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Executives

Annie Leschin – IR

Bob Maxfield – President & CEO

Chris Stanfield – EVP & CFO

Analysts

Colin Rusch – ThinkEquity

Dale Pfau – Cantor Fitzgerald

Sean Hannan – Needham & Company

Paul Coster – JP Morgan Securities

Ben Schuman – Pacific Crest Securities

Charles Fishman – Pritchard Capital Partners

Craig Irwin – Wedbush Securities

Joe Maxa – Dougherty & Company

Bheeshma Chaudhary – Deutsche Bank

Justin Cable – Global Hunter Securities

Echelon Corporation (ELON) Q1 2010 Earnings Call Transcript May 6, 2010 5:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the first quarter 2010 Echelon Corporation earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Ms. Annie Leschin, Investor Relations. Please proceed.

Annie Leschin

Hello everyone and thank you for joining us this afternoon on our first quarter 2010 earnings conference call. With me on today's call are Bob Maxfield, President and Chief Executive Officer; and Chris Stanfield, Executive Vice President and CFO, both of whom will present prepared remarks.

By now, you should have received a copy of the press release we issued a short time ago. If you would like a copy, please visit our Website at www.echelon.com. Before we begin, I would like to let everyone know that during the second quarter, Echelon will be participating in Deutsche Bank’s Alternative Energy, Utilities and Power Conference on May 12th in Washington, DC; J. P. Morgan’s Global Technology, Media and Telecom Conference on May 18th in Boston; and Credit Suisse’s Future of Energy Conference on June 3rd in Washington, DC. As other events are scheduled, we will make additional announcements.

I would like to remind everyone that during the course of this call, we may make statements relating to our business outlook, future financial and operating results, accounting matters, and overall future prospects. These forward-looking statements are based on certain assumptions, and are subject to a number of risks and uncertainties. We encourage you to read the risks described in our press release, as well as in our SEC reports, including our report on Form 10-K and 10-Q for a more complete disclosure of the risks and uncertainties related to our business.

The financial information presented in this call reflects estimates based on information that is available to us at this time. Actual results could differ materially. Echelon undertakes no obligation to update or revise these forward-looking statements, and guidance will not be updated after today's call until our next scheduled quarterly financial release.

And now, I would like to turn the call over to Bob Maxfield.

Bob Maxfield

Good afternoon everyone, thank you for joining us. As you have probably seen by now, today we filed a shelf offering for as much as $200 million. Though we believe we have sufficient cash to maintain our business for the foreseeable future, we believe the filing of this offering gives us the flexibility to access capital as needed over the next few years as our business grows.

With that, let me turn to the business. My focus since I came onboard as CEO two quarters ago has been first and foremost to ensure a seamless transition with the management team and to bring myself up to speed as quickly as possible; I feel that we are well along on that priority and that Echelon is running smoothly and effectively. The next priority has been to reassess our opportunities as a company and initiate a comprehensive review of the company’s overall strategies for markets, products, operations and finance

One of the results has been our new selling strategies in the form of our LonWorks solutions partner program and our NES direct selling program, which is targeted at uncommitted US investor-owned and larger municipal utilities. I will discuss both these programs in a little more detail shortly. I am confident that these two programs will have a positive impact going forward to ensure that Echelon remains a leading smart grid provider.

Let me begin with a review of the quarter’s results. I am pleased to report that Echelon’s business showed some signs of recovery this quarter, but not consistently throughout the world. In North America, the first quarter picked up noticeably, whereas in Europe, the recovery remained slower and spottier as each country works through not only its own financial situation, but also the severe difficulties of weaker EU member countries. Asia on the other hand has been the one geography that has seen little impact from the recession, particularly in China and India.

In total, Echelon’s March quarter exceeded our expectations with $18.1 million of revenues, driven by strong energy-related sales in our LonWorks product line. Both NES and Enel revenues were lighter this quarter as anticipated. GAAP gross margins reached 46.2%, reflecting the higher LonWorks sales. GAAP net loss was $10.6 million or $0.26 per share. Now, I will turn to some of the highlights of the quarter, beginning with the LonWorks infrastructure product line. Our LonWorks product line performed better than anticipated this quarter, driven largely by NOP-related [ph] applications, specifically demand response continued its strong seasonal ramp, showing strength in first quarter installations.

We see an emerging seasonal trend in this market, which indicates that the strongest quarters are the winter and spring months, and the weakest is the third quarter, resulting from the acceleration of orders in the first half of the year in preparation for the summer. It’s important to note that this was the first time one of our energy-related customers was among our leading LonWorks supply customers in a quarter, and we hope this will be an ongoing trend.

Our goal is for energy management and control to eventually become the dominant portion of the LonWorks business. This represents an opportunity and we are confident that our LonWorks products will lead the industry in offering the best, open infrastructure, enabling intelligent, remote, reliable and inexpensive energy management and control. Our partnerships in demand response in particular and across the spectrum of energy management remains strong and we are working to expand those relationships.

Other energy-related markets such as street lighting gained momentum this quarter. With 10 companies currently signed up to utilize Echelon’s technology in their street lighting solutions, we are excited to see this market developing. These companies and partners are pursuing aggressive growth plans and actively looking to broaden their efforts both within Europe and into Asia and China, which are the primary markets we see developing for street lighting in the near-to-mid term.

The US market on the other hand is in the early stages and will lag behind these other markets for the same reasons that US meter market has lagged Europe. There is however increasing customer interest in the US, which will simulate the availability of the needed products, such as communicating balance for lighting fixtures. As for our traditional LonWorks markets, the results of this quarter were mixed. Some such as the semiconductor equipment business began to recover after the industry hit bottom last year.

The semiconductor demand is growing at a rapid rate, our revenues from the semiconductor capital equipment manufacturers are seeing a more modest ramp as our customers take a conservative approach to ramping up their capacity. On the other hand, large LonWorks markets such as building controls remained at recession-like levels, as the commercial real estate market remains flat and a significant recovery is not expected for at least a year.

In our discussions with building controls customers, we believe they are slowly ramping in anticipation of a slowly improving market depending on the geography. One exception to this is China where we are seeing good activity from building OEMs who are producing products for the local Chinese markets. However, given the low inventory levels in the building automation segment industry-wide, the market could potentially pick up significantly in just a short period. And the biggest news in LonWorks this quarter was the release of our first LonWorks 2.0 products for production shipments.

As previously discussed, LonWorks 2.0 represents an important evolution in the platform, offering higher performance, lower cost, smaller size and simplified installation. We publicly released these products last month at the Light & Building Show in Frankfurt, which is the world’s largest fair dedicated to the lighting and building controls industry. We received a very enthusiastic response to the announcement from our customers and immediately saw an uptick in development system orders in just the first few weeks as well as overall higher interest in our Smart Transceivers, both of which are very encouraging signs.

In conjunction with this product introduction, we announced our Solutions Partner Program which I mentioned earlier. We believe this is the right program for Echelon at this time for three important reasons. First, we see growing worldwide interest in energy management applications with short financial payback periods, as enterprises of all sizes try to reduce costs while conserving energy. One example is cities that are looking to monitor and control their public lighting assets. Another example is multi-site organization such as bank branches that want to centrally monitor and manage their sites in order to reduce energy and maintenance costs, ensure operational consistency and identify and replicate best practices.

Second, with the recent introduction of the i.LON SmartServer 2.0, we now have a powerful, programmable platform that enables the creation of tailored energy management solutions by a new breed of IT-centric system integrators. Third and most importantly, we see a number of capable system integrators previously in the IT and communications world that want to expand their capabilities into the energy management arena. They are unfettered [ph] by outdated ideas of building controls and eager to expand their expertise as energy management consultants, specialists and system suppliers.

The Systems Partner Program is designed to attract these IT-centric integrators and provide them with a marketing support, training, applications development support and sales incentives needed to serve the rapidly growing energy efficiency and controls market. We have already signed a number of exciting companies to the program, and we are pleased with their initial progress.

Now, I would like to turn to our NES product line. Revenue from our NES product line was in line with expectations this quarter albeit at lower levels than last quarter, driven by the deployment schedules of our Danish and US projects. Our deployments at Duke are proceeding very well and they are very pleased with the NES system and our support of their activities.

Duke is currently negotiating its $200 million in government stimulus funding with the Department of Energy. It’s signed in the contract, Duke has said that this will provide the necessary resources in addition to its own matching funds to accelerate its programs in Ohio and potentially other geographies as we have previously discussed. In Indiana, as you may have recently read, the PUC meeting has been delayed until July. If approved, we are confident that similar to Ohio, this will be a first phase to demonstrate to the regulators and consumers the strength and functionality of our smart grid infrastructure and Duke’s overall system that this will motivate both PUC to proceed with the full deployment even if a little later than expected.

Overall, we are encouraged by the long-waited distribution of the DOE stimulus funds, which we expect to reignite the US market. While there has been a lot of discussion in the market about the utilities that have received awards, there are still tens of millions of meters at other utilities yet to be awarded. We see this as a large opportunity that is yet to unfold in the US market, and as I mentioned in my introduction, we are refocusing our sales efforts to capitalize on it.

By building on our successes with Duke, we have developed a new more targeted approach to selling Echelon’s NES solutions in the Americas. First, we are educating our sales force on what we have learnt and applying that to a very focused sales activity with selected major uncommitted IOUs and municipalities. Second, we are taking a multi-pronged approach by addressing large utilities directly as is our preference and targeting others through our partnerships with value-add partners and system integrators that are directly connected to the utilities. This will provide Echelon with the best, most comprehensive way to target and sell to the market.

Finally, we intend to increase our sales force over the next year as we see results in order to most effectively accomplish these strategies. We will report on our progress from these actions over the coming quarters. Given the early stage of the market in the US, the industry has been more focused on numbers of meters installed and as yet on proven prospect of energy management through control of wireless in-home thermostats rather than the broader spectrum of benefits possible with an operational smart grid. This contrasts with the market in Europe and utilities such as Duke Energy where we are seeing more attention paid to successful rollouts that provide utility operating cost reductions and real consumer benefits.

This is the case with Echelon’s various worldwide deployments, all of which are operating at or above expected levels of performance. Everything we hear both our utility customers and the consumers they serve are very satisfied with our results. As the size of deployments grows, the scalability and performance of the system becomes increasingly important. The scalability and performance of the NES system was recently verified in a third-party report by the Tolly Group, an IT industry analyst firm. The report highlighted that not only can the NES system reliably deliver the data produced by today’s advanced metering applications, but it also has the capacity and flexibility needed to handle the increased amount of information that will be generated by future smart grid applications.

With the best of our knowledge, no competing system has the proven performance of the NES system in the US or Europe. At a recent Scandinavian Meter Show, we announced the shipment of our 2 millionth meter to the Danish Utility, SEAS. At this show, we saw at least a half dozen examples of products such as home gateways that can actually open interface of our NES meters. This interface enables the connection of additional meters and other devices to send and receive information through our open system architecture.

As we look to the future, this will be a crucial element in realizing an integrated smart grid that can encompass every device on the network that has an electrical heartbeat. This will enable optimal efficiency of the grid, be adaptable to the future world of distributed local energy generation, electric vehicle charging and other alternative energy technologies. These developments demonstrate the differentiation of the open interface Echelon solutions, which enables the community of application developers to introduce products that our customers can utilize to build a truly smart grid.

Our successful deployments, proven scalability and growing ecosystem of development partners provide critical references and are frankly the best marketing for our products. Since many newer vendors have only just begun to deploy their products and await results on effectiveness, reliability and capability.

In summary, while the first quarter of 2010 was a light quarter in our NES product line, we were pleased with the overall performance on the seasonal strength and LonWorks, especially the energy-related markets. Now that we see the initial signs of economic recovery, we are hopeful that this will translate into continuing opportunities in recovering markets and a slow and steady pace of recovery in more hard-hit markets.

As the year progresses, we expect to see our NES revenues ramp with a further deployment of existing projects in Denmark and at Duke and the beginnings of our Finnish project. With those forces in mind, we look to the second quarter and remainder of the year with a bit of optimism. In LonWorks, we expect to see an ongoing strength in the energy markets such as demand response subject to its seasonal downturn as the late spring summer approaches. Although weakness in Europe is expected to continue in the near term and the slow improvement in the building controls market is keeping LonWorks growth potential in check, we are looking forward toward new opportunities and growth potential in emerging markets such as South America and China. I remain optimistic about all of Echelon’s markets, and I believe the real opportunities are ahead of us and our outlook for modest growth in 2010 remains intact.

I will continue to reach out and forge relationships with key utilities and potential partners as we work to position Echelon as a premier player in the energy management and smart grid infrastructure space. I want to thank the entire Echelon team around the world for their dedication, creativity and hard work. I would now like to turn the call over to Chris Stanfield, our CFO, to review our operating results.

Chris Stanfield

Thanks, Bob. Please note that all references to non-GAAP amounts exclude stock-based compensation. For ease of reference, we have prepared a complete non-GAAP statement of operations for the first quarter ended March 31, 2010, which can be found on the Investor Relations section of our Website.

Revenues for the quarter were ahead of expectations at $18.1 million, down from $38.8 million last quarter and relatively flat with the same period in 2009 at $18.2 million. Sales of our LonWorks infrastructure product line were strong at $12.3 million compared to $11.4 million last quarter and $11.2 million in the same period last year.

NES sales were $5.5 million, down from $21 million in the fourth quarter as expected, but roughly similar to (inaudible) first quarter of $5.7 million. As anticipated, revenue from the Enel project was down to $362,000 this quarter, as we delivered a significant order last quarter, which is intended to meet much of their future needs. This compares to $6.4 million in the fourth quarter and $1.3 million in the first quarter of 2009.

First quarter non-GAAP gross margin hit a two-year high of 48.2% compared to 42.7% last quarter and 45.5% for the same period last year. On a sequential basis, the margin strength was driven by a greater proportion of our higher margin LonWorks product line revenue this quarter. When compared to the same period a year ago, when our product line revenue mix was relatively similar to this quarter, our NES margins have improved.

Non-GAAP operating expenses were $16.2 million, down from $16.7 million last quarter and up from $15.9 million a year ago as we prudently managed costs in product development and sales and marketing. Interest and other income was $435,000 for the quarter versus $130,000 in the fourth quarter and $310,000 in the same period last year. The sequential increase was due to strengthening of the US dollar during the first quarter of 2010.

Our GAAP net loss for both the first quarter of 2010 and the same period last year was $10.6 million or $0.26 per share. This compares to a GAAP net loss of $3.7 million or $0.09 per share in the fourth quarter. Our non-GAAP net loss for the quarter was $7.3 million or $0.18 per share compared to a net loss of $74,000 or $0.00 per share last quarter. Our non-GAAP net loss for the first quarter of 2009 was $7.5 million or $0.19 per share.

Moving to the balance sheet, we ended the first quarter with cash, cash equivalents and short-term investments of $76.6 million, a $3.5 million decrease from last quarter. During the quarter, we increased our inventories by approximately $3.6 million in preparation for shipments during the second quarter. We have carefully managed working capital during this recession and are confident of our ability to do so going forward. We believe the company is positioned for growth in the future and we understand the working capital that this may require. Accordingly, we announced the filing of a universal shelf registration statement on Form S-3 earlier this afternoon.

The shelf registration statement is meant to provide the company with the opportunity to raise capital from time to time in the future depending upon the favorability of market conditions and the company’s needs for additional capital. The registration statement has been filed with the SEC, but has not yet become effective. For further details, we refer you to the press release that announced the filing issued earlier today for any questions you have regarding the shelf registration statement at this time.

Neither the press release nor this presentation shall constitute an offer to sell or a solicitation of an offer to buy the securities identified in the registration statement nor shall there be any sale of the securities identified in the registration statement where such offer, solicitation or sale would be unlawful prior to the registration of qualification.

Now, I would like to turn to our guidance for the second quarter of 2010. We expect total revenues for the second quarter of 2010 to be in the range of $24 million to $26 million, with LonWorks infrastructure accounting for approximately 45% and NES about 53%, with the remainder from Enel. We anticipate non-GAAP gross margins to be in the range of 40.4% to 41.4% for the quarter, as more NES sales are anticipated.

Finally, we estimate our GAAP loss per share will be between $0.24 and $0.26 per share and our non-GAAP loss per share will be between $0.15 and $0.18. Now, I would like to turn the call back to the operator for questions.

Question-and-Answer Session

Operator

(Operator instructions) First question will come from the line of Colin Rusch of ThinkEquity.

Colin Rusch – ThinkEquity

Good afternoon gentlemen. Can you give us an update on power activity in both the US and Europe, and then secondary question, can you talk about the sales proposition in China, if you are able to sell any grid solution for the building management as well as smart metering solutions for customers in China?

Bob Maxfield

Sure, the situation on pilots in the US and Europe is we continue to – as you know, we have a number of pilots underway in Europe and a few in the United States. Those are continuing; deployments of those systems have of course been delayed by the economic slowdown. We have a number of possibilities of additional pilots in the pipe, and so, the activity is looking good, especially some more activity in Eastern Europe and more activity in some of the4 other countries in Europe. As to China, with the LonWorks SmartServer, the opportunities there are of course in building automation, which is we have a number of partners over there that build products for the Chinese market.

Another big interest in China that will involve our SmartServer is the street lighting where there is a lot of activity. As to NES in China, that in terms of using the full NES system, that probably is not market suitable because of the Chinese government basically has defined exactly how the systems are to be built and follow this, exactly the standards for those systems and there probably will be primarily Chinese manufacturers, however there is a consider opportunity there for our LonWorks semiconductors or power line chips to be used in that market. And so, we are exploring some of those opportunities.

Colin Rusch – ThinkEquity

Great. Thanks a lot guys.

Operator

And the next question will come from the line of Dale Pfau, Cantor Fitzgerald.

Dale Pfau – Cantor Fitzgerald

Good afternoon gentlemen. I have a quick question about your, what you think your biggest opportunities are for the LonWorks as we head into this year? It looks like you would be able to get a little bit of pickup in demand response and street lighting, do you see it expanding beyond that, and perhaps gaining a bigger foothold in some of the hands that are being developments out there?

Bob Maxfield

That’s correct. The demand response and the street lighting is certainly an area of activity. I think that the real growth is in energy-related applications like those, not only but also for example quick service restaurants, multiple facility, remote managing of energy using our SmartServer. So, there are a number of applications that are continuing to expand, plus we are expanding in other countries as I mentioned before. And I think that our Solutions Partner Program is key to all of that activity. And so, we are focused for example of the first eight partners that we have signed up for that program, four of them were in the US, one is in Spain, one is in China, one is in Korea, and one is in Turkey.

So, as you can see, that program is rolling out around the world and we are signing out system integrators to exploit all of these energy-related applications for our SmartServer and other LonWorks products.

Operator

Your next question will come from the line of Sean Hannan, Needham & Company.

Sean Hannan – Needham & Company

Yes, good afternoon.

Bob Maxfield

Good afternoon.

Sean Hannan – Needham & Company

So, first if I could ask, with your 2010 outlook assuming that there really hasn’t been much that’s changed there directionally versus your last call, when you think about the perspective of how Duke was going to contribute to the year, where they are with still remaining close to signing the stimulus and the delay in Indiana having occurred again with the PUC, are there any changes around how you expect Duke to contribute this year? And then separately, I was looking to see if we can get some color around the ELO relationship, whether there was anything recognized as revenue in the quarter and then how you will expect the manufacturing side of that agreement or relationship to develop in the near term versus traction with them as a VAR? Thank you.

Bob Maxfield

All right. So, as to Duke, of course we expect them to sign to receive their stimulus money and so we anticipate. The delay in the Indiana filing does not impact our 2010 outlook. So, there is really, we don’t anticipate any changes there in terms of our expectations for the year from Duke. With respect to ELO, there would not be any revenue this in 2010 from ELO. This program requires us to, first we have to assist them with the technology to build their meters, then they have to get their meters homologated or certified by the Brazilian authorities. And that activity will run through the end of this year, and it will be 2011 before they will be in a position to generate revenues for the program.

Sean Hannan – Needham & Company

But when you differentiate between the manufacturing agreement side of that relationship versus using them as a real traditional VAR, how do you view those ramp or traction in either side to that agreement?

Bob Maxfield

As we said, they are going to be both. They are going to be a VAR, which means they will resell our data concentrators and our system software, you know, all of our systems and they will use their meters that are manufactured using our technology. And so, it’s an immigrated package if you will. The cost of the trade barriers to importing our meters although they can do that in limited numbers, and we will probably -- perhaps may do that for some of the pilot trials and all of that, but the bulk of what they will be selling in South America in the long run is their manufactured meters.

Operator

And the next question will come from the line of Paul Coster, JP Morgan.

Paul Coster – JP Morgan Securities

Yes, thank you very much. Chris, just in policy, if you could just share the Enel number again, I missed that, but my main question is regarding the energy management systems, where is the demand coming from? Is it coming from these end customers, the sort of multi-site banks and so on, is it coming from the utility, is it coming from the intermediaries like EnerNOC, and what to what extent SEP, the State Energy Program funds and incentives playing a part in all of this?

Chris Stanfield

Your first question about revenue, for the quarter, the Enel revenue was $362,000 I believe.

Paul Coster – JP Morgan Securities

Thank you.

Chris Stanfield

And so, as you look at the demand response, the demand response activity first of all is largely in the United States which you know, and we see it through the eyes of our customers, and it’s a program to read about it and watch their going out and signing up groups of commercial and industrial companies to these arrangements and they act as an intermediary between those companies and then whomever is paying for the program. It has hit us quite, quite well.

Paul Coster – JP Morgan Securities

So, it’s not the utilities, it’s the intermediaries like EnerNOCs and Convergys that are driving this question?

Chris Stanfield

Yes.

Paul Coster – JP Morgan Securities

Yes. Okay, to what extent are the state energy programs starting? There is mandates to achieve certain efficiency levels and so on, and for that matter, stimulus funds playing a part in the DR programs.

Chris Stanfield

We are not aware of the specific impact, because once again what we see is the end demand from our customers, but obviously as you read their press releases, you can understand what’s driving their business.

Paul Coster – JP Morgan Securities

Okay. Great. And then my last question is, Chris, in terms of visibility in bookings and backlog, is there anything you can share there? It has become very much just sort of vogue in the industry to shed back log numbers and you haven’t?

Chris Stanfield

What I can tell you is that our business profile remains as it is. LonWorks product line is largely a book and ship kind of business where our customers order on a just-in-time basis based for their production of products. And I think we have shown an ability to predict that business given that order pattern. With respect to NES, clearly we have very good visibility near term, and I think we have shown the ability here in our business right the guidance that we have provided for this quarter is in backlog, and as I would look to the long term for any given project, we have a great ability to understand how those process are going to do. As you and I have discussed, the tough part is understanding what those projects are going to do two quarters from now.

Paul Coster – JP Morgan Securities

Yes. Okay. Thank you very much.

Operator

And the next question will come from the line of Ben Schuman, Pacific Crest Securities.

Ben Schuman – Pacific Crest Securities

Good afternoon guys. I am not sure if EnerNOC was your big demand response customer in the quarter, but does it concern you guys at all that EnerNOC purchased a small, ZigBee, network management company, and do you see that as a potential sign that low power wireless could maybe take some share in the commercial demand response phase?

Bob Maxfield

First of all, EnerNOC was our largest customer for the demand response in the quarter. We have a very good relationship with EnerNOC. Yes, they did purchase a very small company that has a very low-end product which is applicable to a very different set of customers than they are currently selling to. They are trying to sort of expand their region in price and scope and so forth. So, that product is applicable only for very small installations, and really I don’t think it’s a direct threat to the bulk of the major industrial customers that they have.

Ben Schuman – Pacific Crest Securities

Very helpful. Can you give a little bit more detail maybe about the timing of some of the potential US deals out there, are you mostly responding to RFPs at this point or is there some shortlist opportunities or deals in kind of later stages of vendor selection?

Bob Maxfield

They aren’t a lot of RFPs out there today, and once we are out there, they are not that we think we can go after. We certainly are going after, so I guess I canned out a lot of light to that.

Ben Schuman – Pacific Crest Securities

Okay, great. And I think you guys mentioned the forum maybe you would be kicking in at the end of this year, is that mostly concentrators and stuff ahead of the meters in 2011or other infrastructure?

Bob Maxfield

The major deployment for quarter is going to occur next year, but we are shipping meters and data concentrators to them today and so far.

Ben Schuman – Pacific Crest Securities

Great, thank you very much.

Operator

The next question comes from Charles Fishman, Pritchard Capital.

Charles Fishman – Pritchard Capital Partners

Thank you. Bob, do you have any concern with the problems in Europe that either the ongoing Denmark deployment or the Finnish deployment could be delayed in any way?

Bob Maxfield

Nope, we have seen no indication that, that could happen.

Charles Fishman – Pritchard Capital Partners

Okay. And then just continuing Europe, and now it looks like from the guidance you gave, the second quarter is also at a lower level than we have seen in the past. Has the relationship changed at all, or is that just due to the big inventory slot they got in the fourth quarter of last year?

Bob Maxfield

Yes, what we responded to where the orders that we received from Enel, in some cases from their meter manufactures, and Enel is always scheduled to provide it for a very large level of purchases last year. They have let us know that the purchases will be lower this year and so, there’s really no surprise. Our relationship with Enel remains very, very helpful.

Charles Fishman – Pritchard Capital Partners

Okay. Great. Thank you.

Operator

And the next question will come from the line of Craig Irwin, Wedbush Securities.

Craig Irwin – Wedbush Securities

Thank you. Chris, in your prepared comments, you mentioned the NES margin improvement to back out the LonWorks products. I was hoping if you give us little more color on the sources of the margin improvements and the potential longer-term trajectory for any of those products.

Chris Stanfield

Yes, I think as I have discussed before, our gross margins for NES bottom lines started out very, very low. Our focus was on building a product that is very solid and then cost reducing it overtime. And as you know, we have introduced multiple gyrations of products. A lot of the improvement as you see is because of the efforts of our design team and also on the efforts of our production team in terms of driving down those costs. The effect of that on any given quarter has been adjusted a little bit by the fact that our earlier generation products worked so well now that people continued to buy them. And so, what you are seeing is more and more of movement to our latest generation products which of course have the best costs. And so we had anticipated this improvement vis-à-vis a year ago.

Craig Irwin – Wedbush Securities

Okay, excellent. And these are potential further margin on those products to potentially fund maybe mid-30s, maybe higher, I mean, can you frame out what they could achieve over the next several quarters.

Chris Stanfield

I am not going to get into a specific number, but we anticipate on an even-case basis looking at a given customer buying products speaks that our margins continue to improve in any given instances you understand depending upon configuration etcetera, the margins in any two transactions may be different, but yes, we expect our margins to continue to hover.

Craig Irwin – Wedbush Securities

Great. And then in the past, you mentioned that there was a large Eastern European utility that looks like it was fairly close to deciding on a vendor and then the credit crisis hit. I was wondering if there was potentially any update or if there is maybe something else that you could potentially share with us there?

Chris Stanfield

Okay. There is nothing new with respect to that transaction that was last year, but as I think I said on the last call, what we have seen is we have seen what we call the Eastern European marketplace coming back. And so, whereas in other markets you saw the volumes drop some percentage, the drop-off in Eastern Europe was much more severe during the credit crisis, and yes, we have seen a recovery in Eastern Europe.

Craig Irwin – Wedbush Securities

Great. And then last question if I may, I understand there is a Dutch utility that you work for a very long time, if it also materializes a large-sized customer at some point and hopefully not too far out, I was wondering if maybe there was an update on the Dutch utility that you have worked with in the past?

Chris Stanfield

No, there is no update on that. The Dutch regulatory agencies are still in a bit of state of uncertainty in terms of what the requirements are going to be in the future and that’s sort of slowing things down. But we have meters installed in the Netherlands and we anticipate that we would be a player there as that situation evolves.

Craig Irwin – Wedbush Securities

Great. Thank you very much.

Operator

(Operator instructions) The next question will come from the line of Joe Maxa, Dougherty & Company.

Joe Maxa – Dougherty & Company

Thanks. You also mentioned your North American opportunity or you mentioned that there was tens of millions of meters out there; can you give us data what you think your realistic opportunity is in the next two to three years?

Bob Maxfield

We believe it’s quite large an opportunity. Of course, we have to execute and that’s part of what our new focused sales program that I described is. Our Senior VP of NES Worldwide Sales and Marketing has been onboard just a few months now and he’s really focused in on the very well-thought out, a carefully crafted plan for focusing on the US and particularly on selected set of major IOUs. As we have said before, we were a bit late coming to the US market and what we found is that contrary to Europe, the US market utilities are not as advanced and they are thinking about what real smart grid applications are going to require. And so, we have an education problem to overcome some biases and also to educate what the real needs of the true smart grid system should be. So, we have gone through a very careful process of educating sales force, increasing our sales force, giving them the ammunition that they need such as the Tolly Report that we mentioned earlier that proves the performance and scalability of our system. And of course, we have the Duke support, which is a very key aid to us in this activity.

That said, the sales cycles in the US with major utilities are very long. And so, this is not going to be an overnight process, and these sales cycles can typically take up to 18 months from start to deployment in terms of educating and getting (inaudible) and pilots and so forth. So, I think we have a great program in place, I think we have got a great opportunity. There is plenty of market out there, and I am quite confident that we have the best system and that we are going to get a significant share of that market.

Joe Maxa – Dougherty & Company

Just wondering [ph] client, you talked about adding sales staff, what are you thinking as quantities and when do you decide to add them, was it after you – seeing from success or do you need them, do you need more guys to get after and generate this revenue?

Bob Maxfield

I think at the moment we have a right size force to what we are focused on right now as we roll this program out, as we start to get some successes, we will certainly grow the sales force as wanted by our success in our progress.

Joe Maxa – Dougherty & Company

Okay, thank you.

Operator

The next question will come from the line of Carter Shoop, Deutsche Bank.

Bheeshma Chaudhary – Deutsche Bank

Hi guys, this is Bheeshma Chaudhary for Carter Shoop. Quick question on the Duke, you had said in your last call that you have shipped roughly 30% of the Duke Ohio meters which is about 700,000, can you just update us on how many meters you have shipped so far for Duke Ohio and how many meters you expect to ship by the end of this year?

Bob Maxfield

I will deal with the first part. Our shipments this period were under 10,000 units and that’s what we expected. We are not going to provide a forecast going forward. What I will tell you is we anticipate Duke revenue in every quarter of this year, but I am not going to provide a meter forecast.

Bheeshma Chaudhary – Deutsche Bank

Got it. That’s helpful. And then as far as, you said you were looking at increasing I think –

Bob Maxfield

I didn’t, someone said, I said 110. I said under 10,000.

Bheeshma Chaudhary – Deutsche Bank

Yes. I got it. And then you said you were expecting increase in your sales force, could you provide us some commentary on where you are expecting those increases and kind of how many people you are looking at, is this handful of people or couple in some regions?

Bob Maxfield

I am sorry; could you repeat your question?

Bheeshma Chaudhary – Deutsche Bank

Yes. I was wondering you had you were expecting some increases in your sales force; I was just wondering what kind of increases you were expecting.

Chris Stanfield

The increases will depend on how well our new focus selling program goes. As I said, I think we have the right resources in place today and we grow that overtime as the successes want [ph], so there isn’t any fixed number that I can tell you ahead of time what we are going to do.

Bheeshma Chaudhary – Deutsche Bank

Okay, thank you.

Operator

Next question will come from Justin Cable, Global Hunter Securities.

Justin Cable – Global Hunter Securities

Thank you. Just a couple of questions, one is you have been managing your working capital pretty well over the past year, inventories coming down, receivables coming down, are we sort of at a new base going forward, or is there still room to bring down some of those items, and then a second question is on the shelf filing, should we read into that as there may be some acquisitions near term or is this based on sort of the continued cash burn and possible cash needs over 18 to 24 months down the road?

Bob Maxfield

Okay. As it relates to your first question, I think there are some opportunities in inventories as I said in my prepared remarks. We intentionally drove up our inventories in Q1 because we were trying to level off some production. And so, we think we will be able to do better on inventory by the end of Q2. And receivables looking on a days sales basis, I think we are doing about as well as we can do, but obviously actual receivable levels are going to be a function of any quarter’s revenues. The shelf registration is just that. We have no plans to do anything at this time. And as I said in my prepared remarks, what we are trying to get ready for is that as growth comes in 2011 and beyond and we believe it will have come, we recognize that we will have to increase working capital. We want to put ourselves in position to execute against that.

Justin Cable – Global Hunter Securities

Great, thank you.

Operator

We have a question from the line of Paul Coster, JP Morgan.

Paul Coster – JP Morgan Securities

Yes, thanks for that, I mean, on the second time. Actually just following up from that last question, to what extent is your ability to secure capital do you think an important consideration when you are going up – you are selling direct to some of the large utilities that are seeking evidence of your ability to deliver on large scale?

Bob Maxfield

It’s not been a factor whatsoever.

Paul Coster – JP Morgan Securities

Okay, thank you.

Operator

And this concludes the question-and-answer session for today’s conference. I would now like to turn the call back to Chris Stanfield for closing remarks.

Chris Stanfield

Thank you very much everyone. We appreciate your time and we will be talking to you in about three months.

Operator

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation. You may now disconnect and have a great day.

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