American Superconductor Corp

NASDAQ:AMSC

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and welcome to the AMSC Second Quarter Fiscal 2023 Financial Results Call. [Operator Instructions] Please note that this event is being recorded. I'd like to turn the call over to Mr. John Heilshorn. LHA. Please go ahead.

[John Heilshorn]

Thank you, Nick. Good morning, everyone, and welcome to American Superconductor Corporation's Second Quarter of Fiscal 2023 Earnings Conference Call. I am John Heilshorn of LHA Investor Relations, AMSC's Investor Relations agency of record. With us on today's call are Daniel McGahn, Chairman, President and Chief Executive Officer; and John Kosiba, Senior Vice President, Chief Financial Officer and Treasurer. American Superconductor issued its earnings release for the second quarter of fiscal 2023 yesterday after the market closed.

For those of you who have not yet seen the release, a copy is available in the Investors page of the company's website at www.amsc.com. Before starting the call, I'd like to remind you that various remarks that management may make during today's call about American Superconductor's future expectations, including expectations regarding the company's third quarter of fiscal 2023 financial performance, 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 set forth in the Risk Factors section of American Superconductor's annual report on Form 10-K for the year ended March 31, 2023, which the company filed with the Securities and Exchange Commission on May 31, 2023, and the company's other reports filed with the SEC.

These forward-looking statements represent management's expectations only as of today and should not be relied upon as representing management's views as of any date subsequent to today. While the company anticipates that subsequent events and developments may cause the company's views to change, the company specifically disclaims any obligation to update these forward-looking statements.

Also on today's call, management will refer to non-GAAP net income loss, which are non-GAAP financial measures. The company believes that non-GAAP net income loss assist management and investors in comparing to the company's performance across reporting periods on a consistent basis by excluding these noncash, nonrecurring or other charges, and it does not believe are indicative of its core operating performance.

The reconciliation of GAAP net loss to GAAP net profit -- net income loss can be found on the second quarter of fiscal 2023 earnings press release that the company issued and furnished to the SEC last night on Form 8-K. All of the American Superconductor's press releases and SEC filings can be accessed from the Investors page of its website at www.amsc.com.

With that, I will now turn the call over to Chairman, President and Chief Executive Officer, Daniel McGahn. Daniel?

[Daniel McGahn, executive]

Thanks, John, and good morning, everyone. I'll begin today by providing an update and sharing a few remarks on our business, John Kosiba will then provide a detailed review of our financial results for the second fiscal quarter, which ended September 30, 2023, and provide guidance for the third fiscal quarter, which will end December 31, 2023. Following our comments, we'll open up the line to questions from our analysts.

Several quarters ago, we discussed possible business performance scenarios that could lead to increased shareholder value. We discussed revenue growth, margin expansion and expense control as factors driving potential cash breakeven and cash generating scenarios. Our second quarter results stand as proof that this can be done. For the second quarter of fiscal 2023, we generated a modest non-GAAP net income. We had positive operating cash flow. We showed expanded gross margins, we showed higher revenue, and we delivered another quarter of strong orders.

All signs this quarter are quite positive. I believe we are ahead of schedule. Total revenues for the second quarter of fiscal year 2023 exceeded our expectations and came in above our guidance range. Our second quarter revenue of $34 million, was driven primarily by strong new energy power system shipments. Our grid segment revenue for the second quarter accounted for over 80% of AMSC's total revenue and grew over 10% versus the year ago period.

The remainder of the revenue came from our wind business, which also grew significantly as a percentage from a year ago. We had very strong bookings in the second quarter with both new and existing customers for our products. We announced a near record $37 million of new energy power systems orders in October and have a strong 12-month backlog of over $128 million.

Our backlog grew nearly 30% versus the year ago period. If you look at the 12-month backlog over time back into fiscal 2020, we had about $50 million in backlog. In fiscal 2021, backlog grew to $80 million. Last fiscal year, it reached $100 million. And as you can see, we're now approaching $130 million, again, in 12-month backlog. We see general improvement in our pipeline, orders and overall business. We have a more diversified and more sustainable business with new and existing customers.

Our business has turned a corner. It feels like we've arrived. Over the past several quarters, the business secured an average of $40 million of total orders per quarter. Orders for the second quarter totaled over $40 million, giving us visibility into fiscal year 2024. We see lead times for certain products starting to decrease to under 12 months. We were seeing long lead times take about 15 or more months to procure. This is good news for our business and for our customers.

During our second quarter, we shipped systems to renewable projects in the U.S. and Canada, a mining project in Canada, semiconductor projects in the U.S. and Taiwan. And please note, this is to multiple different chip manufacturers. SPS systems to the U.S. Navy projects and projects supporting the supply chain for batteries and electric vehicles in the U.S. We saw a diverse set of orders from renewables, to semiconductors to materials and mining, to industrials as well as for utilities and military applications.

We are pleased with these results and excited about the rest of our year. Now I'll turn the call over to John Kosiba to review our financial results for the second quarter of fiscal 2023 and provide guidance for the third quarter of fiscal 2023, which will end December 31, 2023. John?

[John Kosiba, executive]

Thanks, Daniel, and good morning, everyone. I'd like to start off by saying I'm pleased with our second quarter results. As many of you may recall from our investor call back in the third quarter of fiscal [ 2020-'22 ], I mentioned we had taken several strategic steps to lower our overhead cost structure. In addition to our revenue growth, these steps have clearly paid off.

I also elaborated that, as we moved into fiscal 2023, there would be several scenarios where cash gross margins could approach 25% and operating cash flow breakeven could be achieved as revenue approached $35 million in a quarter. I am pleased to report that in the second quarter, we reported gross margins of 25% and generated $900,000 of operating cash flow. AMSC generated revenues of $34 million for the second quarter of fiscal 2023 compared to $27.7 million in the year ago quarter.

Our grid business unit accounted for 84% of total revenues, while our wind business unit accounted for 16%. Grid business unit revenues increased 11% in the second quarter versus the year ago quarter and wind business unit revenues increased 177% over that same time period as we are shipping more ECS to our India wind licensee.

Looking at the P&L in more detail. Gross margin for the second quarter of fiscal 2023 was 25% compared to 7% in the year ago quarter. Gross margin for this quarter was favorably impacted by increased revenues and a favorable product mix driven by revenue growth across our most profitable product lines. Additionally, increased service and spares revenue had a meaningful impact on gross margins in the quarter.

And lastly, the price increases we implemented over a year ago are starting to work their way through our backlog and had a favorable impact on our gross margins. All these factors contributed to the improved gross margin we reported in the quarter. Now moving on to operating expenses. R&D and SG&A expenses for the second quarter of fiscal 2023 were $9.6 million compared to $9.7 million in the year ago quarter. Approximately 11% of R&D and SG&A expenses in the second quarter of fiscal 2023 were noncash.

We generated a modest non-GAAP net income for the second quarter of fiscal 2023 of less than $0.1 million or $0.00 per share compared with a non-GAAP net loss of $6.5 million or $0.23 per share in the year ago quarter. Our net loss in the second quarter of fiscal 2023 was $2.5 million or $0.09 per share. This compares to a net loss of $9.9 million or $0.35 per share in the year ago quarter.

Please see our press release issued last night for a reconciliation of GAAP to non-GAAP results. We ended the second quarter of fiscal 2023 with $24 million in cash, cash equivalents and restricted cash. This compares with $23.1 million on June 30, 2023. We generated operating cash flow in the second quarter of fiscal 2023 of $900,000. We generated this cash flow through the strength of our operating results and continue to have a strong balance sheet with no debt.

Now turning to our financial guidance for the third quarter of fiscal 2023. We expect that our revenues will be in the range of $33 million to $36 million. Our net loss on that revenue is expected not to exceed $4.3 million or $0.15 per share. Our non-GAAP net loss is expected not to exceed $2.5 million or $0.08 per share. The company expects operating cash flow to be breakeven to a positive cash generation of $2 million. We expect to end the third quarter with no less than $24 million of cash, cash equivalents and restricted cash.

With that, I'll turn the call back over to Daniel.

[Daniel McGahn, executive]

Thanks, John. Strong market demand from industrials, renewables and utilities drove orders for our second quarter of fiscal year 2023. We see government mandates as well as federal policies, such as the Inflation Reduction Act, supporting fossil fuel retirement, renewables growth and electric vehicle sector developments.

In calendar year 2022, renewable energy generation, including hydropower, exceeded coal-fired power. During the first half of this calendar year 2023, data shows that wind and solar power produced more U.S. power than traditional coal. We see power generation from coal progressively declining and being replaced by natural gas and renewables. We see opportunities for our products and services as utilities address the addition of distributed power generation into the electric grid.

Recently, the U.S. retired nearly 14 gigawatts of coal capacity, nearly 7% of the coal fleet since 2022. Nearly 2/3 of fossil fuel-fired electricity generation capacity is expected to cease by 2035. Solar, wind and natural gas made up more than 90% of the capacity added to the U.S. electric grid in 2021. Investment in clean energy sources in 2021 increased by 10% from the prior year to about $50 billion and was estimated to grow by 16% to nearly $60 billion in 2022.

The market drivers for a low-carbon economy and a modern, reliable and secure power grid are in our favor. Our applications help harmonize the world's desire for decarbonization and clean energy with the need for more reliable, effective and efficient power delivery. That's why we believe to be well positioned for the longer term. We have a robust pipeline of opportunities, thanks to strong market demand, and we are aggressively going after those opportunities.

We are committed to the continued diversification of our business, expanding our scale and reach domestically and internationally and investing in resilient markets that create a path for a more sustainable world. Our key growth markets are renewables; mining; materials and metals, particularly for electric vehicles; semiconductors, utilities; and military. We believe the march towards a more sustainable world will be a driver for the markets we serve in the foreseeable future.

Our products are expected to play a central role in this evolution, and we continue to intensify our efforts in collaboration to take advantage of these trends. We continue to work towards growing a business that's supporting power management at the substation level for renewables, mining and metals, utilities and for military uses as well as supporting customers in the semiconductor industry.

We have turned a corner and delivered another remarkable quarter. We aren't looking back. We can see that the fundamentals of our business are well grounded. We generated cash and expect robust performance during the third quarter.

In conclusion, we delivered a strong first half of fiscal 2023. We are executing on orders from Inox Wind. We delivered multiple sets of 2-megawatt electrical control systems this quarter. We are supporting Inox Wind as they expand their offering to include an exceptional 3-megawatt class wind turbine. We are supporting Doosan as they commissioned their 100-megawatt offshore wind farm with our 5.5-megawatt wind turbine design, which they intend to complete next year.

We are broadening our revenue base with multiple products for the U.S. Navy. We have won a total of 5 Ship Protection System contracts for the San Antonio-class LPD. We've delivered and installed 1 Ship Protection System and are currently in the process of commissioning that system. We are delivering our second Ship Protection System this fiscal year. We have a major utility project driven by environmental mandates to reduce greenhouse gas emissions and are aggressively pursuing others.

Our installed resilient electric grid system in Chicago is performing as planned and has become a showcase for the technology. Our current backlog is strong, well diversified and growing. We delivered strong revenue of over $30 million in the first quarter and over $34 million for the second quarter and expect robust revenue during the third quarter of fiscal year 2023.

We believe we are ahead of our plans, and that's very positive. Overall, the business is performing well, and we are serving an expanded set of customers in our grid business. Already, our transformative power solutions are moving the world forward. We are executing on our vision and believe that our creativity can meet today's challenges and help us progress to a better future.

This means using future-facing technologies to harmonize the world's desire for decarbonization and clean energy with the need for more reliable, effective and efficient power delivery. We believe empowering progress by designing, developing and deploying power control solutions that harmonize an increasingly complex energy system. We are very excited about our future. I look forward to reporting back to you at the completion of our third fiscal quarter of 2023.

Nick, we'll now take lines -- questions from our analysts that are on the line.

[Operator]

[Operator Instructions] First question will be from Colin Rusch of Oppenheimer.

[Colin Rusch, analyst]

Congrats on the progress here. It's great to see you guys delivering on the cash flow metrics. Can you talk a little bit about where you're winning and how you're winning on the grid side and the cadence of orders? And then the follow-up question, I'll just hop back in the queue after this, is really around your ability to start rolling through lower component costs and potentially lower in working capital as you move forward, given some of the rebalancing on supply chain?

[Daniel McGahn, executive]

Thanks for the compliment, Colin. So we're winning on -- with utilities, we're winning with mines, we're winning with things for EV, we're winning big in semiconductor. I mentioned multiple customers. It's the first time I've said that. We continue to win in renewables. So it's really across the board. We've tried to build this robust, diverse, sustainable business, and we feel like it's now fully been built and we've been able to demonstrate it.

John telegraphed back a few quarters that this was possible. And I think that we're here probably earlier than we thought. So the business is really, really performing even much better than we had anticipated. Do you want to take his other question?

[John Kosiba, executive]

Colin, can you repeat the second question? I didn't quite fully understand it entirely.

I think you were asking something about component cost as it's drop and how it could impact working capital? We haven't quite seen -- I wouldn't say we've seen component costs drop yet. I think we have stabilized. I think what we're hoping is that we've got a nice stable supply chain, one, with lead times are starting to come down and prices are stable. As prices come down, that might change.

As far as working capital, I don't see how that changes for us as much. Remember, our business is highly tied to milestone billings. So our working capital tends to be funded from our orders based on the milestone bill and schedule. But we can take this offline if you have any further questions.

[Daniel McGahn, executive]

Yes. I think the key point is more -- we're focused more on trying to control lead times, so our customers can get their projects started on time. That's really been the focus of the team, and we're seeing some benefits there.

[Operator]

Next question will be from Eric Stine of Craig-Hallum.

[Eric Stine, analyst]

So maybe I'll just touch on margins you laid out. I mean, great to see the improvement. I'll second that. You laid out some of the reasons mix in other areas for that improvement. But could you maybe just drill down, I mean, should we look at this as evidence that you're finally through the Neeltran backlog, the low-price backlog that, that's kind of a thing in the past. I mean is this a level, plus or minus that we should view as sustainable?

[Daniel McGahn, executive]

I'll answer the sustainable part. I mean given the guide, clearly, we're guiding to potentially increased revenues and increased operating cash flow. So when you look at the backlog, the backlog is the thing that's really given us the confidence there. We'll be able to sustain about this revenue level for the next 12 months. We're looking to get new orders into 2024, which hopefully will help be able to add additional growth on top of that. So we're very bullish on what the business looks like, obviously, for next quarter and beyond. But we're really only guiding out the 1 quarter in time as we eventually do.

[Eric Stine, analyst]

Yes. Understood. But that bullishness extends to margins, right, just to confirm?

[John Kosiba, executive]

Yes. I mean -- so we don't guide to margins, so I want to be careful on that. But I will say -- what I will say is that if you look at what I explained for the gross margins, one of them is we had a -- we're starting to see the impact of our price increases. Well, that's kind of -- in theory, that's going to continue. We did have a very strong service revenue this quarter. We put a lot of efforts to do that. That wasn't by accident. So to the extent we can continue to deliver on a strong service component of our total revenue, that's going to help our margins as we move forward.

And then lastly, as our margins overall, our product mix changes, we are seeing strength in our best-performing product lines. So to the extent we can do that, we're going to continue to see strong gross margins. To comment on your Neeltran, surely, as we shift off that backlog, that surely is having an impact on our margin growth.

[Daniel McGahn, executive]

I think, though, Eric, to be very blunt with you, we're going to stop talking about either the acquisitions. They've been integrated, they're working. Everything is behind us that we have. We really like the business, how it sits today, how it complements each other. We like the constituent components and the team is now selling everything as a full solution. So I think that mission accomplished with trying to get both of these pieces of the business becoming part of the main part of the business.

So going forward, we're really just focused on how do we grow grid, how do we help continue to support our wind customers. And hopefully, we'll see some wins in the future as well on the Navy side and more cities for REG for sure.

[Eric Stine, analyst]

Okay. That's helpful. And maybe last one for me, just on wind. Obviously, another good quarter. I think last quarter, you had talked about that the -- that this is maybe a level to expect for the next several quarters and that the next step would come when you start to get ECS orders for the 3-megawatt platform from Inox. Is that still the way that we should think about things here going forward, both near term and then longer term?

[Daniel McGahn, executive]

Yes. I think if you continue to see the orders come from Inox, you see steps forward, not backwards. You see the potential for growth. They were very positive on their most recent call about where they are with the 3-megawatt platform. They seem highly excited about it, probably even more than they were 3 months ago. So we will work with our constituency, including you, you'll see, if we get orders, we'll certainly look to announce them or mention them on calls or what have you because we know they're important to people seeing progress. But yes, we are at a different level in wind. And then given, again, with the backlog, it's able to support the overall business, as I said earlier.

[Operator]

[Operator Instructions] Next question will be from Justin Clare, ROTH MKM.

[Justin Clare, analyst]

So I guess the first one I wanted to ask about is you did talk about the gross margins, where if you're at a level of, say, $35 million in revenue, 25% margins are an expectation or a reasonable expectation. As you move to higher levels of revenue, if you get to 40% or above, can your gross margin continue to expand in that type of scenario?

[Daniel McGahn, executive]

Absolutely. That's -- we're trying to get leverage. We want to drive the top line disproportionately to the cost line. So we think there's a great deal of leverage in the business. We haven't put out just on any numbers. We've kind of put this out. John has mentioned in the time period of it, it wasn't that long ago. And we've been able to make that. I know probably people are going to now say, well, what's next and where do you go?

I think the overall probably theme what you guys are after is the sustainability. And I think it's in the backlog. The pricing is there. We're doing a great job on the service side. We've been able to see robust revenue across the product line. So we're very happy and very pleased with where we are, and I believe where we're going to go next.

[Justin Clare, analyst]

Got it. Okay. And then you got strong bookings in Q2 here. I was wondering if you could talk about the trend that you're seeing in project sizes that you can supply and then also the content per project and that ability to cross-sell between the different various product offerings that you have. If you could speak to that, that would be helpful.

[Daniel McGahn, executive]

Sure. You're kind of lead and cause and effect. So we're now selling more content for project, which means the revenue for a project is going up, and that's part of the strategy and the leverage of selling the different products together as a complete solution. So that's working out very nicely. And we've seen it very specifically in semi, we've seen some in renewables, we've certainly seen it in the mining and the materials as well as kind of general industrial.

So we feel we're a very different business today than we were. We've talked about getting there. Now I feel like we're there, and we want to go and continue to do more and more in the future.

[Justin Clare, analyst]

Okay. And then just one more, shifting gears to wind. And it might be a little bit early for this one. But Inox was talking about that their 3-megawatt turbine is a more profitable turbine than the 2-megawatt. So I was wondering if there is an opportunity there for you to potentially have a better margin profile for the 3 versus the 2 if your customer is capturing greater value for the product that you're providing?

[Daniel McGahn, executive]

Yes. With respect to our customer, we don't talk and break out margin by product line. I'm certainly not going to break it up by customers. So I don't want to offend you, Justin, but I'm just not going to answer.

[Operator]

That ends the question-and-answer session. I'd like to turn the call back over to Mr. Daniel McGahn for closing remarks.

[Daniel McGahn, executive]

Great. I think we're at a whole new place here, guys. We said that we were nominally positive with non-GAAP. I'm not an accountant to break through what all that means with GAAP and non-GAAP. But the good news is, John predicted it, the business has delivered it. It's a result that we haven't been able to do since back in 2010. This is a huge, huge, huge milestone for the company.

Most of you investors that have been with us for a long time have always asked me when this going to happen? We've always talked about how. And then as I said, John telegraphed how, and now we've delivered it. So we think onward and upward, the backlog really is strong, the pipeline is very strong. There's a lot of diversity. There's a strong move in the world to decarbonization, and we're really right at the center of it, and we hope to benefit from it. So thank you all for your support, your attention and look forward to getting back to you in about 3 months' time. Thank you, everyone.

[Operator]

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