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Executives

Anne M. Leschin

Ronald A. Sege - Chairman, Chief Executive Officer, President and Member of Stock Option Committee

William R. Slakey - Chief Financial Officer and Executive Vice President

Analysts

John Quealy - Canaccord Genuity, Research Division

Craig E. Irwin - Wedbush Securities Inc., Research Division

Benjamin Schuman - Pacific Crest Securities, Inc., Research Division

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

Echelon (ELON) Q4 2012 Earnings Call February 12, 2013 5:00 PM ET

Operator

Welcome to the Q4 2012 Echelon Corporation Earnings Conference Call. My name is John, and I'll be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded.

I will now turn the call over to Ms. Anne Leschin. Ms. Leschin, you may begin.

Anne M. Leschin

Thank you, operator. Hello, everyone, and thank you for joining us this afternoon for Echelon's Fourth Quarter 2012 Earnings Conference Call. With me on today's call are Ron Sege, Chairman and Chief Executive Officer; and Bill Slakey, Executive Vice President and CFO. Both of them will present prepared remarks. By now, you should have received a copy of the press release that we issued a short time ago. If you would like a copy, please visit our website at www.echelon.com. Additionally, we will refer to a set of slides that we have posted on the IR section of our website to help walk through the quarterly results and outlook for our market.

Now, I would like to remind everyone that during the course of this call, we may make statements related to our business outlook, future financial 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 can 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 financial release.

And now, I'd like to turn the call over to Ron Sege. Ron?

Ronald A. Sege

Thank you, Annie, and good afternoon, everybody. Beginning with Slide 3, we delivered revenue of $23.8 million for the quarter, which was in line with our expectations although below the $40.5 million we achieved in the fourth quarter of 2011. The year-to-year reduction was primarily result of the winding down of our Smart Grid installations with Duke in Ohio and Fortum in Finland, as well as the general lack of new smart meter awards in the industry. We saw a modest uptick in our Commercial business this quarter. Company non-GAAP gross margins improved nicely to 47.6% due to product cost improvements, favorable mix and some one-time benefits. We had a non-GAAP loss of $0.06 per share versus a loss of $0.03 per share in the same period last year. Put another way, Q4 2011 to Q4 2012, the Echelon team has reduced our quarterly operating expense by 20% or $3.5 million, while increasing our gross margins by over 600 basis points. These changes have dramatically improved our operating leverage and reduced the revenue we need to generate a profit for our shareholders. We were also pleased to end the year with more cash and investments than when we began. Overall, as the market starts to grow again, we are poised to benefit through additional operating leverage.

Moving onto Slide 4. Not unexpectedly, 2012 was a challenging year from an industry perspective. The Smart Grid market remains largely in a period of pause with just a handful of smaller awards being issued and many larger projects and even pilots being pushed out relative to earlier expectations. In the Commercial business, our entry into emerging markets such as street lighting continue to be promising, but not enough to compensate for slack demand and market share lost in our Building Automation business.

Despite lackluster markets, we had a number of key accomplishments this year. Our strategy to return to our roots as an embedded system supplier via our systems/sub-systems model has begun to pay dividends with momentum building in several new markets such as Brazil and China, where we would have been otherwise unable to participate. We also began to see traction with the positioning of our multi-application energy control networking platform, where one investment supports multiple applications such as metering, grid sensing, transformer monitoring, street lighting and more. We established a sub-system joint venture with Holley Metering in China and have begun pilots based upon its new meter and communication modules. We successfully implemented significant new cost savings initiatives throughout the company, and we have returned to gross margin levels not seen since the first half of 2011. While we remain optimistic that the broader Smart Grid market will begin to pick up later in the year and into 2014, it is imperative that we maintain the financial strength of Echelon. We have, therefore, made very tough decisions to continue to cut operating expenses by eliminating additional positions and by moving some activities to lower cost locations. Bill will provide more detail later.

Now, let me turn to a few highlights in each of our systems and sub-systems businesses. Turning to Slide 5. This quarter, we are benefiting from recent investments in extending our Grid product like to the needs of promising geographies. Through our partner, Caribbean Metering Systems, we began shipping a new range of ANSI meters to what we expect to be a 30,000-meter pilot by the Puerto Rico Electric Power Authority. Based in San Juan, this system will utilize our new meters, our Edge Control Nodes and smart Data Concentrators and our software to capture analytics. Echelon smart meters and sensors will allow customers to view energy consumption to increase awareness and reduce waste, while helping the utility to enhance service and limit non-technical losses. Over time, this win could represent a significant opportunity for Echelon.

Partnering with Telvent, we were also awarded a pilot in the Middle East this quarter based upon Echelon's new MTR 0600 meter from our Echelon-Holley joint venture. The longer-term goal of this project is to reduce significant non-technical losses and energy shortages that result in daily rationing. We are very encouraged by this pilot and believe that our joint venture meter will provide us entry into other important developing markets.

In other news this quarter, we began shipping to Basel, Switzerland, for a 25,000-meter rollout. Additionally, we are working with our partner Kapsch Smart Energy, a division of Kapsch Group to target utilities in Central Europe. Currently, Kapsch is using our smart meters at Stadtwerke's utility in Feldkirch, Austria. We also began a pilot with Kapsch in Vienna at Wien Energy, the largest Austrian utility. Over the next few years, we believe Austria could represent a roughly 5 million-meter market opportunity.

Finally, we were recently selected for the Smart Grid Gotland project in Gotland, Sweden. This demonstration project, developed in part of our customer, Vattenfall, will showcase the advantages of new Smart Grid technologies and how they can improve the power quality of large, reel [ph] grids. Echelon will provide its Edge Control Node, control operating system-based application platform and 3,000 advanced grid sensors that provide smart meter functionality.

Turning to our Grid sub-systems business on Slide 6. Since last November our joint venture with Holley Metering in China has won a number of new pilots for approximately 15,000 Holley meters embedded with Echelon's power line communication modules. Early performance data have been very positive and we are excited about our prospects in this region. In Brazil, we currently have 15 pilots up and running through our partnership with ELO. They are performing well and plans are in place to extend several of these to larger production systems in 2013 and beyond. Two of these pilots have already expanded with the announcement of the Eletrobras Parintins project and CEMIG smart energy project.

Eletrobras is a leading utility Latin America with over 3 million customers. They are currently running the Parintins City project, which is a 3400-meter pilot. We believe our unique solution, developed with ELO and incorporating both RF and PLC channels, was selected because of its proven ability to quickly and effectively sense tampering and operate securely. By the end of 2013, ELO will deploy another 12,000 meters as part of this project which, when complete, is expected to be approximately 102,000 meters.

CEMIG is the largest power company in Brazil, serving more than 7 million customers and 774 municipalities. This initial project is designed to determine the breadth and benefits of deploying future Smart Grid. Its primary goals including -- include motivating customer engagement through smart meter installation, education and monitoring. With 12 million total meters, these Brazilian utilities are expected to roll out expanded programs over the next several years. As other utilities begin smart meter projects, we expect to add additional pilots during 2013. Additionally, ELO has pilots operating in other areas of South America including Chile, Paraguay, Uruguay and Colombia.

Our sub-system strategy is also helping us to win business in other new territories. Recently, we began the first pilot utilizing our sub-systems with VIDCOM, a meter supplier based in South Korea. The roughly 5,000-meter pilot is in Tajikistan and will be deployed over the next 6 to 8 months. VIDCOM is also pursuing another opportunities based on our technology in Asia, Eastern Europe and the Middle East.

Finally, on the sub-systems front, I am pleased to report that we signed a new 2-year contract with Enel, under which we will continue to provide them technology for deployment throughout Italy. Also this quarter, we had live demonstrations of our multi-application grid edge platform in both Metering Europe and the recently completed DistribuTech in the U.S. We showed various endpoints performing metering, outage detection, theft identification, street lighting and transformer monitoring using our single platform.

Turning to our Commercial business, we saw some improvement in the Building Automation vertical this quarter and our street lighting activity continues to be promising. Our CPD 3000 outdoor lighting controller integrates previously discrete components to reduce installation and deployment cost, and it provides vital data to reduce energy use and operating costs. This product is seeing strong demand early in its life cycle so we are optimistic about its prospects. One of our new street lighting pilots in Jakarta, Indonesia, recently received great press coverage in the local news. This is the first street lighting deployment in that country. In addition to controlling lighting at night, the system will notify field personnel via SMS when lights are out or damaged. The customer estimates that power consumption will be reduced by 30% using our system.

Turning to Slide 7. As we move into 2013, we believe we have established a broad Grid product line and flexible go-to-market strategy. We have a number of pilots in key geographies around the world and are for the waiting the reacceleration of the Smart Grid market. We continue to believe that the underlying technology in both our Grid and Commercial businesses and our unique ability to create feature-rich embedded systems for very small, very low-cost devices are unique in our industry. Our embedded platform, toolsets and peer-to-peer device communication, system-on-a-chip, provide key advantages to our customers, including ease-of-use, security, flexibility and reliability. As we move through the year, we expect to shift our R&D spending a bit towards this foundational technology, while maintaining tight control over OpEx overall. We believe this investment will allow us to take advantage of the market transitions we see coming in Building Automation, lighting control and Grid product offerings. In particular, we believe the growing market interest in the so called "Internet of Things" for commercial markets based on IPv6 is driving a need for a communications and control layer that is analogous to HTTP and HTML on the web. Unlike the web, this intelligence layer must be optimized to operate in devices that are very small, very low cost and very power constrained. To underscore the market position that Echelon has in these emerging space, Connected World Magazine just named us to their "CW 2013 100", a listing of the most promising companies in the M2M business. We also recently won an award from Postscapes for our innovation in the 2012 "Internet of Things" in the Smart City application category. Finally, we were just named the Top Networking and Communications Company from Smart Metering U.K. and Europe.

In closing, we continue to believe that Echelon is unique in its advanced technology offering for both of our target markets, grid and sub-systems and we are increasingly focused on bringing these technologies to market in partnership with others. At the same time, it is imperative for us to protect our financial resources to be healthy and ready for the market upturn. And so we continue to make painful but necessary reductions in our operating expenses and headcount. Before I turn the call over to Bill, I would like to thank all of our employees for staying focused, supporting our very difficult choices and continuing to believe in and deliver to our vision. We have a passionate and committed team of professionals, and I appreciate their confidence in our strategy and our company. Bill?

William R. Slakey

Thanks, Ron. Good afternoon, everyone, and thank you for joining us. Before I begin, please note that all references to non-GAAP amount excludes stock-based compensation and restructuring charges. For ease of reference, we have prepared a complete non-GAAP statement of operations for the quarter ended December 31, 2012, which can be found in the Investor Relations section of our website.

Beginning with Slides 8 and 9, total revenues for the quarter were $23.8 million, down 41% from $40.5 million in the fourth quarter of 2011. Our projects at Duke in Ohio and Fortum in Finland are nearing completions, resulting in systems sales of $10.7 million versus $26.4 million a year ago. Sub-systems sales were $13.1 million, down from $14.2 million a year ago. Sub-systems sales for the quarter included $2.9 million in sales to Enel, compared to $2.1 million in the same period last year. For the year, total company revenues decreased 14% to $134 million. Systems revenue was $85.2 million, down 14% year-over-year, and accounting for 64% of total revenues in 2012. Sub-systems revenues were $48.8 million, decreased 14% year-over-year, comprising 36% of total revenues.

Moving to Slide 10. Non-GAAP gross margin for the quarter was 47.6% of sales, up from 40% of sales a year ago and 41.6% in the previous quarter. Fourth quarter gross margins included some one-time benefits from software and services revenue, which added approximately 100 basis points to our gross margin. Excluding that, our gross margins were still quite strong, increasing both sequentially and year-over-year. This improvement resulted from ongoing cost-reduction efforts, especially on our meters, lower fixed and departmental manufacturing costs and a revenue mix that included a larger proportion of Commercial sales.

Turning to operating expenses. Non-GAAP operating expenses declined 20% this quarter to $13.7 million compared to $17.2 million a year ago. This reflected our continued cost controls. Expenses were also down 3% sequentially. On a sequential basis, R&D decreased 8% to $6.1 million, sales and marketing expenses increased 4% to $4.5 million, G&A expenses decreased 4% to $3 million. Interest and other expense was $167,000 this quarter versus income of $129,000 in the fourth quarter of last year. This difference was driven primarily by changes in exchange rates and the resulting translation losses on our foreign currency intercompany balances.

Our joint venture with Holley in China generated a small loss for the quarter as we hired there in engineering and sales. The JV's results are consolidated in our results and Holley's share of this loss was $207,000, which as discussed in the past, is reflected as a slight benefit on our P&L.

Income taxes were $71,000 for the quarter versus $100,000 a year ago, leaning to non-GAAP net loss for the quarter of $2.7 million or $0.06 per share, compared to a non-GAAP net loss of $1.3 million or $0.03 per share in the fourth quarter of 2011.

For the full year of 2012, non-GAAP net loss was $4.7 million or $0.11 per share, compared to a non-GAAP net loss of $3.4 million or $0.08 per share in 2011. During the quarter, stock-based compensation expenses were $1.4 million compared to $2.9 million in the same period a year ago.

Moving to the balance sheet, on Slide 11. We ended the quarter with cash, cash equivalents and short-term investments of $61.9 million, having burned approximately $800,000 in cash during the quarter. Despite the sequential decline, we increased our cash and investment balance by approximately $3.2 million for the full year of 2012.

Finally, I would like to turn to guidance for the first quarter on Slide 12. We expect total revenue in the range of $24 million to $26 million. We anticipate a 50:50 split in systems and sub-systems revenue. We expect that non-GAAP gross margin will decline sequentially due to the absence of one-time benefit and be in a range of in 45% to 46% of revenue, still a very solid expected margin for us. We anticipate that first quarter operating expenses will increase from Q4 to a range of between $14 million to $15 million. This is the result of an increase in spending in our joint venture in China, the typical increase in payroll taxes following the start of the year and an increase in R&D expenses related to timing of specific projects.

As Ron discussed, we have made the decision to take additional steps to reduce our operating expenses. This will involve a reduction in current headcount of approximately 15%. These reductions will take place over the next 12 months. Financially, we will see a small benefit from these actions in Q1 with a larger benefit in Q2 and beyond. The reduction in headcount and other expenses will be primarily in R&D, G&A and in manufacturing costs. In sum, we expect these efforts combined with steps we have already taken will allow us to reduce our quarterly operating expenses on a year-over-year basis throughout 2013. As a result of these actions, we expect to record a restructuring charge of $2.5 million to $3 million in the first quarter.

In sum then, we estimate that our non-GAAP earnings per share for the first quarter, excluding stock comp and the restructuring charge, will be a loss of between $0.06 and $0.11 per share. We expect our GAAP loss per share to be between $0.16 and $0.21 per share, including approximately $1 million in stock-based compensation and a $2.5 million to $3 million restructuring charge.

I would now like to turn the call over to the operator for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from John Quealy from Canaccord Genuity.

John Quealy - Canaccord Genuity, Research Division

So just a couple of housekeeping first, please. Did you guys say the guidance includes the charge or excludes the charge for Q1? I'm sorry.

William R. Slakey

The non-GAAP guidance excludes the charge and the GAAP guidance includes the charge.

John Quealy - Canaccord Genuity, Research Division

Got you. Okay. And then in terms of the gross margins, I'm insinuating from the commentary that 47% excluding, sounds like you have a 100-basis-point lift on some discrete items. But the 47% range, it seems like it's at least the level that you can work towards moving forward. Are we past the worst of the gross margin in your model or how should we think about that?

William R. Slakey

Well, I think our guidance for Q1 is 45 to 46 points John, and I think, that's a representative rate going forward. It will be driven by a shift in mix. As meters become a bigger part of the mix, the gross margin, as a percentage of revenue, will come down a little bit. But I think it's representative of what we're able to do right now.

John Quealy - Canaccord Genuity, Research Division

And in terms of your forecast, I know you don't give full year guidance, but if we look at the top customers last year in '12, Telvent slashed forward at $40 million, Duke at $18 million. Can you give us an indication, are those 0 in '13? Or how should we think about the relative magnitude of '13 visibility on those two accounts?

William R. Slakey

Yes. No, they're definitely not 0. But they're in the $5 million to $10 million ranges.

John Quealy - Canaccord Genuity, Research Division

Okay. And then lastly, on terms of sort of the numbers -- sorry to be grilling you here. Where do you -- post-headcount reduction, where do you stand employees by function? Can you break it out G&A, R&D, that type of thing?

William R. Slakey

I can't break it out for you on this call, John. Total headcount will be in the -- excuse me, the breakout will be in the 10,000. Total headcount after we're through with this will be in the range of about 200 to 210 employees in total.

John Quealy - Canaccord Genuity, Research Division

Okay. And then, Ron, a couple of questions for you more market-facing. First, as you talk about the R&D platform in a couple of different areas that you're exploring, how close do you get to the line where you cut into some muscle here with some of these strategic cuts to keep cash flow preserve? But yet, there's a lot of things that this platform can do, so walk us through your strategy and what you're looking for to make sure that you can keep R&D which has been a pretty strong part of Echelon's history intact.

Ronald A. Sege

And I guess, first thing I'd say, you'll see the breakout of headcount, John. But we've worked very hard to balance the cuts with ensuring we have a sustainable platform going forward, and intercepting a long-term model that has the appropriate ratio of R&D investments to revenue. And while it's true we've got a rich heritage, over the last couple of years we've spent too much in that area. So we think we're striking the right balance. We're not cutting in the muscle, and in fact, one could argue by redirecting some of our investment into the core, the foundational technology as I call it, they were actually reinvesting in muscle, if you will. And the whole sub-system strategy is to try to get out from under so much investment in sheet, metal and plastic by focusing on sub-systems with guys like ELO and by moving some of our packaging -- the system business over to our joint venture. So I guess the sum would be, I would say, we're investing a much greater percentage of our remaining R&D in muscle. Does that make sense?

John Quealy - Canaccord Genuity, Research Division

Yes, that's perfect. And then 2 questions, market-facing. On the PREPA pilot, does this have anything to do with the old Aclara, DCSI power line carrier? I think they deployed pretty ubiquitously 5 or 6 years ago. So can you comment a little bit what you're trying to do here? And then I have a question. I don’t know if you saw recently Turkey made some announcements along with the U.S. government about trying to be very, I would say, accelerated in the grid investment, generations endpoint. If you can comment about what you see about that opportunity?

Ronald A. Sege

Sure. And then, I just -- on the second first, we saw that news. We've been tracking it and we're in the process of getting more color on it. But it certainly is in our wheelhouse in terms of -- where in the world, we are focused from sales and marketing perspective. On the PREPA opportunity, yes, generally it is part of a process of modernizing the grid investment that included that old Aclara stuff, and it's the beginning of a long process. It's a nice pilot but a relatively small one relative to -- but we think the long-term opportunity is there. So we're actually quite excited about that. It is quite a competitive thing and we're pleased to be piloting there.

Operator

Our next question comes from Craig Irwin from Wedbush.

Craig E. Irwin - Wedbush Securities Inc., Research Division

First question I wanted to ask, you've given us some great granular information on the projects that you're pursuing out there, everything from PREPA to Kapsch traffic and then what you're pursuing with Telvent, some stuff in the Middle East. But from a big picture standpoint, can you quantify for us roughly what your target pipeline is right now, whether or not you've seen that expand in the last year? And how you expect to see potential changes in visibility in this pipeline or what you're looking for over the next handful of quarters?

Ronald A. Sege

Well, okay, I'd say we commented on pipeline in the past. We worked hard to build it in our target markets. I would say, frankly, it's been relatively stable in the last year or so. We're not tracking a lot of new opportunities, I would say. And I would say the opportunities that we are tracking have been moving to the right, primarily because of mandates getting pushed out or weakening as in Brazil or just macroeconomic pressures, meaning governments have put their attention elsewhere. So it's not -- as you know from the industry, Craig, it's not that deals are being lost or canceled. They're just not closing. And I'd say we don't have any more visibility today than we did a year ago or six months ago. I wish we did, but it's a political process. It's dependent on obviously fundamentals like theft and shortage of electricity and so on. And also these are political decisions that are dependent on governments feeling, like they can either tap an unfunded mandate along to a consumer or use stimulus dollars. And those are just impossible to predict. I'm pleased that the level of pipeline activity and just what we were able to talk about today in the prepared remarks because pilots lead to wins, and wins lead to deployments. So I would say that our pilot activity is increasing and that gives me modest optimism that the market will pick up later in 2013 and into '14. But it's a hazard to be definitive in this market.

Craig E. Irwin - Wedbush Securities Inc., Research Division

Okay. So then if at some point this year, you were to see one of your larger targeted opportunities actually materialize as a bookings and to start generating revenue on this project, would you potentially see much of a change as far as your budgeting for SG&A? I mean, would you need to potentially ramp up your OpEx to serve anyone of these significant opportunities that you're targeting now? Or would you likely maintain expenditures until you see greater visibility on some of the other opportunities out there?

Ronald A. Sege

So let me start, I'll let Bill answer. But Craig, we worked incredibly hard and it's been incredibly painful to lower the OpEx, improve the gross margins in the last couple of years. And rest assured that we will not give that back that ground easily. So this management team is very focused on creating leverage. I'd also say that our business model of focusing more on sub-systems and being very careful as to how we invest in systems means that our R&D, sales and marketing and G&A are more leveraged. So partnering with ELO, for example, we don't have to invest in designing sheet metal and plastics. It's the same board that we sell the VIDCOM and so on. So with the fundamental shift in strategy we're embarking on here means that we'll be able to get a lot more leverage out of $1 of OpEx. So Bill, I'm sorry.

William R. Slakey

Your question, Craig, if I could jump in here. So we've scoped the company now to be in a breakeven level of somewhere between $120 million to $130 million of annualized revenue. And what you ought to expect is that we will be very, very, very conscious of cost controls until we've reached profitability and gone through that level a little bit. At that point, we'll look to add expenses. And I think you're right, they're probably going to be in the sales and marketing area, because I think for all of those dominoes to come together well, that large pipeline we're tracking will be starting to close, and that will be the signal that a little more dollars in SG&A can drive the top line.

Craig E. Irwin - Wedbush Securities Inc., Research Division

Last question, if I may. 10 years ago, Echelon was not talking about some of the things like demand response and street light controls. Those are new applications that have been really good opportunities for you over the most recent several years and still growing nicely. Can you talk about any applications that you're serving now that you think are particularly interesting or exciting further growth potential over the next handful of years?

Ronald A. Sege

Well, you mentioned one, which is street lighting. And as we've said in our prepared remarks, there are real tangible specific short term savings associated with investing in control systems there. We remain excited about the low voltage grid metering, as well as distribution automation. And at some point, utilities have to invest aggressively there, particularly as economies start growing and distributed generation and so on, come online. So that's the second area that we will continue to invest in cautiously and we've got to time it with the market. And then the third, as I mentioned in my prepared remarks, is this transition to IPv6 and a streamlined version of the IP stack that's optimized for a very low cost, very low power devices, we see as the trend developing over time. Today, very high in thermostat. It has a Wi-Fi radio embedded in it. And as a result, it's fairly expensive, fairly complicated and consumes a lot of power. And there are many household devices that can't be connected to an "Internet of Things" because there's no low-cost, low-power radio. And we see that as a potentially very exciting opportunity for Echelon over the next number of years. We're starting to invest in that. That will take a while. Design cycles take a while and then will take a while to ramp up. But certainly over the next 3 to 5 years, we're quite enthusiastic about that trend.

Operator

Our next question comes from Ben Schuman from Pacific Crest Securities.

Benjamin Schuman - Pacific Crest Securities, Inc., Research Division

Can you talk about where you sit from a management and board standpoint in terms of potentially selling the company? And given that you have great technology, a nice gross margin relative to most of your competitors, but hard time needed to scale as a standalone company. And also, all this talk about the "Internet of Things", I would think there would be an uptick of interest, if you can comment on where you've seen that?

Ronald A. Sege

Ben, obviously, I can't comment on that. Our job is to run the business as a separate and going concern, and that's what we're focused on. Obviously, we're a public company so anybody can buy our shares at any point, but beyond that, I can't comment.

Benjamin Schuman - Pacific Crest Securities, Inc., Research Division

Okay. Great. And then when you talk about the broader "Internet of Things" opportunity, is that primarily a physical layer opportunity for Echelon or could you look into getting applications in that area as well?

Ronald A. Sege

Well, I'm not sure what you mean by physical layer there. There's actually -- the whole -- the same stack -- that 7-layer stack that exist in the Internet also exists in kind of the "Internet of Things" or controlled networks. And as you know, we've got great expertise in both. We've got physical layer expertise with our power line -- with range of power line and FT products, but we also have the whole LonWorks heritage, which as I said in my prepared remarks, is really sort of analogous HDTV. It's the metadata, if you will, that allows devices to easily connect and configure and share information, and that's really the foundation and heritage of Echelon, our know-how and our intellectual property. And updating that, so it fits into an IPv6 world, is that's largely a software and a protocol thing as opposed to a physical layer thing. Will we build iPhone applications? No. Will we enable those kinds of applications to be very powerful and take advantage of all the stuff that the web gives you? Absolutely. Does that answer the question?

Benjamin Schuman - Pacific Crest Securities, Inc., Research Division

Yes, absolutely. So you're talking about pouring over LonWorks site server and all that stuff to this new kind of IPv6 world versus just selling transceivers to industrial customers?

Ronald A. Sege

So, yes. I mean, that's the general idea. And obviously, more details will be forthcoming over time.

Benjamin Schuman - Pacific Crest Securities, Inc., Research Division

Okay. Great. And then just one more for me. Are there any big systems deal in the Q1 guidance that are going to be -- gone away and move through the year and creating a headwind or can you kind of maintain that level through the year without any big significant system wins?

William R. Slakey

Yes. Well, Ben, so the guidance for the quarter is flat top revenue and that's the first time we've been able to say that for a few quarters. So I think that's the positive step. We don't yet have enough visibility to the rest of the year to give you guidance on the rest of the year. But in terms of big deals or things that are creating headwinds, the Telvent and Duke revenues have ramped down quite a bit, so those aren't nearly the headwinds that they have been in terms of being able to maintain or grow this revenue level.

Operator

Our next question comes from Pavel Molchanov from Raymond James.

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

A question about Holley. So it's good to see that you guys are making some progress, boosting headcount there. But when is the earliest that we can realistically see some meaningful revenue coming out of that JV?

William R. Slakey

Well, we're in pilot now and as we've previously indicated, it will be meaningful through the course of this year. That's for revenue on a sales basis into China. And then as you know, the other half of the JV is about building new meter forms for us to sell into the rest of the world. And we now sold our first version of that meter, the MTR 0600 into our opportunity in the Middle East. So that also -- that revenue stream will be modest but will ramp up through the year as well.

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

Okay. And then you referenced some of the European markets, Austria, where you have some decent visibility. What about the U.K.? It's -- I don't think that's an area where you guys have historically been very active, but talk of potentially a 60 million-meter rollout over the next 5 years? Is there room for you guys there?

William R. Slakey

It's not conducive to power line technology. So the sort of architectural standard there is really centered around RF. So it's not a natural place for us to participate. But being the scrappy competitor that we are, we're looking for a variety of ways in, including potentially through our joint venture partner.

Operator

We have no further questions at this time.

Ronald A. Sege

Okay. Great. Well, thank you, all, very much, and we'll talk to you all soon. Have a great evening.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

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