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CPST: Its Strategic Cost Reduction Initiatives and Programs

IN FOCUS: CAPSTONE TURBINE AND ITS STRATEGIC COST REDUCTION INITIATIVES AND PROGRAMS

The alphaDIRECT Insight

During fiscal 2016, Capstone faced a significant short-term shift from high-growth mode into strong and challenging macroeconomic headwinds. The company had to adjust its model quickly and declare a “war on costs” by rapidly cutting costs and streamlining the business. With a stated final business model goal of $5.5M in quarterly expenses, Capstone has managed to cut its operating expenses by 42% during an 18-month period and is within $700k of its target run-rate. This type of strategic adjustment can present a number of challenges, but we believe this is a critical move by the company. Investors are intensely focused on the company reaching breakeven levels and we believe this can now be accomplished at a much lower revenue level than under the company’s previous model. The numbers confirm that Capstone has managed its cost reduction initiative well, but there are additional cost-cutting opportunities the company is capitalizing on. Today, Capstone is driving revenue growth from its Signature Series products, improving the product mix by moving away from oil and gas and focusing more on the service portion of the business, as well as lowering operating expenses on multiple levels. We expect all of these factors will help to improve margins as well. As Capstone moves into fiscal 2018, there is still work to be done, but we believe reaccelerating revenue growth will be critical over the next 18 months and, when combined with the lower operating expense margin, the company should be well-positioned to reach overall profitability and cash flow objectives.

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