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Executives

Vanessa Lehr – IR

Bob Maxfield – President and CEO

Chris Stanfield – EVP and CFO

Analysts

Colin Rusch – ThinkEquity

Sean Hannan – Needham & Company

David [ph] – Wedbush Securities

Dale Pfau – Cantor Fitzgerald

Bheeshm Chaudhary – Deutsche Bank

Charles Fishman – Pritchard Capital

Brian Kremer – Roth Capital Partners

Joe Maxa – Dougherty & Company

Echelon Corporation (ELON) Q2 2010 Earnings Call Transcript August 3, 2010 5:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the second quarter Echelon Corporation earnings conference call. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session at the end of the presentation. (Operator Instructions) As a reminder, the conference is being recorded for replay purposes.

I would now like to turn the presentation over to Vanessa Lehr, Investor Relations. Please proceed.

Vanessa Lehr

Hello, everyone and thank you for joining us this afternoon for our second 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, who will both 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 echelon.com.

Before we begin, I would like everyone to know that in the third quarter, Echelon will be participating in Canaccord's Growth Conference on August 10th in Boston, Wedbush Securities' Clean Technology & Industrial Conference on September 14th in San Francisco, and Deutsche Bank's 2010 Technology Conference on September 15th also in San Francisco. As additional events are scheduled in the quarter, we will make other 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 subsequent reports on Form 10-Q for a more complete disclosure of the risks and uncertainties related to our business.

The financial information presented in this call reflects estimates based on the 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. Guidance will not be updated after today's call until our next scheduled quarterly financial release.

I will now turn the call over to Bob Maxfield.

Bob Maxfield

Good afternoon, everyone and thank you for joining us on our second quarter earnings call. I am pleased to report that in the face of an uncertain worldwide economy and skittish markets, Echelon performed above expectations.

The second quarter featured strength across all of our product lines, reflected in $27 million in revenues. While NES revenues were in line with our expectations with deployments to our Danish projects continuing on plan, revenue from LonWorks and Enel exceeded our forecast. Our LonWorks product line's strength came from increased activity in the building controls market in the face of the expected seasonal declines in the demand response market.

Given the higher mix of NES sales this quarter, GAAP gross margins declined from last quarter to 42.2%, while our GAAP net loss was better than our expectations at $6.9 million or $0.17 a share.

Now, I'll turn to a more detailed summary of the quarter, beginning with the LonWorks infrastructure product line. During the first half, the demand response market continued to be a highlight, though I will remind you that this is a seasonal market where systems are installed during the winter and spring to be ready to operate during the summer peak.

This summer, we saw a very visible example of our demand response solution in action. Those of you on the call from the East Coast are likely aware that there were near blackouts that were avoided during the recent heat wave in the region. This was thanks in part to Echelon power demand response systems, such as the one EnerNOC utilizes, which helps utilities shed power loads.

EnerNOC, which is one of our key customers in this market, uses our SmartServer to reduce energy demand at its customers' premises. EnerNOC has been highly visible and has announced that not only has its demand response solution helped to prevent problems in the most recent heat wave, but also that it was called upon to shed load over a dozen times by system operators from California to New York over the past month. Not only does demand response help keep the grid running, EnerNOC's customers get paid to shed load in times of need, making it a win-win solution for end users, the utility, and the grid.

We remain very excited about the role that demand response plays in the smart grid and Echelon's opportunity in this market. We saw continued activity in other energy related markets this past quarter, including intelligent street lighting and solar generation. We are currently engaged with over 15 partners using Echelon's technology in their street lighting solutions around the world and there are several projects in the pipeline.

Turning to solar generation, you may remember that we announced last year that SMA America was using our SmartServer to monitor the health of and the electricity generated by the panels in their solar arrays for service, reporting, and verification purposes. Since that time, we have seen other companies in the solar inverter market begin to migrate to our technology, with several evaluations and designs underway. As with street lighting, we are still in the early phases of this market, but we are building a strong foundation of what promises to be a high-growth industry.

In our traditional LonWorks markets, it is too early to point to the sustainable upward trend worldwide. China seems to be a bright spot where we see promising activity from OEMs for the local Chinese market. We are confident that when economic conditions improve in our markets, we will realize substantial revenue growth in our LonWorks product line.

Now, let me turn to our NES product line. As I mentioned, revenue from NES was in line with our expectations this quarter, driven by the deployment schedules of our Danish projects, as well as the initial shipments to Fortum in Finland. We also received good news that Duke Energy has signed a contract with the Department of Energy for $200 million in government stimulus funds, removing that uncertainty from their plans.

While there has been some negative press surrounding a few non-Echelon smart grid deployments in North America. We are seeing increased interest from other North American utilities. While the deployment concerns could slow some decisions in the short run, we believe it will be positive for Echelon in the long run. It gives us the opportunity to build our presence in North America. This will shift the focus beyond simple AMI and time-of-use metering to an interest in overall grid reliability and consumer benefits.

Echelon has a long history in satisfied customers worldwide to whom we have delivered large systems that are providing consumer benefits, while operating securely, reliably, and economically for the utility. These customers are happy to share their experience of how Echelon's system has streamlined their operations, met or exceeded their expectations, delivered good return on investment, and improved the overall customer experience.

Echelon's customers have been very impressed by the value our NES system offers above and beyond traditional AMI from power quality monitoring capabilities that have helped our customers avoid outages to automated topology management to ensure the accuracy of the information that is required to restore outages quickly and efficiently. And we are glad that the U.S. market is awakening to the value of these and other rich benefits of the NES system.

Before I close my remarks, I would like to briefly mention two other exciting items from this past quarter. In May, Echelon was invited to join U.S. Commerce Secretary Gary Locke on the first Cabinet-level trade mission of the Obama administration. As one of only 10 companies, it was a great opportunity for us to meet with companies and leaders in Indonesia to explain how our products can help meet the growing demand for energy efficiency technologies.

Also in May, Echelon was invited to attend the meetings in China as part of a visit by U.S. Secretary of State, Hilary Clinton. We were especially pleased to be highlighted in the remarks of the Secretary where, among things, she said that Echelon is, quote, "a world leader in developing networking devices and control systems that support smart electrical grids and other ways of improving efficiency. The technologies that Echelon is exporting to China help reduce water usage and greenhouse emissions, which is also good news for both China and the United States," end quote.

Both of these visits provided Echelon with heightened visibility and validation in an important and growing region.

In summary, while we would certainly like to see a more vibrant global economy, we are pleased with Echelon's performance in the first half of 2010. Our LonWorks product platform continued to perform well, our NES deployments in both Europe and the U.S. remain on track, and we expect to see revenues ramp in the second half of the year with continued deployment of our projects in Denmark and at Duke Energy.

We look to the second half of the year with optimism and we remain on track for modest growth in 2010. I remain excited about all of Echelon's markets and I believe there are great opportunities ahead of us. As we work to position Echelon as a premier player in the energy management and smart grid markets, the Echelon team will continue to reach out and forge relationships with key utilities and potential partners. 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 second quarter ended June 30, 2010, which can be found on the Investor Relations section of our website.

Revenues for the quarter were ahead of expectations at $27 million, up from $18.1 million last quarter and up from $22.6 million in the same period in 2009. We were pleased that both our LonWorks infrastructure sales and our NES sales improved on a year-over-year basis.

Sales of our LonWorks infrastructure product line was strong at $11.9 million compared to $12.3 million last quarter and $10.9 million in the same period last year. NES sales were $13.5 million, up from $5.5 million in the first quarter and up from $10 million in the same period last year. Revenue from the Enel project was also ahead of our expectations, as these spare part orders are often hard to predict. Enel's second quarter revenues were $1.6 million compared to $362,000 in the first quarter and $1.7 million in the same period of last year.

Second quarter non-GAAP gross margin was 42.2%, which was below last quarter's strong 48.2% and below 44.9% in the year-ago period. While non-GAAP gross margin declined on both the sequential and year-ago basis, the decrease was driven by stronger sales on our lower-margin NES product line, though we are pleased to be ahead of our target.

Non-GAAP operating expenses were $15.2 million, down from $16.2 million last quarter and up from $14.7 million a year ago. The sequential reduction was due in part to the timing of expenses that we now expect will occur in the second half of the year. We continue to focus on prudently managing our operating expenses.

Interest and other income was $504,000, up from $435,000 in the first quarter on continued strengthening of the U.S. dollar. In the same period last year, interest and other income and expense was a net loss of $377,000 due to foreign currency translation losses we booked as a result of the then weakening U.S. dollar.

Our GAAP net loss for the second quarter of 2010 was $6.9 million or $0.17 per share. This compares to a GAAP net loss of $10.6 million or $0.26 per share last quarter and a GAAP net loss of $9.5 million or $0.23 per share in the same period last year. Our non-GAAP net loss for the quarter was $3.9 million or $0.09 per share compared to $7.3 million or $0.18 per share last quarter. Non-GAAP net loss for the second quarter of 2009 was $5.5 million or $0.13 per share.

Moving to the balance sheet, we ended the second quarter with cash, cash equivalents, and short-term investments of $72.4 million, a $4.1 million decrease from last quarter. Strong revenues that were largely back-end loaded caused accounts receivables to increase by $5 million to $18.7 million.

Now, I would like to turn to guidance for the third quarter of 2010. We expect total revenue for the third quarter of 2010 to be in the range of $25 million to $27 million with LonWorks infrastructure accounting for approximately 44%, NES about 50%, with the remainder from Enel. We anticipate non-GAAP gross margin to be in the range of 45.3% to 46.5% for the quarter. Finally, we estimate our GAAP loss per share will be between $0.20 and $0.23 and our non-GAAP loss per share will be between $0.12 and $0.15.

Now, I would like to turn the call back to the operator for questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Colin Rusch of ThinkEquity. Please proceed.

Colin Rusch – ThinkEquity

Can you talk a little bit about the municipal smart grid market in the U.S. and any pilot activity, quoting activity, and how big you think that opportunity might be for Echelon?

Bob Maxfield

Could you please repeat your question one more time?

Colin Rusch – ThinkEquity

Sure. Can you talk about the municipal utility market in the U.S., about any activity now in terms of building pipeline and how big that opportunity might be for you over the next two years?

Bob Maxfield

Sure. I think that the municipality market is developing more slowly than the larger utilities, but represents a very – long term, represents a very good market for us. There are some – there have been some municipal utilities that have made some awards, there are a number of pilots going on, and we think that our particular system technology is particularly well suited for utilities – I mean, for municipalities. So – but at the moment, we have not reported any significant wins in municipalities.

Operator

Our next question comes from the line of Sean Hannan of Needham & Company. Please proceed.

Sean Hannan – Needham & Company

Yes, good evening.

Bob Maxfield

Hi, Sean.

Sean Hannan – Needham & Company

Hi. Okay. So a quick question for you. Is there a way perhaps if you can provide a little bit of an update for us around the regulatory environment, particularly internationally, what perhaps has progressed in the last few months, and in particular, what are you seeing in places such as The Netherlands or any countries that maybe you can identify that are – that you are tracking maybe a little bit more closely?

Bob Maxfield

We are tracking all of the activities in Europe and in the other major markets. There really is nothing significant, new to report in the last quarter or so. The German regulators, the U.K. regulators have still not clarified a lot of the issues in those countries. There is an EU-wide committee that has mandated to look at overall standards for Europe that is still in process. So there really is no significant developments there.

Sean Hannan – Needham & Company

Okay. Well – so, if you look out – and I know it's a little bit early to talk about, say, even guidance for 2011, but when you look out at your opportunities and based on your current programs and the NES – the – specifically, the NES side, domestically with Duke, also Denmark, Finland, perhaps Eastern Europe, can you provide a little bit of a rank order around where you expect your larger level of activities to be generated and how that may progress?

Chris Stanfield

Well, I think we expect to have revenues in all of the areas in what you mentioned. The Duke program is progressing quite well as Bob said in his prepared remarks. Obviously, next year is going to be an important year for our projects in Finland. We are hopeful that things are going to develop in the other parts of Europe. And beyond regulatory issues, we are also hopeful of an improving economy improve the market for our products in Eastern Europe.

Sean Hannan – Needham & Company

Okay. That's helpful. And then lastly, if I can just ask a little bit around the LonWorks environment, is there a way if you can provide a little bit of color around the mix of the business that you would expect to typically play out in the back half of the year in terms of relative strength considering what – I think we all know that the DR space is really the only major piece that has some significant seasonality to it in general.

Chris Stanfield

Well. Yes – this is Chris. Let me just give some basic thought here. You have already observed the fact that the deployment period for DR system tends to be in the winters, right. In Europe, there is an overall slowdown that occurs in the summer quarters and that's associated with vacation patterns, and in some instances, some of our customers actually shut down their facilities for periods of time. Beyond that, I don't think there is any great seasonality that I can speak to in terms of LonWorks.

Sean Hannan – Needham & Company

Okay. All right. Thanks very much.

Operator

Our next question comes from the line of Craig Irwin of Wedbush Securities. Please proceed.

David – Wedbush Securities

Hi. This is David [ph] for Craig.

Bob Maxfield

Hi, David.

David – Wedbush Securities

Hi. I got a couple of questions. I guess I'll piggyback on the NES. Can you guys talk a bit about the – any cost-outs on the redesign there?

Chris Stanfield

Well, I think if what you are referring are margins, our margins are improving over time as a result of customers moving from our generation 2.X products to our 3.X products. But I don't want to get into specifics in terms of margins.

David – Wedbush Securities

Okay. How about – how are trials going in South America, North America, and Europe?

Bob Maxfield

Well, all of our trials that are underway are continuing to do well. In South America, as you know, we have a – an agreement with our partner in Brazil, ELO, who is in the process of using our technology to design an NES compatible meter for our system in Brazil. They have submitted their design for certification to the Brazilian authorities and they are one of the first meter manufacturers in Brazil or first into – any meters to be submitted for approvals under the new smart grid program there. So we are very encouraged by that. We think we are in a leadership position in that area and as soon as their rollouts begin, we think things will go very well.

David – Wedbush Securities

How about pipeline for trials? Do you have any color there?

Chris Stanfield

I think it – as we have reported in the past, I mean I think there is lots of activity occurring around the world. We are very encouraged by that. We track it carefully and that's part of our whole process of managing our NES pipeline.

David – Wedbush Securities

Okay, thanks. And then if I can just – will you guys talk a little bit more as to demand you are seeing for demand response? Do you have any further color you can provide there?

Chris Stanfield

Well, I think what we see is, we see a view through that subset of customers that use our solution. But – yes, I think what see is an increasing – that that is a rapidly growing portion of our LonWorks product line and I think it reflects the obvious advantage that this provides, as Bob said in his prepared remarks, a short-term action that can be taken today to help balance supply and demand. And we are – as Bob said, we are very pleased with how we contributed to helping folks manage through what was thus far a very warm summer.

David – Wedbush Securities

Thank you, gentlemen.

Operator

Our next question comes from the line of Dale Pfau of Cantor Fitzgerald. Please proceed.

Dale Pfau – Cantor Fitzgerald

Good afternoon, gentlemen. First of all, could you give us an update on – in the past, you would at least give us – given us some indication of how many trials you've got going on. Has that changed, up, down? Just a little bit of thought there and then I've got a follow-up.

Bob Maxfield

Well, we have a large number of trials underway as we have said and that number is – continues to change. I mean, some trials new – we have some new trials, but we don't report on specific details of the trials.

Chris Stanfield

But it's going well.

Dale Pfau – Cantor Fitzgerald

Okay. And then to follow up on what you are doing with some of the inverter manufacturers in the solar business, I am certainly aware a number are using your transceivers and SMA using the SmartServer. Are other – particularly for central inverters, are people – more people considering using the SmartServer or are you just talking about a broader application of the transceivers?

Bob Maxfield

Well, I think we have companies that are interested in both. The power line transceivers are a very good technological way to communicate from the solar panels to the controllers and of course, our SmartServer is ideally suited for monitoring and controlling large arrays of panels. So we have interest in both aspects of our product line there.

Dale Pfau – Cantor Fitzgerald

Okay. Thanks very much, gentlemen.

Operator

Our next question comes from the line of Carter Shoop of Deutsche Bank. Please proceed.

Bheeshm Chaudhary – Deutsche Bank

Hi, good afternoon, guys. This is Bheeshm Chaudhary for Carter. First question, I guess, I had was on the Danish utility. Can you comment on how large a percentage of that was the NES revenue this quarter?

Chris Stanfield

I don't have that number with me, but the Danish projects were a significant portion of our revenue; as I had previously indicated, they would be. Those projects are moving forward and they are performing very well for us.

Bheeshm Chaudhary – Deutsche Bank

And you expect that to continue through 2011, the Danish project?

Chris Stanfield

We can – we believe that Denmark is going to be a continuing important market for us. It is a part of the source of the second half growth that we see in NES, as Bob reported to you earlier. And we are very excited about how we are doing in Denmark.

Bheeshm Chaudhary – Deutsche Bank

Okay. And when you say significant percent of revenue, you mean total revenue or – I guess, NES, but is it – would it be fair to say it's about 20 – over 20% of total sales?

Chris Stanfield

Yes. I think – as you know, there is a schedule that we will be filing with our Form 10-Q and I'm sure that Eltel, who is our value-added reseller that manages many of these opportunities, because there is many of them, it's not a single opportunity – I expect that for the six-month period, they will be around 28% of our consolidated revenue.

Bheeshm Chaudhary – Deutsche Bank

Thank you. The second question I had was on Duke. You said that with the news of Duke getting DOE – or finalizing the DOE funding – and I know that the Indiana portion has not yet been decided on, but on the Ohio part, how long do you expect that project to be deployed over, now that Duke has its smart grid investment grant?

Chris Stanfield

I don't think we know, because as you appreciate, there was a delay that was built into the process by the time it took to get the stimulus awards out there. But once again, as Bob said earlier, we expect shipments to Duke in the second half to be part of the reason for accelerated NES revenue in the second half of this year.

Bheeshm Chaudhary – Deutsche Bank

Got it. Thank you.

Operator

Our next question comes from the line of Charles Fishman of Pritchard Capital. Please proceed.

Charles Fishman – Pritchard Capital

Thank you. Bob, in the first quarter call, you mentioned that you may increase sales – domestic sales staff just because of the difference in the selling process between the U.S. and international. Did that occur and could you provide any numbers if it did?

Bob Maxfield

Well, I believe what I said was that as we get traction with opportunities and – in this market that we will increase our staff as appropriate to cover the opportunities that we have. We are at the moment aggressively recruiting for additional salespeople for the U.S. market.

Charles Fishman – Pritchard Capital

So the numbers are flat, but you are recruiting and expect to add people. Is that – would that be a correct statement.

Bob Maxfield

Yes, that's correct. We are well along on the recruiting process.

Charles Fishman – Pritchard Capital

Okay. And then next question is, how – Finland just started taking product and will that ramp pretty quickly now in the second half as well?

Bob Maxfield

Well, that's – it's going to ramp more slowly in the second half. The main ramp for the Finland project will be in 2011.

Charles Fishman – Pritchard Capital

Okay. Thank you very much.

Operator

Our next question comes from the line of Brian Kremer of Roth Capital Partners. Please proceed.

Brian Kremer – Roth Capital Partners

Bob, good afternoon.

Bob Maxfield

Good afternoon.

Brian Kremer – Roth Capital Partners

Two questions maybe. Back to Duke, would you assume – should we assume that the size, scale of additional shipments to Duke is going to warrant some sort of press release or is this – or these just smaller orders that you are getting regularly that will continue? I mean, if it's going to – again, support a stronger second half, I would think it would be the former rather than the latter.

Chris Stanfield

Well – this is Chris. What we do, as you know, is when we win something – let's refer for a moment, say, to the Danish projects, we will tell you folks that we won an opportunity through our value-added reseller Eltel for a certain number of meters with a certain utility. Then in the ordinary course, we get orders from time to time and no, we don't announce those.

That's the same way we manage the Duke project. We, of course, announced a major order a year ago, because that was really the signal that Duke had chosen our platform. But as we receive orders from Duke from time to time, we don't put out press releases.

Brian Kremer – Roth Capital Partners

Okay. But there is obviously a big gap between – what was it, about $16 million and $150 million potential and I'm assuming obviously that include – included Indiana.

Chris Stanfield

So I think what happens with most of our customers – I'm going to generalize now, is what happens is that they have a project and they order products consistent with lead times to support their installation schedules as those evolve over time and Duke is no different than the rest of those. And so we would – there is no reason for Duke to go out and order all of the material it needs for Ohio today. They place orders from time to time for the materials they need, and that's how we have managed this business for years.

Brian Kremer – Roth Capital Partners

Okay, great. Thank you. And then on the – I think the – it was the – some of the costs, R&D, sales and marketing, you referenced, Chris, I guess there was a slight downtick in the quarter, but this was related to some one-time and we shouldn't expect that going forward? Could you elaborate on that a little further for us?

Chris Stanfield

Research and development, product development costs in all departments are of course comprised of some costs like people, but then there are other costs. And those costs could be payments made to third parties for services, et cetera. Those costs under-ran our expectations in the first half. We have looked at why that happened. It was pretty much all timing; that is the expense is still going to happen, it's just going to happen later than we have intended. And so that's why I wanted to be careful that people didn't think that we had done some brilliant job of –

Brian Kremer – Roth Capital Partners

Okay. And I guess the same – a little bit there on the sales and marketing, but maybe that was addressed in terms of you guys foresee potentially bringing some more folks on board, but there was a bit of a – quite a drop-off there as well.

Chris Stanfield

Yes. I don't – I think that the – beyond – I think the biggest issue is simply the timing of what I would call other controllable expenses. The personnel portion of our spending is occurring pretty consistent with our target.

Brian Kremer – Roth Capital Partners

Okay. Okay, that's it. Thanks.

Operator

Our next question comes from the line of Joe Maxa of Dougherty & Company. Please proceed.

Joe Maxa – Dougherty & Company

Thank you. Most have been answered. I did want to ask a little bit about your Eastern European opportunities. Have you seen some pickup there or do you expect to anytime in the near future?

Bob Maxfield

Yes. I think we are seeing increased activity in various parts of Eastern Europe. The – it still remains – the economy still remains an issue, financing still remains an issue, but a lot of our European – our Eastern European partners are talking to us about the situations that they are getting involved in and we are pretty optimistic.

Joe Maxa – Dougherty & Company

And you think this could lead to something meaningful, when, by the end of the year, next year, 2012?

Bob Maxfield

No, I think – well, 2011, I think these – the things that we are looking at now would start to – if they come to fruition, and not all of them will of course, it would 2011-type revenues.

Joe Maxa – Dougherty & Company

Got it. All right. Thank you.

Operator

(Operator Instructions) Our next question comes from the line of Colin Rusch of ThinkEquity. Please proceed.

Colin Rusch – ThinkEquity

I apologize for getting cut off earlier. Chris, can you talk a little bit about cash flow through the end of this year into next year and what your expectation is in terms of working capital needs and the cash balance going into 2011?

Chris Stanfield

We are managing very closely to our plan. As I said in my prepared remarks, we didn't do as well as I would have liked on accounts receivable this period, but that was more a matter of when the revenue was timed from the customer. But we are doing an outstanding job of managing inventories, accounts receivable, capital expenditures, all of the things you would do.

We don't have any short-term need for cash and I think that we will be able to manage through the recession, or whatever it is we are in, just fine. But as I said on my last call – on our call, the reason that we filed a shelf registration that we did is that we do see things getting better. We think there is a bright future for LonWorks, we think there is a bright future for our NES product line, and we recognize that we will need working capital when growth returns.

Colin Rusch – ThinkEquity

And can you give us an update on the building controls opportunity in Asia, what you are seeing right now in terms of activity and pipeline building?

Chris Stanfield

Well, I think it's what Bob said. I think what we see is that China, albeit from a small base, is doing the best job of growing right now through much of Western Europe and the United States; we are of course still digesting the problems in commercial real estate. The growth in China is real.

Colin Rusch – ThinkEquity

Great. Thank you so much.

Operator

Our next question comes from the line of Craig Irwin of Wedbush Securities. Please proceed.

David – Wedbush Securities

Hi, I tried to jump out of the queue. My question was asked. It was on the SG&A decline. Thanks.

Operator

There are no further questions at this time.

Bob Maxfield

Thank you very much. We will talk to you on our next call. Bye.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.

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