Good day, and welcome to the American Superconductor First Quarter Fiscal 2020 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. John Heilshorn. Please go ahead, sir. .

Thank you, Ella. Good morning, everyone, and welcome to American Superconductor Corporation's First Quarter Fiscal 2020 Earnings Conference Call. I'm John Heilshorn, 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 first quarter of fiscal 2020 yesterday after the market closed. Those of you who are not -- 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 would like to remind you that various remarks that management may make during today's call about American Superconductor'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 set forth in the Risk Factors section of American Superconductor's annual report on Form 10-K for the year ended March 31, 2020, which the company filed with the SEC on June 2, 2020, and subsequent reports that the company has filed with the SEC.

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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.

For the company -- 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 certain non-GAAP financial measures, non-GAAP net loss and non-GAAP operating cash flow.

Non-GAAP net loss is defined by the company as net income loss before stock-based compensation, amortization of acquisition-related intangibles, changes in fair value of warrants, other noncash or unusual charges and the tax effect of adjustments calculated at the relevant rate for the company's non-GAAP metric. .

Non-GAAP operating cash flow is defined by the company as operating cash flow before the China settlement, net of legal fees and expenses and other unusual cash flow items. .

The reconciliation of the non-GAAP measures to the most directly comparable GAAP measures can be found in the first quarter of fiscal 2020 earnings press release that the company issued and furnished to the SEC last night on Form 8-K.

All of 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?.

Thanks, John, and good morning, everyone. I will begin today by providing an update on our grid and wind business units. John Kosiba will then provide a detailed review of our financial results for the first fiscal quarter, which ended June 30, 2020, and provide guidance for the second fiscal quarter, which will end September 30, 2020.

Following our comments, we'll open up the line to questions from our analysts. .

We are growing and diversifying our business. Revenue for the first quarter of fiscal year 2020 came in above the top of our guidance range and grew by more than 50% versus the year ago period. Our grid segment revenue grew nearly 80% versus the year ago period.

In fact, this was the largest grid quarter we have reported in nearly the decade, which is the time that we've been reporting a grid segment. All of our grid product lines, D-VAR, VVO, SPS and REG, contributed to the strong growth in the quarter. We ended the first quarter with more than $62 million in cash.

Our grid business was driven by stronger D-VAR, VVO and SPS revenues. .

With our very strong start to fiscal 2020 and a robust grid backlog scheduled for the remainder of the fiscal year, we believe that our grid segment is on track for yet another record-breaking year.

We made shipments against our order from our Korean partner, Doosan Heavy Industries, for our 5-megawatt class electrical control systems, or ECS during the first quarter of fiscal 2020. We expect to complete shipments under this order this fiscal year. .

Our growth through grid strategy is working. Our record backlog of D-VAR projects is expected to ship this fiscal year. The first quarter of fiscal 2020 was the largest D-VAR revenue quarter in about a decade. Grid is driving revenue growth and D-VAR has been the foundation of our grid business.

Our business development and manufacturing teams are working very hard. The D-VAR product currently is focused on addressing renewable energy installations and industrial installations like a mine or semiconductor fab. The majority of our D-VAR revenue today comes from the interconnection of renewable energy generation plants to the electricity grid. .

First quarter of fiscal 2020 D-VAR shipments were for wind farm connectivity applications in Australia, the United States and the United Kingdom. We anticipate strong D-VAR shipments to continue in the second quarter of fiscal 2020. .

As you know, D-VAR is a power transmission level product whereas our new Volt/VAR Optimizer or VVO product addresses the power distribution market. .

Our sales team has done an excellent job of educating utilities about our VVO product, and we are encouraged by the utilities' positive reaction to our solution. Our team had a strong start to fiscal 2020, shipping our first multiunit order of VVO product to a utility in the United States. .

We are anticipating a higher volume of VVO shipments this fiscal year. We are beginning to see multiunit orders from multiple utility customers. We do expect VVO to contribute to our grid growth in fiscal 2020. .

Our SPS business with the Navy is gaining significant momentum. AMSC's ship protection systems are also known as the degaussing systems. At AMSC, we call them SPS. In July, we announced our third SPS order for the San Antonio Class LPD platform. This latest order will be for deployment on LPD 31. .

I want to take a moment to recap developments with our SPS and the Navy. The SPS is designed to manage the magnetic signature of a ship, which can tort an undersea mine's ability to detect and damage the ship. AMSC has worked with the U.S. Navy to develop a lighter weight, more power-efficient version of this degaussing system.

The high-temperature superconductor SPS, we are now selling to the Navy. .

AMSC's SPS became the baseline design for the San Antonio Class and VVO's warfare ship or LPD platform. The Navy's plan is to build 15 additional San Antonio class ships starting with LPD 28. We have an order for SPS for LPD 28. We have an order for SPS for LPD 30, and we now have an SPS order for LPD 31.

Our expectation is that our next SPS order will be for LPD 29. .

Our SPS team is very busy and focused on continuing to expand the business while we deliver our first systems. We are working very closely with the Navy and our supply chain to ensure timely delivery of our 3 ship system orders. .

We are engaged, as we reported on the last call, in establishing the capabilities to deliver the SPS systems. From a capacity perspective, we have been planning for the concurrent manufacturing of multiple SPS orders. We have implemented safety protocols, including social distancing on our factory floor.

The San Antonio class is our first design win with the Navy. .

Other potential platforms include, but are not limited to, destroyers, aircraft carriers, frigates and Littoral Combat Ships. SPS contributed to our strong grid segment revenues in the first quarter of fiscal 2020. We have reached a new revenue threshold for SPS. We're working closely with the Navy to understand the program timing for LPD 29. .

Last month, in July, we announced that ComEd, a unit of Chicago-based Exelon Corporation and one of the nation's largest electric utilities, has begun construction on its Resilient Electric Grid or REG system. The REG system is expected to become a permanent asset within Chicago's electric power grid.

We have been establishing our REG manufacturing and product delivery systems for this project and we are on schedule for delivery of the system in 2020. .

ComEd's first REG system is expected to be operational in 2021. We continue to work with major utilities on specific projects, which we believe show a lot of promise. .

We are diversifying our wind business. We made shipments against our order from our Korean partner, Doosan Heavy Industries for our 5-megawatt class electrical control systems, or ECS, during the first quarter of fiscal 2020. In fact, Doosan has been our largest wind customer for the past 4 quarters.

We anticipate delivering additional units of the 5.5 megawatt ECS in the second quarter of fiscal 2020. .

As part of South Korea's Ministry of Trade, Industry and Energy strategy, renewables are targeted to generate 20% of South Korean electricity by 2030, and at least 30% by 2040. .

According to the publication business, Korea, the South Korean government is promoting that its offshore wind power generation will be 12 gigawatts by 2030. South Korea intends to become one of the world's top 5 offshore wind power producers and we believe Doosan is well positioned for a very high market share.

To date, there are approximately 9 large-scale offshore wind farms in the development pipeline, which totaled nearly 9 gigawatts of wind capacity. We understand Doosan will supply wind turbines for the southwestern offshore wind project and the Gunsan offshore wind farm. .

In 2019, global offshore wind power generation reached about 29 gigawatts. By 2030, global offshore wind power is expected to increase sixfold to 177 gigawatts. South Korea, Japan and Taiwan are expected to contribute to the development of offshore wind power farms.

Our team is working closely with Doosan, and we look forward to potentially penetrating the global offshore wind market with this important partner. .

In India, we are encouraged by Inox's stated desire to lower the levelized cost of energy by way of a new, larger wind turbine design. Inox has publicly announced its expectation to transition to a 3-megawatt class turbine by next year. However, we have not yet signed a 3-megawatt ECS supply agreement with Inox.

Inox has indicated a new turbine is an integral part of its long-term strategy to deploy wind power in India. We saw and still see uncertainty in the Indian wind market and at Inox. We stand ready to support our partner in India as they need support commissioning new turbines or need new stock of 2-megawatt ECS.

We have been in constant communication with Inox. .

Inox has paid some outstanding amounts on some of its contracts. Inox is working diligently to regain compliance with the 2-megawatt supply contract. We are using the capabilities of our contracts with Inox to help bring the situation to a positive resolution for both parties.

We believe we are well-positioned to support any expansion of Inox's business. .

Now I'll turn the call over to John Kosiba to review our financial results for the first quarter of fiscal year 2020 and provide guidance for the second fiscal quarter of 2020, which will end September 30, 2020.

John?.

Thank you, Daniel, and good morning, everyone. AMSC generated revenues of $21.2 million for the first quarter of fiscal 2020 compared to $13.8 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 by 80% in the first quarter versus the year ago quarter due primarily to higher D-VAR and SPS revenues. Wind business unit revenues decreased 11% in the first quarter versus the year ago quarter as a result of fewer ECS shipments to Inox.

This was partially offset by increased ECS shipments to Doosan during the period. .

Looking at the P&L in more detail. Gross margin for the first quarter of fiscal 2020 was 24% compared to 11% in the year ago quarter. The year-over-year increase in gross margin was primarily driven by the revenue growth within our grid business.

The increased revenue resulted in a favorable product mix and increased factory absorption, both contributing to the year-over-year margin improvement. .

R&D and SG&A expenses for the first quarter of fiscal 2020 were $8.1 million. This was up from $7.7 million for the same period a year ago. Approximately 17% of R&D and SG&A expenses in the first quarter of fiscal 2020 were noncash. .

Our non-GAAP net loss for the first quarter of fiscal 2020 was $2.4 million or $0.11 per share compared with $6.2 million or $0.30 per share in the year ago quarter. Our net loss in the first quarter of fiscal 2020 was $3.4 million or $0.16 per share. This compares with $3.5 million or $0.17 per share in the year ago quarter.

Included in our first quarter of fiscal 2019 net loss was a $2.9 million noncash gain associated with the change in the fair value of warrants. This favorably impacted the year ago results. .

Please see our press release issued last night for a reconciliation of GAAP to non-GAAP results. We ended the first quarter of fiscal 2020 with $62.2 million in cash, cash equivalents, marketable securities and restricted cash. This compares with $66.1 million on March 30, 2020.

Our operating cash burn in the first quarter of fiscal 2020 was $3.1 million. This came in stronger than our previous guidance of a $4 million to $6 million operating cash burn. .

As mentioned in previous calls, our working capital for the business fluctuates from quarter-to-quarter depending on working capital requirements for individual projects. When you look at our cash requirements over recent quarters, our working capital tends to average out any quarterly variations.

Over the last 4 quarters, our non-GAAP operating cash burn was approximately -- has averaged approximately $3 million a quarter on an average quarterly revenue of $18 million. Each quarter, our cash flow requirements may be higher or lower due to changes in our working capital.

We believe the operating cash burn in the first quarter of fiscal 2020 was well within the range of where we would expect our cash requirements of the business to operate. .

Now turning to our financial guidance for the second quarter of fiscal 2020. We expect that our revenues will be in the range of $17 million to $21 million. Our net loss on that revenue is expected not to exceed $6.5 million or $0.30 per share, and our non-GAAP net loss is expected not to exceed $5.5 million or $0.25 per share.

The company expects operating cash flow to be a burn of $4 million to $6 million in the second quarter of fiscal 2020. We expect to end the second quarter with no less than $55 million in cash, cash equivalents, marketable securities and restricted cash. .

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

Thanks, John. As we discussed last quarter, the emergence of COVID-19 has created both operational challenges and macroeconomic concerns for all businesses. AMSC has demonstrated and is demonstrating it can operate effectively through times of uncertainty.

We were early to implement physical separation protocols at our manufacturing sites and we have not missed a beat in production. We have instituted cleaning protocols for our offices to help keep everyone safe and healthy, which is paramount.

We are focused on our people and our parts supplies for our products, as well as on strong customer service and product quality. We have been operational throughout the pandemic. .

We have started fiscal 2020 on a very strong note. Grid represented over 80% of our revenue in the first quarter of fiscal 2020 and was our strongest grid quarter in nearly a decade. Our D-VAR business is clearly very strong.

We are delivering VVO to the market, developing our pipeline, especially for repeat customers or customers seeing the need to purchase multiple units. We have SPS orders for deployment on LPD 28, LPD 30, and now most recently, LPD 31. .

We are in production of ComEd's first REG system. We are supporting Doosan's efforts to penetrate the offshore wind market with our 5.5 megawatt turbine. We are executing against our goals and that is to the credit of our employees due to their hard work and dedication. Our resilient people are focused on our resilient products.

I look forward to reporting back to you at the completion of our second fiscal quarter of 2020. .

Operator, we'll now take questions from our analysts. .

[Operator Instructions] And we will take our first question from Philip Shen with ROTH Capital Partners. .

First one is on D-VAR. You saw some nice growth there. This quarter, you see more ahead. Daniel, I was wondering if you could talk about how long you expect this could sustain. I know you're seeing strength in renewables, in wind specifically. And I think you talked about going to the U.S., U.K. and Australia.

So to what degree are you winning business in other countries, beyond these 3? And do you think you can continue to just grow with the overall wind industry as your -- it seems like your -- the value proposition of your offering seems to be a nice winning formula compared to the competition. .

Thanks, Phil. Let me start a little bit bigger with just grid. I think what we've shown today is that we clearly have a backlog to support grid growth for the year. That's obviously driven by D-VAR. We did say we anticipated a surge in the business. I believe we're seeing some of that now.

I think it's very hard for us to look out into the fall and into the winter, given the pandemic and given the fact that the U.S. is going to go through an election. So I don't really know what the market demands are going to be. What we have seen, though, is our sales team already looking at sales for next year.

They're looking at projects that are probably now as many as 6 or 7 quarters out in the future. That pipeline remains very robust. But that doesn't necessarily mean, Phil, that macro market effects won't slow things down. We're in position to continue to deliver at these kinds of levels.

But I think, clearly, I want you to realize that we have seen an acceleration in that part of the business. We'll see how we go forward with the next few quarters. We certainly have guided what we think is a nice quarter again for the second quarter.

But beyond that, it becomes probably even more difficult than typical years to prognosticate what the future holds for us. .

Okay. As a follow-up there, can you talk about whether or not you're potentially bidding or winning new orders in new countries? So we talked about -- or you actually highlighted the 3 earlier.

Is there an expansion of reach as well there?.

It's going to depend on some of our partners. So our typical core markets are the U.S., Canada, U.K. We sometimes see some business in Australia. We're obviously seeing that right now, but doesn't necessarily mean that we'll continue. And in the past, we've demonstrated some orders in Latin America, Continental Europe and the Middle East.

At this point, all I can say, Phil, is, stay tuned as we announce orders. I don't know what's going to close next. I know the pipeline is very much focused on our current core markets, U.S., U.K., Australia. We do have a nice healthy pipeline, certainly for renewables. But for industrial as well. And industrial could be also in Asia or in North America.

So we try to manage risk by having multiple shots on goal for the product. And having that diversity allows us, hopefully, to continue the beat of the music that we're on today. .

Great. Shifting gears to VVO. It sounds like you're having some nice success there as well.

Can you talk about the number of utilities that are doing multiple orders? And then also how many utilities are you selling to today? And then how many do you think you could expand that to in 2020 as well as '21?.

I think either in the next call or the call after that, we'll probably go through a more detailed update on VVO. I think this is an important year for it. We did mention that we're planning on making a certain number of units this year.

We're trying to put them in the hands of what we think will be utilities that will buy bundles is easy, therefore, deployments that use multiple systems, but hopefully at least purchases of multiple systems. I really don't want to get into the specific numbers at this point, Phil.

I think as we see the year mature, we can give more color on the product. I'm very, very happy with where we are. And we gave some indications in the prepared remarks about this idea about multiples, but we're still in the beginning throes of it. I think as we look forward to 2021, one, with VVO, I think, it only gets stronger there and beyond.

But we think 2020 is a very important year for delivery of VVO and making these customers happy enough to buy multiple systems either this year or in the next years. .

Great. Congrats on the success you're seeing in the grid. .

Thanks, Phil. .

We'll take our next question from Eric Stine with Craig-Hallum. .

It's Aaron Spychalla on for Eric. Maybe first, on the Navy -- and maybe first on the Navy business, congrats on the order for LPD 21.

Can you just kind of talk a little bit more about timing on the first 2 ships? Are those still expected to be delivered this fiscal year? And then any more color on the efforts to expand into other areas? I think last quarter, you mentioned the Navy has identified the next class of ship.

Any other color on potential sizes or timing there? And then just any more color on the capacity there? I know you mentioned multiple ships, but any more color would be great. .

Yes. It's kind of hard to give a lot more color or predict in the next order until we announce it. But to kind of give you how the revenue profile works. We had the 2 systems going into the quarter. Now we've added a third. I think the best way to think about it is we're basically delivering a system this fiscal year.

We'll be in a position to deliver one next fiscal year. And then I think the timing for LPD 31 means we'd be delivering probably the following fiscal year. So when we said new revenue threshold, what we mean is we're kind of at a regular beat now where we're going to be able to deliver one ship system a year.

And then I wanted to make sure people understand we have the capacity for more because we're expecting growth. And as we get wins, we'll certainly announce them. .

Understood. And then maybe next on customer diversification. Can you just give us an update there? I mean, it really sounds like on D-VAR, and just broadly in the grid, you're really starting to see that. I think I saw another new significant customer in the queue.

Can you just maybe talk about the pipeline there and how that's growing?.

Yes. We're seeing, I'll say, a surge maybe in some larger projects in D-VAR. It doesn't mean that they all are, but I think the numbers of large projects that we see on the horizon are very nice for us. That translates in the potential that these projects would be a 10-plus percent customer for any quarter.

I think this quarter, you see the same customer as last quarter at 10% plus and an additional one. And it's kind of interesting that our -- all of our 10-plus percent customers are come from the grid side and really specifically for D-VAR. One is a project in Australia, one is a project in the U.S. .

All right. And then maybe last for me, you've kind of talked in the past about the efforts on the supply chain.

Can you just maybe give a little more detail on kind of what you've done there? And just how you view that as important going forward?.

Yes. I think update on supply chain that we've seen, which I think makes sense, given risks and turmoils in other markets. Some of our suppliers have been able to pull in timing.

We've been in a good position now where we're looking at multi-sources on pretty much everything, within the systems that we're delivering, for instance, for D-VAR and for ECS. So I think our supply chain challenges still occur maybe on a weekly basis, not a daily basis as they did in the spring.

But it is really a series of effort that go on with the team to ensure that we're able to get parts on time and in the quantities that we need. But some key components, we've actually seen the lead times shortened, which is good. .

All right. And congrats, again, on the quarter. .

Thanks, Aaron. .

We will take our next question from Colin Rusch with Oppenheimer. .

It's Joe on for Colin this morning.

Can you provide a little bit more color on visibility into the Korean wind market and when we could potentially see some revenue and as well as maybe some color around scale of revenue coming from that market?.

Yes. I think that's some of the good news in here is as we see that market potential open up, Doosan would advocate, and we would support it that they think that they're going to get superior market share locally. It seems to be set up in that way.

To get to the 12 gigawatts that are now in projections and I've seen some 14 and 16, but the latest one we could call attention to is this 12 gigawatt one. It implies they're going to have to get up to a rate of about 1 gigawatt or more a year.

We've talked about our content being between $50,000 and $100,000 per megawatt, so dollars per megawatt and that translates the same for Doosan. So doing the math, the opportunity in Korea alone is in the hundreds of millions of dollars for us. It doesn't quite reach $1 billion with the total market, but it gets pretty close to it.

I think the challenge and the question will be what share will Doosan be able to take. We think they're going to differentiate on technology and we know the technology is superior to many offerings in the market. And we think that we're the only one out with such a large winter, but as a local Korean manufacturer.

So we're cautiously optimistic at this point in 2020 that Doosan has a great future ahead of it. I don't know if that's going to show impact in '21, but certainly in years beyond that, we think they'll be an important customer not only this year but for many years going forward. .

At this time, we have no further questions. I will now turn the conference back over to Daniel McGahn for any closing comments. .

I want to thank everybody for your attention today. I mean it's been challenging getting through the pandemic. I think the good news is the numbers show that the business is really humming along. We're at the level that John went through with the numbers, right, where we wanted to be able from we look from a revenue and from a fall-through standpoint.

We're getting good leverage in the business. We see gross margin this quarter being very good. I think a lot of the questions that people asked us last quarter got answered today with the results and the information on the call. .

Going forward, we have a lot of work ahead of us to continue the growth that we're on, the trajectory that we're on in grid. And we also showed, we think, some good signs even coming from India in some of the comments that we made. .

So we see strong results coming again in the next quarter, given the guidance and we're going to do the work to make sure we continue to be able to do that.

We do have some lumpiness in the business from time to time, and I really can't tell you today what's going to happen with the election, what's going to happen in the fall and the winter with COVID, but we want to make sure we're in a position to take advantage of every opportunity that comes our way. Thank you, everybody, and we'll talk soon. .

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect..