ELON

Echelon Corporation (ELON)

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Echelon Corporation (ELON)

Q4 2010 Earnings Call Transcript

February 10, 2011 5:00 pm ET

Executives

Annie Leschin – IR

Ron Sege – President and CEO

Chris Stanfield – EVP and CFO

Analysts

Michael Horwitz – Baird

Elaine Kwei – Jefferies

Sean Hannan – Needham & Company

Mark Siegel – Canaccord Genuity

Mike Ritzenthaler – Piper Jaffray

Craig Irwin – Wedbush

Dale Pfau – Cantor Fitzgerald

Colin Rusch – ThinkEquity

Patrick Jobin – Credit Suisse

Carter Shoop – Deutsche Bank

Joe Maxa – Dougherty & Company

Charles Fishman – Pritchard Capital Partners

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Echelon quarterly earnings conference call. I would now like to turn the conference over your host for today, Annie Leschin.

Annie Leschin

Thank you, operator. And thank you, everyone, for joining us this afternoon for our fourth quarter 2010 earnings conference call. With me on today's call are Ron Sege, President 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 we issued a short time ago. If you would like a copy, please visit our website at www.echelon.com.

Before we begin, here are few calendar items that we have in the first quarter that Echelon will be participating in. First, the Jaffray’s Global Clean Tech Conference on February 23 in New York, next Pacific Crest Emerging Technology Summit on March 1 in San Francisco, and Canaccord Sustainability Forum on March 3 in Deer Valley, Utah. As additional events are scheduled, we will make other announcements.

As a reminder, during the course of this conference call, we may make statements relating to our business outlook, future financial and operating results, accounting matters, and overall future prospects. These are forward-looking statements 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 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, and guidance will not be updated after today's call until our next scheduled quarterly earnings financial release.

I would now like to turn the call over to Ron Sege.

Ron Sege

Thanks, Annie. And thank you, everyone, again for joining us today. I’m pleased to report that Echelon delivered on its promise of modest revenue growth for 2010 with a 7.5% annual increase. We ended the year with a particularly strong fourth quarter, slightly exceeding our guidance of $38.8 million in revenue and with a non-GAAP net loss of 4%. We are certainly encouraged by these results, but not satisfied.

I know that growth and profitability are top priorities for our investors and they are top objectives for me and the Echelon team as well. As you will hear on this call, we are making the hard decisions and taking the right steps to drive plus-20% revenue growth in 2011 and reach profitability in 2012.

Before discussing our results for the past quarter and year, I’d like to spend a few minutes reminding you of my view of Echelon’s differentiation and the markets we serve. I will then turn to steps we are taking to better align our operations to this view and then highlight progress we made in the fourth quarter. Finally, I will offer our view of longer term path to profitability.

My ongoing meetings with Echelon’s customers, prospects and partners have convinced me of three key points. First, the smart grid, or the reliable, survivable and instantaneous management of electricity, requires control networking, which is the unique core competency of Echelon. With the control network, data is collected and decisions are made at the edge of the network, which means maximum reliability, survivability and response time across a wide range of applications. The market worldwide now recognizes that the benefits of the smart grid result from control, a very important step beyond advanced meterings.

Second, the two markets we serve, utility and commercial, are converging as utilities around the world reach into buildings and homes and pursue new business models. Third, Echelon is uniquely positioned to benefit from this convergence because of the breadth of our control networking solutions, the range of applications they support, and the strength of our customer base.

As I talk to customers and partners, I am impressed again and again by the results our products are delivering. Our systems are performing extremely well, and utilities and commercial customers alike are very satisfied with the measurable return on investments they are receiving. Our challenge is that outside of customers and partners, too few know of our success. Great products and technologies do not sell themselves. So, as we have discussed previously, Echelon needs to invest more in marketing and sales to drive growth. Therefore, we will be intelligently increasing our spending in sales and marketing in 2011.

To achieve profitability and a balanced long-term financial model, it is necessary to offset this planned increase with reduction in other areas. Therefore, after a very careful strategic review, we have made the very difficult decision to reduce spending in engineering, operations, and G&A. Since the majority of our expenses are people-related, this is resulted in a reduction of approximately 8% of full-time equivalent employees. This was obviously a very tough decision, but the right one in order to fund our growing sales effort and to better equip the people selling Echelon’s innovative solutions.

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