Echelon's (ELON) CEO Ronald Sege on Q2 2014 Results - Earnings Call Transcript

Aug. 7.14 | About: Echelon Corporation (ELON)

Echelon (NASDAQ:ELON)

Q2 2014 Earnings Call

August 06, 2014 5:00 pm ET

Executives

Annie Leschin -

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

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

Analysts

Patrick Jobin - Crédit Suisse AG, Research Division

Chip Moore - Canaccord Genuity, Research Division

Marc Silk

Operator

Welcome to the Q2 2014 Echelon Corporation Earnings Conference Call. My name is Adrienne, and I'll be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I'll now turn the call over to Annie Leschin. Annie Leschin, you may begin.

Annie Leschin

Thank you, operator. Hello, everyone, and thank you for joining us this afternoon for Echelon's Second Quarter 2014 Earnings Conference Call. With me on today's call are Ron Sege, Chairman and Chief Executive Officer; and Bill Slakey, Executive Vice President and CFO, both of whom will present prepared remarks. By now you should have received a copy of the press release that we issued a short time ago. If you would like a copy, please visit our website at www.echelon.com.

Additionally, we will refer to a set of slides that we have posted on the IR section of the website to walk through the quarterly results and outlook for our markets.

During the quarter, Echelon will be participating at the Jefferies Industrial Conference on August 11 in New York and at the Canaccord Genuity 34th Annual Growth Conference on August 14 in Boston. As other events come up, we will make additional announcements.

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

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

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

Ronald A. Sege

Thank you, Annie. Good afternoon, and thank you for joining us on today's call. I'll begin with a brief discussion of an important strategic decision, followed by an overview of second quarter results and then provide an update on our Industrial Internet of Things, or IIoT strategy.

Beginning with Slide 3. The headline today is that we have made the strategic decision to turn substantially all of our attention and resources to the very compelling market in the IIoT. In order to implement this decision and after a lengthy and extensive process of pursuing strategic alternatives for our Grid business, including the hiring of bankers, we plan to scale it back to meet existing customer commitments only, unless a buyer is found in the very near term.

Our modest expectations for what such a transaction might yield, if at all, are underscored by our Q2 write-off of all goodwill associated with the Grid business. While we continue to be believers in the long-term prospects of the Grid market, we now believe that the market uptick will move outside of the horizon where we can successfully invest in the Grid and, at the same time, fully capitalize on the growing opportunity in the IIoT. With a clear focus on the IIoT, we believe we can leverage our assets and core competencies to best serve customers and offer the highest potential long-term return to our shareholders.

Let me now turn to Slide 4 in our results for the quarter. We met our guidance of $15 million in revenue and a non-GAAP loss of $0.10 per share. With a higher portion of business coming from commercial IIoT applications, gross margins remained strong. We ended the quarter with $51 million in cash, as our cash burn of $4.2 million approximated our non-GAAP operating loss.

On Slide 5. Now let me give you an update on the progress with the strategic objectives that we started to lay out last summer. First, we are reinvesting in our highly reliable, scalable and interoperable core IIoT technology to address the market share erosion in our large LonWorks installed base. With our new products, our industrial customers can now have a smooth path to transition their legacy products into the IIoT based on the IP protocol.

Next, we are expanding into adjacent market segments where important transitions are beginning to occur, such as BACnet base building automation solutions and lighting controls, where we can capitalize on our technologies and competencies.

Finally, the important strategic steps I've already discussed should allow us to reduce our cash burn while continuing to target our investments to opportunities with the greatest overall long-term potential.

On Slide 7. This quarter, we continued to lay the foundation for the migration of our installed base, the next-generation IIoT-enabled technology, while extending the life of customer legacy devices and networks. The combination of our IzoT platform with our multi-protocol IP-enabled FT 6000 chipset and our upcoming IzoT-enabled WiFi modules, is reengaging existing customers and allowing us to reach new ones.

Demand for our IzoT evaluation kits, or EVKs, and the FT 6000 has begun to outpace supply, with roughly 20% of EVKs shipping to new customers. At this year's embedded.com trade show in Japan, we had a strong response from our technical seminar demonstrating our IzoT platform, where over 1/3 of the participants were prospective customers.

Historically, Japanese customers have been at the forefront of IPv6 adoption, and they are enthusiastic for an IP-based solution from Echelon. The building automation market, in particular, is already starting to talk about IP as the future network base for devices. The Japanese market also values highly reliable solutions, a big plus for Echelon.

In May and June, we held 5 successful European IzoT Hands-on Labs, existing and potential customers tested our IzoT technology and worked with our technical experts to understand how to connect different devices in a multi-protocol, multichannel environment; prototype applications on Raspberry Pis; and productize with Echelon chips and modules. Our new platform and products are creating upgrade potential for existing customers' product lines, opening up opportunities for BACnet customer integration and generating interest in new areas.

We increasingly believe that we are addressing a critical need in the market to leverage existing investments while simultaneously preparing for the move to IP with reliable and scalable solutions. According to the Linley Group, only 20% of industrial networks are currently IP-enabled, leaving roughly 80% of the potential market untapped. By offering industrial markets a proven, reliable and scalable way to migrate to IP while not stranding legacy equipment, we can provide unique value to the market.

As a result of our renewed engagement in the IIoT, we are seeing interesting applications emerge. Recently, we spoke to a manufacturer of hospital prescription drug shelves that is looking for a better way to automatically enable access to specific shelves for particular individuals. Drawers enabled with our control technology could provide improved, highly reliable security, allowing only authorized personnel to access the shelf, thereby limiting mistakes or misuse.

In building controls, one of our OEMs has developed a line of refrigeration, HVAC, lighting and energy control products for supermarkets using Echelon's technology. By using our platform, they can mix and match best-of-breed devices from multiple manufacturers into their solution, with a path to a future all-IP network.

Using this control system, a supermarket chain recently created the first refrigeration system in the U.S. to cool and freeze food using only CO2 as a refrigerant. Where traditional refrigeration technologies are prone to leaks that deplete ozone, using this new control system, they can reduce potentially dangerous greenhouse gas emissions.

As part of our strategy to target this growing array of potential applications, we continue to expand our sales distribution channels. This quarter, we added a new semiconductor sales rep that will focus on driving opportunities for the IzoT platform in Germany, Austria and Switzerland.

Turning to our second strategic objective on Slide 8. The upgrade cycle in commercial and industrial lighting appears to be accelerating, driven by the rapid transition to LED technology. We are seeing increasing opportunity in outdoor lighting, driven by the demand for increased public safety, lower energy usage, reduced maintenance costs and multi-vendor interoperability. With the addition of a wireless option to our existing power line-based lighting control solution, we can enter new markets such as commercial parking lots; and new geographies, such as North America.

Along with an expanded product offering, we are also growing our sales channels into the lighting market. We now have 17 manufacturers' representatives signed up and are seeing a heightened level of activity and a growing list of pilots in countries ranging from South Africa to Ecuador, Malaysia, Brazil, China, France and the U.S. While many of these pilots are initially small, we see good potential for larger installations.

Let me now highlight a few on Slide 9. In a seaside city in Ecuador, one of our partners has installed new LED light fixtures equipped with Echelon's outdoor lighting controllers. Now the city can dim the lights on the beachside with a pole, differently than the street side. The result is a safer neighborhood, with less expensive lights to maintain and higher quality, more aesthetically pleasing lighting.

In Asia, a large electric utility was looking at a variety of options for an initial outdoor lighting pilot, which could lead to a large scale, 80,000 unit deployment around the country. In addition to energy savings, they also wanted an automated system to alert them within minutes if a lamp had failed. Having looked at a variety of options, recently, they selected Echelon technology for their initial pilot.

In California, a mass transit agency that we visited recently has been struggling with using wireless links for lights in tunnels due to poor reliability. With our new hybrid IzoT platform, the customer will be able to use a reliable wired link to reach difficult-to-cover areas while using wireless for the rest of the installation, all in one system.

With a growing number of positive data points, we are increasingly convinced that multi-vendor controls will soon be as essential as an on/off switch. In indoor lighting, our work with Xicato to deliver a 48-volt DC power distribution and control solution continues to be validated in the U.S. and Europe. This integrated control platform, powered by Echelon, can turn existing lights from multiple vendors into intelligent, connected devices that can be managed from virtually anywhere. We believe this could be an important catalyst for future opportunities in lighting.

In closing, on Slide 10. The strategic choice to turn substantially all of our resources to the IIoT opportunity, we believe, will ultimately put us back on a growth trajectory. If we cannot find a buyer for our Grid business in the very near term, we, of course, plan to honor our commitments to our Grid customers and partners who have faithfully worked with us over the years.

In the IIoT segment, I am pleased with the progress we have made in just the last few quarters to introduce a new platform and multi-protocol chip, chip evaluation kits, develop new sales channels and begin to reenergize our customer base. The leading indicators we are seeing, including our increasing pipeline in outdoor lighting, high demand for our EVKs and a growing list of new applications are encouraging. We will, of course, continue our emphasis on fiscal responsibility as we finalize our decision on the Grid business, and we believe we are laying the foundation for future growth as an important industry enabler.

I would like to thank our customers, partners and employees for their support and patience during this time of transition as we strive to best serve the market and create long-term value for our shareholders.

Now I'd like to turn the call over to Bill. Bill?

William R. Slakey

Thanks, Ron. Good afternoon, everyone, and thank you for joining us. Let me begin by noting that all references to non-GAAP amounts exclude stock-based compensation and impairment charges. For ease of reference, we have prepared a complete non-GAAP statement of operations for the quarter ended June 30, 2014, which can be found on the Investor Relations section of our website.

Beginning with Slide 12. Revenues for the second quarter were in line with our guidance at $15 million, down 39% from $24.8 million in the second quarter of 2013. The year-over-year decline was primarily the result of lower Grid revenue, which totaled $6.1 million this quarter compared to $13.4 million a year ago. IIoT revenues for the quarter were $9 million versus $11.4 million a year ago, sales to Enel included in our IIoT revenues were $315,000 in the second quarter versus $1.8 million a year ago.

Sequentially, our revenues were down slightly from $17.8 million in the first quarter. This was driven by a sequential decline in Enel revenues from $1.5 million. As we have said, revenues from Enel can be lumpy quarter-to-quarter.

Sequentially, Grid revenues were down slightly from $6.9 million, and IIoT revenues declined from $10.9 million. We have been working diligently the last few quarters to develop new products to position us to capitalize on the transition to the IIoT, but it will take several more quarters until those new products generate meaningful revenue for us.

Turning to Slide 14. Non-GAAP gross margins for the second quarter were 50.2%, an increase from the 47.8% recorded in the second quarter a year ago and up from 49.4% in the first quarter. Gross margin this quarter benefited from higher software revenue, as well as a reduction in other cost of goods, including lower excess and obsolete charges, which is a function of lower inventory balances.

In the third quarter, we expect our gross margin to return to a more typical range of 45% to 47% overall.

Turning to expenses. This quarter, non-GAAP operating expenses were $11.5 million, an 8% reduction from $12.5 million a year ago. This was the result of the restructuring activity initiated last year and ongoing cost reduction efforts. On a non-GAAP basis, R&D for the quarter was $4.6 million, sales and marketing was $3.6 million and general and administrative expenses were $3.2 million.

Looking at the rest of the P&L. Interest and other expenses totaled $350,000 in expense this quarter, compared with $476,000 in expense in the second quarter of last year. These expenses relate to the movement of foreign exchange rates and their impact on the value of intercompany balances.

Our joint venture with Holley in China generated a small loss this quarter. As the results are consolidated, Holley's share of the loss was $129,000 on a non-GAAP basis, down from $176,000 in the second quarter of last year. This is reflected as a slight benefit on our P&L.

Our results this quarter include a noncash impairment charge of $4.1 million against the value of goodwill and long-term assets associated with our Grid business. This reflects our expectations of the value of the business in a sale or as an operation that is scaled back to support existing customer commitments only.

Income tax expense was $106,000 this quarter, roughly flat with a year ago. Non-GAAP net loss for the quarter was $4.2 million or $0.10 per share compared to a non-GAAP net loss of $988,000 or $0.02 per share in the second quarter of 2013.

On a GAAP basis, including stock compensation expense and the impairment charges previously discussed, the net loss for the quarter was $8.6 million or $0.20 per share. This compares to a GAAP net loss of $827,000 or $0.02 per share in the same quarter a year ago.

Our stock-based compensation expense this quarter was $423,000 compared to a stock-based compensation benefit of $161,000 in the same period a year ago. The benefit a year ago was the result of a credit for previously recognized stock compensation expense for employees who left the company, primarily as a result of our restructuring activities.

On Slide 16 and 17, as we first reported in our 10-K filed in March, we are now segmenting the financial information in our IIoT and Grid businesses. IIoT includes sales of our embedded control platform, including components, control nodes and development software. These are typically sold to OEMs and built into their industrial application. Our Grid business includes sale of smart meter devices and software for electric utilities.

Looking at the businesses individually. Our $9 million of IIoT revenues generated strong gross margins of 61.2% in the second quarter. After deducting IIoT-related R&D and sales and marketing expenses, this business generated a strong contribution margin of $1.2 million.

Grid revenues were $6.1 million this quarter, driving gross margins of 34%. With Grid-related R&D and sales and marketing expenses deducted, this business generated a negative contribution of $1.8 million.

In both cases, the segment contribution margin does not include stock compensation expense, G&A expenses or other income and expense. Grid expenses do not include impairment charges.

Moving to the balance sheet on Slide 18. We ended the quarter with $51.1 million in cash, cash equivalents, restricted cash and short-term investments, a sequential decrease of $4.2 million from the first quarter. Our cash usage for the quarter was in line with our non-GAAP operating loss.

Let me turn now to our decision to significantly scale back our Grid business to support existing commitments only, if we are unable to find a buyer in the very near term. Throughout 2012 and 2013, we have taken a number of steps to effectively manage our cash and expenses in order to stretch out the runway we have to see the Grid business through until market conditions improve and demand picks up again. However, as we saw in Q2, our cash burn is now increasing, and we believe we have reached a pivotal point in the future of our IIoT business. Ultimately, we believe that if we continue to invest in both businesses, we may not succeed in either. The financial and opportunity costs have become too large. We believe that it's crucial now that we focus all of our efforts on the IIoT business.

In so doing, we believe that we will be focused on a market that gives us a greater opportunity to differentiate on our advanced technology, pursue an inorganic strategy to expand into additional verticals and grow successfully with a profitable and value-creating business model.

As a result of today's announced decision, we plan to reduce and then eliminate the losses that we have been incurring in the Grid business. In the second quarter, those losses totaled $1.8 million as detailed in our segment reporting; and in Q1, they were $2.1 million.

Additionally, we plan to reduce corporate overheads including G&A expenses. We anticipate a restructuring and other charges in the third quarter resulting from either the scaling back of the Grid business or a potential sale. The size of that charge and the details of the restructuring will be determined during the quarter.

We then expect to begin to see progress towards our expense reduction goals in the second half of the year.

With those comments in mind, our guidance for Q3 on Slide 19 is more limited than is typical. We expect total revenues in the range of $13.5 million to $15 million, due to slightly lower Grid revenue. We anticipate approximately 65% of our revenue will come from sales of the IIoT products, including Enel; and approximately 35% from sales of our Grid products and systems. We expect non-GAAP gross margins to return to a more normalized range of 45% to 47% of revenue. We anticipate restructuring and other charges in Q3, the size of which will be determined by the path we take.

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

Question-and-Answer Session

Operator

[Operator Instructions] And we have Patrick Jobin from Crédit Suisse on the line with a question.

Patrick Jobin - Crédit Suisse AG, Research Division

So the decision to exit Grid, it seems like you could emerge very focused on IIoT and certainly improve the P&L structure here. Just want to make sure I'm looking at some calculations correctly. I'm back calculating roughly about $3.8 million in Grid-related OpEx. Do you think that, that's an achievable spend that you could take out of the business following the sale or otherwise exiting the business?

William R. Slakey

Patrick, this is Bill. Yes, I do. It will take us several quarters to get that done. But yes, I do.

Patrick Jobin - Crédit Suisse AG, Research Division

Okay. And then just bigger picture when you think about the IIoT opportunity set. Certainly, a lot of different verticals you can go after. Just maybe help us understand the cadence of adoption that you're expecting. Certainly, the leading indicators here are positive. But it might be helpful to understand the total TAM and then kind of when you would anticipate really the commercial revenue to kick in.

Ronald A. Sege

Yes. So sure. Thanks, Patrick. So I guess, I'd talk about it in 2 dimensions. The near-term opportunity for revenue growth comes with our outdoor lighting offerings. So those are products we generally already have we're going to be shipping. We have a power line base product today. We're going to be shipping our RF-based product by the end of the year. That both allow -- the latter both allows us to access the North American market. And both of them together give us, we think, quite a unique offering in the marketplace because now we can have a hybrid power line and RF solution to cover indoor areas like parking garages, simultaneously with outdoor areas. So we're very focused on building our outdoor lighting pipeline. It's 9- to 12-month sales cycles. We've added, as I mentioned in my prepared remarks, 17 sales reps. We're starting to build the pipeline in the U.S. and so on. So that's certainly the nearest-term opportunity for growth. The rest of our business today, as you know, is focused -- is largely embedded. Semiconductors and related software gateways and so on that sell primarily into the building automation space. There, we are going through a product line refresh. We just introduced a new chipset. As you know, the free topology FT 6000. We're shipping eval kits. We're pleased with the response so far. But the customer has to evaluate the solution, then they have to design it into a product and then those products have to sell from the OEM out before we start generating revenues. So those evaluation and design cycles could be 6, 9, 12 months or even longer. Building a product is another 6 to 9 months, maybe 12 again, and then the sales ramp. So that's why in my prepared remarks, I said we should consider that part of our business more cautiously and expect revenue to ramp starting in 2015.

And then as I said previously, we're also looking at inorganic options, which hopefully will come with revenues that could further accelerate our growth in IIoT.

Patrick Jobin - Crédit Suisse AG, Research Division

Just last question for me. Two simple housekeeping ones. One, when you separate the IP here of Grid versus IIoT, would the licensing structure merge? Or is the technology capable of being separated? And then just I want to make sure I understand, Enel is being included here in IIoT, given it's the -- the components going into it. I just want to make sure I understood that correctly. And then one on the financials, not guidance, but just want to understand what type of R&D and sales organization investment do you think needs to be made over the next 12 to 24 months to penetrate the IIoT? Presumably you're gearing up for that market.

Ronald A. Sege

Yes. Okay, so lots of questions. I'll start with Enel. And yes, that's correct. Enel will be part of our ongoing IIoT business with builds is how we classify it today. And in fact, we could conceivably sell that kind of a platform to other utilities. It's how we got into the utility business in the first place. As I mentioned, lighting and buildings are our primary goal. But we sell to distributors and OEMs. So the platform could end up with other utilities in the future. Another question you asked is what kind of investment in sales and marketing. So the good news is we are planning to rely very heavily on channels. So for example, both in semiconductor and in lighting, manufacturers' reps are very, very active. And so this is quite an inexpensive way to get more feet on the street, certainly, from an OpEx perspective. As we get a dividend -- should we ultimately end up winding down the Grid business and as we get an OpEx dividend, we will probably put some of that revenue -- or some of that dividend back into sales and marketing coverage. But we'll really do that with a force multiplier into the lighting and the building and OEM business. So those were the 2 questions.

William R. Slakey

IP.

Ronald A. Sege

Oh, intellectual property. So for the most part, you could think of our Grid products as being powered by our IIoT platform. So the Grid products are underpinned by what we -- our legacy LonWorks platform, they would have evolved to IzoT over time. So certainly, we are retaining all of that intellectual property. Some intellectual property that, for example, don't hold me to this, the design of a meter, which something that's negotiable with a future buyer, but the core intellectual property will retain with -- remain with Echelon.

Operator

And your next question comes from Chip Moore from Canaccord.

Chip Moore - Canaccord Genuity, Research Division

Just curious on the Grid decision, if you could give maybe a little more background on when you made the decision, how far along you are in the process. Were there any specific projects that influenced the decision?

Ronald A. Sege

Thanks, Chip. So as you can imagine, I'm not going to get into the details of the process we used. I can assure you, it was a very comprehensive one. We are constantly evaluating our strategic options and have been looking at this for a long time. As you know, we have all been waiting for some signs of an inflection point in the Grid modernization business and, in particular for us, in the electric meter market of the Grid modernization business. We've been able to work extremely hard to contain the cash burn as we waited over time. But as you know, recently and in particular as we announced this quarter and what we have been saying is that at some point, cash burn would approximate our EBITDA, and that time has come. So it just became, Chip, apparent as time went on that continuing to invest for success in both the Grid business and the IIoT business was not a winning proposition. So we've made this decision, which we chose to announce on our earnings call very, very recently. And we're enthusiastic. It's a very tough decision, I might add. Lots of blood, sweat and tears have gone into that -- building that Grid business. We're hopeful that we can find a buyer for it, but it's a short period of time and it's a complex transaction. But we're quite enthusiastic, of course, about the potential in the IIoT market and all of the assets that Echelon has built over 25 years that we can bring to bear on that market.

Chip Moore - Canaccord Genuity, Research Division

Sure. No, that's fair. And assuming you are able to effectuate a sale in short order and with cash burn going down, does this make you more aggressive on the M&A front? And what kind of things are you looking at?

Ronald A. Sege

Well, look, we'll -- our M&A appetite is governed by 2 things. One is does it fit into our strategy? So it has to fit into enhancing our core platform. Ideally, it will fit perfectly with one of our target markets, lighting, for example, building automation, and it has to be consistent with our long-term commitment to fiscal responsibility. So obviously, if we're able to cut -- as we're able to OpEx and conserve cash, that will give us more flexibility and to the extent we can handle this -- can [ph] less flexibility, but we're going to be very careful in how we make these decisions.

Operator

Our next question comes from Marc Silk with Silk Investments.

Marc Silk

So on the Smart Grid, how long has it been since you've engaged, say, an investment banker in this process?

William R. Slakey

Marc, we're not going to go into the details on how long the process and when did we engage. But it's been a lengthy process. It's been exhaustive. We have explored many, many alternatives down this path.

Marc Silk

Okay. And then actually on the balance sheet, you moved about $6 million to restricted cash. Is that just being conservative, just putting that aside as far as -- if you have to close down the Grid operation or sell it?

William R. Slakey

No, that's restricted cash against our lines of credit and such.

Marc Silk

Okay. And going forward, once you're doing no business in the Grid, what can we expect the gross margin to look like? Obviously, you stated the IIoT is about 61%. Is that something we could look forward to down the line?

William R. Slakey

Well, that's what the IIoT business runs at now. As to whether the company as a whole would get to that kind of a level, that depends on exactly the path we take, how many incremental costs for facilities and such that are allocated to Grid now sneak on over to that IIoT side. But generally speaking, the IIoT business for us is made up of semiconductors and software and high-value silver-like appliances. So it runs at a much better gross margin, and I would expect that our gross margins will increase as a percentage of revenue as we become more focused on that.

Marc Silk

That should be exciting. So Ron, I've been reading up on this company called Wink, I'm sure you've heard of it. So it's a simple app that controls and unites all your household products and brands. And their main technology is software intended to be the equivalent of an open operating system, helping to seamlessly connect all kinds of automated home devices. Are those type of things, that's great for us? Or that's a competitor?

Ronald A. Sege

I would say it's neither. Wink is targeting the consumer market. We're targeting the commercial and industrial market. I would say that at the highest sort of conceptual level, they're trying to solve the same problem, which is to provide a platform for multi-vendor devices to interoperate and connect and be managed together, and that also has been the long-term goal and heritage of Echelon and continues to be the goal of IzoT going forward. But we will operate in the industrial setting and they operate in the consumer setting. And yes, Wink is an interesting company. I think it was backed among others, by GE. But there are many, many other competitors there, and the ecosystem into the home is fragmenting like mad. So I think, frankly, that fragmentation is going to slow the consumer market and consumer adoption until there's consolidation, and then maybe the market will accelerate, which is one of the reasons we're staying away from it.

Marc Silk

I can understand like an average Joe, it's just going to take them a long time to figure this out. So you feel that the industrial side of this -- of the IIoT is probably the place to be and as far as being able to monetize these investments sooner than later?

Ronald A. Sege

Yes. I mean, we can point to real return on investment for our customers in the commercial and industrial space. We can point to significant energy savings in buildings. We can point to -- there's a lot of interest in the increasing controllability of LED lighting, not just on/off and dimming, but also controlling color casts. We mentioned that in the prepared remarks that we're working with Xicato, who targets the high-end retail market. And they believe in their studies that shoppers are more comfortable and more satisfied if the color of the light can be adjusted during the course of the day and depending upon what display is being highlighted. So that's more revenue, more customer satisfaction, lower expense and so on. And we have ROI models in our outdoor lighting business that show a 3- or 4-year payback just on the basis of energy savings and then you get the safety and security and maintenance improvement. And so I'm a big believer that we need to go where there are proven ROI models as opposed to more in the consumer space who are -- frankly, it's a convenience thing, not a must-have.

Marc Silk

And lastly, I'm not shocked about the Grid announcement. I guess, the surprise is that we haven't been able to find a buyer yet. So hopefully that happens and we can move on. So good luck.

Ronald A. Sege

Yes. It's a tough market, as you see from some of the competitors' announcements as well. So no assurances. It's complex. We've given ourselves a short time frame, but we're trying.

Operator

[Operator Instructions] And we have no further questions at this time. I would now turn the call back to Ron Sege.

Ronald A. Sege

Okay. Listen, I know it's a busy day, and I thank you, all, for joining our conference call. I want to just close with 3 points: First, we've made an important and carefully considered decision and related announcement today in the history of Echelon. Second, of course, our decision to scale back the Grid business to meet existing customer commitments only unless we find a buyer is a tough one, but we believe it's the right one for our shareholders. We think the decision allows us to focus on emerging -- an emerging market with great potential, where Echelon can apply its formidable assets. Once we're through the transition, we expect operating expenses to be lower and cash burn less, which can enable us to build a profitable, valuable company. So we look forward to talking to you one-on-one and at conferences next week in New York and Boston. Thank you, all, very much.

William R. Slakey

Bye.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!