Echelon Corporation (ELON)

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Echelon Corp. (ELON)

Q2 2009 Earnings Call

July 30, 2009 5:00 pm ET


Annie Leschin - IR

Ken Oshman - Chairman and CEO

Chris Stanfield - EVP and CFO


Dale Pfau - Cantor Fitzgerald

Carter Shoop - Deutsche Bank

Elaine Kwei - Piper Jaffray

Justin Cable - Global Hunter Securities

Ben Schuman - Pacific Crest Securities

Joe Maxa - Dougherty & Company

Sean Hannan - Needham & Company



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

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

Annie Leschin

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

By now, you should have received a copy of the press release that we issued earlier today. If you would like a copy, please visit our website at www.echelon.com.

Before we begin, I would like to let everyone know that in the third quarter, Echelon will be participating in the Pacific Crest Conference on August 9th in Vale, Colorado, the Cowen Conference on September 10th in New York, and the ThinkEquity Conference on September 15th in San Francisco. 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 related 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 2009 report on form 10-K for a more complete disclosure of the risks and uncertainties related to our business.

The financial information presented on 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 or until our next quarterly scheduled financial release.

I would now like to turn the call over to Ken Oshman.

Ken Oshman

Good afternoon and thank you for joining us. We began the second quarter with modest expectations after what we hoped was the low point earlier this year. While the tide is no longer receding in a few of our key markets, the question of when and how quickly it will return is yet unanswered. The economic slowdown and credit tightening remain the most determining factors to the growth of our various markets.

Capital spending in most of our markets, from utilities to building automation has slowed. Ironically, the slowdown seems to have been exacerbated recently by the promise of governmental aid, particularly from the US stimulus package. Large or small, the grants have yet to make their way into the economy and the complex application and reporting process has only just begun.

The good news is that revenues improved from the first quarter lows to $22.6 million, and gross margins stayed high at 43%, even as the revenue increase came from our normally lower margin NES revenues.

Operating expenses also came in better than expected due to the timing of expenses and our continued management of costs. This led to a net loss on a GAAP basis of $9.5 million or $0.23 per share, beating our forecast. Our cash position remain strong at $82.5 million in cash and marketable securities, and no borrowings.

First, LonWorks infrastructure. LonWorks infrastructure products had roughly a flat quarter, as some of our larger markets continued their slide, while the smaller, emerging markets made up for a bit of the shortfall, presenting very real opportunities for future growth.

The largest market for LonWorks products, building automation, remained at the first quarter's weak levels. Down approximately 20% year-over-year, this market shows very few signs of improving any time soon given its ties to the real estate market.

Another of our LonWorks markets, semiconductor manufacturing equipment, seems to have bottomed, though we expect it may take a little time to translate back into orders for Echelon. It remains unclear what shape the recovery will take in this industry.

Finally, LonWorks sales to other electricity meter manufacturing companies are down 70% from last year. Overall, customers are taking a wait-and-see approach, conserving cash, and lowering inventories until they gain greater visibility.

We were however encouraged by the strength of some of our emerging markets, all of which are centered on energy management and control. As the need for the smart grid and energy efficiency becomes an international focus, demand response is at the forefront, as it shaves peak usage by removing consumption from the grid.

One of our customers, Voltalis, has made a noteworthy impact in the French press with its residential demand response system, thus far deployed in about 10,000 homes. Their system can save about one to three kilowatts of energy per home during peak demand or 10% of a customer's typical energy usage.

Surprisingly, the French energy regulator said that Voltalis should have to pay the utility for lost revenue. As you can imagine, this has created a huge public outcry, and the regulator has now indicated that it will look at new rules by year end.

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