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Echelon (NASDAQ:ELON)

Q1 2011 Earnings Call

May 05, 2011 5:00 pm ET

Executives

Ronald Sege - Chief Executive Officer, President, Director and Member of Stock Option Committee

Oliver Stanfield - Chief Financial Officer, Principal Accounting Officer and Executive Vice President of Finance

Annie Leschin - IR

Analysts

Michael Horwitz - Robert W. Baird & Co. Incorporated

Benjamin Schuman - Pacific Crest Securities, Inc.

Craig Irwin - Wedbush Securities Inc.

Elaine Kwei - Jefferies & Company, Inc.

Colin Rusch - ThinkEquity LLC

Patrick Sullivan

Sean Hannan - Needham & Company, LLC

Mike Ritzenthaler - Piper Jaffray Companies

Dale Pfau - Cantor Fitzgerald & Co.

John Quealy - Canaccord Genuity

Unknown Analyst -

Operator

Welcome to Echelon Earnings Conference Call. Now, I'd like to turn the call over to Annie Leschin, Investor Relations.

Annie Leschin

Hello, everyone, and thank you for joining us this afternoon for our first quarter 2011 earnings conference call. With me on today's call are Ron Sege, President and Chief Executive Officer; and Chris Stanfield, Executive Vice President and CFO. Both of them 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.

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

Before we begin, I would like to let everyone know that in the second quarter, Echelon will be participating in Deutsche Bank's Alternative Energy, Utilities & Power Conference on May 11 in New York City, JPMorgan's Global Technology, Media and Telecom Conference on May 16 in Boston and Needham's Clean Tech Conference on May 17 in New York. As additional events are scheduled in the quarter, we will make other announcements.

Now I'd 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 those in our SEC reports including our report on Form 10-K and subsequent reports on Form 10-Q for 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.

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

Ronald Sege

Thank you, Annie, and good afternoon, everyone. Let's start with Slide 3 in the presentation. I'm pleased to report that our focus on sales discipline, go to market execution and accelerated innovation showed results in Q1. Under our core theme of one company focused on open standard energy control networking, we are successfully building pipeline as we sell into our 2 target markets, utility and commercial and in most promising geographies and vertical flow of life. We've begun to partner more successfully and more flexibly across our range of solutions and we are beginning to layout our strategic vision to lead this market with the introduction and extension of the Echelon Control Operating System, COS, the world’s first open standard control operating system and a broad range of hardware that runs it.

Turning to Slide 4, as a result of this improving execution and clear direction, I am happy to report that we once again achieved our guidance on both the top and bottom lines in Q1 with revenue of $28.4 million and non-GAAP net loss of $6.1 million. Revenue grew 56% versus Q1 2010, which we believe is well ahead of market growth rates.

Even more encouraging is our guidance for Q2 2011 which represents another 56% year-over-year increase with revenues of $42 million to $44 million and a non-GAAP profit range of breakeven to $0.02 per share.

Given our momentum so far this year, we now expect to achieve 2011 growth towards the higher end of our previously guided range of 20% to 30%.

Turning to Slide 5, let me begin with a few high-level comments before I discuss the details of our Q1 results. The tragic and challenging events worldwide in recent months have, in our opinion, reinforced the critical need for better energy management. From the terrible incident at the Japanese nuclear plants to the unrest in much of the Middle East, global interest in energy independence and, therefore, in the benefits of the smart grid is accelerating. The smart grid requires control networking, a combination of control software and control hardware that is reliable, survivable and instantaneous. This has been Echelon's specialty and core competency for 20 years, giving us a unique perspective on the needs and the dynamics of this market.

While the macro trends appear positive, post-recession, we are seeing increased scrutiny of the business cases for smart grid investments. These business cases rest on specific drivers in various geographies and verticals. Consideration such as energy supply availability, the condition of existing distribution grids, back levels, interest in renewables and electric vehicles and commitments to reducing greenhouse emissions and improving air quality are increasingly determining specific smart grid demand.

Importantly for Echelon, areas such as Europe and Russia where we have a strong presence are especially committed to addressing these challenges as our other emerging regions such as Latin America and China, where we are now focused in our developing early tractions.

Now, let me provide some color on our key markets in our key Q1 results. Beginning with our Utility market, Q1 revenue grew 168% versus the same quarter last year to $14.6 million. Rollouts continued to Duke, Fortum, SEAS as well as several smaller projects in our international markets and we announced an important new win at NRGi in Denmark. Our pipeline continues to grow as we focus our sales efforts on key target geographies. Our new strategy of selling complete solutions, subsystems or components and partnering as appropriate is giving us further flexibility to penetrate these markets.

European governments continue to drive towards the EU 20-20-20 goals, which in turn are driving ongoing interest in the smart grid. With just a small fraction of the EU's 250 million meters currently considered smart, we anticipate continued strong activity throughout Europe where Echelon has a significant presence.

NRGi is a new win for us in Europe. In 2008, the Danish utility selected Echelon for its first 50,000-meter project. When it came time to roll-out the remainder of its 200,000-meter territory, NRGi went back to the market and issued a new RFP [request for proposal] to ensure that it purchased the best system it could for its customers, one that was highly reliable, cost effective and has delivered a wide range of services, not just for smart metering but to enable a plant-to-plug smart grid.

After a very detailed analysis that examined the costs of different solutions, as well as the financial and operational benefits over 15 years, Echelon won again. We expect this new deployment to rollout over the next 12 months.

Other examples of countries where we see the right conditions for strong smart grid demand are Brazil, Russia and China, where we are focusing our range of sales tactics, selling systems, subsystems and components.

In Russia, we are utilizing a value-added reseller relationship with EnergoAuditControl, EAC, to successfully build market share with our complete NES systems. With EAC, we recently announced the win at PermEnergo which is part of the MRSK Group, one of Russia's largest utility holding companies with about 15 million residential customers.

This national pilot of 50,000 meters has become very high profile, capturing the attention of Russian President Medvedev. Working with EAC, Echelon was the only non-Russian vendor among the 5 selected to install 10,000 meters by year end. The government expects this project to save customers up to 20% on their electricity usage while lowering operating costs and improving overall smart grid efficiency. With nearly 60 million meters, the Russian market has significant potential for us.

In Brazil, we are pursuing a subsystem model. Our partnership with ELO, the leading meter supplier in Brazil with about 40% market share is progressing well. ELO remains on track to be the first third party to integrate Echelon's Open Smart Grid Protocol, OSGP into their meters. We anticipate regulatory approval of ELO's meters in the next few months and expect Brazilian utilities to begin pilots this year with ramp to volume in 2012 as Brazil starts to upgrade its 63 million homes to smart meters.

In China, with fast economic growth and a burgeoning middle class, improving electricity distribution and usage efficiency is an absolute imperative. In fact, I just read in a local Chinese newspaper that the power shortages in the Zhanjiang Province were the worst since 2004 with 500,000 enterprises operating according to a rotating supply schedule. Since Chinese utilities generally buy from local suppliers, we are marketing our unique components and subsystems to targeted Chinese partners in this exciting 300 million-meter market that are seeing promising signs.

Last but certainly not least, our Duke deployment in Ohio is in full swing. We expect Duke to present a scheduled status report on its smart metering program to the Ohio PUC [Public Utilities Commission] later this summer, and we look forward to the market seeing more details on our successful rollout and its benefits. In Indiana, we, like Duke, are awaiting regulatory approval so we can proceed with deployment.

With our Edge Control Node, or ECN, running our Echelon COS software, our field trial at Duke continues to go well. We are focused on delivering initial production units later this year as planned and ramping to volume in 2012. Overall, our pipeline for the ECN and Echelon COS continues to develop and we are bullish about our prospects in the U.S. and abroad.

Building on the introduction of COS in September, we recently extended it to our NES meters to enable utilities to easily connect and control devices inside buildings. For example, using Echelon power line communications or wireless Zigbee from the meter, utilities can give their customers power usage detail on an in-home display and also control devices such as thermostats and load controllers if the consumers desire it.

Our Finnish customer Fortum will be the first to roll out this solution, relying on our power line communications for most of the deployment because of its high reliability under a wide variety of conditions. We expect strong interest in COS on the meter as utilities offer consumers immediate information and control over their energy consumption.

Now for our commercial markets highlights. As shown on Slide 6, Q1 revenue grew slightly over Q1 2010 to $12.6 million as we saw demand improve in our OEM building automation market and promising traction in our 3 target vertical markets. In our building automation market, we are seeing steady improvement as a result of our renewed sales focus.

Demonstrating the importance of our technologies to our OEM partners, Siemens Building Technologies announced a shipment of its 1 million LonWorks-based energy controllers. Overall, Siemens has installed Echelon-based products in more than 6,000 customer projects, reflecting the distinct advantages of our products to this industry.

In building energy management, we announced the relationship to deliver turnkey solutions with Infor, a leading provider of business software and services to 70,000 customers in 125 countries. Complementing our partnership with cloud-based Serious Materials, the Infor climate state solution allows commercial and industrial customers to quickly and easily reduce building energy maintenance and maintenance costs. The solution is comprised of Echelon SmartServer and Infor's EAM Asset Sustainability Edition product. Working with Infor enables Echelon to increase our market reach by leveraging their large sales force and installed base.

In street lighting, we are seeing increasing traction in Europe with especially strong interest in France. Today, we have approximately 30,000 streetlights deployed there with pilots in more than 60 municipalities including Lyon, Brest and Moissy. These pilots are reporting up to 45% energy savings for more efficient and granular monitoring and control of individual lamps.

In China, we are also seeing new pilot activity following our initial deployments with ESCO, Rongwen and other partners. Our power line chips are also starting to be designed into LED street lighting controllers, while early days we believe this will be a rapidly growing segment in the years to come.

Turning to Slide 7, before I close, let me welcome 2 new executives to the Echelon family who will drive our focus on accelerated innovation. Rob Hon, joined us in March as Senior Vice President of Engineering. Rob continues a long career in Silicon Valley with a deep understanding of systems, software and hardware derived from advanced computer science degrees from Carnegie-Mellon University and Yale and executive assignments at Apple, Cadence, Packeteer and innovative start-ups. More recently, Varun Nagaraj joined us as Senior Vice President of Product Management and Marketing. Varun brings excellent experience with recent start-up CEO roles, plus senior leadership roles of Extreme Networks, PRTM and HP. Together, Rob and Varun will help us refine our products and solutions strategy around the Echelon Control Operating System, our unique control networking hardware and our unrivaled power line communications technology.

In summary, while there is much more to do, we are pleased with our progress in Q1 and our outlook for Q2. On my first conference call after joining Echelon, I remarked that ours is a company with great technology, products and customer success story that is a well-kept secret and that we needed to fix that and get out, get the word out to the world. In that context, I was pleased to see that Forbes Online just named us one of the 5 most innovative tech companies in America. This is also a good indication of our progress.

Now let me turn the call over to Chris.

Oliver Stanfield

Thanks, Ron. Good afternoon, everyone and thank you for joining us on our first quarter earnings call. 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 quarter ended March 31, 2011, which can be found on the Investor Relations section of our website.

As reflected on Slide 9, revenues of $28.4 million were in line with our expectations and significantly ahead of the $18.1 million reported in the same period last year. Promotional revenues continue to improve year-over-year, coming in at $12.6 million for the quarter, up slightly from the same period last year. Sales of our utility products were $14.6 million this quarter, up 168% over the first quarter of 2010. Our revenue from Enel in the first quarter was $1.2 million, up 223% from the same period of last year.

For an overview of revenues from our significant customers during the first quarter, please refer to Slide 10.

Turning to Slide 11. First quarter non-GAAP gross margin was 47.4%, below last year's 48.2%. This reduction led the result of a higher percentage of our revenues we derived from our utility products this quarter. The good news is that we continue to see improved gross margins from this product line. In addition, we did an effective job in managing our indirect spending in cost of goods sold in the quarter which helped maintain overall higher gross margins.

Non-GAAP operating expenses for the first quarter were $18.9 million up from $16.2 million in the same period a year ago. This $2.7 million increase was spread as follows: $1.4 million in product development, $753,000 in sales and marketing and $543,000 in G&A. As compared to the fourth quarter of 2010, non-GAAP operating expenses increased by approximately $245,000 or 1%. The higher product development expenses in Q1 2011 as compared to the same period in 2010 were primarily the result of continued costs associated with our Edge Control Node and Echelon COS products which we announced in the third quarter of last year. In addition, our product development expense increased due to the timing of customer funding to some of our product development expenses.

As you may remember from our last earnings call in February, approximately $4.5 million of our full year 2010 product development expenses were offset by customer payments we received. Of this $4.5 million, approximately $587,000 was used to offset product development expenses in the first quarter of 2010. There was no corresponding offset during the first quarter of 2011.

The year-over-year and sequential quarterly increases in our non-GAAP sales and marketing expenses were anticipated and were used for our renewed focus on sales and marketing which we discussed in last quarter's call. The increase in non-GAAP G&A costs during the first quarter was due primarily to increased compensation cost associated with our 2011 management bonus plan as well as the restoration of full salaries of our G&A personnel in the second quarter of 2010.

Interest and other expense was $360,000 in the first quarter, down from interest and other income of $435,000 in the same period last year. This change from income to loss between the 2 periods was driven by foreign currency translation losses we booked on our short-term intercompany balances during the first quarter of 2011. In the first quarter of 2010, we have recognized translation gains on these balances when the dollar was strengthening.

Our GAAP net loss for the first quarter of 2011 was $9.3 million or $0.22 per share. This compares to a GAAP net loss of $10.6 million or $0.26 per share in the same period a year ago. Our non-GAAP net loss for the quarter was $6.1 million or $0.15 per share compared to $7.3 million or $0.18 per share on the first quarter of 2010.

Moving to Slide 13, we ended the first quarter with cash, cash equivalents and short-term investments of $60.9 million, a $3.7 million decrease from last quarter. $2.6 million of this reduction was due to cash used in operating activities with the remainder being attributable primarily to capital expenditures and taxes paid on equity compensation awards.

Now, I would like to turn to guidance for the second quarter of 2011 as reflected on Slide 14. We expect total revenue to be in the range of $42 million to $44 million, with our utility revenues accounting for approximately 65%, commercial about 31% and the remainder from Enel. We anticipate non-GAAP gross margin to be in the range of 45.5% to 46% for the quarter. Finally, we anticipate our GAAP loss per share will be in the range of $0.05 and $0.07 and our non-GAAP results will be between breakeven and an income per share of $0.02.

For full year of 2011, we now expect revenue growth in the upper end of our previously stated 20% to 30% range. Within our specific markets, we believe that utility revenues will grow nearly 40% and the commercial revenues will grow in line with the 10% improvement we achieved in 2010. Lastly, we expect our Enel revenues will increase by about 50% during 2011.

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

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Sean Hannan of Needham & Company.

Sean Hannan - Needham & Company, LLC

One thing I wanted to -- if I could ask about, since we're preceding a little bit more with some of these emerging geographies, when we think about how you may ultimately get through a better scale in Brazil with ELO as well as whatever opportunities may materialize in China, can you talk about how the impacts will be when you look at your margins considering that this is going to be a slightly different dynamic around that product sale?

Ronald Sege

Let me first ask Chris to answer this specific question. But just to make sure, and I know you know that, Sean, that our strategy for going into Brazil is a subsystem one. And our strategy for going into China is subsystems and components. And in fact, the strategy we used so successfully with NL in Italy is exactly the one that we're applying in variance to both Brazil and to China. And that's different than how we sell into, for example, Duke and Fortum where we sell complete systems. So with that, let me turn it over to Chris to answer this specific question about margins.

Oliver Stanfield

Yes, our percentage margins are going to be just fine. I think the only issue as you know, Sean, is obviously the dollars of revenue per point would be less. But our percentage of gross margins are going to be just fine.

Sean Hannan - Needham & Company, LLC

Okay, that's helpful. And then when we think about the pilots that you're engaged in Russia, when would something like this actually go to a full deployment? And then just if you can help to kind of clarify for us, what's the point in opportunity there?

Oliver Stanfield

Well, just to be clear, so what we announced was that we were one of 5 selected for a 50,000-meter pilot and that is effectively a proof of concept for the smart grid in Russia that has very high visibility. And by the way, we were the only non-Russian smart grid provider selected. So there is no specific follow-on project, this isn't part of a broader tender. However, Russia and the President have high expectations. They need to cut energy costs. As I said in my prepared remarks, it's one of those geographies that scores high in terms of the various criteria that we are using to target our market. So we expect to have a successful pilot. We suspect that that will be compelling and that will lead to the market moving. Obviously, it gives us more visibility, allows us to participate in and influence the standards and it's a 60 million point plus market. It's big. Does that answer the question, Sean?

Sean Hannan - Needham & Company, LLC

That does. Just a quick point of clarification. I realized this we're not talking about attendance [ph] today but were there or have there been any conversations around what that expectation should be? Is that a 2012 to 2013 scenario where you would turn around and go back into process?

Ronald Sege

There have not, but I will remind you that there are deployments happening in China. I think we previously announced that we have -- I'm sorry, in Russia -- that we have 300,000 meters already deployed there so that market is moving and our hope is that successful pilot here will accelerate that.

Sean Hannan - Needham & Company, LLC

Terrific. And then turning domestically, when we look at the Duke deployment, as well as the ECN field trials, can you discuss a little bit around how -- what have we actually done so far in terms of getting products on the ground on the ECN side? And then to what degree should we expect some sort of scale there either in Ohio or ultimately Indiana?

Ronald Sege

So specific to the ECN, that we're exactly on track to the time line that we laid out in previous calls. We're in field trial with Duke right now. We expect production shipments to start before the end of the year and things are going fine there from an ECN perspective.

Operator

Your next question comes from the line of Elaine Kwei from Jefferies.

Elaine Kwei - Jefferies & Company, Inc.

I was hoping you could help me understand a little bit on your guidance on Slide 15 for the breakeven target. It seems that with your guidance for upwards of 30% revenue growth this year, we'd sort of be getting close to that range for revenue breakeven but we're still quite a ways off there on the bottom line. And I'm just wondering if you could help clarify that for me?

Oliver Stanfield

Well, I think you're talking about -- let me be clear, are you talking about Q2 results, Q2 guidance?

Elaine Kwei - Jefferies & Company, Inc.

This is the Slide 15, I believe it's...

Oliver Stanfield

Yes, what we said before is that our non-GAAP break even would be between $150 million and $160 million. And that would require a 45% gross margin and that is, as you know, we're moving to a cross structure that we intend to be in by the end of this year, and those numbers are still valid.

Elaine Kwei - Jefferies & Company, Inc.

Okay. So it seems to imply that it will be...

Oliver Stanfield

On the last call, what's happening is we've commenced marketing investments at the beginning of the year and you see a reflection of those, I think, in the numbers that Ron has already discussed with you. In terms of the reduction in our product development expenses, that will be largely in the second half.

Elaine Kwei - Jefferies & Company, Inc.

Okay, great.

Ronald Sege

And that's because we have products to finish that were already in the pipeline and we got to get them to customers.

Elaine Kwei - Jefferies & Company, Inc.

Okay, great. That's very helpful. And then between the guidance that you have for 2Q and the fiscal year, it's sort of -- it's seeming to imply that 2Q could be the revenue peak of the year if I'm interpreting that correctly, and if I'm not, then please let me know. And if so, is this because of any potential pull ins from the second half?

Oliver Stanfield

Well, I think what you see in our numbers is the fact that it has contrasted with last year, is that you now have the Fortum project, which is on its steady-state insulation plan. You have the Duke project which is installing, as you recall those installations were largely in the fourth quarter last year or significantly in the fourth quarter. And then you, of course, have the other strength that we've had in SEAS and then most recently starting in Q2 in NRGi. I think the message that we're trying to deliver is that, obviously, there was a significant end loading to our utility revenues last year. I believe 44% of them occurred in the fourth quarter. But we don't anticipate that same kind of end loading for this year.

Elaine Kwei - Jefferies & Company, Inc.

Okay, that's really helpful, Chris.

Ronald Sege

And it's okay not to have a hockey stick.

Operator

your next question comes from the line of John Quealy of Canaccord Genuity.

John Quealy - Canaccord Genuity

Just a couple of questions. In terms of Duke and the ECN opportunity about shipping production ready units by the end of the year, what have you said previously or what can you share with us about the opportunity there. I imagine as a ratio of one ECN per 7 or 8 meters per se, and obviously, the price point must be higher for the ECN than the meter. But can you talk about an accretive opportunity or what we should think about for this product line at Duke?

Oliver Stanfield

Well, I think what we've said is that what you know is we received an order for I think $14.5 million and we said that we were going to have initial shipments towards the end of the year. We have to ramp the volumes in 2012. And the -- this product would displace in our normal architectural of data concentrators. So whatever the ratio is that the utility has in a particular service area, there would be one of these per neighborhood. In your example, maybe 5 -- one for every 5 or 6 meters.

Ronald Sege

And of course the ECN has a superset of functionality of a data concentrator. So there's a revenue, a per unit revenue increase as you move from a data concentrator to an ECN.

John Quealy - Canaccord Genuity

That's right. All right, great. And then Ron, can you talk a little bit about -- you talked about external channel, if you would, by geography and that's really helpful but can you talk about what's going on internally on the direct sales force side, whether it's on the commercial utility side. What sort of changes in your milestone we should look for moving through the year?

Ronald Sege

Well obviously, the most important one is its continued revenue growth. And internally, we are driving that by dramatically increasing pipeline and sales activity and by -- as you know, John, focusing our sales team especially on the commercial side of things. So we now split the sales force into 2. There's one sales force in commercial focusing on building automation and our key accounts like Honeywell. And then we have a territory sales team that's focused on what I call direct -- creating direct touch demand alongside our partners. And in the latter case, we have instructed them to focus principally on 3 verticals, which we've made announcements about, building energy management, renewables and street lighting. And again, that's to give them focus and that's so we can internally measure progress. And obviously, you're seeing us make more announcements in those 3 verticals because we want to create demand, we want to let people know we're in business. But that is kind of an internal yardstick and we'll be looking for progress in terms of numbers of buildings, number of street lamps that are in our pipeline and so on. So it's all the staples, John, of basic good blocking and tackling day-to-day, week-to-week, month-to-month sales management

[Audio Gap]

Patrick Sullivan

So my first question is as it relates to your outlook for the utility segment, just looking at the model here, it looks like the revenue is kind of follows up on Elaine's question, but the revenue, it looks very robust in Q2. I was hoping you could talk to -- and if that were to continue or it would exceed the 40% growth rate you're speaking about, could you maybe talk about to which regions are kind of winding down or winding up? Any color there would be helpful.

Oliver Stanfield

Well, I hope you did focus on the information that I've mentioned in terms of the key customer statistics. So that's in the slide deck that we have provided. But I think the message for Q2 is a lot like the message for Q1. Our numbers are going to be driven by Duke and Fortum with an important contribution from SEAS and Ron spoke earlier about the role of Russia and then added into that of course are the results from our very important win at NRGi which has provided strength that this reflected in what we said about full year revenue growth. In terms of your point about the revenue profile, I think you're saying it in the context of assuming that what's going to be a -- what we've seen in the last few years where there's a lot of revenue at the end of the year. And I don't know if that's going to be the case because as we've said before, we now have a number of utilities that are in deployments and as opposed to the conditions that existed last year, we have a lot of external factors like the stimulus process that had sort of pushed revenue into the second half of the year.

Patrick Sullivan

Okay, that's helpful. And then just kind of a question on the commercial side of the business, given that such a long sales cycle to get new products introduced, any updates as to OEMs looking at your technology and embedding it in new product lines?

Ronald Sege

That's, Patrick, the purpose of having a dedicated OEM sales force. Their only job today is to go get new design wins and get ourselves designed into more products. And the good news is we've got coverage with a lot of OEMs. The bad news is historically, we didn't have a sales force who lived or died, and ate or didn't eat on the basis of those design wins. So as you can imagine, there are a lot of more activity, but also as you say the sales cycles are longer. But I'm pleased with the early progress of having a dedicated sales force into that channel.

Oliver Stanfield

And I think that when you look at our large commercial customers, as Ron has said many times, of course, Honeywell is by far #1. But when you look at the top 10, I think 7 of them are associated with buildings in one form or another. And part of the initiative that Ron is driving is to get ourselves attached to these emerging very important markets that we've talked about including street lighting, obviously, and renewables because that's going to be the basis for influencing that growth rate over time.

Ronald Sege

There at least are opportunities and they're going to take time to develop. But obviously, we believe they will be big markets that will eventually move the needle here in Echelon.

Operator

And your next question comes from the line of Craig Irwin of Wedbush Securities.

Craig Irwin - Wedbush Securities Inc.

I just wanted to dig down a little bit deeper into the renewables market because I agree that this is a really interesting growth opportunity. And it sounds like it's under penetrated right now for Echelon. Could you give us a little bit of color as far as how you participate there right now? What sort of products you're already embedded in? And then if you could maybe be a little bit more specific about the inverter opportunity and if you could mention how many of the top 5 vendors of inverters you are already serving in both the solar and wind markets?

Ronald Sege

Okay, great. So specifically how we participate is exemplified by the announcement we made with Direct Grid last quarter. So we are the communications control backbone for their microinverter deployments, and that is giving them finer grade control over the panels which gives them lower operating and deployment costs and better efficiency. And so that being general is the value proposition which we are now taking around to at least 75 other inverter and microinverter manufacturers around the world. And so there's the opportunity, obviously, to participate in today's market, which is the inverter market, and then we believe that the market is going to pretty rapidly move to microinverters because of the advantages of those and we're especially focused on those microinverter manufacturers. I don't have anything more to announce about other inverters or microinverter companies that we're engaged with but stay tuned to this channel. And then you mentioned wind, it's another area we're focused on. We think they need good control as well and we're starting to build a pipeline there, too. But as you also mentioned, it's a recent [ph] and it's just getting started.

Operator

Your next question comes from the line of Michael Horwitz of Baird.

Michael Horwitz - Robert W. Baird & Co. Incorporated

Actually everybody asked all my questions.

Operator

Your next question comes from the line of Colin Rusch of ThinkEquity.

Colin Rusch - ThinkEquity LLC

Can you give us a bit more detail on the partnership with Infor? How should we think about the sales elasticity with the relationship? And is there a potential for Echelon to migrate towards a SaaS-based business model within that relationship?

Ronald Sege

Well, yes. So first of all, Infor is in the building energy management space, one of our 3 verticals, and it serves a dual purpose for us. One is it allows us to present a complete solution to our customers, which they're asking for. They're asking for it because they want a one-stop shopping and they want something that's pre-integrated and therefore faster and easier to deploy. Now, in the case of Infor, the solution is an enterprise-based, a premise-based solution. So we are part of their enterprise asset management suite. So energy management is a module of that and it runs on pram and is targeted generally, therefore, at larger enterprises. Now, they are also a channel with that 70,000 customers in 125 markets. So they've got a lot of salespeople and that gives us a lot more leverage, of course, on top of our direct touch sales guys. Now Serious Energy, Serious Materials that we previously announced the relationship with is a SaaS based. It's a cloud-based model. So their software resides in the cloud. Again, it presents a complete solution to our customers which they want, one-stop shop, easier to deploy, et cetera. But in general from what I've seen so far, that's more attractive to small and medium enterprise, and the Infor to large enterprise. So we are playing in both the SaaS and the premise-based solutions. You have to ask Infor themselves if they have plans to migrate EAM to the cloud.

Colin Rusch - ThinkEquity LLC

Perfect. And then as we think about the renewables communication solutions, I understand that you're targeting the microinverters. But we've seen one of your key customers, Duke Energy, announced a 36-megawatt energy storage agreement with the company Xtreme Power. Obviously, there's communications and management of those assets as well. Are you looking at the energy storage space, looking at how you would integrate into power management solution with energy storage solution at this point?

Ronald Sege

Yes, sir. And in fact, that is a principal design center of the Edge Control Mode and of COS. So the idea is to manage microgrids, which include renewables and storage, and that's clearly our vision is, if you talk to David Mohler of Duke, it's their vision, so that's absolutely right in our wheelhouse.

Colin Rusch - ThinkEquity LLC

Great. And how many -- how big is the pipeline there right now? I mean are you talking to the energy storage company or is that primarily just through the utility sales channel for managing those assets?

Ronald Sege

We don't comment on the specifics of our pipeline, but we are building pipeline across our target verticals, distribution automation, at the edge of the grid, in the neighborhood is definitely a priority for us. And as you probably remember from our launch of COS, one of our high priorities is to get application partners that run on top of what we position as kind of the Android operating system for the smart grid. And you might imagine that we're talking to anybody who participates in this emerging microgrid space.

Operator

And you have a question from Craig Irwin from Wedbush Securities.

Craig Irwin - Wedbush Securities Inc.

I wanted to circle back and just ask a little bit about Fortum. Obviously, we've got Duke's filings so we know what their plans are and their implementations. But can you update us on how linear you expect the shipments to Telvent to be for the Fortum implementation. Is it something that we should expect to be pretty linear over the course of the project or are the unit shipments going to be front-end loaded?

Oliver Stanfield

I don't think they're going to be front-end loaded. What you saw last year was that those shipments started occurring as they built their ramp. And as you and I have discussed, with that occurs is you have an installation period. It's never perfectly linear because of vacation patterns and other logistical factors, but there's going to be a relatively linear period and of course, then at end it scales back down again.

Craig Irwin - Wedbush Securities Inc.

Great, great. So then when we look at your guidance and parse the utility products, what you're expecting for second quarter, sort of suggest maybe a $12 million to $13 million sequential increase? Is this strictly from the ramp at Fortum where they're really supposed to start hitting the ground this May and ramping significantly now or is this -- is there any other major utility customer in there that's supporting this significant ramp quarter-over-quarter?

Oliver Stanfield

Well, the ramp you're referring to is the increase from Q1 to Q2?

Craig Irwin - Wedbush Securities Inc.

Exactly.

Oliver Stanfield

The most important factor in that increase in my view would be Duke, and I think you're aware of what they're doing. And then on a quarter-over-quarter basis, you're of course correct, that there's a ramp at Fortum. There's also of course, as I said earlier, we're going to have some revenue from EAC and then we're going to have continued strength in places like SEAS. And then we're going to start seeing the initial deployments with regard to NRGi.

Craig Irwin - Wedbush Securities Inc.

Great, great. And then if I can follow up just to touch on Duke, I understand that there were Echelon units used in the trial in North Carolina in the past. I was wondering if maybe you had an update for us as far as what the results were of that trial and whether or not they differed from what you learned in Ohio and Indiana when you worked with Duke in them developing the business case for those territories?

Oliver Stanfield

Well, I think the time line, as you recall, was that there was some work done in Carolina. And as far as I understand there were multiple technologies that were looking at that time frame. We were than the only technology that was taken to Ohio for the pilot. That was concluded successfully. And that led to the decision to go ahead and to do the full rollout more than this event. So that's sort of the normalized process in terms of people proving out the business case to themselves. But in terms of any updates with respect to most recent experience in Ohio, we'll get that from Duke when Duke files its filing with the PEC [Progress Energy Carolinas, Inc.].

Operator

Your next question comes from the line of Dale Pfau of Cantor Fitzgerald.

Dale Pfau - Cantor Fitzgerald & Co.

Somehow they didn't pick up my question. A lot of good questions out there. I got a couple. Could you talk about your anticipated ASPs in the China market, of course that's pretty price competitive. And then could you also talk about ASPs in Russia? And my third part of the question is back to the good old U.S.A. and all the potential ASPs that are out there, could you give us any kind of updates about what you're doing with other potential trials outside of our good friends at Duke?

Ronald Sege

Okay, so I think my buffer is about full. So I think the first question was about ASPs and for obvious reasons we can't comment on that, but I'll remind you that in the case of China, we'll be using our component and our subsystem strategy. So the revenue per point will be lower than in our systems business. And in Russia, we will be selling complete systems. And of course, we believe we have a higher value because we have an end-to-end plant for plug smart grid solution, not just an AMI solution. So we obviously think that relative to our competitors, our ASPs will hold up well. But that's as much guidance as I can give you on that. And then in the U.S., we again believe there's a bit of a lull now. There's 60 billion meters left. We're starting to see some indication that unlike in the past where the most utilities were focused on the application of AMI and biased towards RFP solution, we think there's starting to become an awareness, kind of the Duke model, if you will, of building and end-to-end smart grid of which EMI is one application. It's starting to be of interest here in the U.S. We believe that, obviously, power line has a lot more value in that broader vision. And so we're guardedly optimistic about our potential in the U.S. going forward. But obviously, nothing to announce today.

Craig Irwin - Wedbush Securities Inc.

And have you gotten any feelers from some of the larger AMI deployments using wireless that have challenges in certain areas within their area? Can you talk about there?

Ronald Sege

Yes. We believe that there are problems, pockets of problems with RF solution. As you might imagine in urban canyons and multi-tenant units and so on. We've indicated in the past on these calls that we are targeted at those fill-in opportunities and have had some discussions. But again, nothing to announce. And eventually, the utilities in the U.S. are going to have to deploy a ubiquitous smart grid, and they're going to have to solve these problems.

Operator

Your next question comes from the line of Joe Maxa with Dougherty & Company.

Unknown Analyst -

This is Ash Burlow for Joe Maxa. My question is, although most of my questions have been answered, too many questions, but my question was regarding the couple of large installation potentials that you guys have announced over the next 2 years and this is relating to your commercial product segment in street lighting. Can you give us some color on how you expect your street lighting sales to grow this year and next year?

Ronald Sege

I really can't. Obviously, the percentage rate will be strong because that is a very nascent market. We are in pilot, I think in terms of hundreds of pilots. And in our broad pipeline and again, this is no commentary on -- we don't constrain our pipeline in terms of when a deal may happen but we have sort of millions of streetlights in our broad pipeline with particular interest in Europe and in China. And as you know, we've announced now in a couple of occasions that in these pilots, customers are seeing 40% to 50% energy savings. So we believe there's a compelling business case here. I can't tell you how long it's going to take. I can also tell you that there's 200 million streetlights approximately in the world and we previously said think in terms of $10 to $15 per pole or per streetlight of revenue opportunity for Echelon. And hence, that's why we're focused on it as one of our 3 verticals. So hopefully, Ash, that gives you a little bit of guidance. We don't break out our results by verticals. As I said, before, it's really more of a sales strategy, sales discipline, focusing on a few verticals that we think will be meaningful going forward.

Unknown Analyst -

Okay, that's great. So in your -- another question is in Brazil with ELO partnership. Can you -- I think I missed the year you said you will have volume ramp up, have you seen any traction this year or are we thinking about 2012?

Ronald Sege

Pilots this year ramping in 2012. And we're still awaiting approval by the authorities so we can start deploying the pilots and we expect that to happen in the next few months. And that's a 65 million-meter opportunity, so definitely a big, attractive market.

Unknown Analyst -

Perfect. Any disruptions in components or supplies from Japan?

Ronald Sege

We do get one of our components, a protocol processor that we call Neuron, from Toshiba. Unfortunately, their plant was destroyed. They had previously announced a kind of a very long end of life of that product. There are other sources for it. In addition, we had a newer model product protocol processor and we've been working with our customers ever since Toshiba announced that, that plant was destroyed, to migrate them over to one of these alternatives. And while there's a little bit of incremental design required, we don't see any revenue interruption, nothing that will be material to the company.

Unknown Analyst -

Okay. Just one final question from me. The Eli [ph] just announced their solar decree and they signed that. And so are we -- in that solar decree, they have mentioned that they won't cap the one megawatt -- up to one megawatt of roof installation as far as the fits go. Are we going to see more business in the renewal business segment going forward or in this year or 2012?

Ronald Sege

I think that's another bullish sign for solar in the justifying our focus on that vertical. As you may know, Governor Brown here in California also signed a -- I think it was called SB 2X, which set the goal of 33% renewables here in California by 2020. And we're all in favor of those kinds of goals. And those kind of mandates. It's driving our demand in Europe. It's driving demand in China and in Brazil. So it's another reason to be bullish about the solar market

Unknown Analyst -

Okay. But you are not looking to give any guidance or color or a percentage breakdown?

Ronald Sege

No.

Operator

Your next question comes from the line of Mike Ritzenthaler of Piper Jaffray.

Mike Ritzenthaler - Piper Jaffray Companies

My first question is on the -- one more on commercial products. I think it's 2% growth year-over-year, but if you look at the likes of Honeywell and jansen [ph] and soul [ph], that segment of their business is growing like crazy. What are the structural differences between what you're doing with your billing efficiency products and what those other companies are doing that's helping them grow so much quickly -- so much more quickly?

Ronald Sege

Well first of all, we don't break out the subverticals within our commercial market. And we did also see -- having said that, we did also see good growth from the likes of Honeywell and our OEM customers. And we are driven fundamentally by the same factors that drive their growth, namely occupancy rates and commercial buildings starts. So you need proxy for that part of our business, those 2 metrics are in. And like I said, we are driving demand because we go in to their controllers and their energy management devices.

Mike Ritzenthaler - Piper Jaffray Companies

Okay. And then on the merger of Progress Energy and Duke, what impact you think that might have on opportunities in the Carolinas especially if Progress wants to use a different communication mechanism like RF of something else?

Ronald Sege

Well, all I can say is what I think what we've said before which is that anytime one of your biggest customers gets bigger. And in this case, it's a 4 million-meter customer turning to a 7 million-meter customer. I view that as a positive opportunity. But beyond that, I really can't make any commentary as you know that merger is still pending a bunch of approvals in various places.

Operator

Your next question comes from the line of Ben Schuman of Pacific Crest Securities.

Benjamin Schuman - Pacific Crest Securities, Inc.

So with regards to the Brazil market, obviously a lot of vendors going down there, chasing this 60 million-, 70 million-meter opportunity. Some guys like Aclara and Elster are already conducting pilots down there. Are you hearing from the utility customers that they're hungry for a new solution? Or what I guess makes you think that you can really win in that market?

Ronald Sege

Two things. We got a great partner. As you heard in my prepared remarks, ELO has 40% market share in Brazil so they have great exposure to utility customers. And we've got not just an AMI solution but an end-to-end smart grid solution. So it's not just the meters but it's the ECN, it's the policy mapping. It's all the stuff that we offer our customers that our competitors don't. And from everything we've seen and we've heard from the Brazilian marketplace, they absolutely want to build a state of the art in the world smart grid solution as they want to -- as they aspire to be a leader in so many different areas. So we talked about our partnership for a while. We're very excited about it and looking forward to getting into pilots in the second half of the year.

Benjamin Schuman - Pacific Crest Securities, Inc.

Okay, great. And then Chris, you did a pretty good job of kind of outlining the quarter-over-quarter growth and some of the drivers there. And I heard your answer to, I think Elaine's question and then when Patrick asked it again, but I guess I'll ask it for a third time. If you look at Q3 and Q4 based on the highest end of your guidance, 30% growth, those quarters on average would be down 17% from Q2. So there has to either be some lumpiness there or you're just being conservative. Maybe revenue will be flat and you'll grow 40%, 45%, I don't know. But assuming your guidance is true, what's driving that quarter-over-quarter decrease after Q2?

Oliver Stanfield

I want to just go through the math so I understand your math. So last year was $111 million or 37% or something and you increased that by 30% and you're in the 140s, right?

Benjamin Schuman - Pacific Crest Securities, Inc.

That's correct.

Oliver Stanfield

All right. And the first half, and 28 and 43 to 71. And so I don't understand...

Benjamin Schuman - Pacific Crest Securities, Inc.

So you're about 50-50 first half to second half, but you're weighted towards the second quarter in that?

Oliver Stanfield

As I explained before, what was happening last year, as you recall, is we saw at the very beginning of the year very modest volumes with respect to Fortum. And then as they started ramping that started moving. And then, very importantly there were delays in the United States, that you're more familiar with than I am, associated with the delayed stimulus. And so what I tried to make clear was that a model in which 44% of our revenue for the utility channel occurs in the fourth quarter is not the recurring model that we see. Does that help?

Benjamin Schuman - Pacific Crest Securities, Inc.

It does, but I still see a sequential decline from the second quarter to the third quarter to the fourth quarter.

Oliver Stanfield

That's just to what numbers you're putting in the third and fourth.

Benjamin Schuman - Pacific Crest Securities, Inc.

Did you get the 30% growth?

Oliver Stanfield

Once again, if the first half is a 71 and if 30% times 111 is on the order of 144, then that's about -- that's the even growth between the 2 halves. All right?

Benjamin Schuman - Pacific Crest Securities, Inc.

Yes, I'm just thinking about more on a quarterly basis but we can take it off-line, that's fine.

Oliver Stanfield

I think the key point is you have to do a reset in your own mind of what -- how would last year have looked if we had not had those delays, in particular in the United States associated with all of the stimulus stuff, such that the Duke revenue would've occurred more rapidly. Okay? I hope the slide that we provided you in our slide package and I hope you guys appreciate that package. Hopefully that slide helps a lot because we tried to break out the key customers by quarter for you. That's Slide 9.

Operator

Ladies and gentlemen, that concludes our question-and-answer session for today. I'll turn the call over to management for their closing remarks.

Ronald Sege

Well, thank you all very much and we appreciate your ongoing interest in Echelon, and we look forward to seeing you at the various conferences next quarter. Goodbye.

Operator

That concludes our presentation for today. Thank you for your participation. You may now disconnect.

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