Echelon Management Discusses Q1 2013 Results - Earnings Call Transcript

May. 3.13 | About: Echelon Corporation (ELON)

Echelon (NASDAQ:ELON)

Q1 2013 Earnings Call

May 02, 2013 5:00 pm ET

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

Sean K.F. Hannan - Needham & Company, LLC, Research Division

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

John Quealy - Canaccord Genuity, Research Division

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

Operator

Welcome to the First Quarter 2013 Echelon Corporation Earnings Conference Call. My name is Elena, and I will 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 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 First Quarter 2013 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 whom 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 quarter's results and outlook for our market. During the second quarter, Echelon will be participating at the Deutsche Bank Clean Tech, Utilities and Power Conference in New York on May 14. As other events occur, we will make additional announcements. 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 reports 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 on this call reflects estimates based on information that is available to us at this time. Actual results may differ materially. And Echelon undertakes no obligation to update or revise these forward-looking statements and guidance 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 thank you, all, for joining us. Beginning with Slide 3, we delivered revenue of $25.2 million in the first quarter, in line with our expectations and up slightly from last quarter although below the $40.3 million in the first quarter of 2012.

With a renewed focus on product cost reduction and increasing efficiency in manufacturing operations over the last few quarters, non-GAAP gross margins maintained their strong levels at 47.4%. Together with our operating expense reductions, these efforts have created a significantly more leveraged financial model, which led to a non-GAAP loss of $0.04 per share, significantly better than our expectations. As Bill will discuss, we had a restructuring charge during the quarter related to our workforce reduction and a $3.5 million charge for the settlement of a bankruptcy case in the Italian courts with Finmek, a supplier to Enel.

Moving onto Slide 4. We continue to make progress with our grid business strategy as evidenced by our increasing pilot and partner activity. We continue to expand our network energy services or NES systems product line to enable us to serve a broader range of geographies from Norway to Poland to the Middle East. Finally, to improve grid customer ROI and expand our target markets, we are broadening the applicability of NES to support a range of applications and operational analytics. This includes Smart metering and sensing, transformer monitoring and fault protection and isolation. These moves should further differentiate us as grid markets reignite. As I mentioned on our last conference call, we have now started to carefully reinvest in our foundational technologies. Combined with our proven existing solutions, this should allow us to participate in several important transitions in the commercial lighting and building automation markets. These include the move to solid state or LED lighting and that trend to connect autonomous control systems, or what we refer to as communities of devices, to the Internet creating the so called Internet of Things. We particular believe that Echelon's core technology is differentiated in terms of reliability, integration of legacy protocols into IPv6 and ease of installation, commissioning and use. Turning to our grid systems business on Slide 5. We continue to target areas with the best business cases for utilities and with sources of funding for meaningful projects. In some cases this has taken us into new regions like the Middle East and Eastern Europe but in all cases, the activity we are currently seeing is the result of sometimes years of efforts in working with these tenders and investing in partnerships with system integrators.

We've experienced steady pilot activity and saw a small few Smart Grid awards issued recently, leaving us slightly more optimistic about our pipeline visibility and conversion, especially as it relates to project that can be meaningful in 2014. In the Middle East, based on the success of our pilots, we are increasingly confident in our ability to win deals that can lead to deployments with a potential to add in excess of $10 million to 2014 grid revenue. In general, countries with this -- in this region suffer from inefficient electricity distribution systems and large amounts of theft. Pricing can be challenging therefore our recently introduced NES-compatible meter, from our joint venture with Holley, will be very valuable in these engagements. In Eastern Europe, specifically Poland, utilities are now required by law to convert 80% of their customers to smart meters by 2020. In 2013, we expect 3 significant RFPs to be issued, where we have already won small pilots. We hope to capture a substantial share of this market through the sales of our complete NES system and through partners via our subsystem strategy. These deals in Poland could total as much as $35 million to $45 million for us over time. Turning to Russia, the political situation appears to be stabilizing after the recent elections and we expect a number of small orders through our partner, EAC. This gives us more optimism that larger orders will follow later this year and into 2014. Recently, EAC was elected for a pilot in IKEA stores located in Samara, Russia's sixth largest city. This pilot is part of IKEA's sustainability effort as it works to minimize the impact of the emissions from their stores on the environment. The pilot we utilized Echelon's advanced grid sensors providing smart submetering functionality to monitor and reduce energy consumption. While not an enormous deal, it highlights the potential to expand NES to submetering applications. Overall, we are optimistic that Russia could return to previous revenue levels of $5 million to $10 million in 2014. Finally, this quarter, Ericsson, one of our VAR partners in Europe, announced that it would start to operate the Smart Metering system for E.ON, Sweden's largest utility. As a part of this program, Ericsson plans to offer E.ON the latest version of our NES system software for over 400,000 existing Echelon smart meters. This will add features including remote upgradability and remote monitoring of network conditions to prevent and predict outages. We expect this deal could add modestly to our revenue in the second half of 2013, demonstrating the value of our installed base to deliver follow-on software and services revenue. Turning to our grid subsystems business on Slide 6. Our subsystems partner program is continuing to expand. In China, our JV developed communication modules are performing well in pilots, yielding read rates far above competing products. We continue to increase our piloting activity this quarter and hope to see more awards as we get through the piloting phase. Just recently, we were awarded a 25,000-unit project with the Heilongjiang province. In Brazil, our pilots at CEMIG, Electrobras, CELESC and COELBA continue to perform well and grow with several potential expansions into larger system rollouts anticipated in 2014 and beyond. Although Brazil is rolling out more slowly than we had hoped, we believe our ongoing commitment to this region and our strong partnership with ELO will pay off as this market inevitably develops. In the Polish market, both GE and Mitsubishi are planning to offer utilities NES-based smart meter solutions using Echelon's technology. Mitsubishi also plans to offer its Echelon-based Smart Metering solutions throughout Asia and the rest of Europe, illustrating the power and openness of our subsystems, our partner, Gorlitz, in Europe, successfully integrated a Landis+Gyr meter into an NES system. The speed to market and functionality that our NES subsystems provide are critical to expanding both our partners and our global presence.

Turning to Slide 7. In our commercial business, we see important transitions occurring in lighting and building automation. With our technology's established brand and distribution channels, we believe we have an important role to play in the connecting of millions of devices via legacy autonomous control networks in the Internet of Things. We have spent the last few years advancing our LonWorks protocols for grid applications, now we plan to add IPv6 support to more easily allow legacy control networks to share information via the Internet. By expanding beyond LonWorks to embrace multiple protocols, including BACnet in the building automation space and others in lighting controls, we can significantly improve the flexibility and ease of use for our customers as legacy networks migrate to the Internet of Things. Finally, we expect to add wireless support to our systems to expand our addressable market. As a result, we can offer our customers a platform upon which to bring their legacy control systems into a world where devices are connected ubiquitously to each other and can take advantage of a wide range of exciting new applications. The core technology is behind controlling a community of devices applies equally well to the grid as to lighting, buildings and other areas. This positions us in exciting growth markets potentially doubling or tripling our TAM.

Let me give you an example in the context of the future office area. When someone walks in, a motion sensor could start turning on lights at the entrance then trigger a sequence of lights to turn on along the path, finally turning them off again behind. This motion sensor could work in conjunction with the daylight harvesting sensor to optimize lighting, HVAC and security systems to the needs of the individual user under the control of an application connected via the Internet. To ensure a maximum reliability at minimum cost, this would require a multi-vendor network of these devices to be able to collaborate with each other without any real time remote oversight relying instead upon peer-to-peer intelligent device communities. To make this vision pervasive, this network of devices would need to be easy to physically install, commission use and maintain while also being compatible with legacy devices and supporting Internet protocols.

On Slide 8, we are already seeing movement towards this vision in outdoor lighting where our wins are highlighting the transition towards LEDs in the critical role that controls are playing. In the Guangdong province in China, through our partner Rongwen, we are implementing a community of 48,000 LED streetlights that can be individually controlled. Rongwen provide the LED fixtures and management software and will implement its system using Echelon's smart transceivers and segment controllers. These controlled streetlights should be able to reduce energy cost and carbon emissions by 2x to 3x with controls providing 30% more savings than using high-efficiency LED light alone. This project will be among the largest installation of individually controllable LED streetlights in the world, and Rongwen estimates that this project should expand to more than 100,000 lights in 2014. In Japan, Echelon-powered solutions are now running in 5 major cities. Our partner, ITOCHU, has installed systems in the city of Kobe. Our other partner, Mitsui, has installed systems in the city of Higashi Matsushima, part of the earthquake damaged regions of Tohoku and on the campus of Hiroshima City University. In Hiroshima, the move from high-pressure sodium lamps to dimmable LEDs is lowering electricity usage by more than 50% annually and is expected to save approximately $240 per year per lamp. This system can also be used to dim lights based on whether our traffic patterns offering an additional 20% to 30% savings. This street lighting deals alone can represent several million dollars of revenue to Echelon over the next 2 to 3 years and based on pipe research estimates for the overall street lighting controls market, the market may reach $2 billion per year in this decade. To further extend our presence in outdoor lighting, we recently announced the partnership with OSRAM, one of the leading light manufacturers and a wholly-owned subsidiary of Siemens. OSRAM plans to offer lighting system using Echelon's transceivers and segment controllers across a range of luminaires from LEDs to induction lightering. Our core technology also continues to remain a vital enabler of building automation systems. We just announced that Schneider Electric reaffirmed its commitment Echelon technology and is transitioning its MicroNet series of controllers to our latest generation of smart transceivers to reduce installation complexity and cost. Given the attractive return on investment associated with building energy management, we estimate that the market for commercial building automation systems will double over the next decade, increasing from $3.6 billion in 2011 to $7.3 billion by 2021. Finally, illustrating the value and ease of installation of our technologies, we were awarded an important patent this quarter for what we call interoperable self installation, which is a simple way to install and configure a community of devices on a controlled network. Additionally this quarter, we filed 9 patent applications to build upon our existing portfolio of 105 granted patents. In summary, we have been working hard to create a leverage business model and to stay true to our strategy in the grid market. Our grid product line is broadening and our go-to-market strategy gives us extended market coverage at low cost. We have well performing pilots in key geographies around the world that we hope will drive our business in 2014 and beyond. In our commercial markets, the evolving trends towards connected -- connecting communities of devices via the Internet should drive the reacceleration of that business as we bring new solutions to market later this year and into next. With our solid balance sheet and the ongoing streamlining of our business, we plan to carefully balance our investments with necessary expense controls and position Echelon to deliver solid profitability as our markets accelerate. I would like to thank all of our employees for the progress we are making with our strategy. We have a passionate and committed team of professionals, and I appreciate their confidence in our strategy and in 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 amounts exclude stock-based compensation, restructuring charges and costs for legal settlements. For ease of reference, we have prepared a complete non-GAAP statement of operations for the quarter ended March 31, 2013, which can be found on the Investor Relations section of our website.

Beginning with Slides 10 and 11. Total revenues for the first quarter were $25.2 million, up 6% sequentially on slightly higher system sales compared to Q4. Total revenues were down from $40.3 million in the first quarter of 2012. System sales were $13.4 million versus $28.7 million a year ago. As you can see in our large customer information on Slide 16, systems revenue was down year-over-year due to the winding down of projects by Duke and Telvent. Subsystem sales for the quarter were $11.9 million, up slightly from $11.6 million a year ago. Subsystem sales for the quarter included $1.9 million in sales to Enel compared to $227,000 in the same period a year ago. Moving to Slide 12. Non-GAAP gross margin for the first quarter was 47.4%, up from 43.6% a year ago and in line with the 47.6% reported in the previous quarter. Our continued strong margin performance was the result of the ongoing value engineering of our products that we began more than a year ago, our recent restructuring activities to further lower cost, and reductions in inventories in reserves. We expect many of these factors will continue in the second quarter. Non-GAAP operating expenses for the quarter were $13.9 million, a reduction of 17% from $16.8 million a year ago and reflecting our continued emphasis on improving the operating leverage in our financial model. We estimate that our non-GAAP breakeven level is now approximately $120 million to $130 million in annual revenue, a significant improvement from $160 million a year ago. This improved leverage should be very valuable to us as the market for Smart Grid products begins to improve. On a non-GAAP basis, R&D expense for the quarter was $6.2 million, sales and marketing expense was $4.2 million, and general and administrative expenses were $3.5 million. The reduction in non-GAAP operating expenses includes a partial benefit from the restructuring activities we announced in February. The full benefit will be realized in the second half of the year as some of our employees who were affected by the reduction and forced to finish their transition period. The total cost of the restructuring is estimated at $2.5 million and is reflected in our first quarter GAAP operating expense. Our GAAP operating expenses this quarter also include a $3.5 million charge for a settlement of a lawsuit related to the bankruptcy of Finmek, a company that purchased chips from Echelon to support Enel's Smart Metering project in Italy. In January 24, Finmek stopped purchasing chips from us and subsequently filed for bankruptcy. In April 2009, we were notified that Finmek had filed lawsuits against many of its previous suppliers, including Echelon, seeking under Italian law to claw-back payments made to these vendors during the 2 years preceding the bankruptcy filing. In Echelon's case, the payments Finmek was attempting to recover totaled approximately $16.7 million. We firmly believe that the Italian claw-back law did not apply to the circumstances surrounding our transactions with Finmek. In recent months, however, we have learned that similar cases have been decided in favor of Finmek in the Italian courts. Therefore, because these cases are decided on an all-or-nothing basis, we have decided to settle to avoid the possibility of an adverse ruling that could consume a large portion of our existing cash, as well as to avoid any additional litigation costs and administrative burdens. Although the settlement for $3.5 million is not yet final, we expect it to be completed during the second quarter. 50% of the settlement amount is tentatively scheduled to be paid in the second quarter of 2013 with the remaining 50% to be paid in the second quarter of 2014.

Turning to interest and other. Interest and other expenses this quarter totaled $37,000, compared with $615,000 in expense in the first quarter of last year. The decline in expense was driven primarily by changes in exchange rates our foreign currency intercompany balances. Our joint venture with Holley in China generated a small loss for the quarter as we staffed engineering and sales positions there in advance of the first meaningful revenue. The JVs results are consolidated in our results and Holley's share of this loss was $148,000 which, as discussed in the past, is credited on our P&L. Income taxes were $37,000 this quarter versus an income tax benefit of $53,000 a year ago. This led to a non-GAAP net loss for the quarter of $1.9 million or $0.04 a share compared to a non-GAAP net income of $249,000 or $0.01 per share in the first quarter of 2012. On a GAAP basis, including the impact of the restructuring charge, legal settlement and approximately $1.4 million of stock compensation expense, our net loss after tax for the quarter was $9.3 million or $0.22 per share.

Moving to the balance sheet on Slide 13. We ended the quarter with cash, cash equivalents and short-term investments of $59.1 million, having burned approximately $2.8 million during the quarter. We continue to do a solid job of managing our working capital this quarter that includes a sequential improvement in our inventory turns. Finally, I would like to turn to guidance for the second quarter on Slide 14. We see total revenue in the range of $22.5 million to $25.5 million. We anticipate approximately 50% of our revenue will come from sales of systems and approximately 50% from subsystems. We expect that non-GAAP gross margin will continue to be strong in a range of 46% to 47% of revenue. We anticipate that second quarter non-GAAP operating expenses will be in the range of between $13.5 million and $14.5 million due to a further reduction in operating expenses in some areas as a results of our restructuring, offset by a bit of investment in our joint venture. We estimate that our non-GAAP earnings per share for the second quarter, excluding stock compensation and other items, will be a loss of between of $0.05 and $0.11 per share. We expect our GAAP loss per share to be between $0.08 and $0.14, including approximately $1.5 million in stock-based compensation expense. On the cash front, we expect the larger than usual cash burn in the quarter where typically, we expect our cash burn to approximate our non-GAAP operating loss. In the second quarter, we also expect to see $1 million to $1.5 million for payments of severance related to the restructuring actions we took during the first quarter, as well as approximately $1.7 million related to the first payment associated with the anticipated settlement with Finmek. Charges for both these items were reflected in the first quarter income statement so here, I am referring only to the cash flow impact of these items in the second quarter.

In closing, let me say that we are working diligently to create a more profitable business model that can benefit from a variety of growth initiatives we have underway. As Ron mentioned, we are excited about the many potential opportunities that lay ahead. Our flexible go-to-market strategy in the grid business has put us front and center in a number of important opportunities and we remain optimistic that this lead to success since the market begins to grow again. In addition, we are positioning ourselves to capitalize on new opportunities for control system and the promise of the Internet of Things. In short, I believe we are taking steps to expand both our opportunities for future growth while creating a financial model that will bring the value of that growth to the bottom line. 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 Sean Hannan with Needham & Company.

Sean K.F. Hannan - Needham & Company, LLC, Research Division

So, I want to see if I can dig into the system side, particularly the opportunities that you laid down on the presentation here tonight. First, if there's a way to detail a little bit more around Poland and sounds like that $35 million to $45 million of opportunity is pretty solid. So just trying to get an understanding of how involved have you been in terms of the pilots versus competitors? And how many competitors really were you seeing there? And then kind of part b to that, what degree of confidence do you see in landing most or all 3 of those projects? Is that a realistic opportunity? And then lastly, I'm assuming those RFP decisions we could see something before the end of the year.

Ronald A. Sege

Sure. So I would say yes on that last part. That's our expectation, that we would see decisions at the end of the year. We are bullish about Poland because of that, because of the new regulations, which reinforce and create a relatively approximate mandate. Also, as we said in the past, theft, supply/demand imbalances, and issues with grid reliability all make it an attractive market, which we've been working on for quite some time including Sean, now running pilots, which are going very well. We believe there's a very high correlation between where we're running a pilot and where we subsequently win a deployment. And we've got resources on the ground, directly our own sales people as well as the partners I've mentioned in our prepared remarks. So for all those reasons, we are bullish about the market. Frankly, I'm going there next week, meeting with many of our partners and our customers and we'll have an even better assessment that I feel is good about that market, Sean, as I can with the caveat that this has been a relatively difficult market to forecast reliably in.

Sean K.F. Hannan - Needham & Company, LLC, Research Division

Okay. That's helpful, Ron. And then when I look at the upgrade in Sweden, can you give us a little bit more detail behind what's driving the upgrade there? This is -- if I understand correctly, these are your meters and it's not that they would have necessarily been in place all that long. So just a little bit more understanding around what drives that.

Ronald A. Sege

Sure. So the bigger -- I think, Sean, due in fact, 2006, '07 and '08, so they have been installed for a while. There's 400,000 of our meters there. There are also other meters, legacy meters as well. And so in general, I believe that customer wanted 1 service provider to take over that network and wanted that network to have as modern features as possible. So by moving to through our latest software, it gives them the features I've mentioned in my prepared remarks, the ability to do future remote upgrades and then the ability to run the applications that I mentioned again in the prepared remarks that we've added to NES' remote power quality monitoring outage detection and so on. So, again, it illustrates the power of having a software driven system and ability to add more value to that system as time goes on.

Sean K.F. Hannan - Needham & Company, LLC, Research Division

Okay that's helpful. And then last question, if I can. As you look at the second half of '13, as you look out toward that, is there any sense about how that could materialize for you? Is there any potential where you could get a second stronger half in '13? Or is it just too difficult to tell still at this point?

Ronald A. Sege

I think it's too difficult to tell. We've tried -- in the prepared remarks, really, indicate that we're getting increasingly comfortable with 2014 but again, it's so difficult to predict in this market. I'm not sure I could say anything different about second half of '13.

William R. Slakey

Yes, Sean, this is Bill. The good news is that we are seeing more activity as this tender's getting closer to closing but it does take a little while to move from closed tender to deployment. And so things that we will be landing between now and the end of the year will largely help us next year.

Operator

The next question comes from Ben Schuman with Pacific Crest Securities.

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

I guess, first one on cash flow. So just to clarify, what was said at the end of prepared remarks, maybe next quarter we can expect cash flow to trend $3 million or $4 million below operating income and then kind of normalize at a level close to operating income going forward?

William R. Slakey

Yes, Ben, this is Bill. That's right. Typically our cash will run in line with our non-GAAP operating income gain or profit or loss. Next quarter will be unusual. The quarter after that I expect will go back to typical behavior.

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

Okay, great. And then on the systems side of the business, it looks like we've seen some level of stability over the last couple of quarters and then into what's implied with Q2 guidance. Are we at sort of a baseline of where things can go assuming that new stuff that you're booking right now is going to take a couple of quarters to kick in? Or is there a little bit more downside potentially as Telvent or somebody else continues to finish up with deployment?

Ronald A. Sege

There's -- Ben, it's Ron. There's still a little bit of tail off to go in Duke and Fortum, so we have to book and ship business to replace that and then we need to convert pipeline into revenue to grow from there. And I would just reinforce the caveat that Bill mentioned earlier, which is the time lags in between booking and -- sorry, the deployment and then the pace of deployment. So I'm cautious about the rest of '13.

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

Okay. And then quickly on the Middle East, what is it about that region that makes you especially confident that your technology is going to be competitive there? I mean, I'd imagine that all of your competitors are looking at that as a pretty interesting new market as well.

Ronald A. Sege

I suppose so. We've been working there for some time, we've got good partnerships there, we've introduced a new range of very competitive meters coming out of our joint venture, which I'm very pleased about because that was a key element of our strategy. We knew price competition was coming especially in developing markets and so I think we've got an advantage in terms of functionality there. And it's just been a market that because of the theft, because of the equality in supply versus demand issues, we focused on for quite some time.

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

Okay, great. And then lastly, I guess, this deal with GE and Mitsubishi and Landis with subsystems in their meters, is that all completely new other than what you've done in the past with Enel?

Ronald A. Sege

Well, it similar to what we are doing with ELO. So it's an NES subsystem powering these partners offering. And GE and Mitsubishi are new. Just to be clear on Landis, it's our partner, Gorlitz, who's been a long time partner of Echelon that took one of our subsystem products and was able to use it to bring in Landis+Gyr meter into the NES systems. So we don't have a deal with Landis, rather it's just meant to illustrate the flexibility of our subsystem strategy to incorporate third-party meters into our system. So does that make sense?

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

It does.

Operator

Your next question comes from John Quealy with Canaccord Genuity.

John Quealy - Canaccord Genuity, Research Division

So a couple of questions. First, with Schneider and the Telvent relationship, I know that it's been centered in Scandinavia but when you start talking about Internet of Things, I mean, you know as well as I, Schneider just realigned the Telvent guys into a smart infrastructure group. Talk about the potential of trying to cross fertilize and get some partnership potential away from the legacy metering group towards some of the Smart City stuff that they're trying to do, the likelihood of that? Or what you're feeling is about trying to make that leap with that particular partner?

Ronald A. Sege

Sure. First, I would remind you that we already have a relationship on the commercial side with Schneider. It's not the old Telvent group, but we do have a base of business and some momentum on the building side of Schneider. We believe that over time, as we bring the products to market that I mentioned in my prepared remarks, that we can see more synergies between the commercial side of our customers and the grid side. So I would say we're certainly going to try to work those 2 units together over time but they are still distinct units as I understand it, John.

John Quealy - Canaccord Genuity, Research Division

And I'm sorry, my question was more towards to the street lighting part of it and at least I know Telvent had a big energy component that had nothing to do with utilities. So if I could ask the question better, it was really the nontraditional side of Schneider that haven't dealt with. What's the likelihood that you can try to gain prominence and content with those folks?

Ronald A. Sege

Yes, we're certainly targeting them and the details of the commercial strategy I outlined today are brand new. We've got ourselves guys calling on all of our customers and it certainly is a high-profile target for us, John.

John Quealy - Canaccord Genuity, Research Division

Okay. And then Ron, we had talked for a while about the different directions that Echelon could go in and one of the areas clearly is data and predictive analytics for buildings and also for utility data. This call here doesn't seem to be talking much about that. Can you update us about your thoughts around those types of initiatives? And what we should look forward moving forward?

Ronald A. Sege

Sure, I would say, as we've talked about before, that the enhancements to our NES system, our grid product lines, include capturing more data, more power quality data and so on, so we can do the outage detection transformer monitoring and so on. We did demonstrate those at DistribuTECH, and we have partners interested in figuring out with us on how to integrate those sources of data into their back office offerings. So I would say that more and more of our customers are asking for that analytics. I don't think that anybody's got the entire solutions, so there's an opportunity there for us. But beyond that, John, nothing to announce today.

Operator

[Operator Instructions] The next question comes from Pavel Molchanov with Raymond James.

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

Is it still the case that you would take about $120 million annualized revenue run rate for you guys to be at breakeven on the bottom line?

William R. Slakey

Yes, Pavel, this is Bill. At current gross margins and expenses, we could actually get there on a little less than $120 million in revenue. Now, I do think most likely where the growth will come from -- to get us to that $120 million revenue will come from meters, that would be slightly lower gross margin and so where I think it all intersects for us is $120 million or maybe a little bit higher.

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

Okay. And then you mentioned some of the Eastern European opportunities you guys are pursuing. I'm not sure if you -- if I missed it but is the U.K. market of relevance to you right now?

Ronald A. Sege

Nothing to announce there. We know it's a big opportunity, Pavel, but no announcements.

Operator

We have no further questions at this time. I'd like to turn the call back over to Ron Sege for closing remarks.

Ronald A. Sege

Okay. Thank you, all, very much for your continued interest, and we will talk to you all soon. Bye-bye.

Operator

Thank you, ladies and gentlemen. This concludes the first quarter 2013 Echelon corporation earnings conference call. Thank you for participating. You may now disconnect.

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