Q2 2021 Capstone Turbine Corp Earnings Call
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Ladies and gentlemen, thank you for your patience. This conference will begin momentarily again. Please remain on the line. This conference will begin momentarily.
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Good day, ladies and gentlemen, and welcome to your Capstone Turbine Corporation earnings Conference call and webcast by the financial results for the second quarter fiscal year 2021. Indeed on September Thirtyth 2020, all lines have been placed on a listen only mode and that will be a key.
<unk> answer session. Following the presentation as a reminder, today's program will be recorded at this time. It is my pleasure to turn the floor over to Mr. Colby Peterson corporate counsel, Sir the floor is yours.
Thank you very much good.
Afternoon, and thank you for joining today's fiscal 2021, the second quarter conference call as a rule.
Binder the company issued preliminary selected second quarter results on October 2nd 2020.
On the call with me today is Darren Jamison, Capstones, President and Chief Executive Officer, and Air Cancun, Kapstones Chief Financial Officer.
Today Capstone issued its earnings release for the second quarter fiscal 2021 and filed its quarterly 10-Q report for the Securities and Exchange Commission.
We'll be referring to slides that can be found on our website under the Investor Relations section during the call today.
I want to remind everyone that this conference call contains estimates and forward looking statements representing the company's views as of today November 10 2020.
Capsicum disclaims any obligations to update or revise these statements to reflect future events or circumstances, you should not place undue reliance on these forward looking statements because they involve known and unknown risks uncertainties and other factors that are in some cases beyond our control.
Please refer to the safe Harbor provisions set forth on slide two and in Kapstones filings with the Securities and Exchange Commission for information concerning factors that could cause actual results to differ materially from those expressed or implied by such statements.
Please note that is there and then they are going through the discussion today, when they mentioned EBITDA, they're referring to adjusted EBITDA and the reconciliations in our presentations appendix having.
I would now like to turn the call over to Darren Jamison, President and Chief Executive Officer.
[noise]. Thank you <unk>. Good afternoon, everyone. Thank you for joining us today to review our second quarter fiscal 2021 results ending September Thirtyth 2020.
Before getting into specific financial highlights I'd like to review recent business highlights.
The update and our adjusted EBITDA initiative.
We couldn't turn the presentation to slide four.
On slide four we have outlined some of the key events for the last couple of months and I'm glad to say this is a very long list, which is a significant improvement over the first quarter as we started to see our business rebound.
I will not run through each item, obviously, but I would like to draw your attention to a couple of the more critical evidence that demonstrate the inflection point that I believe we have reached to the company.
On August 24th we announced a significant progress on our Microturbine hydrogen testing as fuel flexibility is a key part of our energy solutions backbone and hydrogen is clearly emerging as a viable low carbon source of energy over the next couple of years I'll be spending a little bit more time later in the presentation discussing or more specific.
Detergent strategy.
On September 10th we secured a new five year long term SPP contract as part of our growing energy as a service business and the Asia Pacific region, which I believe indicates that that region is beginning to also recover and could return to a significant growth opportunity for the company.
I'd also say that the market in Europe rebounded nicely during the quarter. We were actively monitoring the current situation with some countries shutting down for the month of November has COVID-19 continues to create business challenges in various parts of the globe.
Whoever the second quarters, most significant achievement was the capstone posted positive cash from operations as total cash on hand increased to $16.8 million in the second quarter from 16.2 million in the first quarter, which Eric will cover in greater detail the financial results section.
However, just to put this accomplishment into some perspective. This is the first positive cash from operations quarter to 11 quarters every accomplish this at significantly lower cobot impacted revenue levels.
Lastly, the other critical milestone for the quarter technically came just after the quarter ended we successfully upsized. Our original Goldman Sachs 30 million term note to $50 million and did so five months ahead of our stated goal of February 2021.
We did this at a significantly reduced interest rate and for a new three year term.
Make no mistake. This is a huge achievement as it provides additional financial flexibility to aggressively pursue our energy as a service strategy and to do so at a substantially lower cost of capital.
Also this gives our new direct sales team the balance sheet it needs to support direct sales efforts with larger fortune 1000 companies.
Also I believe the Goldman Sachs lending, a total of $50 million to Kapstone with its history of losses in the middle of a global pandemic speaks volumes as to the future of capstone and its growing energy as a service business model.
One final comment on this.
I believe that the upsize Golden credit facility is not only significantly lower interest rates and new three year term for the fact of the date, we executed the note our market cap was less than the total loan amount.
Lets go and turn to slide five.
Slide five highlights our adjusted EBITDA goal through the second quarter versus our year over year goal of $10 million EBITDA improvement. Despite the ongoing impact of COVID-19 in our business today, we have posted an impressive 4.2 million improvement for the six months ended September 32020, compared to the same period in 2019.
Excluding a noncash provision for potential payout under the annual executive bonus program.
The numbers really speak for themselves here at this point, we are tracking in the range, we expected in order to achieve our 10 million adjusted EBITDA improvement goal year over year.
With that I will now turn the call over to air Cancun provide more specific details on our excellent second quarter financial results Eric.
Thanks Darren.
I'll now review in detail our financial highlights for the second quarter of fiscal 2021, which can be found on slide six through 10.
I want to begin by highlighting our total cash and cash equivalents as of September Thirtyth 2020 were 16.8 million.
An increase of $2.6 million compared to 16.2 million as of June Thirtyth 2020.
Which was the result of strong working capital management, despite a challenging cobot operating environment.
During the quarter, we generated $1.9 million.
Positive cash from operating activities, representing a 3.7 million improvement quarter over quarter.
And an $8.2 million improvement year over year.
The company benefited from his energy as a service or E Hey, EPS business model.
For Capstone he asked consist of spare parts.
Factory protection service contracts rentals.
Distributor support subscription fee and other service revenue.
Cash flow improvement is a critical milestone in this quarter showed strong positive momentum.
I want to stress that this was accomplished without any financing activities as the company generated positive cash from operations for the first time in 11 quarters.
We accomplish this through a combination of tight cost controls the.
The growing success of our E.
Business and working capital management.
Specifically total inventory decreased by $3.7 million or 19% to $15.5 million in the quarter compared to 19.2 million as of June Thirtyth 2020.
If you refer to our 10-Q filed today you will see we decreased inventory by 7.2 million or 32% compared to 22.7 million as of March 30, Onest 2020.
This decrease supported improved liquidity and positive working capital during the second quarter.
New gross product orders were 9.8 million in the second quarter, which compared to 5.5 million in the first quarter, representing a positive book to Bill ratio of 1.4 to one as the business continues to rebound from the impacts of the Cobi 19 pandemic.
As Gary mentioned the company continued to execute against is 10 million.
Fiscal year over year, adjusted EBITDA improvement goal posting a 4.2 million improvement for the six months ended September Thirtyth 2020 compare.
Compared to the six months ended September Thirtyth 2019 excuse.
Excluding a noncash provision for the executive bonus plan.
Total revenue for the quarter increased 2.7 million sequentially from 14.2 million in the first quarter to 14.9 million in the second quarter, primarily due to improving product revenue has the impact of Koby 19 continues to subside, but.
But decreased $5.8 million compared to total revenue of $20.7 million in the year ago second quarter.
The year over year decrease in revenue was primarily the result of lower product parts and accessories volume as project schedules were adversely impacted by the global COVID-19 pandemic.
Gross margin as a percentage of revenue was 17% an increase of two percentage points compared to the prior year second quarter. Despite a 20% drop in total revenues.
Primarily due to improving service margins and lower warranty expense.
Gross margin as a percentage of revenue decreased seven percentage points compared to the first quarter due to revenue mix as well as a decline in service margins impacted by the COVID-19 pandemic.
Operating expenses in the second quarter were 5.5 million.
On a sequential basis operating expenses increased 1.6 million.
From $3.9 million in the first quarter, which was primarily due to costs associated with our Indycar racing sponsorship.
As well as an accrual for executive bonuses.
The majority of the Indycar racing sponsorship costs was recognized in the second quarter as the season was condensed due to COVID-19.
Operating expenses decreased $8.9 million compared to 6.4 million in the second quarter of last year.
I merely due to lower costs from our COVID-19 business continuity plan.
Net loss was $4.2 million for the second quarter of fiscal 2021 compared to a net loss of $4.4 million in the year ago quarter.
Adjusted EBITDA, excluding executive bonus was negative 1.9 million for the second quarter of fiscal 2021 compared.
Compared to an adjusted EBITDA, excluding executive bonus of negative $2.2 million for the year ago quarter.
Now I would like to talk in more detail about our energy as a service business and we have a new slide I would like to share with shareholders to help frame. This critical part of our business.
Let's go ahead and focus on slide 12.
Where we set out our historical energy as a service or E.A. as revenue and gross margin.
As well as pro forma through fiscal 2023.
For the full year fiscal 2021, we assume Q2 fiscal 2021 year to date annualized numbers for both revenue and margin.
Fiscal 2022 and 23.
Our also Q2 fiscal 21 year to date annualized for revenue and margin.
But we also assume that kapstone builds its.
Its current 8.6 megawatt rental fleet by approximately two megawatts per quarter.
Until it reaches 21.1 megawatts as required under the new Goldman Sachs note.
And we modeled in 85% rental utilization rate.
Our model assumes that the average rental contract revenue per megawatt is $90000 per quarter.
And 70% gross margin.
This is not meant to be a forecast and there is no assumed growth in revenue or margin in spare parts AFP or DSS in this model for fiscal 22 or 23 when.
When compared to year to date fiscal 21 only growth in rentals.
To try and illustrate the importance of our rental business in.
An improved service margins compared to prior years.
The one key thing to take away from this new E. S. Slide is that there is a tremendous positive margin impact with each incremental dollar of E ads revenue.
Also it's important to note that we assume in fiscal 23 R. E as margins will be close to our current annual opex rates.
Which means our E commerce business small business could cover a significant portion of our opex.
Well margin contribution from product sales would drop to the bottom line said another way, we believe the continued growth and profitability.
Of our energy as a service business would ensure our future viability profitability and positive cash flows from operations.
I will now hand, it back over to Darin to give additional color on our fiscal 21 goals and objectives as.
As well as our strategic initiatives in hydrogen Darren excellent where it's going.
Turn to slide 14.
Slide 14 highlights our 2021 objectives and those remain unchanged from what you saw in our last quarter and are centered around our goal to see 10 million in year over year adjusted EBITDA improvements, excluding any executive bonus scheme.
A key component to achieving that goal include a 22% gross margin target compared to the 17% posted this quarter driving 15% of revenue from our new direct sales channels.
Reaching the 10 megawatts of rentals that Eric talked about which is currently at 8.6 megawatts and improving our working capital to approach six inventory turns compared to 3.3 in the second quarter.
Speaking of inventory, Kurt Pat and his team have reduced it from 22.7 million to todays $15.5 million in just two short quarters, which is simply amazing we expect that inventory turns should start to accelerate in the back half of this year as product shipments strengthen and started approaching historical pre coated product shipping.
Levels.
The key takeaway and all this is the second quarter results show, we are on track to reach these key business goals and objectives. Despite the ongoing global pandemic. However.
However, I do expect volatility and continued.
Difficulties, given the world economic uncertainty, but the results. This quarter show we are fighting through the challenges and we are on track to meet our stated goals and commitments to all capstone stakeholders.
I would now like to turn our attention to our hydrogen business strategy starting on slide 16.
The starting point stems from the fact that hydrogen economy is real and gaining significant momentum. This means the capstone as a clean energy company must have an answer and expand our fuel flexibility to include the zero carbon fuels in the future.
Kapstone has demonstrated that can run on 20% hydrogen mix and recently announced a new research and development partnership with the U.S. Department of energy and Argonne National Laboratory at our combined engineering teams are currently running at 65 in the labs at 7% hydrogen 30% natural gas plant.
This is an extremely promising milestone toward our goal of reaching a fully 100% hydrogen fuel microturbine commercial product at a fraction of the cost of the curtain fuel cell products.
Our objective with our technology roadmap is to carefully manage our R&D spend while staying in front of the technology curve and providing timely cost effective solutions to our global customers.
Now to say that after years of development efforts hydrogen is now officially part of our commercial product portfolio and we have shipped our first commercial product at a 20% hydrogen mix to our strain distributor optimal.
Let's go ahead and moves by 17.
Slides.
Slide 17, I want to show the importance of green hydrogen with the energy industry. One of the key concepts behind this is the stranded elektron for maneuver energy assets. What this means is there's a large quantities of stranded renewable electricity that cannot be used at the convention electrical grid as we shown in this diagram.
Using the surplus electricity for electrolysis, and thereby producing hydrogen is seen as a valuable solution functioning as energy storage and transport medium with the energy burden to create the hedging coming from renewable assets, hence the term green hydrogen.
This renewable hydrogen is blended with natural gas or eventually could be used in its pure form as fuel for our capstone CHP systems, thereby creating a very ultra low carbon energy source for our global customers.
Slide 18 highlights some of the key topics around the capstone product when operating on hydrogen.
It's also important to note the capsules products are typically located behind utility meter inside the fence at the whole site. This.
This means the capstone is not necessarily held back waiting for the regional natural gas infrastructure to be upgraded to except the natural gas hedge and blend we could see significant growth from onsite distributed hydrogen generation at a more competitive price to current fuel cell technology.
Slide 19 shows our recent patent towards 100% of hydrogen fuel for our Microturbines as I mentioned earlier, we have some now offers renewable power with the use of up to 20% hydrogen of our commercial.
Microturbine and we have successfully operated on a blend of natural gas and hydrogen using the current fuel system architecture and will use this newly patented injector to decrease our current blend up to 100% pure green hydrogen and a commercially release system.
On slide 20, I wanted to share with you that this is not just a concept or an idea at this point, but rather we are moving ahead toward a commercial product launch using blended natural gas and hydrogen fuel.
In closing I'd like to say I am proud of the entire caps and team and the fact that we are managing to successfully navigate through these key inflection points in our operations and strategic.
Strategies, despite less than optimal external business conditions.
I'm excited to think of what we can do when we actually have significant tailwinds around the globe at our customers regained stable economic footing.
Despite the micro challenges and macro challenges I will reiterate that there are favorable trends focused on broader corporate and government initiatives, specifically around energy efficiency and global carbon reduction.
The Green Global recovery is real in our view and we sit right in the middle of it.
I entered fiscal 2021 optimistic, but cautious given the global pandemic, but have an ever growing confidence we will be successful navigating our way through this and achieve our shirt short term business goals and long term profitability objectives.
Operator, I would like to now open the call up from our analyst community.
Ladies and gentlemen, we have reached the answers and questions portion of the call. If you have a question. Please press star one on your telephone keypad at this time.
Again for questions that is star one.
Okay. Our first question comes from Eric Stine, Craig Hallum Capital Group, Sir. Please go ahead.
[laughter] generic.
How you doing great.
Great how are you.
But.
Got it so just wanted to start on the rental business with the with the upsize loan I know you had the energy as a service slide which is not necessarily a projection you do have some up you know requirements as part of the loan but what do you think this can become I mean do you have some some internal targets you can share.
You know, whether it's one year out three years out how should we think about that.
Yes, definitely we want to get to from the 8.6 megawatts in the 21 megawatts. This required under the agreement as quickly as possible.
We got about an 18 month period to achieve that according to the terms alone.
We were added at 8.6 before the pandemic hits and obviously, we'd be several backwards a little bit with a couple of our oil and gas customers. We're hopeful to get those units back on rent here shortly and then start a building that up.
As I said in our prepared remarks, we want to be a 10 megawatts by the end of the fiscal year, but.
But I think you know Eric is modeling about two megawatts growth a quarter I believe that's very doable. We've got about 62 megawatts of identified pipeline in active quotes out there.
We've just gone through a rebranding strategy, we'll be updating our website, we've hired a couple rental salespeople as well. So we're just really getting spot on fruit.
From a very small rental fleet into a.
Medium sized rental fleet is probably still being unkind, obviously the rental market is a multi billion dollar markets. We've got a lot of room to expand the.
Importance is as Eric said in his remarks.
The margins on this product as you know clip approaching 70% the IR ours about 30% or.
So the more of these rentals, we can get out there it has a pretty profound impact on our profitability and having the.
Note from Goldman to give us that ability to build a rental fleet is really key to our success.
Got it okay [noise].
That is helpful. And then maybe on hydrogen just curious I know, there's a lot of activity or at least a lot of public discussion about it I mean, when do you realistically think that this is a meaningful contributor.
To your business.
That's a really good question and it really hard one to answer I've got a board meeting next week, while I need to try to answer that for our board I think our answer is.
We've seen much more much more inquiries around hydrogen in the last six months when we have the last six years theres.
Theres definitely a lot of interest or the recent order that we just got in Las Vegas for four megawatts. The customer said, what's your hydrogen path even.
Even though that's a natural gas CHP driven sites. So I think we're seeing customers talk about hydrogen and levels. We've never seen before we're seeing more and more utilities and.
Energy providers talking about hydrogen so I would say you know I lived through the original hydrogen highway with Schwarzenegger back too many years ago. This feels different this feels like there's really a lot of momentum behind hydrogen.
Sold our first see 65 on hydrogen we've got multiple quotes out there.
You know at todays business levels, I don't know, what you'd consider significant though it could be 5% to 10% of our business. The next couple of years are easily.
And maybe more if it grows faster our challenge is really to modulate our R&D spend and product development efforts on how fast the market develops there is no sense being early in.
And hydrogen development and spending a lot of dollars to do that but I don't want to be laid either so I think managing our R&D spend in product development efforts.
In a way to match the market development and the opportunities really are key.
Got it and maybe last one for me just on the FTP backlog.
Over the last couple of quarters, it's been plus or minus 80 million just.
Curious any thoughts on why that's kind of stagnating, a little bit and what.
What do you think is needed to kind of break that out of that range.
Yes, a couple things that definitely the pandemic had a big big hit on that I mean, we had folks but.
Either idled their facilities or pause their FTP is.
We had a couple of cancellations, but I would say nothing overly significant.
No we didnt see a lot of sites commissioned because of construction halts and and people that actually be able to go out there and commission units I think the combination of some.
You know units not not commissioned or put on hold because of the pandemic impacted us.
We've had a couple of good recent FDP signings and there should be some more coming here in the next 30 to 60 days. So we expect that to continue to grow the challenges. Obviously, we feel every quarter. So if we're not adding a new sites or if you have any cancellation that impacts the growth that backlog.
Nothing were concerned of long term once we get past pandemics.
Okay. Thank you.
I think there.
Okay next on the line, we have Colleen right, calling from Oppenheimer. Please state your question.
So much.
Guys could you talk a little bit about the.
The supply chain.
And while you're out like that in terms of having.
John down some inventories.
Our ourselves able to keep up with the move towards a little bit leaner turn time.
And is that impacting any of your component costs at all.
Yeah, Great question as I said, I'm, a very large Kirk and his team have done a great job on on reducing our incoming materials and improving our inventory turns with a target to get five or six turns by the end of the fiscal year and I think if we see product revenue growth in Q3 and Q4 based on the Q2 bookings that's something that we can think we can achieve.
But definitely the leaner you run the lower the water level the rocks pop up in the river.
We have seen some challenges some of our suppliers and so we are actively working that.
We're bringing on a couple of new resources into in the purchasing department that a little more skilled because we've got to get our suppliers to be doing more smaller more frequent shipments and be a little more nimble with us because we don't want to lose orders, but we don't want to increase our inventory levels and so it.
It's definitely not the sexiest business in the world, but its really impactful going from two inventory turns to you know six turns is $10 million of cash freed up on our balance sheet you can see what the cash from ops. This quarter was and what we've done for the first six months. So really important for US I mean were old fashion. We think you take cash the make not revenue.
And so I think managing our supply chain and making a world class is really key for the next couple of years for us.
Okay. And then you know you are you taking some measures around salary and instead.
Staffing around co that.
It's also where you're at in terms of bringing people back up to.
Regular salary levels, how should we think about you know that's not my business.
Yeah, No. It's great Great question, I'm, calling we had six months of salary cuts.
Myself in the leadership team and most of the senior folks amortization took a 25% pay cut for six months.
The kind of mid level management folks took a 15% pay cuts.
And those have all been put back in place at the end of September.
And so that's a that's can impact our opex a little bit.
The furloughs, we we took people back in ways and so a portion of those folks came back in a month some in two months and some in three months.
And we really do try to modulate that based on business recovery and.
And to make sure we get people safe so.
So I think we're good shape there all folks that are they're going to come back have now come back. We did have some people that based on current business levels. We didnt bring back on so I think our low point.
During the Furloughs is about 109 are about 90 people in about 120 today.
So I think we brought back about 30 of the 50 people or.
Some some number like that but I think in general I think we really had a good business continuity plan.
We've had only two people get sick and Weve managed facility basically.
The same kind of performance levels before.
Covert after cobot and they've done a good job. So I think that for us going forward, it's going to be just a matter of building back and we've hired salespeople. We're having some supply chain people will continue to add people that business grows back, but I think a Q3 Q4, we expect higher revenues in Q1 to Q2, so that will be positive much more fun hiring folks than it is.
Furloughing people.
Perfect. Thanks, so much guys.
Thank you guys.
Okay next on my line, we have Rob Brown.
The main street capital Rob Please state your question.
Hey, Rob.
Hi, good afternoon.
Just wanted to kind of get a little more.
Clarity on some of the orders you had nice a nice run of orders over the last couple of months, how does the order pipeline at this point in the visibility there and.
And what what sort of areas are you seeing strength.
Yeah. That's a great question Weve seen say Europe kind of come back first I think from Covance.
And then maybe think a little bit right now, but we saw a really nice order flow in the quarter from Germany, We got a nice order out of the UK, we saw orders from Slovenia, Poland, Romania.
Italy, and so that was great. The ended the quarter, we started seeing Australia wake up we started to seeing Mexico coming back online do.
The U.S. is poised to have a very nice quarter this quarter. So.
So I think the U.S. will be the biggest portion of our bookings for this current quarter you mentioned that four megawatt project, we had in Las Vegas.
That is a resort development on the strip that is our first major reserve development in Las Vegas, So thats, a nice marquee order for us that will.
Rebuilding from that's a annual report cover type of project with our HR EMS and four megawatts of a CHP system.
And so I think we're really excited about the opportunity to to build on the momentum that we've already had going before cobot. The direct sales force. We started in January and unfortunately, they get their wings clipped pretty quickly, but they've got a lot of national account momentum going with folks that have one or two projects and have 100 different installations around the world. So we're really interested.
About and excited about expanding those relationships with the balance sheet that we have now to the refinance of Goldman.
And the products running really well, we're getting the the part tissue that we have with the vendor behind us.
It's in the field and so we're excited about the back half of this year and then getting into next fiscal year hopefully post cobot.
In the in the rental market are you I think you had a couple of units come back on the oil and gas side are you are you seeing rental strength outside of oil and gas for or where are you really seem to like.
Yes, we started with oil and gas that was kind of our launch customer with shell and the Permian we've.
Weve gone out to other oil and gas customers now and then the.
Last few months, we've done some renewable projects and grow house projects, we really kind of expand into more CHP.
And so were pretty flexible.
We've got some interesting projects going right now that are non oil and gas I'd say, probably 65% of our pipeline of pending rentals as oil and gas, 35% is renewables and CHP, but.
But I think that that's going to be closer to 50 50 over time.
Thank you I'll turn it over.
Thank you I just wanted to add.
Rob as it is oil prices are below $50, a barrel, we see more rental opportunity in oil and gas above 50, we see more purchase opportunity or capital spend pick up so I do think that having your rental business in the oil and gas market kind of gives us a natural hedge against a slowdown and product shipments and oil and gas and so oh.
Gas customers still have to get product out of the ground if they can't spend capital dollars than though Brent using operational dollars and so having a rental fleet gives us kind of both sides of that heads, which I think is important for us going forward.
Thank you.
Okay. Our next question comes from some years Joshi wage H.C. Wainwright.
Can you. Please state your question.
Thanks.
Thanks for taking my question.
Just a follow up on common question about those T.V. and all I would eat into your adjusted EBITDA target.
He also said that you will be increasingly you haven't even gone so okay.
[laughter] go up over the next couple of quarters.
No.
The mobile coupons to medium.
So how do you see the tools to do that then medium.
Given that youre going.
Thank you all.
[noise] yellow I'll, let Eric take that.
Yeah, I think we previously guided on the offer.
Operating expenses it was pre coded to a range of $5.2 million to $5.7 million.
Given all the actions we've taken as a result of the business continuity plan. So a lot of those for those determined it turned into permanent reductions we should be at the low end of that opex range and potentially being even lower than that.
And then okay yeah.
Yeah, and then you know if you look at the Oh, the slide in the deck on our goals.
We're guiding towards that 22% margin goal so I.
That gets you to your 10 million improvement year over year, Yeah, and also I think as Eric said in prepared remarks, Q2 had some kind of onetime items, we had almost the entire indycar season hit in one quarter, just because the way they compressed schedule.
So you that's not going to return in Q3 and Q4.
We also had a non cash.
Charge for the decade, a bonus program part of a bonus program is tied around refinancing goldman's, obviously that that hit in one quarter and so I think that the legal expense going on with the the bad vendor part that we got and so we think Q3 and Q4 are going to be pretty good opex was not as good as Q1, but you know should be at the low end of our range you know as margins.
Frank than and product revenue returns, we're into higher revenue rates and higher gross margins and so I think two.
You think about Q1 and Q2 is more focused on Q1 was very big on on cost reduction in Opex and our business continuity plan Q2 was a little bit more of a blend Q3, you should see higher revenue growth and better margins in Q4 should be continuation of that also if you look at the $10 million year over year improvement I think.
[music] for alone was about a $5 million a negative EBITDA. So we've got a big opportunity to really hit it out of the park in Q4, if we could be close to EBITDA positive in Q4, we could pick up $5 million of a year over year improvement in one quarter.
Understood. Yes. So it was a one time charges in Q2 that have made this a little higher.
Correct.
So moving on to the.
Yeah and again this goes into the system needs and then Phil.
Just broadly speaking if instead of 50 million. If you had say 200 million how would you have been able to address like security enough customers. So the question is that enough when slowed but I do business.
Uh huh.
Turning to go anything that is something I.
I think it's a great question I mean, we started the rental businesses zero and so obviously getting momentum going in the rental business took us some time because they said, we're just now getting our website landing pages updated literature done. We just started branding the rental units and they were making some changes to our standard product and make them more rental ready.
So getting into a new business it always takes a little bit of ramp rate.
You know we started we had zero and pending opportunities now we're over 60 million.
The words getting out there we have it we've hired some direct sales people that have rental experience and ongoing customer lists and contacts so.
So we're pretty confident that we can get growing and grow it fairly substantially.
There are some rental opportunities that are north of five megawatts that could really move the needle quickly. We've already had conversations with Goldman about you know if we outstrip. The 21 megawatt fleet you know things continue to go well can we you know continued upside is aligned and hopefully continue to reduce that rate and so I think.
As we grow.
And as you build this I'm confident we'll we'll hit our targets and I think it'll be easier to get capital.
Obviously, the more profitable we've become and the more cash we generate the cheaper the capital become easier over to get.
And just.
One last one the 15% or data say in a target is that something that is for the entire year or is that something you expect to achieve on a run rate basis by about when you use when you exit the quarter for Q.
No that that those are all annual sets, we expect to do for the year. So we expect 15% of our total revenue to come from that direct sales organization. We've already had a couple of wins that have contributed very nicely one of those wins as a customer who's got multiple sites and then we're looking at doing the second site, which.
Which is much larger sites in the first site and so I think that that's kind of the business model we're looking for.
Our distributors are involved in the direct sales, even though we're kind of taking the lead a they're helping us to job walks and you know for had installed equipment and also maybe the service component. So.
Not meant to take business away from our distributors and spent to take our our distributors business, which is at a regional level and turned it into a global business or global relationship I mean on a much larger scale.
So we're excited about it obviously depend demick impacted ability here for this whole new sales organization together than they couldn't get on a plane.
And so thats, a looking forward to that changing but.
But I think there's lots of opportunities and really it's about timing of.
The product being in the right place the market being in the right place our balance sheet being in the right place and then having our distribution channel be mature enough to where we can spend more of our focus on leveraging the single wins and turning them into home runs.
Understood. Thanks for that took take other questions offline.
Great. Thank you.
Okay. Our next question comes from Shawn Severson with water Tower Research Shah. Please state your question.
Thanks.
Darren you talking about you know five megawatt deployments in the energy service business just had a larger win in Vegas too if I recall correctly I mean, the Microturbine. Your systems were very competitive you know the one to two megawatts and it just seems like you're getting.
Some bigger orders and Togneri targeting big an order. So I'm just kind of wondering if that's changed the way you run into the industrial turbine or other solutions as you get up into these larger megawatt because it seems like.
You're more competitive at those levels. These days, just trying to understand if something changed or what happened.
Yeah, I'd say I think it's a combination of just the more we do with larger projects. We've got more reference sites and so obviously Mohawk carpet was a great. One we've done some sites in Canada and Australia. So at least are pointing to 5678 megawatt sites.
That helps us get other big customers to make that decision I think were competitive EPS or roughly 10 megawatts you start getting over 10 megawatts and and we'll probably look at bringing in a different partner and.
And so we've got some conversations going in that area that where we would a partner with a another turbine supplier over 10 megawatts.
So I think there's opportunities for us still play in those spaces and again, we'll get some more national accounts a.
We may have to meet loads from 30 kilowatts to 30 megawatts and have kind of one.
Face to the customer to do that and so that's that's also part of our strategic plan, but definitely you're right. We are seeing more opportunities at a bigger scale projects and I'd say up to 10 megawatts were fairly competitive, especially if there's any variability into customers load it externally or electorally or if they want to dispatch the units.
Bigger machines don't like to you know cycle on and off and if we've got multiple units. We can quickly turn on and off to match load time of day use demand thermal demand whatever may be.
And what about feeding into year end to year technology.
Map I mean is there anything that is looking at bigger bigger loads bigger machines or something that would no you're gonna liking a lot. It has a lot to fill up a 10 megawatt a 10 megawatt order. So just what's on the technology roadmap.
Yeah, we saw the 250 out there and we've obviously got that into into the lab operation the.
The reality is that doesn't really change them for in the box for megawatt versus five doesn't help US address you know 10 megawatt loads in different.
And so I think we've kind of made the strategic decision to really work on the cost and the performance and reliability of the current 281000 signature series product today.
We still haven't seen the reliability catch up to the C 65 of that product line and that's really been my goal. There, we're not going to head off a new architecture till we get to you know the the latest architecture up to the same.
You kind of high standards, we set with the C 65 product line that being said again I think we've got some some strategic relationships. We can do about 10 megawatts and obviously you wouldn't have to do very many of those projects to move the needle for us on the revenue side, but I think for US energy as a service is really our biggest focus you know whether that's our or EPS.
He contracts, our new rental fleet our distributor.
Subscription model, we want that recurring high margin revenue and make sure. We can cover our Opex every every day and so you know I look at other people in our space and their sexier from a revenue standpoint, but there are effects is three or four times, what ours is a they've got huge cash burns.
I just don't know those models are sustainable long term and I think you know to build a business with a strong foundation that generates cash and grow it in a in a profitable responsible way you know it seems like the best thing to do for our shareholders.
Great. Thanks, Dan.
Thank you John.
Okay. There appears to be no further questions at this time.
Excellent well. Thank you I'll, just say in closing I'd like to remind investors that we have a very well defined business plan. We are very clear goals and objectives that you can see in the in our presentation. Today I believe that the unfortunate global pandemic has served to highlight the true value of our energy as a service business model as not many companies that report.
Did the two strongest quarters in their history during the pandemic, which is something that we've done and so I think it really highlights the value of that recurring high margin revenue business that we're building lastly, I can't wait to get on the other side of the pandemic is generally we believe that it's going to be a green economic recovery.
Obviously, the recent us election is going to lead to the U.S. rejoining the Paris climate accord and money being spent on green energy in a green economic recovery.
We think our new hydrogen blend product is going to better position us than we've ever been in the history to capitalize I got to the changing energy landscape that said before 30% of the global population today has grown up with climate change and so there's a reason why we're talking about hydrogen in green energy and Decarbonizing, the oil patch and yes, Gee that's not a.
The accident its not a marketing ploy to the fact that you know 30% of the population has grown up with with climate change global warming and they want to see the you know some different directions and different activity happens and so as those folks that have grown up with climate change become.
Become you know higher ranking in their companies bigger consumers more active voters, you're going to see more and more a move in this direction as I said before we're starting to see customers, even though they are putting in natural gas fired CHP, they're asking us about our hydrogen future and how we're going to build a change with the the changing energy landscape. So very soon.
Right about where the product is very excited about where the company is very excited about where the energy market is going because I think as I said, we're well positioned to capitalize on the changing energy landscape.
Look forward to seeing.
Seeing everybody in Q3, and hopefully talking about even better results in the upcoming quarter. Thank you.
Ladies and gentlemen, this does conclude today's teleconference. You may now disconnect your lines and enjoy the rest of your day.
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