Echelon Management Discusses Q2 2013 Results - Earnings Call Transcript

| About: Echelon Corporation (ELON)


Q2 2013 Earnings Call

August 08, 2013 5:00 pm ET


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


Chip Moore - Canaccord Genuity, Research Division

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


Welcome to the Second Quarter 2013 Echelon Corporation Earnings Conference Call. My name is Larissa, and I'll be your operator for today's call. [Operator Instructions] Please note this conference is being recorded. I now like to turn the call over to Anne Leschin. You may begin.

Anne M. Leschin

Hello, everyone, and thank you for joining us this afternoon for Echelon's Second 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 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 our outlook for our market.

During the third quarter, Echelon will be participating in the Jaffray's Global Industrial Conference on August 12, and at Needham's Advanced Industrial Technologies Conference on August 13, both of which are in New York City. The company will also participate in Canaccord Genuity's Growth Conference on August 15 in Boston. And finally, we will also be presenting at the Credit Suisse's Future of Energy Track at the 2013 Small & Mid Cap Conference on September 17 and 18, also in New York City.

Now I'd 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. 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

Hello, and thank you, all, for joining us on our second quarter conference call. Let me start by updating you on our grid and commercial markets in the context of our 3 strategic objectives to create long-term value at Echelon. One, to leverage our financial model. Two, to target our grid business on the most promising markets with our flexible go-to market strategy. And three, to capitalize on the strong assets of our commercial business.

Starting on Slide 3. In light of the extended investment cycles and unpredictable market drivers that characterize our grid and commercial markets, our first objective, to reduce our breakeven point and lower our cash requirement, is critical. Our results this quarter demonstrated progress with this objective and underscored the potential of our operating model. At 47.7%, our non-GAAP gross margins exceeded our plan despite lower revenue of $24.8 million and reflected our aggressive efforts to value-engineer our products over the past year.

Improved expense management resulted in a non-GAAP loss of just $0.02 per share, which was better than our expectations. We also generated cash as we carefully maintained our strong balance sheet. Based on our cost-saving initiatives, we have reduced our non-GAAP breakeven to $110 million to $120 million annually, down roughly 25% to 30% from when I joined Echelon.

Turning to Slide 4. In keeping with our second objective, to focus our grid business on target markets with the best demand drivers and the best product market fit, we are expanding our presence both in existing and new territories through pilots and partnerships. With our NES system, we are winning new pilots in territories, such as the Philippines, and making solid progress with existing pilots in locations including Poland and Austria.

For example, in Poland, we have a number of pilots currently underway and more recently, visibility into future RFPs that will expand existing pilots as they move closer to production awards.

In Austria, our ongoing pilot activity positions us well for rollouts over the next several years. The range of activity we are seeing across territory remains encouraging and my recent visits with customers in these regions leaves me optimistic about our positioning for future awards.

While piloting activity can be lengthy and small at first, Echelon's superior pilot performance has historically led to expansion opportunities and winning key tenders.

Integral to our success in the grid market are our selling partnerships on Slide 5. We continue to align Echelon with key players to expand our presence and future opportunities. We recently partnered with Metrima, a leading AMI supplier in Sweden with more than 600,000 units installed. They are standardizing on Echelon's NES system for their customers. Metrima's strong position with a large number of smaller utilities, positions us well for the pending changes in Swedish energy law that could require upgrades to advanced smart meters for more frequent load profiling.

Similarly, our partner Ericsson recently announced that it would upgrade Echelon's smart meters for Sweden's largest utility, E.ON. Finally, we are leveraging our partnership with Kapsch to penetrate central European countries.

In our grid subsystems business on Slide 6, our flexible go-to market strategy continues to progress, albeit at a slower-than-desired pace. In Brazil, despite the less comprehensive mandates recently announced, our pilot activity remains solid and opportunities for expansion are on the horizon in 2014 with some of our larger pilots such as CELESC. In China, we have received our largest pilot order to date for more than 50,000 end points with Hunan Utility. We recently completed the next version of our communications and control module to meet the new China state grid requirements for future awards.

From a strategic standpoint, our China joint venture is creating exciting new metering products for Western markets while keeping R&D cost low. This is opening up new potential territories such as the Middle East where we are currently participating in several tenders.

While we had expected a few of these tenders to move forward in the first half of 2013, delays have now pushed these decisions into the next year or so. We remain optimistic that we will win our fair share of these awards.

Turning to Slide 7. Our third objective, which we have started to focus on recently, is to leverage the assets in our commercial business, particularly our installed base, brand awareness and broad distribution channels, to help our customers easily migrate from their large legacy control networks, to what the market is now calling the Internet of things, or IoT. We see IoT as the convergence of the IT world with the physical world of devices in such applications as building and home automation, lighting control, transportation, medical telematics and factory floor control. Historically, devices have worked in autonomous groups to execute tasks and today, some 500 million devices are connected together to form control networks using a variety of legacy protocols such as LonWorks, which Echelon pioneered.

Increasingly, these groups of devices will connect to IT networks through IP addresses, today, through gateways and in the future, through end-to-end native IP support or what we are calling IP-all-the-way.

While the initial use cases that have captivated the public are consumer-oriented, such as connected wrist band pedometers and smart watches, the larger economic impact of the IoT has the potential to be felt across commercial and industrial sectors in the form of productivity gains and cost savings.

At Echelon, we have an established commercial and industrial customer base, brand and customer presence in segments that can most benefit from the IoT, including energy, lighting, industrial and commercial buildings and transportation. These vertical markets are expected to grow at an estimated 35% CAGR over the next 5 years as control systems migrate to the IoT.

Similar to legacy computer networks in the '80s and '90s, the devices of today's control networks need to be transitioned smoothly and economically without wholesale swapouts to IP-based systems for interoperability, application breadth and productivity gains.

As a provider of technology that has enabled these OEMs to build their pre-IoT device networks, Echelon has a unique opportunity to lead these customers smoothly and easily to the IP-all-the-way world. Over the past several months, we have visited nearly 100 of our device-networking customers. We validated our thesis that the move to IP-all-the-way device network is becoming a distinct driver of their next-generation architectures and devices. Currently, we believe at least half of the roughly $4 billion worldwide building automation market is preparing for a redesign cycle over the next 5 years.

As we had hypothesized, the main challenge that these OEMs face is how to cost effectively converge on IP without stranding legacy assets, creating too many SKUs for different protocols and overspending on R&D.

For example, E-Mon, a subsidiary of Honeywell and an electric sub metering market leader, recently announced that several models of its advanced meters are now fully interoperable with both LonWorks and BACnet legacy protocols. With Echelon-powered IP-all-the-way, E-Mon can easily add IP support to their devices and will no longer need to produce multiple models and SKUs to conform to different standards.

Other markets, such as lighting, are facing similar challenges in migrating to IP-all-the-way. The growing penetration of LED lighting and the implementation of energy efficiency standards and safety regulations are helping to drive this transition even more quickly. One example was the rebuilding of Christchurch, New Zealand after the recent earthquake, where an energy-efficient Echelon-based system, combined with Philips outdoor lighting controllers is now installed and controlling both pathway LED lamps and new LED-based handrail lighting along the downtown area's public walkways. The lighting system will make it safer for pedestrians and cyclists to navigate at night and save energy by dimming lighting during low-traffic times.

Turning to Slide 8. Over the next 15 months, we plan to launch an any-protocol, any-media strategy to transition our control networking platform for silicon software and routers to give us a strong platform, as legacy control networks become IP-all-the-way. This will enable our customers and prospects to cost-effectively and easily migrate to the IoT, using either wired or wireless connections. Our planned family of multiprotocol transceivers will establish a completely new price performance point for wired device connectivity, offering a very compelling and cost-effective alternative to Ethernet-based solutions. This family will be based on our ISO standard free topology architecture and will use very low-cost twisted-pair wiring.

One of the important differentiators of our next-generation transceiver will be its ability to enable multiprotocol support in the chip itself. This should allow many of our traditional building OEMs to migrate smoothly and easily to IP-all-the-way. We believe this will create more universal acceptance of Echelon's products to include devices that implement LonWorks protocols, as well as the potentially large number of other legacy protocols expecting to transition to the IP world.

To expand beyond our large installed base of customers and leverage our recently awarded Interoperable Self-Installation patent, we plan to create standalone IP-enabled embedded software to allow developers entering the IoT space to rapidly build devices with wired and wireless connectivity that can work at autonomous and self-organizing communities. The support of any media at the device level represents a major shift for Echelon, and one that we believe can significantly expand our target addressable market.

Finally, as we move towards our IoT-aligned software in Silicon, we may selectively forward integrate in certain verticals such as outdoor lighting. This will allow us to provide additional value with a more complete solution and to capture greater share of wallet. We estimate that of the 20 million outdoor lights installed each year worldwide, nearly 1 million to 2 million lights could be installed with controls, representing an annual spend of $75 million to $150 million on outdoor lighting controls.

For example, we recently extended our outdoor lighting solution by demonstrating a wireless controller product at the LumiVille show in France. The addition of an RF lighting controller coupled with our powerline base controller will make our solution more broadly applicable to outdoor lighting projects around the world.

In summary, we continue to execute on our 3 objectives for long-term value creation. We have dramatically reduced our breakeven level, focused our grid business on the opportunities that hold the most promise for Echelon's products and technologies and begun to implement a plan to revitalize our commercial business.

Of course, market transitions take time. As Smart Grid mandates in our target countries grow closer, the pressure to issue awards and begin deployments mounts. We are mindful of the unpredictable and lumpy nature of our Smart Grid markets. While certain larger territories such as Poland and Norway are pushing out potential awards by more than a year, other, more opportunistic, awards in places such as the Middle East could occur before that.

In the meantime, we are energized by the prospect of modernizing our legacy control platform to offer the large installed base of connected devices a smooth transition to the IoT.

We look to accomplish this objective through both organic and acquisition opportunities for additional technologies and adjacent vertical markets where we can provide significant value.

I would like to thank our shareholders, customers, partners and employees for their support and commitment. We look forward to updating you on our progress in the upcoming quarters. I'd now like to turn the call over to Bill. 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 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 June 30, 2013, which can be found in our second quarter earnings press release issued this afternoon and now on the Investor Relations section of our website.

Beginning on Slides 10 and 11. Revenues for the second quarter were in line with our guidance for the quarter at $24.8 million, down 1% sequentially and down from $40.8 million in the second quarter of 2012. Systems revenue for the quarter totaled $13.2 million compared to $28 million a year ago as our large contracts with Duke and with Fortum, Finland through Telvent have run their course. Subsystem sales for the second quarter were $11.6 million, down from $12.8 million a year ago due to lower sales in our connectivity and SmartServer product lines.

Revenues from Enel were $4.2 million in the second quarter. And now, revenues this quarter included $1.8 million of chip steps [ph], which compares to $1.5 million a year ago. These revenues are recorded as subsystem sales. In addition, this quarter, Enel purchased $2.4 million worth of Data Concentrators, which were recorded as systems revenue for the quarter.

Turning to Slide 12. Non-GAAP gross margin for the second quarter was 47.8% of revenue, up sequentially from 47.4% and significantly higher than 39.5% a year ago. In addition to changing product mix, our strong gross margin performance is the result of the cost reductions we have implemented as part of our restructuring activities and the benefits from our ongoing efforts to reengineer products.

Looking at our non-GAAP operating expenses. For the quarter, they totaled $12.5 million, a reduction of 20% from $15.7 million a year ago. This reduction reflects the restructuring activities we announced in February and ongoing expense management.

Based on current quarter results, we estimate that our non-GAAP breakeven revenue level is now between $110 million and $120 million in annual revenue, a significant improvement from $160 million a year ago.

We expect to see the benefit of this improved financial leverage when our targeted Smart Grid markets move forward and we roll out new products for Internet of Things applications in our commercial markets.

On a non-GAAP basis, R&D expense for the quarter was $5.4 million, sales and marketing expense was $3.9 million and general and administrative expenses were $3.2 million.

Interest and other expense totaled $164,000 this quarter compared with interest and other income of $254,000 in the second quarter last year. The decline in other income was driven primarily by the impact of changes in exchange rates on our foreign currency inter-company balances.

Our joint venture with Holley Metering in China generated $182,000 in revenue and a small loss for the quarter. The JV's results are consolidated in our results and Holley's share of that loss was $176,000, which, as discussed in the past, is a credit on our P&L.

Income taxes were $106,000 versus $144,000 a year ago. This led to a non-GAAP net loss for the quarter of $988,000 or $0.02 per share compared to a non-GAAP net income of $237,000 or $0.01 per share in the second quarter of 2012. On a GAAP basis, we had a small credit of $161,000 for stock compensation expense this quarter. This was the result of recording a credit for previously recognized stock compensation expense for the employees who left the company during the quarter, primarily as a result of our restructuring activities.

Including this credit, the GAAP net loss after tax for the quarter was $827,000 or $0.02 per share compared to a GAAP loss of $0.04 per share in the same quarter a year ago. Going forward, we expect stock compensation in Q3 to return to a more normal level of approximately $1 million.

Moving to the balance sheet on Slide 13.

We generated $661,000 in cash during the quarter and ended the quarter with cash, cash equivalents and short-term investments of $59.7 million. This cash generation was the result of a reduced operating loss combined with solid working capital management, particularly inventory, which was reduced by $3.6 million during the quarter. Additionally, the first $1.7 million settlement payment related to our legal proceedings with Finmek, which we discussed last quarter, that payment has moved to the third quarter, which also helped our cash position for the end of the second quarter.

Let me turn now to guidance for the third quarter on Slide 14. As Ron mentioned, we are in a transition period as a company. Revenue from our 2 largest contracts at Duke and Fortum, Finland have essentially run their course, and new tender awards in our target markets continue to be delayed. The net result of that will be a reduction in our quarterly revenue.

Over the last 4 quarters, our quarterly revenue, not including Duke and Telvent, has been between $16 million and $20 million. Our guidance reflects that. In the third quarter, we expect total revenue in the range of $16 million to $19 million. We anticipate approximately 60% of our revenue will come from sales of subsystems and approximately 40% from systems.

Included in our systems sales in the third quarter will be a software contract recently announced with Ericsson. As a result of this software revenue, we expect that non-GAAP gross margin will be unusually strong in a range of 54% to 55% of revenue. After the third quarter, we expect gross margins to return to levels similar to our gross margins during the first half of the year.

We anticipate the third quarter non-GAAP operating expenses will be in a range of between $12 million and $12.5 million, down slightly from spending levels in the second quarter.

We estimate that our non-GAAP earnings per share for the third quarter, excluding stock compensation and other items, will be a loss of between $0.04 and $0.10 per share. We expect our GAAP loss per share to be between $0.06 and $0.12 per share, including approximately $1 million in stock-based compensation expense.

In closing, obviously, our near-term revenue guidance is lower than we all want to see. We do believe that it is just a matter of time before our commitment to the Smart Grid market will be rewarded with project wins, revenue and shareholder value. At the same time, we have very real opportunities to create new revenue streams in the long run as an early participant in the market for the Internet of Things. We are making purposeful investments in technology and sales channels while working relentlessly to create a more profitable business model to position Echelon for future success. When our business begins to grow again, we believe the benefits of this will become increasingly apparent to investors.

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

Question-and-Answer Session


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

Chip Moore - Canaccord Genuity, Research Division

It's Chip for John. I was wondering if you could -- appreciate the color on the updated breakeven, if you can expand a little bit on some of the expense control, where you stand in terms of engineering out some costs, what you may have left.

William R. Slakey

Yes, Chip, this is Bill. As far as the big benefits from our restructuring in February, they're generally in the income statement now. There's always a little something we can do to whittle away operating expenses and whittle away at some of the expenses and our cost of goods, but the bulk of the benefits from the restructuring are in the income statement that you see there for Q2.

Chip Moore - Canaccord Genuity, Research Division

Okay. And then on the Internet of Things. Can you talk maybe about some -- the strategy there, whether you're going to pursue some partnerships, if there's some specific projects you're going after. How should we be thinking about that?

Ronald A. Sege

Yes, it's Ron, Chip. So I think I laid -- gave a considerable amount of color in the prepared commentary. Internet of Things, for us, is designing business. So by definition, it will be with partners, whether existing partners like Honeywell and Schneider or new partners to be identified and announced. I also mentioned in my prepared remarks that we're -- we both have plans for organic growth and are looking for inorganic growth opportunities. So we'll be, obviously, updating you on that as the quarters go by.

Chip Moore - Canaccord Genuity, Research Division

That's fair. And any particular target areas on the acquisition side that you're looking at?

Ronald A. Sege

It's got to fit within the, first of all, the prime directive here, which is to maintain a healthy income statement and then it has to fit into this sort of any protocol, any media architecture that I described in my prepared remarks. So the big opportunity for us is, first of all, in the commercial and industrial side of the Internet of Things and secondly, in transitioning these 0.5 billion legacy devices that are running these legacy protocols, like LonWorks, like BACnet over all IP infrastructures. And we'll do that with our historic strength in wired connectivity but also with wireless. And so that kind of gives you a sense of the sorts of things we would be looking for and obviously, we're -- we'll be looking for things that contribute to growth.

Chip Moore - Canaccord Genuity, Research Division

Okay, that's fair. And then, I guess, just lastly, on some of the new opportunities you touched on, Middle East and some other areas, maybe just expand on those.

Ronald A. Sege

Sure. So there are tenders in the Middle East that we're actively participating in. As I mentioned, our hope had been that they would close in the first half of 2013. They're still there. We now believe that they've been pushed out. Given the lack of visibility and the many moving parts in this market and in that -- those regions in particular, I just can't hazard an educated guess as to when they will close, but they could close soon.


The next question comes from Patrick Sullivan [ph] from Crédit Suisse.

Unknown Analyst

So first question, I have 2 here. So firstly, on your pipeline. Is there a way you could quantify, maybe, how the pipeline stands today relative to the start of the year? And maybe kind of riverbank what the size is or if not, maybe just in particular, some of the tenders you're referring to.

Ronald A. Sege

Sure. So I would continue to characterize our pipeline as robust. It's -- our opportunity is not constrained by pipeline. Our opportunity is constrained by impending events in the marketplace and drivers for closing deals and generating awards. So we see -- continue to see near-term opportunities in emerging markets such as the ones I referenced in the Middle East. And they're driven by some near-term impending events that I've described in the past, theft, for example. But they're in politically challenging places and therefore, unpredictable as to when the awards will be made. But I actually traveled to those regions since the last time we spoke and continue to judge our position as promising. And then beyond that, the bread-and-butter markets of Norway, Poland, Central Europe, other parts of northern Europe where there are the 20/20 mandates. And in some cases, in Poland and Norway, the mandates are 1 or 2 years earlier. And as I've said in my prepared remarks, as those mandates get closer, the -- these awards just got to get made, because it takes time to roll out -- each one of these utilities in Poland has 3 million to 5 million meters they got to deploy between today and the end of the decade and these huge projects take time. So again, I'm a little chastened by how unpredictable the market has been thus far, but we're very much in the hunt in those deals, and that's the eyes on the prize we're going to stay focused on. So Patrick, does that give you a little color?

Unknown Analyst

It does, and I agree, the countdown has begun. So shifting gears a little bit. So my second question is on the Internet of Things. As I think through kind of Echelon's organizational footprint or at least sales channel, et cetera, do you envision having to rejigger that a bit to go after, maybe, some different markets or get a different sales channel in place -- or how should we think about that? And then related to it, how should we think about R&D investments going forward? You mentioned some new hardware and software type of push.

Ronald A. Sege

Sure. So I would say that we can think about the channels, the Internet of Things in 2 dimensions. One dimension are the channels to the legacy controls markets, the guys that have built products around LonWorks, for example, BACnet, KNX, Valley. And this is where our historic strength has been, with the Schneiders, the trains, the Honeywells and so on. And I believe that, that is a principal asset of ours. And as we've gone around and talked to those customers with the proposition that, hey, over time, you will need to migrate to IP-all-the-way as we've been saying, they're all saying, yes, we absolutely have to do that but we have all these legacy protocols today. How do we get from here to there? And that's where we see a principal opportunity for us. And don't forget that the 0.5 billion devices out there run these legacy protocols, maybe in 1 in 5 is a LonWorks one, so that gives us a tremendous foundation from which to work. And the other side of the channel are kind of the new entrants into the IoT world and that's both in the commercial, industrial and in the home. Again, there's lots of talk about startups for the home and NES thermostats and so on. We're very much focused on the commercial and industrial space. And as I've mentioned in my prepared remarks, we will be introducing software-only products that are packaged in a way that are easy to consume for those new entrants. And I think we can do that to some extent with our existing channels. But you're right, we will need to develop our channels to better serve that emerging market. So hopefully, that gives you some color on that. And in terms of incremental R&D investment, we're going to be very careful there. We're very mindful of the compliment you gave us at the beginning and we don't want to lose ground there, and I think we can do this within the context of the kind of a breakeven levels and income statements we've talked about here. Okay, Patrick, does that help?

Unknown Analyst

That does. And let me just squeeze one quick one in here. I ask it every quarter, market share on the core commercial market, can you give us just an update there of how that's trending?

Ronald A. Sege

Markets, well, I mean, it's -- I guess, I would be guessing because it doesn't get reported this way. But I would say that historically, in the last couple of years, we've done nothing to gain market share. So we're probably continuing to grow at a slower pace than the overall market. But the strategy we've laid out for you is intended to start -- to change that, initially with some of our software products and maybe if we can get some acquisitions done, but then, over the longer time, obviously, with new products and more aggressive marketing.


The next question comes from Pavel Molchanov from Raymond James.

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

Most of my questions have been answered but one just internal issue, if I may. You guys have obviously gone through a fairly lengthy round of headcount cuts and I'm just curious what the morale of the staff is right now. It's never easy and you guys have had maybe more than most. So just thought I'd get a comment from you on that.

Ronald A. Sege

Well, you're right, it's never easy. These were incredibly difficult decisions we had to make and we worked very hard to make them in as humane a way as possible to communicate effectively and so on. Look, this company has a great long heritage and we have a long-term perspective and belief in the fundamentals of both the grid market that we're chasing, as well as this new opportunity in the emerging Internet of Things. So I would say that the morale is good, the employees are energized, they're pleased at, if you want to call it, kind of our diversification strategy to go after this new opportunity. So I'd judge people as engaged and bought into the plan and starting to execute.

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

Okay. And then secondly, your cash balance, as you noted, actually ticked up during the quarter, now close to $60 million, which is more than half of your market cap. And your stock, of course, is close to a 52-week low. So in that context, what are your thoughts about a buyback program?

William R. Slakey

Pavel, this is Bill. I think a buyback program right now is probably not the best use of the cash. I think instead what we need to do is focus on growth and we need to focus on finding growth potentially through acquisition. And so I think we're -- going forward, our cash management strategy is twofold: one, continue to run the operations extremely, effectively. As you mentioned, I think we've done that pretty well, you go back 1 year, you go back even 2 years, our cash balance is generally unchanged relative to 2 years ago despite the operating losses we've recorded. So we've worked very, very hard to manage that cash. I think right now we have to continue to manage it through operations and then I would prefer to see us use it and deploy it in a way that can grow the top line rather than do a share buyback with it.

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

Okay. I mean, there has been a lot of M&A in the Smart Grid arena, no doubt. But given that your resources are, I guess, not fiscal -- Oracle level, what types of targets would you consider? I mean, is it more on the software side? Is it 0 revenue startups or what stage business perhaps?

Ronald A. Sege

Well, as I mentioned earlier, first of all, it has to fit in the sort of the objective number one, which is to continue to protect our income statements, which implies that we wouldn't take on a bunch of burn with a technology company that's not generating any revenue. And then second, it has to fit in this architectural framework and this market hypothesis that I laid out, which it has to broaden the range of protocols that we can support, it has to broaden -- and/or it has to broaden the range of physical media that we support, or it has to get us into, for example, new channels to start serving the new entrants into the Internet of Things. So those are the criteria we're using. And beyond that, Pavel, I mean, obviously it's opportunistic what's out there, what fits in with the criteria but it's a priority for us to be out and looking.


[Operator Instructions] We have no further questions. I'll now turn the call over to Ron for closing remarks.

Ronald A. Sege

Okay. Thank you, all, for your continued support and attention. And we'll be talking to you on callbacks and the conferences, et cetera. So take care. Bye-bye.


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

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