Thank you. Good afternoon, and welcome to Capstone Turbine Corporation's conference call for the first quarter of fiscal year 2015.

I am Jayme Brooks, your contact for today's conference call. Capstone filed its quarterly report on Form 10-Q with the Securities and Exchange Commission today, August 7, 2014.

If you do not have access to this document and would like one, please contact Investor Relations via telephone at (818) 407-3628 or email [email protected], or you can view all of our public filings on the SEC website at www.sec.gov or on our website at www.capstoneturbine.com. During the course of this conference call, management may make projections or other forward-looking statements regarding future events or financial performance of the company within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

These statements relate to, among other things, growth and diversification of our end markets; increased production rates; strengthened distribution channels; ongoing new order flow; reduced cash usage; growth in revenue, gross margin and backlog; attaining profitability; improvement in certain key performance indicators and strategic initiatives; achievement of our EBITDA and cash goals; adequacy of capital resources; improved operating leverage; new product development; shifts to larger markets for our products; benefits from our cost-reduction initiatives and opportunities in the Bakken shale play; growth of key markets; new certifications; and components of government regulations. Forward-looking statements may be identified by words such as expects, objective, intend, targeted, plan and similar phrases.

These forward-looking statements are subject to numerous assumptions, risks and uncertainties described in Capstone's Form 10-K, Form 10-Q and other recent filings with the Securities and Exchange Commission that may cause Capstone's actual results to be materially different from any future results expressed or implied in such statements. Because of the risks and uncertainties, Capstone cautions you not to place undue reliance on these statements, which speak only as of today.

We undertake no obligation and specifically disclaim any obligations to release any revision to any forward-looking statements to reflect events or circumstances after the date of this conference call or to reflect the occurrence of unanticipated events. I will now turn the call over to Darren Jamison, our President and Chief Executive Officer.

Thank you, Jayme. Good afternoon, and welcome, everyone, to Capstone's first quarter 2015 earnings call.

With me today is Ed Reich, our Executive Vice President and Chief Financial Officer. Today, we'll start with a general overview of the first quarter and then turn the call over to Ed, who'll review the specific financial results.

I will then close with some comments about our markets and geographies. And as Jayme said, during our remarks, we'll be referring to presentation slides that can be found on the Capstone's website under the Investor Relations tab.

Let's go and start with Slide 2 for the first quarter highlights. For the first quarter, revenue was $23.3 million, gross margin was $3.4 million or 15% of revenue, and we achieved another record for backlog at $135.2 million at quarter end.

Our balance sheet is strong with $46.7 million of cash at the end of the quarter. The lower-than-expected revenue for the first quarter was due to delayed shipment requests for the delivery and installation of equipment on project sites.

And this resulted in excess finished goods at the end of the quarter. The timing fluctuations are not the result of an any ongoing pattern of project cancellations or postponements by customers that we're seeing, but instead demonstrate the lumpiness of our business on a quarter-to-quarter basis.

Our business is very sensitive to our customers' specific project timing. If a customer's not ready to take delivery of equipment on the project site, we cannot ship the product until it's ready for installation.

In conversation with some of our key distributors, none of their products have been canceled, and it's not an event-driven slowdown or indicative of a market turndown. But there have been delays of certain projects that have affected our shipments in the first quarter.

New order volumes were also down compared to the prior quarter, but this is typical pattern we have seen in previous years and experienced historically, given our annual price increase in April. However, our pipeline remained stronger than ever as a result of the long-term secular trends driving the markets for distributed generation.

And we do believe that we can make up the first quarter shortfall in revenue over the course of the remainder of fiscal 2015. As I mentioned, we set another record for backlog, which now sits at $175.2 million at the end of June 30, 2014.

A bright spot for the quarter is we received orders from several new partners during the quarter, including: Seven Turbine Power: Optimal in Australia; PipeLine Supply Company; Sarlin; Brightergy; Chenega Energy; Energy Systems of the Caribbean; and Vergent Power Solutions. These new customer orders represent a positive sign that we are improving the diversification of our business, which is critical to our overall revenue strategy and long-term growth.

Let's turn our attention to Slide 3. Slide 3 shows gross margins for the quarter.

Gross margin of 15% for the first quarter showed a modest increase year-over-year despite actually lower revenue than last year. This demonstrates the operating and direct material cost improvements that we have made for our manufacturing processes.

The first quarter of fiscal year 2015 marks our seventh consecutive quarter of double-digit gross margins. I'll pause here and turn the call over to Ed for the first quarter financial summary.

Ed?

Thanks, Darren. Good afternoon, everyone.

Let's begin on Slide 4 with a review of the first quarter results. Revenue for the first quarter of fiscal 2015 was $23.3 million compared to $36.4 million for the fourth quarter of fiscal 2014 and $24.4 million for the same period last year.

Product revenue was $17.6 million compared to $30 million for the fourth quarter fiscal '14 and $20.2 million for the year-ago quarter. Revenue from accessories, parts and service was $5.7 million compared to $6.4 million in the prior quarter and $4.2 million for the first quarter of last year.

Turning to Slide 5. We shipped 125 units representing 17.9 megawatts in the first quarter of fiscal '15 compared to 173 units representing 18.9 megawatts in last year's first quarter.

So while megawatt shift decreased due to overall lower sales volume, average revenue per unit increased based on the mix of microturbines shipped during the quarter, which was more weighted towards our larger products than in last year's first quarter. Gross margin for the first quarter was $3.4 million or 15% of revenue compared to $6.1 million or 17% of revenue for the fourth quarter of fiscal '14, and $3.3 million or 14% of revenue for the same period last year.

The 100-basis-point year-over-year increase in gross margin primarily reflects the lower royalty and warranty expense, offset by the impact of lower revenue and the unfavorable overhead absorption because of lower volumes. First quarter R&D expenses were $2.3 million compared to $2.5 million last quarter and $2.3 million for the first quarter last year.

SG&A expenses were $7.8 million for the first quarter of fiscal '15 compared to $6.8 million for the fourth quarter and $7.6 million for the same period last year. The year-over-year increase is primarily due to an increase in salaries and related expenses, which were offset by a decrease in supplies expense.

Net loss of $6.8 million or $0.02 loss per share for the first quarter of fiscal '15 compared to a net loss of $3.4 million or $0.01 per share last quarter, and a net loss of $6.8 million or $0.02 for the first quarter of last year. The loss from operations for the first quarter of fiscal '15 was $6.7 million compared to $3.1 million for the fourth quarter and $6.6 million for the first quarter of last year.

I will now provide some comments on the balance sheet and cash flow activity. Please turn to Slide 6.

Cash and cash equivalents totaled $46.7 million at June 30, 2014, compared to $27.9 million at the end of the prior quarter and $21.6 million 1 year ago. In May, we closed a public offering for 18.8 million shares of common stock, which was allocated to a single institutional investor.

Net proceeds from the sale of the shares after deducting fees and other operating expenses was approximately $29.8 million. Additionally, on June 9, we increased the maximum borrowing capacity of our credit facility with Wells Fargo Bank by $5 million, increasing it from $15 million to $20 million.

We also amended the financial covenants and extended the maturity dates of the line of credit to September 30, 2017. But between our cash in hand and our expanded credit facility, we believe that we have ample liquidity to fund our growth plans and to meet our increasing working capital requirements that would be required generally with larger orders.

We maintain our focus on reducing our cash requirements, and we used $9.1 million of cash in operating activities, of which $4.5 million was used for working capital instead $200,000 in capital expenditures in the first quarter of '15. This compares to cash used in operating activities of $15.9 million at $300,000 in CapEx during the same period a year ago.

Receivables were $24.2 million at June 30 compared to $28 million at the end of the prior quarter and $24 million a year ago. DSO was 95 days in Q1 compared to 70 days in Q4, and 89 days for the same period last year.

Inventories were $25.4 million at June 30, up from $21 million at March 31, and down from $29 million a year ago. Our inventory turns were 3.4x compared to 5.3x in Q4, and 3.3x in the Q1 of '14.

Finally, Slide 7 shows our growth in backlog since the beginning of fiscal 2007. Backlog increased to $175.2 million as of June 30 compared to $171.6 million as of March 31, 2014, and $155.8 million at the end of the first quarter of the prior fiscal year, representing a 12% year-over-year increase.

We are disappointed in the product shipment delays during the first quarter. We are encouraged by our backlog, which is a positive indicator for future growth.

As our customers work out their project completion schedules over the course of the year, we expect to make up for the lower revenue. In addition, we anticipate continued margin expansion in fiscal '15 based on a shift towards larger units and larger projects and continued progress on our cost-saving initiatives.

We maintained our expectation of crossing over the positive EBITDA during the fiscal year. That concludes my comments.

Now back to Darren.

Thank you, Ed. Now let's turn to Slide 8 for our global shipment mix for the first quarter.

As you can see, 62% of our shipments for the use in natural resource applications, including oil and gas; 32% was for the use in energy efficiency applications; 5% in use of renewable energy applications, followed by 1% for use of applications, including critical power supply and mobile products. On Slide 9, you can see the same data on a megawatt shipments by geography.

Geographically, we're particularly excited about the Bakken shale play in North Dakota, a region that has been largely untapped by Capstone. We've also made inroads into Oman in the Middle East for oil and gas production, as well as recent expansion in Indonesia and Finland.

Please turn to Slide 10. As I mentioned, Vergent Power Solutions is one of our newer distributors.

We're very excited about the partnership with Vergent and as they tackle this Bakken shale play, where recent gas-flaring initiatives have provided excellent opportunity for Capstone product. The Bakken has emerged in recent years as one of the most important sources of oil in the United States.

Most new Bakken drilling and production had been in North Dakota, although the play also extends in the Montana, Saskatchewan and Manitoba. As of 2013, the Bakken produced more than 10% of all U.S.

oil production. In November 2013, the U.S.

Energy Information Administration projected that the Bakken production in North Dakota and Montana would exceed 1 million barrels per day by December 2013. As a result of the Bakken, North Dakota has become the second-largest, oil-producing state in the U.S.

as of 2013, behind only Texas in the volume of oil produced. We fully expect the Capstone Turbine technology will enjoy similar success in the Bakken shale as we have achieved in the Marcellus, Permian and Eagle Ford shale plays.

Turning to the Middle East. We received our first order in Oman from PipeLine Supply Company, our new distributor for Oman and Qatar.

Oman is one of the top 20 flaring nations in the world, but it's dedicated to taking steps to eliminate this unnecessary waste of energy and negative environmental impact. Capstone's microturbines were chosen because of their perfect fit in flare-gas-to-power projects.

This order is an exciting development as this is the first of what could be potentially hundreds of microturbines installed to help Oman reduce its gas flaring. We also recently received an order from United Technologies' Carrier division for 10 C65s for a hospital in Southern California.

This is the first product order from UTC since 2011. So obviously, this is a very positive development.

In looking at the transportation space, the transportation markets continue to be a key focus for Capstone. In the marine market, several new boatbuilders are seriously considering the features and benefits of our unique technology.

Changes in the Sulphur Emission Control Area, or SECA, will affect all shipping within into an out of the Baltic, North Sea and English Channel beginning in January 2015. SECA will limit fuel emissions from ships to 0.1% sulfur compared to the current limit of 1.5%.

In addition, California coast has similarly new legislation coming soon. International Maritime Organization rules now strictly limit sulfur oxide emissions by ships.

Ordinarily diesel and heavy fuel emit a large amount of sulfur oxide when burned. Conversely, LNG is virtually 0-SOx emissions.

All of this becomes more efficient less polluting if hybrid electric powertrains are used, and these have many secondary benefits as well, not the least of which is improved performance. Speaking of improved performance, Ian Wright, the founder of Wrightspeed, who was also involved in the development of Tesla, continues to get traction with his unique electric hybrid vehicle solution utilized in the Capstone product.

He's working on finalizing a 25-unit follow-on order from FedEx and a 19-unit order for garbage trucks for a bay area refuse [ph] company. Let's turn our focus to R&D on Slide 11.

We continue our focus on advancing turbine performance, materials technology and updating our products for compliance to new European grid interconnect standards. The U.S.

Department of Energy remains a strategic partner for advancing materials and supporting the C370 microturbine program. Based on the success last year on the C250 demonstration program, which is the low-pressure spool for the 370, the project team is focused on optimizing the architecture and the component down selection for the integrated dual spool system.

We're planning to hold a final design review with the DOE at the end of this calendar year, and next year, we plan on building a test platform to demonstrate C370 performance. The AFA recuperator project has recently completed the first phase of development and successfully achieved a 3,000-hour elevated temperature test.

The next phase includes a formal qualification testing program and production evaluation. We remain very excited about this program as it supports a low-cost alternative to existing alloys used in high-temperature components in our microturbines.

Capstone R&D is also working very closely with the European certification agencies and European distributors to support new grid interconnect standards. We are currently finalizing our product designs and upgrading our internal development labs to demonstrate this compliance.

Initial certifications are expected later this year, and future compliance work is planned in the next year. We believe the upgrades for our products position us well for future interconnect requirements now being discussed in the U.S.

and Canada and other critical areas to Capstone growth. As a global company, we continuously monitor the changing geopolitical environments in areas which Capstone is doing business or has plan to do business.

More specifically, we're focused on Russia, the Middle East, Iraq, Israel and Africa. The largest potential impact of our current business is definitely Russia and the ongoing tensions in the Ukraine.

The U.S. government is working very hard to impact Russian interest without placing any undue harm on U.S.

companies. To date, we are not aware of any imminent changes or impact at this time related to the company's business in Russia or that of our Russian distributor, BPC.

Turning to the policy front. In June, H.R.4916, the Power Efficiency and Resiliency Act, or POWER Act, was introduced in the U.S.

House representatives by a bipartisan group of legislators. The legislation would modify tax incentives for combined heat and power and waste heat to power increasing than from the current 10% investment tax credit to new 30% investment tax credit.

This change provides support on par with tax incentives available for renewal energy and other technologies. By reducing initial capital cost of deploying these energy efficiency systems, the legislation seeks to encourage greater investments in these new high-efficiency technologies.

Also in June, the California legislature passed the Governor's Budget Trailer Bill, which includes a straight extension of the self-generation incentive program for 5 more years. Capstone microturbines for natural gas CHP applications are eligible for up to a $0.55 per watt incentive, which includes an additional incentive for being a California company.

Capstone's biogas CHP projects are eligible for $2.17 per watt incentive. The SGIP incentives are paid for up to 3 megawatts of capacity with tiered incentive rates.

In July, New Jersey launched a $200 million energy resilience bank, an infrastructure bank focused on energy resiliency. The initial funding will come from New Jersey's Community Development Block Grant Disaster Recovery allocation from the federal Housing and Urban Development department.

In addition, capital from the private sector is also expected to build on its initial funding. Focus for the bank's funding will be on supporting distributed generation resources, primarily combined heat and power for water, wastewater treatment plants and other targeted sectors, including hospitals, emergency response centers, town centers, transit networks and disaster relief centers.

Lastly, earlier this week, Mexico's Congress passed energy reform that will end 75 years of state control over the energy industry. This groundbreaking reform will allow major international oil and gas companies to finally enter the Mexican market oil and gas, which is expected to increase oil output and natural gas exploration activities.

Capstone has seen great growth in the oil and gas market and would likely benefit substantially from increased natural resource development in Mexico. In closing, I want to mention that Richard Lewis, our new Vice President of Operations, has been on board about 10 weeks now and his addition to our team is already paying dividends.

I'm expecting that Richard's 25 years of global supply chain, SAP and lean manufacturing experience will soon take Capstone's manufacturing operations and inventory turns to new levels of performance. Hopefully, some of you will get a chance to meet Richard at our upcoming Annual Meeting of Shareholders later this month.

As a reminder, our 2014 annual shareholder meeting will be held at our corporate office here in Chatsworth on Thursday, August 28 at 9:00 a.m. So we look forward to seeing you there.

If you're unable to attend, we will again be simulcasting the meeting, and management presentation, as always, will be available on our website. In addition, Capstone's marketing team is working on an all-new Capstone website with increased functionality, improved brand recognition and keyword search capability.

So look for that in the coming months as well. So to sum up our prepared remarks for today, despite a slow start to the fiscal year, from a revenue perspective, our business is being fueled by our strengthening distribution channel and record $175 million backlog.

As you know, backlog is leading indicator of future revenue growth and, therefore, we still expect to grow top line revenue for the year, expand our margins and achieve our fiscal year 2015 plan. Capstone continues to find innovative and creative ways to expand microturbine adoption, strengthen our brand and increase our market presence.

We are excited about the future and look forward to updating you on any number of important milestones throughout the fiscal year. Operator, we are now ready to open the call up for questions from our analysts.

This is actually Dillon on for Eric. Just real quick regarding the delayed shipments, and Ed, you've touched on this briefly in your prepared remarks.

You expect to make that up throughout the remainder of the year. Just wondering what kind of visibility you have?

Are there any orders that you guys have booked or shipped already here in Q2? Does that mean that we're going to see a bolus of business come through in Q2, or just what kind of cadence do you guys expect just with regard to those delayed shipments?

Yes, Dillon. This is Darren.

I'll go ahead and field that. We're expecting a strong bounce-back in Q2.

I don't think all of the Q1 orders will ship in Q2, but I think at least half of them, if not more, will -- so we'll clean up a lot of that finished goods. We also had an imbalance.

We had too few C55s slotted for the quarter and too many C1000s for the quarter, so really, a combination of project delays and a mix change that we didn't anticipate. So we're increasing our C65 production over the next couple of quarters to handle that increased order flow.

Then obviously, the C1000s we believe will ship either Q2 or Q3. So from a cadence standpoint, I would expect a strong bounce-back in Q2.

Q3 is typically our best quarter of the year. I don't see any reason why that won't be the same this year, then finish hopefully strong in Q4.

Okay, great. And then I apologize.

I'm going to bounce around a little bit here with regard to a couple of different opportunities. But on CHP, with the agreement with Related Companies, just get an update there, what kind of long-term opportunity are we looking at?

Just an update really.

Yes, no. With related -- New York is one of our markets that didn't take product in the quarter like they thought they would.

I think Related is moving forward. They're looking at, I think, 6 different sites, and the first unit should be installed here in Q2.

So I think, like many things in New York, project timetables tend to move to the right. But again, as I said in the prepared remarks, no cancellations.

Related, I think, will be important. It will be one of our biggest customers at the end of the day, but they're really kind of a hallmark for us or an anchor store to get into more REITs and larger companies like themselves.

So I think any time we get a major end user in a new vertical, that's obviously very important for us.

Okay. And then kind of along that same line with the new users.

The pump jack, what additional testing or development still needs to go into that opportunity? And have you guys been seeing interest from distributors or customers?

What kind of -- has there been a pipeline or backlog that's built up for that?

We haven't accepted orders for that product yet. That's still in field development work.

Obviously, that's a huge market opportunity for us. We're still testing that product, so I think we're probably still a quarter away, maybe 2 from fully releasing that.

Obviously, we want to be able to operate as many loads in the oil and gas fields as we can. And so that's just another step of -- in that process.

Can you just -- I'm sorry to kind of beat a dead horse here. Talk about the nature of the delays that you're seeing with these projects.

Having projects push out more than a quarter is actually a fairly long timetable. So I appreciate that you've got a new customer that's ramping.

But I think we're going to get a lot of concern around visibility and then how trustworthy that visibility is. So if you could just give us a bit more detail around that, that would be very, very helpful.

Yes, I would say that the California and East Coast were the 2 biggest areas in the U.S. I think we did see a little bit on Europe, a little bit of push out, some of the changes in the new grid interconnects are creating some havoc in Europe.

But that's the majority of the project pushouts for larger C1000 Series product here in the U.S., Eastern and Western seaboard. In California, it's more of a permitting regulatory drag on the project cycle times.

New York, it's more just the timeline how these projects go forward. NYSERDA is not exactly the fastest organization to work with, unlike UL and some other organizations.

But I think if you talk to our distributors, Ufinity, RSP, Regatta, they'll all tell you that their pipelines are robust. They feel very good about the business.

This is a short-term anomaly. Air permitting in California always takes longer than you think it should.

We've got some CARB issues we're going with our products for the mobile application. So again, I think folks may be spooked by this, but we are a project-based business.

Projects move in 3 or 4 months. To the right is not anything significant.

We don't see it a problem from an annual basis. And if you think, last year, this is very similar numbers we had last year.

We came off a good Q4, had a slow Q1, rebounded nicely in Q2 and Q3. So we're expecting something similar.

Again, I know folks that are familiar with project-based businesses and doing this type of building retrofits and new construction may be concerned about it. But, again, we've always said quarterly forecasting is always challenging for us.

And something sleeps even 30 days, it moves outside the quarter for us. So hopefully [indiscernible]...

Okay. Yes, I mean, just the quick recap is that this is regulatory approval and interconnection approvals that you're dealing with, not a change in financing structure for these projects or other sort of construction-related delays.

This is just primarily permitting issues, is that correct?

Yes, Colin, if you look at our top 5 distributors, 4 of the 5 revenues down over previous quarter. You talk to all 5 of them and they all feel more robust about the business this year than last year.

They're not seeing any structural changes. So again, if you want to judge Capstone on a quarterly basis.

That's going to be challenging, and we can't ship product without a place for it to go. We can't ship before we have building permits or air permits.

So it's, unfortunately, the nature of the beast. And hopefully, we'll bounce back strong in Q2 and Q3 and put this behind us.

Okay, that's perfect. And then can you just walk us through the cash cost trajectory on the manufacturing, x all the other charges?

And I know you've been working hard on the supply chain. Can you walk us through progress quarter-over-quarter as well as year-over-year on cost reductions?

Yes. It's difficult to see because our revenue is so low this quarter.

I think if you look back a couple of years, it's similar revenues. Even $27 million to $30 million were probably 3%, 6%, 9% gross margin.

We posted a 15% on a very low revenue, so I think that shows you how much we've improved our internal cost structure. Even last year's number of $24 million of revenue, I think, we did a 14%.

So if you equalize that revenue, you're probably looking at a 16% over a 14% so we're definitely making progress. I'll reiterate we expect 500 basis points for the year.

I would say we're well on our way in the first quarter. Again, the lack of revenue or lack of product shipments kind of masks that a little bit.

But again 15% on such lower revenue is, frankly, amazing if you look back just to where we were 2 years ago.

Okay. And then one final question.

Obviously, looking at the map on Slide 9, you've got 0 megawatts shipped to the South America and Africa, where there's obviously, I think, really compelling economics for your solution versus other solutions. Are you looking at upgrading your distributors in those geographies?

Can you talk a little bit about the channel work that's been done in those areas? Or is that not really a focus given the number of opportunities that you have in a little bit more established markets?

No, I'd say it's absolutely a focus. I mean, we shipped 5 megawatts into Africa in Q4, 0 this quarter.

Definitely, there's huge opportunity especially in North Africa. We've got some new distributors in place.

The Middle East, it's got some great opportunities, as I've talked about. And we have got some new distributors that are doing good work there.

South America should be a jewel for us. Colombia, Brazil, Peru, again, those projects tend to move to the right.

But if you look at the pipeline that we built off of opportunities, it's huge. So I fully expect South America to put up some very nice numbers this year.

And a lot of our growth, as we've talked about, is in these other markets. I mean, the U.S.

market's very good, Europe is coming back, but we need to see Australia, where we made distribution changes. Africa, we have new distributors.

South America, we're getting some traction. We need to see those markets pick up.

And so I think this quarter was not a very good example of the diversification that we're getting. But if you look at some of the recent order flow, some of the names I talked about, we're seeing newer distributors start to contribute, which is important.

I think if you look at our lumpiness, it's 2 things. One, we're project-based business, and we don't ship the product until the customer pulls it from us.

That's part of our challenge. But concentricity is an issue.

We have several big distributors and a whole bunch of new distributors that need to contribute. So as we're seeing new distributors contribute, that's going to take 1 of those 2 lumpy parts of the business out of the business.

I think that's very important for us.

It's Matt on for Phil. Just wanted to start out with the pipeline.

Could you guys just kind of break it out for us a bit, maybe by project size, and then just could you give us a sense for how it breaks down by geography?

I think if you look at our pipeline by geography, obviously, North America is the biggest. Europe would be next.

Asia probably would be next. I think South America is probably our biggest pipeline with the lowest amount of closures right now.

So it's probably our biggest area of opportunity. Some of the biggest projects we've talked about that we're looking at 50 megawatts, 80 megawatts, 20 megawatts or in Mexico, they're in South America, they're in Africa.

So some of these areas that are challenged for energy infrastructure are potentially going to be some huge opportunities for us. So I think from a growth standpoint, when we're still hovering around $1.3 billion, $1.4 billion of identified opportunities, but we need to continue to turn those opportunities into orders and push those orders through obviously as fast as we can.

Okay. And could you also just touch on sales cycles with the larger projects, and the 5-megawatt-plus quotations that you're doing?

I mean, how long are those taking currently and sort of any change in the larger-project quotations?

In our typical sales cycle, even for smaller projects, can be a year to 18 months. The bigger projects are probably 18 months to 2 years.

Sometimes, they can go quicker if we get in on when they're already started. But I think the reality is, the bigger projects tend to move slower just because the financing is more complicated, the permitting, citing of the sites.

So again, I think we're getting a shot at those bigger opportunities. I'd like to think we're going to book a couple this year.

We may not ship them this year, but I'd like to see us get the orders by the end of our fiscal year and demonstrate to the Street and to really the entire world that we're not just 1-megawatt guys or the small microturbine guys.

Firstly, just looking at the new booking for the quarter, looks like for me, the book-to-bill ratio was lower than 1 for the quarter, and the -- can you give us some explanation why the booking was also low for the quarter?

Yes, when we measure our book-to-bill, we look at product booking and product shipments. Our actual product booking was higher than our product shipments for the quarter, so it's a positive book-to-bill.

We don't look at it compared to total revenue because the total revenue had accessories parts and service and other things in it, but not part of our backlog. Actually, our service backlog is north of, I think, $40 million, does not include in our [indiscernible].

$49.3 million.

$49.3 million at June 30 for the FPP backlog. So a positive 1 -- more than 1:1 of book-to-bill.

Typically, we see a slowdown in Q1 because we do our price increase in April, so we have a really good Q4 from a booking standpoint ahead of that price increase and then a slowdown in Q1 that picks back up in Q2. But I think our actual book-to-bill product shipment versus product booking is 1.2:1 for the quarter.

Okay, I see. I misread that.

Okay. And regarding a few future opportunities you mentioned, like the New Jersey opportunity about the infrastructure resilient, restructure opportunities.

I don't think you have a much sales into the critical power of market so far? So is there any step you're going to take to address that?

Yes, I mean, we -- it depends on your definition of critical power, but definitely, a lot of what we so sell today is considered critical to the customers from providing emergency backup power, as well as prime power. From a data center standpoint, we have a data center-specific product.

We actually lowered the pricing on the product this year, trying to make it even more competitive. I think we've done 6 data centers to date.

But if you look at data centers and hybrid vehicles, either Marine or over the road, those are less than 1% typically of our revenue in a huge area of upside for us. So I mentioned the good work that Wrightspeed was doing.

They sold 2 units to FedEx. Those have been in operation for about 6 months.

They've got a 25-unit order they're about to execute, and then they've got another 19 unit garbage truck order that they're getting ready to execute as well. So I think seeing data centers start to a adopt the technology, seeing the Marine expansion, seeing the over-the-road truck expansion, although not driving big numbers in the next couple of quarters, 2 to 3 years from now that could be some our biggest markets.

Obviously, for market potential, it's huge.

Okay. And then switch to your -- the new material, the EFA thing.

What kind of timetable we are looking at here, say how long will take you to actually put that new material if everything works into production? And also how much the cost-saving we are looking at, at this moment?

Yes, the cost saving's going to be a minimum of about 20%, maybe as much as 30%. And we'll use it in the recuperator, which is our most expensive component of the microturbine, as well as other hot sections of the microturbine.

By the time we do some field testing and actually cut into production, we're probably looking at next summer. We may probably roll it into the C30 and C65 first, get some hours on it and then roll it into the 200 and 1000 series product.

But definitely within the next 4 quarters, maybe 3 quarters, things can go very well. But again, that's very exciting for us.

The main thing is just making sure that we get the life out of the material. Plus, so I think you'll also see that our current vendors that are supplying the current material may sharpen their pencil when we have another alloy that we can leverage them against.

So I think, either way, we're going to see significant cost savings and not give up any life of the technology or life of the product.

Okay. That 20% of 30% saving numbers you are referring to, what's -- are those for the direct material costs or for the total production cost?

No, that'll be direct material cost, such as the cost of the alloy from what we're purchasing it for today. If you look at -- let's talk about DMC for a minute.

We didn't put a specific DMC slide in here; this quarter, but we have about a 9% to 10% cost reduction that we've identified that we're still taking out with the technology. We then have this AFA material, which is additional cost reduction.

Then we also have the C250, which is going to drive better margin. So there's a lot we're doing to further improve the margins of the product.

We'll probably continue to raise prices modestly every year. You've seen our warranty expense come down.

The royalty expense dropped in half recently. So I think we've obviously got a ways to go to get to our 35% operating model or target model, but I think as I said before, put back 2 years on similar revenue and you'll see a dramatic improvement with the 15 points of margin on this, obviously, what's very low revenue for the quarter.

Great. Well, thank you for another great list of questions, everyone.

Obviously, Q1 '15 did not meet Wall Street's expectations or management's expectations from a revenue perspective, which is disappointing. But I think when you look at it, we're very confident that we still have the backlog and that we're going to deliver the year that we've talked about.

Choppy or lumpy quarterly results for an early stage project-centric company, which Capstone is, is unfortunately par for the course. And I know it's frustrating for shareholders and potential shareholders, but it is the lot life that we have with the type of technology we have in the markets we're in.

Q1 last year and Q1 this year were perfect illustrations of how this project delays pushouts and revenue moving from quarter-to-quarter can impact the business. But like last year, we expect a strong improvement.

I think the big key is that our backlog is still improving, the macro business drivers are still improving whether it's the changes in Mexico, changes in the SGIP incentive, New Jersey. All the different things we're looking at seem to be going in our direction.

Management is not backing away from the full year expectations. We're not lowering our expectations.

If anything, we're doubling down and going to make sure that Q2 is as strong as possible and roll right into Q3, which, again, is typically our strongest quarter of the year. If you look at the recent improvements in our distributor channel, I'm very excited about that.

We need to be more diversified in our channel. We need to be getting more sales outside the U.S.

and Europe. We need to see South America, Africa, Australia, Asia, Eastern Europe, whether that's Slovenia or Poland or the other types of areas that are not doing a lot of business with us today, there's huge opportunities there.

The Caribbean, Haiti, we've talked about in the past. So I think seeing new distributors, seeing different geographies, well, that's going to help with our lumpiness.

Obviously, being a project-based businesses, we're always susceptible to lumps, but getting less concentricity with our top 5 distributors is going to help us quite a bit. And I think that's really the key for us, is to continue to drive that distributor development, continue to get as many distributors as we can, doing $1 million, $2 million, $3 million a year, growing their business, reinvesting back into their companies, we not only have sales targets for our distribution channels today, we also have employee targets on an annual basis.

So the key is to make sure that as they grow their revenue, they reinvest that profit, hire more sales people, hire more application engineers, hire more service techs and keep building that business. So I think from that perspective, silver lining on what is a down quarter for revenue, but like I said before, we're very confident we're going to rebound in Q2 and Q3.

And with that, I invite everybody to attend our annual shareholder meeting and look forward to any questions and good dialogue at that meeting. So thank you.