ELON

Echelon Corporation (ELON)

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Echelon Corp. (ELON)

Q1 2009 Earnings Call

May 6, 2009 5:00 am ET

Executives

Annie Leschin - IR

Ken Oshman - Chairman and CEO

Chris Stanfield - EVP and CFO

Analysts

Dale Pfau - Cantor Fitzgerald

Bill Gibson - Nollenberger Capital

Min Xu - Piper Jaffray

Darren Conti - Wachovia

Justin Cable - Global Hunter Securities

Carter Shoop - Deutsche Bank

Joe Maxa - Dougherty & Company

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Echelon Corporation's first quarter 2009 earnings call.

I would now like to turn the call over to Annie Leschin, Investor Relations. You may proceed.

Annie Leschin

Hello, everyone and thank you for joining us this afternoon for our first quarter 2009 earnings conference call. With me on today's call are Ken Oshman, Chairman and Chief Executive Officer, and Chris Stanfield, Executive Vice President and CFO, who will both present prepared remarks.

By now you should have received a copy of the press release that we issued early this morning. If you would like a copy please visit or website at www.echelon.com. Before we begin, I would like to let everyone know that Echelon will be participating in the JMP Securities Research Conference on May 19th in San Francisco, the RBC Global Energy and Power Conference on June 2nd in New York and, the Deutsche Bank Alternative Energy and Clean Tech Conference on June 10th in Washington D.C. As additional events are scheduled in the quarter, we will make additional announcements.

I would like to remind everyone that during the course of this call, we may make statements relating to our business outlook, future financial and operating results, accounting matters and overall future prospects. These forward-looking statements are based on certain assumptions and are subject to a number of risks and uncertainties. We encourage you to read the risks described in our press release, as well as in our SEC reports including our 2008 report on Form 10-K for a more complete disclosure of the risks and uncertainties related to our business.

The financial information presented in this call reflects estimates based on information that is available to us at this time. Actual results could differ materially. Echelon undertakes no obligation to update or revise these forward-looking statements. Guidance will not be updated after today's call until our next scheduled quarterly financial release.

I'd now like to turn the call over to Ken Oshman.

Ken Oshman

Good afternoon. Thank you for joining us and for your interest and your investment in Echelon. With the ongoing slowdown and uncertain economic climate, it's challenging to look at the first quarter as a good one. Nevertheless, Echelon performed well in the phase of this difficult market.

Total revenue was $18.2 million, and at 43%, gross margins were above our expectations due to favorable product mix. Operating expenses also came in better than our target as we took steps to manage our costs and control expenses.

As a result, our net loss on a GAAP basis was $10.6 million, or $0.26 a share, beating our forecast. Our cash position remained strong at $87.7 million in cash and marketable securities with no borrowings.

In our LonWorks Infrastructure product line, we saw various levels of slowdown. From roughly 15% in the building automation and controls market to well over 50% in non-NES electricity meter manufacturing to a nearly complete stop in semiconductor manufacturing equipment.

It seems clear, customers are not only experiencing business slowdowns but also continuing to conserve cash and lower inventories.

While revenue this quarter declined in the LonWorks product line, overall, there were some bright spots. In March, we made a very important announcement for Echelon and the LonWorks industry. With the introduction of LonWorks 2.0, which is comprised of a new set of products including the FT 5000 Smart Transceiver, the Neuron 5000 Processor and associated tools.

These products provide lower cost, enhanced performance and improved ease-of-use. They are fully interoperable with the millions of existing LonWorks devices and they expand the market opportunity for LonWorks. We are receiving very good feedback from existing customers and new prospects. We expect to begin shipping sample chips later this quarter.

Another bright spot was demand response, as our revenue from this market grew more than expected. This continues to be an exciting area driven the increased national focus on the smart grid and alternative energy. Demand response applications remove consumption from the grid in times of peak usage.

Street lighting is another emerging area where we have a great deal of excitement, focus and attention. We've taken part in several demonstrations in North America, most recently in San Francisco with PG&E, and in San Jose, where the city awarded us a 125 light pilot project.

We've seen significant increases in the number of street lighting systems being planned across the country over the past few months. As cities face increased budget deficits and look for new ways to save cost and energy.

Though the business case alone is typically enough to drive these projects, there is still the question of capital availability. We are hearing that many city lighting departments hope to receive stimulus funds to accelerate their projects.

Interesting street lighting control is probably even more advanced internationally than it is in the United States. In China, our partners are pursuing street lighting trials in four cities, which they expect to install by year end.

In Europe, partners such as Philips Lighting, with its LonWorks based Starsense system continued to respond to RFPs and deploy pilot projects. To give you some sense of the size of this market, with roughly 200 million street lights worldwide and revenue to Echelon on the order of $10 a pole, this market opportunity is around $2 billion.

Read the rest of this transcript for free on seekingalpha.com