Capstone Energy Plus, Inc. Common Stock 2027 Q1 Earnings Call

Good afternoon, and thank you for joining Capstone Energy+'s Fiscal First Quarter 2027 Earnings Conference Call. On the call with me today are Vince Canino, the company's President and Chief Executive Officer, and John Miller, the company's board member and interim Chief Financial Officer. Today, August 12, Capstone Energy+ issued its financial results for its fiscal first quarter 2027, which ended June 30, 2026. During today's call, we will be referring to slides that can be found on the company's website under the investor relations section. This conference call contains forward-looking statements representing the company's views as of today, August 12, 2026. Other than as required by federal securities laws, the company disclaims any obligation 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 2 of the accompanying presentation in today's earnings release and in Capstone's filings with the Securities and Exchange Commission for more information concerning factors that could cause actual results to differ materially from those expressed or implied by such statements. Please note that as Mr. Canino and Mr. Miller go through the discussion today, when they mention EBITDA, they are referring to adjusted EBITDA, which is a non-GAAP financial measure, and the reconciliation to net income can be found in the earnings release and the appendix to the presentation slides. I would like to now turn the call over to Vince Canino, the company's President and Chief Executive Officer.

Thank you, Alfredo, and good afternoon, everyone. Thank you for taking the time to join us today as we share our progress and outlook during what I believe is an exciting energy renaissance. Let's move to slide 4. The first quarter of fiscal 2027 marked another important step in Capstone's evolution. During the quarter, we achieved several significant milestones that are worth highlighting. First, we officially launched our broader market identity as Capstone Energy+. Second, following our successful uplisting to NASDAQ, we began trading under the ticker symbol CEPL. Third, we continue to make meaningful progress in the data center market. While we have not yet signed a customer agreement, we are seeing a growing awareness and interest in how Capstone Energy+ can help address community concerns while enabling additional power generation capacity with lower emissions.

Customers increasingly understand the role our solutions can play in supporting this rapidly growing market. Before John Miller walks you through the financial results, let me frame what I believe is the most important takeaway from the quarter. What these results demonstrate is that we have built a business capable of navigating turbulence while continuing to generate profits. Despite these dynamics, our underlying earnings profile continued to improve. We expanded gross margin a full percentage point in products and accessories, mainly driven by our ongoing DFMA cost reduction initiatives. We generated positive net income and meaningfully stronger operating cash flow. That combination, despite a lower revenue base, achieved higher quality earnings. That is the real story of the quarter. It demonstrates that the cost discipline and operational rigor we have spent the past two years building are paying off. Our strategy has never depended on a single market opportunity.

Instead, it is built around providing resilient, on-site energy solutions wherever reliable power is needed. Our three-pillar framework continues to guide every decision we make. The question we ask ourselves each day is not how successful are we becoming? Instead, we ask, are we creating value for our customers and shareholders? Are we helping customers solve meaningful problems? Are we making those around us better? When we do these well, we build trust. When we build trust, we create impact. When we create impact, success becomes a byproduct rather than an objective. Now, let's move to slide 5. This slide represents who Capstone is and why we exist. We are leaders in a technology that many attempted, many failed to perfect, and many ultimately walked away from. Yet Capstone persevered. At the heart of Capstone is an elegant technology, a single moving assembly riding on a cushion of air.

No friction, no oil, no coolant, no lubricants. No friction means lower noise. No oil means no oil carryover that can contaminate the combustion process. No coolant and no lubricants mean fewer auxiliary systems that can fail and take a unit offline. For more than three decades, we have proven this technology in the field, competing in an industry dominated by some of the world's largest power generation companies. It is true that we entered the behind the meter data center opportunity later than some others. However, we have created growing awareness and interest in Capstone Energy+ and the unique role our solutions can play. Through our technology and our decades of operating experience, we are helping customers think beyond how they generate, manage, and optimize energy. That is why we remain excited about the opportunities ahead. Now, let's move to slide 6.

As I mentioned earlier, we have been engaged in discussions with a wide range of companies across the data center ecosystem. As we developed our reference design and explored different energy strategies and deployment approaches, something interesting happened. During a visit by a major data center infrastructure company at our manufacturing facility, they asked the simple question: Can you whiteboard your value proposition? So we did. We began listing the reasons we believed Capstone Energy+ could be a compelling behind the meter power solution. As the conversation evolved, we worked together to categorize each benefit according to the value attributes that matter most to the data center operators. What emerged is something more authentic, more practical, and more closely aligned with the needs of the people who will ultimately deploy and operate the solution.

I'm not going to walk through every value attribute on this slide, particularly because we've discussed many of them on previous calls. However, there is one that deserves more attention, and that is speed to token. At its core, the economics are fairly simple. The sooner a data center becomes operational, the sooner compute capacity comes online. The sooner compute capacity comes online, the sooner tokens can be generated, monetized, and delivered to customers. Today, there are many factors that can delay that timeline. But in conversation after conversation, we continue to hear the same concern. How quickly can power be delivered to the chips? That is where Capstone simplicity becomes a meaningful advantage. As illustrated on this slide, there are essentially three primary requirements to bring our system online: a concrete pad, a natural gas connection, and an electrical connection. That's it. There are no extensive auxiliary systems requiring additional foundations, piping networks, or complex support infrastructure.

Because of our ultra-low emissions profile, customers can often avoid emissions abatement equipment and its ongoing costs. The result is a solution that is remarkably simple, clean, and fast to deploy. In a market where time to power increasingly translates to time to revenue, we believe that simplicity matters. Let's move on to our cost out case study on slide 7. I remember the first time I held an air bearing cartridge in my hands. The intricate EDM machining combined with a complex volute geometry produced on a five-axis milling machine was impressive. But when I asked our engineering team what it cost, the answer blew me away. More than $970 per cartridge. My immediate reaction was simple. There has to be a better way.

I challenged the team to run the component through our should-cost software. The team renegotiated with the incumbent supplier while simultaneously identifying, testing, and qualifying a second source. The result was a 57% cost reduction while eliminating a significant sole source supply chain risk. Simultaneously, we were able to lower product cost, reduce supply chain risk, and add capacity to support future growth. This is exactly what we mean when we talk about leaving no stone unturned in optimizing the business. With that, I'll turn the call over to John to review our financial results in more detail.

Thank you, Vince, and good afternoon, everyone. Before reviewing the individual outline items on slide 8, I'd like to provide some context around our first quarter performance. Q1 was another step forward in the ongoing improvement of our earnings profile. Although revenue decreased year-over-year due to lower product shipment volume and reduced rental utilization, we grew gross profit dollars, expanded gross margin by 8 points, delivered positive operating income, and recorded our fourth consecutive quarter of positive net income and ninth consecutive quarter of positive adjusted EBITDA. The margin improvement was driven by the sale of previously rented microturbine systems, which more than offset the higher service costs this quarter relative to last year. Our product cost reduction programs continue to strengthen unit economics, and our continued disciplined management of SG&A allowed nearly all the additional gross profit to flow straight to the bottom line.

Looking ahead, we're focused on sustaining the cost improvements, strengthening performance and service on rentals, and converting our robust commercial pipeline into revenue, earnings, and cash flow. Let's move to slide 9. Total revenue for the first quarter was $24.9 million compared to $27.9 million in the prior year period. Product and accessories revenue is $13 million compared to $15.7 million in Q1 fiscal 2026. The decrease primarily reflected lower product shipment volume. As a reminder, product revenue in any given quarter is influenced by the size and delivery schedules of individual customer orders. Rental revenue is $2.2 million compared to $4.2 million in the prior year period, primarily reflecting lower fleet utilization amid uncertainty surrounding oil prices. These decreases were partially offset by parts and service revenue, which increased 14% to $9.7 million from $7.9 million.

Despite the lower top line, gross profit increased 16% to $8.8 million from $7.6 million, while gross margin expanded approximately 8 points to 35% from 27%. The improvement reflected a favorable product mix, including the sale of previously rented microturbine systems, the continued benefit of our cost reduction initiatives, and the contribution from distribution services. Product and accessories gross margin increased to 31% from 8% in the prior year period. While the sale of previously rented systems provided a favorable mix benefit, the year-over-year improvement also reflected the impact of the product cost reductions we have implemented. Parts and service gross margin was 41% compared to 53% in the prior year period. The decrease reflected higher claims under our Factory Protection Plan contracts and increased shipments of our higher cost parts associated with warranty claims, partially offset by the positive contribution from distribution services.