Echelon Corporation (ELON)

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Echelon (ELON)

Q2 2011 Earnings Call

August 04, 2011 5:00 pm ET


Ronald Sege - Chief Executive Officer, President, Director and Member of Stock Option Committee

Oliver Stanfield - Chief Financial Officer, Principal Accounting Officer and Executive Vice President of Finance

Annie Leschin - IR


Michael Cox - Piper Jaffray Companies

Carter Shoop - KeyBanc Capital Markets Inc.

Benjamin Schuman - Pacific Crest Securities, Inc.

Benjamin Kallo - Robert W. Baird & Co. Incorporated

Craig Irwin - Wedbush Securities Inc.

Elaine Kwei - Jefferies & Company, Inc.

Colin Rusch - ThinkEquity LLC

Patrick Sullivan

Sean Hannan - Needham & Company, LLC

Dale Pfau - Cantor Fitzgerald & Co.

John Quealy - Canaccord Genuity

Unknown Analyst -



Good day, ladies and gentlemen, and welcome to Echelon's Second Quarter 2011 Earnings Conference Call. [Operator Instructions] I would now like to turn the presentation over to your host for today's call, Ms. Annie Leschin. Please proceed.

Annie Leschin

Hello, everyone, and thank you for joining us this afternoon for our Second Quarter 2011 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. Additionally, this quarter, we are going to refer to a set of earnings slides that we have posted on the IR section of our website to help walk through the quarterly results and outlook for our markets.

Before we begin, I would like to let everyone know that in the third quarter, Echelon will be participating in Canaccord's Growth Conference on August 9 in Boston; ThinkEquity's Growth Stock Conference on September 13 in New York; Wedbush's Clean Tech Conference on September 15 in San Francisco; and Credit Suisse's Future of Energy Conference on September 27 in New York. As additional events are scheduled in the quarter, we will make other announcements.

Now I'd 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 those 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 the estimates based on information that is available to us at this time. Actual results could differ materially. Echelon undertakes no obligation to update or otherwise 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 Ron Sege. Ron?

Ronald Sege

Thank you, Annie, and good afternoon to everyone. I'm pleased to report that we continue to make progress on the goals we have laid out for the company at the start of this year, including higher growth and sustained profitability. Strong execution in our utility markets this quarter grow strong top line revenue of $43.8 million, an increase of 54% versus the first quarter and 62% year-over-year, well ahead of what we believe to be current market growth rates. We also delivered non-GAAP profitability of $0.05 per share this quarter.

Given our momentum in the first half of this year, we are confident in our outlook for a strong growth in 2011 and are raising our guidance for year-over-year revenue growth to 35% to 40%. Though an increase in contract manufacturing cost for our Utility products will limit our ability to maintain profitability for the remainder of 2011, our outlook for full year profitability in 2012 is intact as we implement plans to reduce product cost through design refinements and other activities.

Although early days, our go-to-market strategy of focusing on vertical segments and geographies with the right fundamentals for growth is starting to show results. We are increasingly active in areas of the world where energy supply cannot meet demand, government mandates are strong and fast and lack of consumer limit utility operations. Our strong market position in northern Europe, bolstered by new wins this quarter, provides a great foundation for focusing eastward. And our performance and experience with customers there will be invaluable as we move into Latin America and Asia.

I'm very excited about our new partnership with Holley Metering to introduce Echelon's smart grid communications and control technology to the Chinese market. China fits all our criteria for a hot market, and Holley is a clear leader that expects to ship 10 million meters this year alone. The proven reliability of our power line components and the unique capabilities of our Echelon Control Nodes and Control Operating System, COS, will further differentiate Holley's offerings and accelerate its penetration of the market.

Now let's turn to our market updates. We had a number of new wins in our utility markets, and I'd like to highlight 3 of them. These wins illustrate the power of our multipronged sales strategy of offering system solutions, subsystems and components and leveraging partners based on the needs of the market.

The first project I will highlight is our resent NES win in Norway. Through our partner Telvent, Echelon was awarded a contract with Fortum Norway for 100,000 meters, with volume deployments beginning in August of 2013. Fortum has the option to expand the Echelon system with our recently announced power line interface to in-building devices. Powered by our COS software, this interface allows utilities to easily and reliably connect to devices such as in-home displays and load controllers.

This announcement represents the first significant smart meter award in Norway, which is a $2.6 million meter market. Similar to much of Europe, Norway recently issued a mandate requiring utilities to begin deploying smart metering systems. The mandates sets a high bar for minimum system functionality, enabling a feature-rich system such as ours to shine.

We also had a small but important win in Denmark this quarter with the potential to reach a much broader utility audience. Though I can't share all of the details with you at this time, what is particularly compelling is that our partner will host our system software using their IT infrastructure and operate it as a cloud service to other utilities. About 1 million of Denmark's 3.3 million meters are spread out over 105 utilities. These smaller utilities will benefit from the leverage of a cloud-based solution.

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