Capstone Turbine: Buy or Sell?

Capstone Turbine (CPST) released its results for the quarter ended 30th September 2015 (second quarter or Q2) on 5th November. The company reported total revenue of $ 17.9 million compared to $ 32.2 million last year and a net loss of $ 7.9 million i.e. $ 0.02 per share compared to $ 6.5 million last year for the three month period ended 30th September. The overall gross margin also decreased from 16 % to 11 %.

The average revenue for Capstone Turbine over the last 18 quarters has been approximately $ 30 million.
13 out of these 18 times it has gone past $ 27 million and 9 times it crossed the $ 30 million mark. Thus, the revenue reported for Q2 seems to be an outlier. One big reason for this can be pointed out as the exclusion of Russian orders from these results. Orders from Russia contributed $ 6.7 million in revenue during last year's second quarter. This could have easily taken the total revenue very close to or even beyond $ 25 million.

The revenue from the sale of products was even more severely affected. It was just $ 11.6 million for this year’s Q2 compared to $ 26.7 million in Q2 of the fiscal year 2015. The reasons behind the decline are obvious ones that include a decrease in volume of micro turbines shipped especially to Russia and continued challenges in the oil and gas market and a shift in customer projects timeline. As a result of low volume of micro turbines shipped, the count of megawatts shipped during the quarter was reduced to just 11.6 MW this year compared to 28.5 MW last year.

On the other hand, revenue from accessories, parts and service increased 15 % or $ 800,000 to $ 6.3 million compared to $ 5.5 million for last year's second quarter. The main driver of this increase was higher FPP contract enrollments and higher micro turbine service work.

R&D expense increased from $ 2.1 million to $ 2.9 million. SG&A expense decreased $ 2.8 million or 29 % from $ 9.5 million in the second quarter of fiscal 2015 to $ 6.7 million this year.

Product backlog was $ 104.8 million on 30th September 2015, down 39 % compared with $ 172.3 million one year ago. Out of the $ 67.5 million drop in backlog, $ 52.4 million was only due to the removal of 200 units or 64.5 MW worth of backlog from BPC to align the backlog with management expectation because of the current macroeconomic climate.

On the other hand the FPP service contract backlog increased from $ 60.9 million at 30th September, 2014 to $ 65.3 million on the same day of 2015. This increase is attributed to the company’s growing installed base of micro turbines.

Also, the on-going efforts of the more mature distributors have established the FPP service contracts among the end customers as a great enabler to achieve a lower total cost of ownership. Thus this segment is something that Capstone Turbine Corp. can bank on for growth in the near future.

On the liquidity front, Capstone Turbine is quite relieved as it has got enough cash and credit to finance its future activities. The company had cash and cash equivalents of $ 10.6 million and a credit facility of $ 5 million from Wells Fargo taking the total of cash, cash equivalents and credit to $ 15.6 million. The relief for the equity holders is that the company doesn’t have a huge debt piled up despite making loss for last few quarters. The total debt stands at $ 15.41 million which is manageable given the strength of its balance sheet.

Future Plans:

Capstone Turbines has suspended the commercialization of the C250, C270 program in order to reduce its R&D cost and concentrate on its core products.

Later this month, Capstone Turbine is going to finalise the Capstone Finance JV. This JV will offer finance solutions to the customers. This will allow third-party ownership for U.S. oil and gas customers that want the product today but lack financing. As per the company’s December presentation, distributors have lost $ 22 million in FY16 and over $ 50 million in FY15 due to lack of financing options. Hence this business will provide a strong incentive for adoption of micro turbines.

Further, Capstone Turbine will add 100 new sales people to sell its enhanced C1000 Series product which will be unveiled later this month. The product is focused on the CHP market and improved reliability. A product price hike is also due in January 2016. This, together with the cost reduction plan will be instrumental in realizing the revised EBITDA breakeven level at $ 30 million per quarter at a 25 % gross margin. In addition, the focus on emerging markets like Latin America, Africa, Middle East and Australia is driving new opportunities.


Capstone Turbine is managing its businesses well. Its cost control is phenomenal and future plans on focus areas are quite promising. The good thing about the company is that it is not completely dependent on the oil market and has other businesses which can come handy in this downturn. Further, advancements like C1000 and the Finance JV place and renowned reputation in the after sales services places it a notch above its peers.
Published on Feb 9, 2016
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

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