Is Capstone Turbine Going Down?
Capstone Turbine (CPST) announced the results for its third quarter (ended 31st December 2015) of fiscal 2016 on 3rd February. The company’s revenue has increased 20 % sequentially from $ 17.9 million in the second quarter to $ 21.5 million in the third quarter. Capstone Turbine was also able to improve its gross margin sequentially from 11 % to 19 % and reduce the net loss from $ 7.9 million to $ 6.0 million, an improvement of 24 %.
Capstone Turbine had a lot of positives to highlight in its third quarter earnings conference call. First, Capstone Turbine has achieved $ 30 million in quarterly revenue 9 of the last 18 quarters and $ 25 million in 14 of the last 18 quarters. The growth in revenue in the third quarter was driven by the growing demand for the energy efficiency in the CHP market in the United States, Europe, and Mexico.
Secondly, there were notable improvements in the financial performance and balance sheet of Capstone Turbine. The sequential improvement in revenue, gross margin and net income are already mentioned above. On top of it, Capstone’s cash and cash equivalents balance, including restricted cash of $ 5 million, improved to $ 18.5 million from the $ 15.6 million in the second quarter. This was driven by some adept working capital management in terms of cash collection, reduced raw material purchases and shipment of finished goods inventory.
Cost reduction and EBITDA:
Capstone Turbine Corp. is really after its stated goal of achieving EBITDA breakeven at a $ 30 million quarterly revenue level at a 25 % gross profit by April 2016. And the plan for April 2017 is to achieve EBITDA breakeven level of $ 25 million in quarterly revenue by April 2017. In this regard, Capstone Turbine has cut its manpower by about 20 % by reducing its number of employees as well as eliminating almost all contract employees and consultants. With savings due to this and also from spending cuts in manufacturing, cuts in service, R&D, and SG&A, Capstone Turbine is expected to achieve a 25 % reduction in total operating expenses by the start of its new fiscal year. Further, cash conservation measures like suspension of investments in stock options, executive bonuses, executive equity, and executive merit increase programs will also bolster the balance sheet and accelerate the progress toward the EBITDA breakeven target.
On reduction in R&D spend, the CEO that the company is forced to suspend the commercialization of the C250 and C370 programs and focus on its core products like the C30, the C65, the C200 and most importantly, the new C1000 Signature Series product. This is expected to bring down the R&D expense from about $ 10 million a year to just over $ 6 million.
The company’s geographical diversification efforts have started to bear fruits as several significant new orders flowed in toward the end of the December quarter. New orders came in from Horizon, E-Finity, Vergent, and Regatta in the U.S., DTC in Mexico, E-Quad in Germany, Regale Energy in Hungary, and SINO Petroleum in China, just to mention a few. Further, orders from Australia-based Optimal generated $ 10 million in Australia alone over the last four quarters. The total orders would indicate $ 12 million of future revenue.
Overall, the geographical diversification of Capstone’s business caused a drop in product revenue from the US, but an increase from other parts of the world. The contribution of U.S. was 54 % of Capstone’s product revenue over the last nine months ending December 31. From outside the US, the contribution of Europe was 16 %, Australia was 11 %, Mexico 9 %, Asia 6 %, South America 3 % and Africa was 1%.
The diversification is not only being done geographically but also sector wise. The company has shifted a lot of its business from oil and gas to energy efficiency. While the weightage of product revenue from oil and gas dropped from 52 % to 37 %, that from the energy efficiency business increased from 42 % to 55 % over the first 9 month period of fiscal 2015 to fiscal 2016. The renewable energy and other applications increased slightly by 2 percentage points.
With oil prices nearing their lowest levels in more than a decade, oil and gas customers need more energy efficient installations that could keep their energy bills in line with their cost reduction targets. And Capstone’s microturbine solutions are an apt answer to that challenge. With its recent energy reform legislation and a greater focus on energy efficiency, Capstone's technology has become an even more attractive option to reduce their own energy consumption at a lower cost than their local electric utility.
The new Signature C1000 series product has an improved air flow, improved 2-stage filtration, lower ambient noise levels, improved overall enclosure design, higher inlet fuel temperatures and is capable of 82 % total system efficiency.
One thing is quite clear from Capstone’s Q3 earnings call, which is that the company is not under any sort of pressure. It has progressive goals set for itself and is looking on course to get there in good time. And the best part is that it is not completely dependent on the US oil market and has other businesses like energy efficiency and the Finance JV which are much less negatively affected by low oil prices. Further, the company’s technological supremacy puts it in a strong position in the industry.