3 Surprising Takeaways From Capstone Turbine Corporation's Earnings Call

Capstone Turbine's (NASDAQ: CPST  ) full-year earnings report offered few surprises. Thanks to its preliminary release, investors already knew what to expect for growth on the top and bottom lines. But looking beyond the numbers, management raised some interesting points during Capstone's earnings call that reveal a good deal about the company's current standing and where it's headed. Here are three key takeaways from the call.

"It's very important to note we have not seen a slowdown in our Russian business."
Since Russia stands among Capstone's key international markets, the ongoing Russia-Ukraine crisis left investors jittery. But the company hasn't faced any trouble there just yet. In fact, Russia emerged as Capstone's strongest market last year, with revenue surging 68% over 2012. As a result, Russia's share in Capstone's total revenue jumped six percentage points to 17% during the last financial year that ended in March.

However, I believe investors should remain cautious. The crisis is far from over, and the U.S. is already planning its next round of economic sanctions targeting energy and other key Russian sectors. Unfortunately, Capstone's fortunes in Russia are tied closely to the oil and gas industry -- a 24-megawatt order from Russian modular power stations in January counts among the company's biggest orders so far this year.

Capstone isn't ruling out the possibility of losses to sales and potential business opportunities if tensions in Russia escalate. Given that the rest of Europe made up only 13% of the company's revenue last year, any weakness in Russia and its spillover to neighboring regions could hurt Capstone's sales considerably.

Another crucial point here may surprise you: Despite a regular inflow of orders from the U.S. shale plays, North America was Capstone's weakest market in 2013, with revenue dropping 20% year over year. While the company blamed a "shift in certain customers' project timelines" for the lower revenue, it might be wise to not get overly excited next time Capstone announces a fresh order from a U.S.-based oil and gas producer.

"It's not unusual for us to see a sequential margin dip from the third quarter to the fourth quarter due to the year-end adjustments." 
That's management's explanation for why Capstone's fourth-quarter gross margin slipped to 17% from 20% in the previous quarter. It was also the most surprising element in Capstone's earnings call.

If a lower sequential margin is normal in the fourth quarter, what was management thinking when, during its third-quarter earnings call, it said that Capstone was on its way to hitting a gross margin of 21% in the fourth quarter that would help it break even on EBITDA?

Either management has no clue about the company's sales and earnings pattern, or it just wanted to give investors a false sense of security by doling out an unachievable estimate. That reversal certainly didn't help Capstone's case, and I believe investors are now left with fresh doubts about management's forecasting capabilities and integrity.

"We are cautiously optimistic that we will return to higher revenue growth rates in fiscal '15."
Top-line growth is of tremendous importance to a company that has yet to turn a profit. But just when investors want to see Capstone's revenue grow leaps and bounds, backed by strong order inflow, the company strangely appears to be losing steam.

Capstone's revenue improved only 4% in fiscal 2014. Though revenue hit a new high of $133.1 million, the growth pace was the slowest in nearly seven years. For perspective, Capstone's top line grew 17% in fiscal 2013 and 34% in fiscal 2012. Here's a self-explanatory chart that shows Capstone's annual revenue growth over the past few years:

Source: Capstone Turbine Q4 Earnings presentation.

It only gets worse that Capstone is "cautiously optimistic" about returning to higher revenue growth in this financial year. Investors certainly expect more clarity and visibility, especially since the company booked orders worth $131.5 million during the last fiscal year (which nearly equals the revenue generated during the full year) that pushed its backlog value up by 15% to a new high of $171.6 million.

Capstone's numbers and projections leave much to be desired. Investors were hugely disappointed when the company failed to show the first signs of profitability last year. While Capstone now expects to "cross over to positive EBITDA" during this financial year, it remains to be seen whether that projections holds water. After all, every time the company misses estimates it keeps an excuse handy to pacify investors.

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