process of ramping to 70 megawatts. So we would expect that to be completed early to mid-2013.

Our next question comes from Jeff Osborne of Stifel, Nicolaus. Jeffrey D. Osborne - Stifel, Nicolaus & Co., Inc., Research Division: Just a couple points of clarification, Chip. You talked a lot about the top line growth, but I was just wondering if you can take us maybe as of year-end what you've done in terms of cost improvement either in the quarter for the year-on-year on year basis would be great.

Okay. You're talking product cost, Jeff? It's Chip. Are you talking product cost, overall cost, structure, which specific...

In particular, on production cost or product cost.

Okay. I'll take a stab at that and maybe have Mike add in if I miss anything, Jeff. But clearly, we've -- our guys are focused on reducing cost. And that really comes in 2 ways, right? I mean, one, it comes with just engineering and things like that, which we got a lot of that out. But the supply chain and the inefficiencies in the supply chain, I think the guys will work really, really hard on that this coming year. And as Mike said, we're in the process of ramping to 70 megawatts. And it's -- 80% of the benefit that we get now on cost reduction or product is volume related. So the good news is we're on the upswing, which means we're going to get more, Jeff. From an overhead perspective, again, when we ramp up here, the good news is we're really just talking about direct labor. So we're really not talking about, as Mike said, there's no capital involved really. And so that's kind of nicely some leverage off of that as well, that obviously goes against our margins. So we're attacking it that way, holding spending down from an overhead perspective and obviously, getting more benefit through the supply chain. Mike, did I miss anything?

No, Jeff, I'd echo that. Certainly above -- 50 megawatts is really the breakeven level at a gross margin basis. And we get strong leverage as we ramp over that as you've seen come through our numbers. But beyond just product cost, there's expanding margin opportunities, as we add additional service agreements for our core products and then go a bit beyond that with some of the expertise that we have, whether it be EPC-type work like the Bridgeport project, for instance, is turnkey. So we're doing EPC work there, or ancillary equipment-type services at our customer sites. So there's margin opportunities beyond just product costs as well. Jeffrey D. Osborne - Stifel, Nicolaus & Co., Inc., Research Division: Excellent. And just a few other quick ones here. Chip, I was wondering if you can give us an update on the Abengoa partnership and anything specific in terms of the demonstration unit that was installed there in Spain and potential opportunity to move that down to South America? And maybe just 2 other ones if you want to answer them all of the same time is an update on the multi-drilling unit development efforts that you had with POSCO for a smaller sub-megawatt facility. Is that something you could use Versa for? Or are you going to stick with your incumbent technology there? And then just lastly, on the data center space, is that something you need to offer leasing for? Or would you expect folks like Microsoft and others to outright buy the units?

Well, okay, I'll try to remember those in order, Jeff. I think I'll take Abengoa first. Yes. So Abengoa, the reason for hooking up with those folks was they wanted to put an installation in their facility there at Seville. They're in the process of doing that. And then they also participate with growing markets in Europe and outside of Europe i.e. Latin America, which is about 50% of their business, I think, last time I checked. But it's -- we -- they're working with us on a couple of projects that we hope to close within the European Union as part of our team. Don't forget, we have Fraunhofer and some other folks there. So that's progressing well. They got their hands in that. And then in fact, we're going to meet with them in January. And we met with them in December to really kind of map out the expansion strategy for other parts of the world. So I guess I'd say stay tuned on that, but I'm kind of pleased where that's going. The 100-kilowatt or the building application, you're exactly right. The product size and the power density and such that Versa can produce a product would fit very, very nicely into that building application, be it slightly larger than 100 kilowatts or maybe slightly smaller than 100 kilowatts. And that's one of the nice fits. I guess I would say that people look at this Versa acquisition. And I would say that we were probably uniquely qualified in the world to do this deal because all of the infrastructure that we've invested in over time is available to be used there, which completely accelerates both learning and expenses. And again, if you deploy the model, like I said, where we use frankly other people's capital and infrastructure, it works. Without that, it wouldn't work. So I feel pretty good about that acquisition. It's the right time for us as well. The data center model, as you probably know, we're doing this pilot with Microsoft. And there is some unique technology or interfacing that they want to do with how they run their data centers. It's unique to them. We are in discussions with others. These plants typically are big. I think also back on building this project in Bridgeport, which is a 15-megawatt plant is going to be very helpful for the people that have confidence that we can build bigger and bigger plants. I see those as them buying all those plants, Jeff, because for 2 reasons. One, some of these guys in the U.S. anyway, can get investment tax credits out there, obviously, which is kind of a nice benefit for them. But it's kind of part of their core competency is supplying power. And so far, we've seen them want to kind of own those rather than do anything else. But I mean obviously, if they were going to try to do a lease or a PPA, that's probably attractive for investors, I would say, because obviously, they're a good off-taker, right? So but generally, I see that as a sale of equipment model at this point in time.

I'm not showing any other questions in the queue at this time.

Okay. Well, operator, thank you very much. And to the callers and the people on the phone, we'd like to thank you for calling in. We look forward to sharing our further progress next quarter and have a safe and a happy holiday season. Take care. Thank you very much, and have a great day.

Thank you, ladies and gentlemen. Thank you for your participation in today's conference. This does conclude the conference. You may now disconnect. Good day.