Capstone Turbine's (CPST) third-quarter numbers missed Street estimates, and that hasn't gone down well with the market -- the stock's down about 6% this morning. But considering that the microturbine maker hit new highs on its top line as well as gross profit, why is the market getting fidgety? Maybe investors need to dig deeper into the earnings report.

Are Capstone's machines losing weight? Image source: Company website

Take a good look at those numbers
Capstone appears to have done a decent job during the third quarter. Here's a quick recap of the key performance metrics. 

  • Capstone's revenue jumped 11% year over year to $37 million, which was a record for the company.
  • Gross margin expanded an astounding six percentage points to 20%, both sequentially and year over year, to hit record high.
  • Capstone halved its losses to $2.2 million year over year. But net loss per share was flat at $0.01 since the company repurchased shares under expired warrants in Q3 this year which increased its outstanding share count.

That pretty much sums up Capstone's third-quarter performance, and it looks good to me. The losses shouldn't have freaked the market out, because Capstone may still have some more quarters before it can turn profitable. But while above metrics give you an overview of things, they don't tell you the full story. To know whether the company is moving in the right direction or not, you need to know the following numbers.

  • Capstone's third-quarter-backlog value improved 7% year over year to $160.4 million, indicating a growing order book.
  • A book-to-bill ratio of 1.4 means that the company booked orders worth $140 for every $100 worth of orders fulfilled and billed during the quarter. Total order value was $40.5 million for the quarter, up 87% year over year. But, the company received orders for only 109 microturbines during the third quarter, compared to 137 units in Q3 2012.

So what does that mean? It looks like Capstone's sales volumes aren't growing, and the product mix is boosting the company's revenue. In other words, Capstone is selling more higher-wattage microturbines like C65 and C1000 (which are, of course, priced at a premium compared to lower-wattage machines) even as sales for its smaller machines are slowing down.

That's actually favorable from the profitability angle, since the company can generate higher margins even on low volumes. That's evident from the fact that Capstone's average revenue per machine rose 16% to $184,000 year over year during the third quarter despite a drop in the number of units shipped. 

Where's Capstone headed from here
Going forward, Capstone expects to break even on its operating earnings or earnings before interest, taxes, depreciation, and amortization (EBITDA) by the next quarter. Considering that the company needs roughly $40 million in revenue and gross margin of about 21.5% to break even, it looks feasible, which is great news for investors.

Capstone started 2014 on a solid note, judging by the number of orders it received in January. The lucrative and high-potential oil and gas market continued to be its largest and fastest-growing market, accounting for 59% of its total shipments during the quarter. So it looks like the company's top line should continue to grow at an accelerating pace, which should help it reverse losses and turn cash flow positive over the next few quarters.

More notably, Capstone wants to hit a gross margin of 35% over the next two years. The good news is that management expects most of it to be driven by cost reductions, and not higher selling prices. Whether the company will achieve the target or not is anyone's guess, but management seems to have some plans up its sleeves and sounds confident. And that sounds like a good reason to keep an eye on this company. 

Editor's Note: Article previously included a section telling investors to pay attention to slowing orders of C200 turbines. Since the company now packages five C200's in a C1000, the logic was incorrect because more C200's are being sold, just not on an individual basis. The Motley Fool apologizes and regrets this error.