Good day, and welcome to AMSC Third Quarter Fiscal 2018 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to John Heilshorn. Please go ahead, sir.

Thank you, Ian. Good morning to everyone, and welcome to ASMC's Third Quarter Fiscal 2018 Earnings Conference Call. I am John Heilshorn, partner of LHA, ASMC's IR agency of record. With us on today's call are Daniel McGahn, Chairman, President and CEO; and John Kosiba, Senior Vice President and Chief Financial Officer. AMSC issued its earnings release for the third quarter fiscal 2018 yesterday after the market closed. 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 today's call will contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995 concerning AMSC's future expectations, plans and prospects that involve numerous risks and uncertainties. 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 the company's annual report on Form 10-K for the year ended March 31, 2018, and filed with the SEC on June 6, 2018; and quarterly report on Form 10-Q for the quarter ended December 31, 2018, which was filed with the Securities and Exchange Commission last night; other reports that we have filed with the SEC and factors outlining the third quarter fiscal 2018 earnings press release. 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 AMSC 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 or income and non-GAAP operating cash flow. Non-GAAP net loss or income is defined as net loss or net income before sale of minority investments, stock-based compensation, gain on Sinovel settlement, net amortization of acquisition-related intangibles, changes in fair value of warrants and contingent consideration, noncash interest expense and the tax effect of adjustments. Non-GAAP operating cash flow is defined as operating cash flow before the Sinovel settlement, net of legal fees and expenses and the tax-effective adjustments. The company believes that these non-GAAP measures assist management and investors to compare results of operations of the current period to prior period results on a consistent basis by excluding these noncash, nonrecurring or other charges that it does not believe are indicative of the company's core operating performance. A reconciliation of the non-GAAP to GAAP measures can be found in the third quarter fiscal 2018 earnings press release issued and furnished to the Securities and Exchange Commission last night on Form 8 and in Form 10-Q for the quarter ending December 31, 2018. With that, I will now turn the call over to Daniel. Good morning, Daniel.

Thank you, John, and good morning, everyone. I'll begin today by providing some positive news on our cash balance. John Kosiba will then provide you with a detailed review of our financial results for the quarter that ended on December 31, 2018, and guidance for our fourth fiscal quarter, which will end March 31, 2019. After John's review, I'll come back and take you through our growth opportunities and our goal of creating greater revenue predictability and reducing variability of our results. We'll then open up the call to your questions. Let's begin. We generated nearly $1 million in operating cash flow in the third quarter of fiscal 2018. This does not include the final settlement payment from China of $25 million. We ended the quarter with over $80 million on the balance sheet. But let's not get ahead of ourselves. We still have to pay taxes and legal expenses of the $25 million payment. We said we thought we would net about $20 million. John will guide you through the details of our payment, which was received very late in the quarter. Also, as we went through our cost controls, we deliberately aligned expenditures with orders. In other words, we were not allowing expenditures without orders in hand. To date, we have not invested in the capability of delivering a Ship Protection System or SPS order. This past week, we received instruction to deliver and are excited to ramp up the factory for our Ship Protection System product. We plan on investing approximately $5 million over the next year to create the capabilities to deliver on the anticipated revenue growth from the Navy. So with that in mind, consider an expected pro forma cash balance of about $70 million. We'll walk you through our details around next year's capital expenditures during our next conference call. Some of you have asked why we received the settlement early. We received it because we asked for it. The terms of the settlement were that Sinovel had to pay by May 6, 2019. Given the macro dynamics between China and the United States, we suggested it would be in everyone's interest to make payment as soon as possible. They listened. We got a nice Christmas gift. Now let me now turn the call over to John Kosiba for his review of our financial results. John?

Thanks, Daniel, and good morning, everyone. ASMC generated revenues of $14.1 million for the third quarter of fiscal 2018 compared to $14.9 million in the year-ago quarter. Wind business revenues of $7.3 million increased by 178% versus the year-ago quarter. This growth is a result of increased ECS shipments to Inox. Grid business revenues of $6.8 million decreased by 45% versus the year-ago quarter. This decrease is due to lower D-VAR shipments. Our Wind business unit accounted for 52% of total revenues for the third quarter while our Grid business unit accounted for 48%. Gross margin for the third quarter of fiscal 2018 was 26% compared to 34% in the year-ago quarter. Gross margin in the year-ago period benefited from a favorable product mix, particularly within our Wind business, which includes royalty payments. Research and development and SG&A expenses totaled $7.8 million for the third quarter of 2018. This was down 8% from the same period a year ago, primarily driven by lower overall compensation expense. Approximately 17% of R&D and SG&A expenses in the third quarter of fiscal 2018 were not in cash. We recorded net income of $17.3 million or $0.85 per share for the third quarter of fiscal 2018. Included in our net income is a gain, net of taxes and fees, of $22.8 million related to the Sinovel settlement. Excluding the gain on the settlement, the net loss for the third quarter of fiscal 2018 would have been $5.5 million or $0.27 per share. This compares to a net loss of $4.2 million or $0.21 per share in the year-ago quarter. Included in our net income for the third quarter of fiscal 2018 was a $2.5 million noncash expense associated with the change in the fair value of warrants. Our non-GAAP net loss for the third…

Thanks, John. For those of you who are new to AMSC, and we're finding that many people are, and for those of you who are reacquainting yourselves with the company, from our perspective, fiscal 2018 represents the beginning of an expected transition in our revenue mix. We believe that the business is moving towards a more predictable recurring revenue base from our Navy product line as we get designed into additional platforms and eventually increase our content per ship. Additionally, we've diversified our Grid product offerings as well as our Wind customer base. This transition in our revenue mix corresponds to changes made over the past 3 years in our product line expansion and customer diversification efforts. Today, we've grown our voltage management business. We've grown sales from the renewable sector and expanded the business to include the industrial sector. We are also expanding sales from the transition -- transmission market with D-VAR to the distribution market with VVO and REG. We have released 3 new products in 3 years. These products include our Ship Protection Systems or SPS, our Resilient Electric Grid systems or REG and our Volt/VAR Optimizer or VVO, all of which demonstrate unique value to our customers. Our strategy is to deliver value, differentiated by our proven technologies through the development of full and complete systems. Three years ago, we set out to triple our total addressable market while erecting high barriers to entry that enable us to derive more margin and greater value for installation. I want to spend a few minutes on today's call to highlight the macro trends we are leveraging with our products to further penetrate our key markets. Let's look at our Ship Protection System product in detail, beginning with the Navy and our opportunity in support of its fleet electrification…

[Operator Instructions] We'll now take our first question from Eric Stine of Craig-Hallum.

So I just wanted to start with Navy. Thanks for the details there on what you can handle now and especially given it looks like you're -- it's kind of normal course of business that you're going to be part of this platform and doing those going forward. But as you think about, obviously, expanding to new platforms, more content, can you talk about longer term, approximately how many ships per year you could handle? And then as part of that, just color on you mentioned $5 million in CapEx for that Navy business. Is that capacity? Is that tooling? Maybe just details there and that would be great.

Sure. I'll give you a little bit and we'll talk probably more in the next conference call. But as you know, we made the move to air. When we made that decision, we made sure that we weren't over investing in things that didn't yet have an order. So we wanted to be able to telegraph to the market that some capital spending was coming and not to be alarmed because it's normal course, as you said, and we believe should be expected. From a capability standpoint, the Navy won't allow us to talk about what our capability is. But for those of you that have been to air and have seen what we're doing, this is an installation that we're designing to be able to meet all of the Navy's need for the Ship Protection System business. We've estimated the market somewhere between $70 million and $120 million annually, assuming we get all of the surface fleet. So we want to be able to make sure we have the capability to serve all of the U.S. Navy's needs. And over time, hopefully, we'll begin to export and we'll be able to serve those needs. All, we believe, out of air. That doesn't mean that there won't be incremental capital. But as we're kind of telegraphing today, it's on the order of a few million dollars to build capacity. The Navy won't let us say definitively what capacity the building can do, so I'm sorry I can't give you a direct answer on that.

No, I understand. All right. That's helpful. Maybe just turning to your REG. And I know you're waiting on DHS approval, but is that something where now that Chicago has made their move, I mean, has that changed conversations with other utilities? Or do you think that, that is something where you need to get it put in the rate base, go through that process, get approval? And if that need to take a few steps forward before other utilities make their move as well?

I think, Eric, it's somewhere in between. So I don't think we need to go through all the steps to get all the utilities to start to look to move forward. We are working, as I've said on the past few calls, with a number of utilities. There seems to be clear and present real need for the product, and we're trying to work through those discussions. We have done a lot of work on the civil engineering side on multiple projects. And we're trying to prime that pipeline so it can all come relatively rapidly in conjunction with the project in Chicago. So definitively, what I've said is many of these projects don't need Chicago to go forward. But certainly, the project in Chicago will help derisk it in the mind of many utilities and I think in a lot of ways aligns utility with us to market the compelling need, and I think that's a tremendous benefit to our company.

Okay, got it. And maybe last one just for John. Just gross margins, obviously, nice number this quarter. Maybe just some thoughts on, if you're able to, how we should think about that over the next couple of quarters.

So we don't guide to gross margin in the future. But this quarter, we did have a strong gross margin at 26%. And you can see in our scripts, a big chunk of that revenue was from Wind. So when we have our revenue profile of a good product mix, I think you can assume gross margins in a similar range since we haven't guided to the product mix in the future. It's difficult for me to try to give you an answer one way or the other. But I -- what I can say is on this revenue profile, this is a margin that we feel pretty comfortable of.

We'll now take our next question from Colin Rusch of Oppenheimer & Co.

Can you talk a little bit about the OpEx spending you're going to need to invest in to support the growth trajectory in the Grid and the Navy business?

Yes, Colin. What we said specifically today has to deal with the Navy. So remember, it's not just delivering wires. It's delivering the whole system, so we're going to put in the tooling to be able to fabricate the complete SPS system. As you can see from what we're saying today, that's in the order of low single-digit millions of dollars. So we didn't want to invest in any of that until we have the order. We now have that order. I think one of the things that people will keep asking is, okay, what's your revenue capability given the CapEx spending? And we certainly probably need to be more transparent with that as we look at our FY '19 plans and beyond. Today, we wanted to be able to signal that there'll be some spending coming. But we also wanted to really highlight the revenue profile on how we see the revenue coming, which we tried to do in the prepared remarks.

Yes. Maybe my question is misunderstood. I'm trying to get a better sense of the OpEx spend going forward in terms of your overhead and how much operating leverage look at as we look for revenue.

I'm sorry, I heard you say CapEx. I apologize. So from an operating spending, this is at a low level compared to where we've been. If you back out the cash level, it gives you a breakeven still scenario like we've said. We don't see OpEx having to grow in line with revenue growth, meaning that we believe there's a lot of OpEx leverage. When we look at programs like SPS or some of the newer products, most of the spending around realization of those revenue comes from cost of goods sold. So we're not looking at ratcheting up in any way operating expense over all. There's not a need to expand the sales force or expand what we're doing in R&D. If we saw any change, maybe flat to maybe incrementally higher, but at the end of the day, it may be noise in the system. We're trying to design the business to get good gross margin and operating margin levels at current operating expense levels. So hopefully, with incremental revenue, we should see great leverage and fall-through from those revenue dollars. That's the way we're trying to direct. Thanks, Colin. Sorry about hearing CapEx instead of OpEx. I guess I got CapEx on my mind.

We'll now take our next question from Philip Shen of Roth Capital Partners.

First one is on Inox. With that 500 million -- or sorry, megawatt order with Adani, well, the one that Adani has with Inox Wind in turn that you can service. I know there's still some milestones that you guys have to meet. Can you talk through -- it sounds like you could get through that quickly. Just give us a little more color on what those milestones are. Are they letters of credit and just kind of making the upfront payments? Or is there something deeper? And then I believe the project is expected to be delivered over a 15-month period. So how do you expect the revenue recognition on your end to be spread over that 15 months? Do you expect to be front-end loaded? Or could it be spread evenly among the quarters ahead?

Okay. So I'll try to be as direct as I tend to be with everybody. I think we're in a difficult situation. Here, we have a customer that needs a product in the 3-megawatt class. They've gone out and they've got an order for it, which is great because if derisked the business for us. But as of today, there are certain prepayment conditions that make the contract go active and we haven't met them. And what we're trying to do is to make sure that as we operate, particularly in the Wind business, that we get security of cash flow. It would lead you to believe that there really is a compelling need for the product if they're able to go and secure orders for it. The 15-month time line is what they've disclosed. That bodes well with some of those SECI projects that Adani has already won. So a large part, it adds up with one of their initial demands. So I think it's a big win for Inox. What we need to do is to get them to execute the payments, then we'll go forward and do the work to be able to deliver the turbine design. We will have to go get certification for it. But net-net, when we look at Electrical Control System demand, we tend to lead delivery of the turbine by, call it, 3 or 4 months. Typically, with the 2-megawatt platform, that's what we've seen. But we're going to have to do some work on the turbine design. So from a revenue profile standpoint, it's not going to be early. It's going to be later in that cycle. But at this point in time, Phil, I don't have payments for the 3-megawatt design and I don't have an order for 3-megawatt ECS. So when we look at orders, we look at what the complete instruction is from the customer and their ability to pay and their payment history to really understand what we think is really an order. So we're in a challenging situation here where it's hard for me to give you very concrete answers until the customer pays for the technology and then the customer put in place an order for ECS.

If you were to provide a probability on that, I mean, do you -- is it an 80% probability that the 2 of you get past the current hurdles? Or is it a less than 50% probability?

In everything we've done with Inox, we've been able to have everything work out positively for both companies. So not that the past is necessarily a complete way to look at the future. But the companies work very well together, and we know they really need to and want to move to this platform and we want to be there to help them. But they need to make sure that they're paying their bills on time. Obviously, it's been a couple of months here between when they announced and today. So we're working very closely with them to get that project to kick off and get it really started.

Is there a chance another ECS supplier can step in? I mean, is there a realistic substitute supplier? Or what's your thought on that?

I don't want to speculate on any of that given what the company's been through in its past. They've announced that they have a deal with us. They have announced that they've signed a deal with us. That's all true. In order for the agreement to become effective, they simply have to pay and we look forward to being able to announce soon that they paid.

Great. Okay, shifting gears. This one might be more for John. I know earlier to, I think, a question to Eric, he had maybe asked about product mix. I know you don't guide to that. But if there is -- if you could share any color on the mix of segments in Q4 -- F Q4 between Wind and Grid, that would be helpful. And do you see something similar to what we had in F Q3? Or do you expect one to kind of take to be more dominant in F Q4? That would really help in terms of model.

Sure. I mean, we don't guide specifics on the breakdown between the segments. What I can tell you is we are shaping up to have a stronger Grid quarter than Wind quarter, so the revenue mix will change. You know what, I'll just leave it at that. We should see a stronger Grid quarter.

As it relates to REG, and I'll pass it on, I know, Dan, you touched on that. But was wondering if you could comment specifically on has the number of near-term opportunities increased? What do you think could happen in fiscal '19 given slow utility scale development, that slow process in general? And has anything progressed meaningfully out of PUC or with a specific utility? How is the Exelon overall opportunity shaping up? I know you have a relationship with ComEd, but it extends, I think, into Exelon as well. If you could just provide a little bit more color on REG overall, that would be great.

Yes. I think on the last call, we went through a lot on the pipeline. All that remains true and it becomes stronger. Everyday we show up to work, we're moving the ball forward on REG. I think everybody today is focused on when we're going to move forward with the DHS modification, which is why we tried to focus the prepared remarks around that. I don't want to go back, Phil, and redo the last conference call. I don't think that would be helpful to anybody. But basically, to say, hey, we still feel very strongly that you have a plethora of projects here in that $25 million to $75 million range that we could be in position to deliver within 1 year. So the revenue ramp from REG certainly is possible. I think what you're hearing from the company, however, is we need to move forward with the 3 megawatt. We need to move forward with DHS. We need to move forward with SPS capability. In the near term in the next few quarters, we have to focus on those things to make the revenue growth happen for those parts of the business. If we're able to deliver on an order for REG in the near term, we think that's just a great accelerator for the business and good news for everybody. We keep working at it. And when we have something to announce, we will.

And we will take our last question from Carter Driscoll of FBR Riley.

First of all, congratulations on moving towards commercialization of your naval business. I know it's been a long, arduous process. So congrats for finally getting that business more towards annuity-like structure. So my first question, Dan, is could you talk about -- since the scope of the 3-megawatt design seems significantly to have a larger dollar content and effectively a much different design than 2 megawatt, do you anticipate the license fee to be different than 2-megawatt? Is there anything you could qualify?

Yes. When we've done license agreements, we really have not announced the economics. What we said typically is these are in the millions of dollars and millions of euros. This is not necessarily different than that. There's a royalty basis to it. And then there's the ECS supply chain. So I wouldn't see this agreement being substantially different than what we've done in the past.

Okay. Do you anticipate that, assuming you work out all the economic details and Inox is forthcoming with payments for it, that it could have a similar type of total dollar content for what you did for the 2-megawatt? Meaning...

Yes. What we said isn't dramatic, particularly when we're looking at Doosan turbines and other turbines that whatever -- we've said typically between $50,000 and $100,000 of value per megawatt and that will hold true for a 2 and 3, a 5.5, whatever size. We think that's the value that we command that we want to try to get that kind of pricing from our customers.

Okay. So obviously, having Doosan helps with the diversification. Assuming that the ramp for 5.5 will be relatively muted in this fiscal year, could you talk about maybe some other potential designs they might be looking at for offshore? I mean, you've seen some of the competitors in the double-digit megawatt size. You guys had obviously a -- see tightening years ago. Maybe just talk about the opportunity set there as offshore seems to be gaining some legs worldwide, particularly in Korea.

Yes. I think with the macro trend, the movement to larger turbines in offshore, it really is in the wheelhouse of ASMC. That's where our technology does even better. And as you comment, we even have other drivetrains that we could do larger turbines for. As the market moves there, and particularly our established partners or maybe new partners, as they need technology to get the larger turbines, we have a very unique set of turbine designs that can allow somebody either to expand their product line or enter the market as a new entry. Right now, the strategy is to go offshore through South Korea. If the direction changes, if their other partners present themselves with other sizes, we said it would certainly be something that we would talk to everybody about. The general feeling in South Korea is that this 5.5-megawatt turbine, I think, is one of the top 10 largest designs in the world. There's a supply chain that has been in development for that size or class of turbine. Getting larger, there's a number of makers out there that are putting up prototypes of larger sizes. When our partners need that technology, we have it. We don't have a lot of development work between what we've done to date versus what we need to be able to transfer to a customer. In South Korea, they're talking already about larger turbines. Certainly, we want to make sure that Doosan is successful with the 5.5. That will put us in position. As they extend their product line, it gives us the potential to deliver other technology and other content to a maker like Doosan or somebody else that's active in offshore.

Okay. Maybe switching gears. Could you -- is there a way to quantify the dollar content of the long lead time items versus what you think an entire system would be per ship? I know you've given very specific per ship ranges for dollar content. Just remind us again maybe what percentage long lead time is in the range relative to the total dollar opportunity per ship?

Yes. I don't think for LPD 30, we put anything out there and there's something in the remarks today. But to give you a sense of what we've already said on LPD 28 is when we got those orders, it represented about 20% of the value that we've already recognized revenue for that amount for LPD 28. We don't see the next ship, LPD 30, as being not much different probably. That helps you -- I think the other thing we tried to signal in the prepared remarks for other ships. So we talked about LPD 29, which we were kind hinting at. We think if we get an order, it would be directly from the Navy. We probably don't need to be in that situation where we have such a long lead because we're now kind of getting more in the steady-state production. So I said in the prepared remarks, we expect that, that may come as one instruction or one order. I think the same thing if we look out to LPD 31. There's a lot of initial work with LPD 30 that will be accomplished with the shipyard that won't have to be done again as we go to the next ship called LPD 31. So we're trying to telegraph that there may be a segmentation of revenue in time where we're maybe integrating over a longer time period for LPD 28 and LPD 30. But we try to signal very directly we're going to see a ramp in fiscal '19 in the back end and will see us basically working on multiple ships in 2020 and 2021.

Okay. All right. So it's fair to characterize this as both investments you're making in your renewed facility along with a quicker potential adoption of those long lead time items at the shipyard level. Both of those should bring a smoothing effect, and as you add more platforms, bring a more annuity-like revenue structure to that business. Is that fair characterization?

Yes. I think you got right at the crux of the call we're trying to telegraph. We're trying to bring not only growth but predictability to that growth. And we see that coming in late '19 and certainly strongly in 2020 and 2021.

Okay. I guess, last for me, and I know you don't -- you've been asked this different ways in terms of the margin expectations. But traditionally, Wind had been a higher-margin business, but is it not fair to assume that as the Navy contributes a larger percentage of that, that Grid overall could either even potentially exceeded what historically has been your Wind margins?

I think to give you a -- some of the things we've said in the past is inside the Grid business, you had historically items where we've under absorbed fixed factory relating specifically around the superconductor technology. To move to air, we signaled specifically what that reduction would be. We've been able to realize that reduction, so that means incremental margin happens at lower revenue dollars in Grid. So that's one point. The second point, I think as we looked at the military, as we get into some scale here, which is not much as we're telegraphing for 2020 and 2021, that the potential for military margins usually outweighs commercial margins. So as we release these products, the idea is not only to grow revenue but to grow operating leverage and to grow gross margin for the business.

Okay, appreciate that. Maybe just last question for me is given that you may face a bit of a transition from Inox to 2 to 3 megawatts, obviously, assuming -- and your confidence that they will occur in the near term, have you set up the same -- I guess, the ability to set up the same supply chain dynamics for 3 megawatt versus 2? Is it -- is there any different components or suppliers that you need to alter from that? I wouldn't imagine so, but just wanted to get your commentary on that.

Yes. I don't think -- I think one of the analysts talked about us being very different. I think the design is different in that it's bigger, but it leverages the same basic components. We're still talking geared systems. We're still talking extensively the same supply chain. What we're trying to get is the more leverage to get into the 3 and the 5.5-megawatt turbines that you get leverage with bigger turbines as well. So as all that comes, what it spells is hopefully some growth for us. When you look at what India has said and what Inox has said, I think the challenge that you're pointing out, which is that transition to the 2 or the 3 may cause some temporal dislocation in demand again in the short term. But if you look at the longer term, when you integrate all their demand, it's a lot of revenue for us. And we looked at -- we're already into $200 million-plus that we've delivered already. The prospects here, if people are patient, I think, quarters to years, not weeks to quarters, their backlog continues to grow. The order with Adani, I think, is a great feather in their cap to show more stability in their business. So I think the overall tailwinds are precedent wins. I think the challenge will be -- and I think you get at it with the 15-month timetable that was subscribed in Inox's announcement, we got a lot of work to do in the next year. And if we're able to execute on that in additional orders, you should see continuing -- the continued growth trajectory that we're on in Wind.

This concludes today's question-and-answer session. I will now turn the call back to Mr. Daniel McGahn for any additional or closing remarks.

Thanks, Ian. And thanks, everybody, for joining us today. We are executing on our plans. We're in a great cash position. We're beginning to grow. We've diversified our Wind and Grid businesses. We've expanded our wind product line with a larger offshore ECS product. And we've expanded our Grid business with our VVO product. We are demonstrating the ability to monetize our HTS technology investment into a very significant SPS and REG opportunity. Our SPS product line is expected to create greater revenue predictability as we deliver on our systems order. We believe that we are on a path towards predictable revenues and growth over the long term. If I look in the very near term in the coming weeks and the coming quarters, hopefully, we'll see and update to you all on the 3-megawatt contract with Inox. Hopefully, we'll be able to update you on the process and the modification to the existing agreement with DHS. And then we're certainly telegraphing that we should hear more on LPD 30 and more on Doosan. So we think we're at a very nice position for the company where we've introduced these new products. We're getting traction. And all indications is that we have multiple pathways to growth, and we have the ability here to be able to support that growth. Thank you, everybody, for your attention, and we look forward to talking to you again when we report the results for the full fiscal year, which will be in the next few months. Thank you.

This concludes today's call. Thank you for your participation. You may now disconnect.