ELON

Echelon Corporation (ELON)

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Echelon Corporation (ELON)

Q2 2010 Earnings Call Transcript

August 3, 2010 5:00 pm ET

Executives

Vanessa Lehr – IR

Bob Maxfield – President and CEO

Chris Stanfield – EVP and CFO

Analysts

Colin Rusch – ThinkEquity

Sean Hannan – Needham & Company

David [ph] – Wedbush Securities

Dale Pfau – Cantor Fitzgerald

Bheeshm Chaudhary – Deutsche Bank

Charles Fishman – Pritchard Capital

Brian Kremer – Roth Capital Partners

Joe Maxa – Dougherty & Company

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the second quarter Echelon Corporation earnings conference call. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session at the end of the presentation. (Operator Instructions) As a reminder, the conference is being recorded for replay purposes.

I would now like to turn the presentation over to Vanessa Lehr, Investor Relations. Please proceed.

Vanessa Lehr

Hello, everyone and thank you for joining us this afternoon for our second quarter 2010 earnings conference call. With me on today's call are Bob Maxfield, President 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 we issued a short time ago. If you would like a copy, please visit our website at echelon.com.

Before we begin, I would like everyone to know that in the third quarter, Echelon will be participating in Canaccord's Growth Conference on August 10th in Boston, Wedbush Securities' Clean Technology & Industrial Conference on September 14th in San Francisco, and Deutsche Bank's 2010 Technology Conference on September 15th also in San Francisco. As additional events are scheduled in the quarter, we will make other 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 report on Form 10-K and subsequent reports on Form 10-Q 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 the 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 will now turn the call over to Bob Maxfield.

Bob Maxfield

Good afternoon, everyone and thank you for joining us on our second quarter earnings call. I am pleased to report that in the face of an uncertain worldwide economy and skittish markets, Echelon performed above expectations.

The second quarter featured strength across all of our product lines, reflected in $27 million in revenues. While NES revenues were in line with our expectations with deployments to our Danish projects continuing on plan, revenue from LonWorks and Enel exceeded our forecast. Our LonWorks product line's strength came from increased activity in the building controls market in the face of the expected seasonal declines in the demand response market.

Given the higher mix of NES sales this quarter, GAAP gross margins declined from last quarter to 42.2%, while our GAAP net loss was better than our expectations at $6.9 million or $0.17 a share.

Now, I'll turn to a more detailed summary of the quarter, beginning with the LonWorks infrastructure product line. During the first half, the demand response market continued to be a highlight, though I will remind you that this is a seasonal market where systems are installed during the winter and spring to be ready to operate during the summer peak.

This summer, we saw a very visible example of our demand response solution in action. Those of you on the call from the East Coast are likely aware that there were near blackouts that were avoided during the recent heat wave in the region. This was thanks in part to Echelon power demand response systems, such as the one EnerNOC utilizes, which helps utilities shed power loads.

EnerNOC, which is one of our key customers in this market, uses our SmartServer to reduce energy demand at its customers' premises. EnerNOC has been highly visible and has announced that not only has its demand response solution helped to prevent problems in the most recent heat wave, but also that it was called upon to shed load over a dozen times by system operators from California to New York over the past month. Not only does demand response help keep the grid running, EnerNOC's customers get paid to shed load in times of need, making it a win-win solution for end users, the utility, and the grid.

We remain very excited about the role that demand response plays in the smart grid and Echelon's opportunity in this market. We saw continued activity in other energy related markets this past quarter, including intelligent street lighting and solar generation. We are currently engaged with over 15 partners using Echelon's technology in their street lighting solutions around the world and there are several projects in the pipeline.

Turning to solar generation, you may remember that we announced last year that SMA America was using our SmartServer to monitor the health of and the electricity generated by the panels in their solar arrays for service, reporting, and verification purposes. Since that time, we have seen other companies in the solar inverter market begin to migrate to our technology, with several evaluations and designs underway. As with street lighting, we are still in the early phases of this market, but we are building a strong foundation of what promises to be a high-growth industry.

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