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Echelon (NASDAQ:ELON)

Q3 2012 Earnings Call

November 01, 2012 5:00 pm ET

Executives

Anne M. Leschin

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

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

Analysts

Sean K.F. Hannan - Needham & Company, LLC, Research Division

Patrick Jobin - Crédit Suisse AG, Research Division

John Quealy - Canaccord Genuity, Research Division

David Giesecke - Wedbush Securities Inc., Research Division

Joseph A. Maxa - Dougherty & Company LLC, Research Division

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

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2012 Echelon Corporation Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I'd now like to turn the call over to Annie Leschin from Investor Relations. You may proceed.

Anne M. Leschin

Thank you, operator. Hello, everyone, and thank you for joining us this afternoon for Echelon's Third Quarter 2012 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 our website to help walk through the quarterly results and our outlook for the market.

Now I'd like to remind everyone that during the course of this call, we may make statements related to our business outlook, future financial operating results, accounting matters and overall future prospects. These are forward-looking statements based on certain assumptions and are subject to a number of risks and uncertainties. We encourage you to read the risks described in our press release, as well as those 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, and thank you all for joining us on our third quarter 2012 earnings call. Before I turn to business, I want to wish those of you who have been affected by Hurricane Sandy a speedy and safe recovery.

Let me begin with the quarter's results and then give you an update on our strategic initiatives. Beginning with Slide 3, we delivered revenue of $29.1 million for the quarter. This was well below the $43.8 million in the third quarter of 2011 due to the winding down of our system projects with Duke in Ohio and Fortum in Finland. We had a non-GAAP operating loss of $0.06 versus a non-GAAP operating profit of $0.04 in the same period last year. We were cash flow-positive this quarter and are pleased to report that we have more cash in the bank today than we did at the beginning of 2012.

Moving on to Slide 4. The third quarter marked the 2-year point in my tenure at Echelon. While we have had some disappointments, we have accomplished a great many of the initiatives that we outlined during the last 2 years and have laid a solid foundation for Echelon's future growth and profitability as the market strengthens.

First, we have made the difficult but important strides in reducing our cost structure over the last several quarters with a reduction of more than 27% in operating expenses since the end of 2010. This has allowed us to reach non-GAAP breakeven in 4 of the last 7 quarters. While streamlining operations, we've been able to invest in crucial areas of our technology and in product cost improvements.

Second, we have redirected our sales and marketing efforts towards today's growing geographies such as Brazil, China and Japan, where the economic benefits of grid modernization are strongest. In Brazil, we now have multiple pilots up and running with more on the horizon. In China, our joint venture received Chinese state grid approval for our communication technology and embedded software, and it has begun to win pilot projects.

Third, we made the decision to re-emphasize our roots as an embedded, multi-application platform supplier, our subsystem strategy, which is allowing us to access more markets by effectively engaging with local development partners that need world-class technology.

Finally, by honing in on Echelon's real asset, our differentiated power line and embedded control system technology, we are enhancing partnerships such as eMeter, now a Siemens business, and recruiting new distribution partners like Kapsch, an energy services company in Europe. This focus on technology enables us to launch innovative new products to meet our customers' needs such as our Control Operating System, or COS applications, which are receiving good marks in the industry.

Our multi-application platform met with a very positive reception at Metering Europe a few weeks ago, where we hosted a record number of meetings with customers, prospects and partners. During this conference, we reiterated our vision of going beyond metering towards modernizing the low-voltage grid with applications such as transformer monitoring, loss detection, and outage and power quality monitoring. We demonstrated these applications running on our head-end software, our Edge Control Node and our latest Open Smart Grid Protocol, or OSGP advanced meters. We also participated in the industry's first multi-vendor OSGP showcase and exhibited interoperability with other smart grid standards such as DLMS.

Turning to our Systems business on Slide 5. The bulk of our 600,000-plus meter deployment at Duke is installed and operational and performing exceptionally well, as are the millions of AMI meters we have installed across Europe. Some of our early adopting customers have begun using these meters as grid sensors to improve their operations and customer service. During the recent hurricane on the East Coast, our beta test ECN technology provided situational intelligence to a utility operator, allowing them to monitor the condition of a segment of their low-voltage grid in realtime.

Looking forward with ongoing macro uncertainty and financial and regulatory challenges, as well as lack of proximate government mandates, we do not see many catalysts for growth in our Systems business in 2013. There are, of course, a handful of smaller awards in our target markets, and we are pleased to be participating in some of them. For example, we just secured a win for 25,000 meters in Switzerland. This $3 million order will be rolled out over the next 2 quarters. We are also continuing to expand our presence at Feldkirch, an Austrian utility, with an additional 16,000 meters. We're also optimistic about our position in Norway, given our success in the rest of Scandinavia. While these deals will not make up for the lack of Duke and Fortum-sized rollouts in 2013, we're optimistic they can drive growth in 2014.

Finally, consistent with our strategy to build a robust ecosystem of software partners for our grid systems and sub-systems, we enhanced our partnership with eMeter. Together, we offer utilities multiple insights into the complex relationships between devices, premises, customer accounts, networks and services across the smart grid, similar to what we offer today to our joint customer in Denmark, NRGi. With Siemens, Alstom, Oracle, Schneider, Telvent and other similar partners, we are excited about the breadth of solutions that we are offering our customers which enable multiple opportunities for grid modernization applications.

Ultimately, the effective analysis of the valuable grid data our platform provides will allow utilities to reduce their costs, improve the customer experience and make their systems more efficient.

Turning to our sub-systems business on Slide 6. We achieved an important milestone in China this quarter. Echelon smart meter power line communication and COS technology received approval from the China state grid, allowing us to enter the Chinese market with our technology through our joint venture, Echelon-Holley. This is a significant accomplishment as the state grid controls roughly 90% of the 300 million meters in China. Our technology has already been recognized in some small demonstration pilots running through Echelon-Holley. The joint venture has sold communication modules for use in some 11,000 smart meters at 10 sites in 5 provinces. In Fuping county, located in Shanxi province of China, a 1,000-meter pilot using Echelon's PLC technology delivered nearly 100% accuracy reading the meters and has been very well-received. Over the next few months, Echelon-Holley communication modules will be installed to expand this pilot by 20,000 meters with a potential to move into other cities and counties in the 8 million-meter province of Shanxi.

Additionally, the JV in Q3 received its first order for meter modules that incorporate Echelon's PLC for use in a 30,000 smart meter pilot in Inner Mongolia. Having begun Smart Grid installations with other PLC technologies 3 years ago, Inner Mongolia is not new to the market. However, Echelon's advanced technology and reliability were key reasons that we were selected for this new pilot. The initial deployment is scheduled to be complete in the first quarter of 2013, and Inner Mongolia is expected to add 10 million new smart meters over the next 5 years, representing a significant longer-term opportunity.

We have also been awarded a similar-sized pilot at Heilongjiang utility, which we'll roll out over the next 2 quarters. This region is installing new meters and replacing old ones offering an overall market potential of around 5 million meters in the next 2 to 3 years. While our current pilots are small, they are critical to establishing Echelon's reliability and performance in China, which should lead to larger deployments. In general, we expect this activity to result in increased revenue for our joint venture in 2013.

In Brazil, our partner ELO currently has over 15 active pilots running thousands of meters across the country. We recently received our first meaningful order for sub-systems that will result in 2 new pilots that together exceed 30,000 meters. These pilots will be deployed over the next 2 quarters and hold the potential for several hundred thousand meters as the market starts to ramp up in 2014.

While the latest mandate from the Brazilian regulator, Aneel, was less expansive than we had hoped, with Brazilian utilities losing 10% to 30% of their power to theft, we believe there is still a very compelling business case to convert a good portion of existing Brazilian meters to smart meters.

Next I'd like to turn to our buildings and street lighting businesses. Our building automation revenue continued to decline, reflecting an ongoing weak macroeconomy and market share loss resulting from limited R&D investment in this area in the past few years. In street lighting, this quarter, we had another win with Rongwen in China for 5,000 lights in Foshan City, the third largest city in the Guangdong province.

Additionally, as discussed last quarter we introduced Echelon's Outdoor Lighting Controller, or OLC, and our Street Light in-a-box program. Our OLC is an add-on product that can easily turn any type of existing streetlight fixture into an intelligent and controllable device. The Street Light in-a-box program packages our OLCs along with segment controllers that can manage groups of lights and data center software to further minimize installation complexity. These products offer meaningful advantages to our partners and to cities by allowing them to use their existing lights for quick demonstrations and deployments. We are pleased with the demand for our lighting controller and already have partners quoting them into specific opportunities.

In summary, even as the smart grid market is in the midst of difficult times, we continued to make solid progress with our strategy and our cost structure this last quarter as we have over the last 2 years. With very tight government budgets and fragile economies and regulatory mandates that, for the most part, are not at hand, the catalyst for near-term investment in the low voltage parts of the smart grid are not apparent. We believe this has delayed the vast majority of decision-making in the industry, and we do not see near-term changes that would lead to significant new deployments in 2013. Based on timing of mandates around the world, we do see a pickup in deployment starting in 2014. This is reflected in our guidance that Bill will discuss later in this call.

Based on the fundamental market needs that we see in our target markets, we continue to believe in the long-term attractiveness of the Smart Grid opportunity. We believe that Echelon is well-positioned to capitalize on this market given our proven industry-leading power line and embedded control technology, our large installed base, which has begun to demonstrate the true potential of grid modernization, and our large pipeline of potential new customers, and our focus on technology innovation. We are cultivating a powerful set of partners with worldwide reach and pursuing a differentiated strategy that allows us to target growth markets more effectively than other established players. Our disciplined approach to market selection, technology investment and operating expense management will put us in a position to drive higher profitability more quickly once the market improves.

Before I turn the call over to Bill, I would like to thank all of our employees for staying focused, supporting our tough choices and continuing to believe in our vision. I appreciate their confidence in our strategy and in our company. Bill?

William R. Slakey

Thanks, Ron. Good afternoon, everyone, and thank you for joining us on our third quarter earnings call. Before I begin, please note that all references to non-GAAP amounts exclude stock-based compensation and restructuring charges. For ease of reference, we have prepared a complete non-GAAP statement of operations for the quarter ended September 30, 2012, which can be found on the Investor Relations section of our website.

Beginning with slides 8 and 9. Total revenues for the third quarter were $29.1 million, down 34% from $43.8 million in the third quarter of 2011. As expected, revenues from our large system deals at Duke in Ohio and Fortum in Finland have began to ramp down and will continue this trend through the first half of 2013. In Q3, this led to system sales of $17.8 million versus $29.2 million a year ago. subsystem sales were $11.3 million, down from $14.7 million in the third quarter a year ago. subsystem sales for the quarter included $1.8 million in sales to Enel, compared to $2 million in the same period last year.

Moving to Slide 10. Non-GAAP gross margin for the quarter was 41.6% of sales, up from 41.4% a year ago and 39.5% in the previous quarter. Gross margins benefited in Q3 from a mix shift towards our higher-margin sub-systems revenue and from cost reductions on our metering products. There were some onetime benefits and costs in the quarter, including charges for excess inventory and production equipment that we do not expect to use as a result of lower volume expectations. On balance, these items reduced our gross margin by approximately 120 basis points.

Turning to expenses. We continued to focus on controlling costs and reducing expenses where possible. Non-GAAP operating expenses in the third quarter were $14.1 million, a decrease of 13% from $16.2 million in the same period last year, and a decrease of 10% sequentially. The sequential reduction in expenses was the result of restructuring activities begun in May, combined with the impact of lower volumes.

On a sequential basis, R&D decreased 8% to $6.6 million. Sales and marketing expenses decreased 16% to $4.4 million due in part to lighter marketing and trade show activity in Q3 relative to Q2. General administrative expenses decreased 4% to $3.1 million in the quarter. Interest and other expense was $520,000 this quarter versus income of $27,000 in Q3 last year. This delta was driven primarily by changes in exchange rates and the resulting translation losses on our intercompany balances held in foreign currency.

Our joint venture with Holley in China generated a small loss for the quarter as we began hiring employees. Holley's share of this loss was $156,000, which is reflected as a slight benefit to our P&L.

Income taxes were $57,000 versus $114,000 a year ago. This led to non-GAAP net loss for the quarter of $2.5 million or $0.06 per share compared to a non-GAAP net income of $1.8 million or $0.04 per share in the third quarter of 2011.

During the quarter, stock-based compensation expenses were $1.8 million compared to $1.2 million in the same period a year ago. Including stock compensation, our GAAP loss for the quarter was $4.3 million or $0.10 per share.

Moving to the balance sheet on Slide 11. Despite the loss for the quarter, we generated $3.2 million in cash from operations and $2.3 million in total cash and investments during the quarter. This was primarily the result of working capital management. We ended September with cash, cash equivalents and short-term investments of $62.7 million, which is up $4 million year-to-date.

Finally, I would like to turn to guidance for the fourth quarter on Slide 12. As mentioned earlier, we expect revenue from our large deployments at Fortum Finland and Duke Energy to continue to tail off in Q4 and through the first half of 2013. As a result, we expect fourth quarter revenues will be lower than the third quarter, with total revenue in the range of $22 million to $26 million. We anticipate that subsystem revenue will account for approximately 50% of total revenue in the quarter.

We expect that non-GAAP gross margin will increase sequentially to approximately 43% of revenue as a result of per unit cost reductions and a favorable shift in the mix of products and customers. We anticipate fourth quarter operating expenses will be up slightly from the third quarter, as a result of year-end expenses, slightly higher marketing expenses and higher expenses at our JV. Looking into 2013, we expect operating expenses can be further reduced from 2012 levels.

Finally, we estimate that our non-GAAP earnings per share for the fourth quarter will be a loss of between $0.07 per share and $0.12 per share. We expect our GAAP loss per share to be between $0.11 and $0.16 per share, including approximately $1.5 million in stock-based compensation expense.

Clearly, we are not satisfied with our top line outlook for the quarter. As Ron reflected in his remarks, unfortunately, demand in our industry is weak and the catalyst for changing that in the near term is not apparent. We continue to believe in the significant long-term opportunity of the Smart Grid. I believe this opportunity will become more apparent and more visible as tenders are awarded in 2013 for revenues in 2014 and 2015. As a Smart Grid pure-play company, we believe that while we will undergo more pressure during industry downturns, we will be poised to benefit more dramatically as the markets recover.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Sean Hannan from Needham & Company.

Sean K.F. Hannan - Needham & Company, LLC, Research Division

So just a question around the guidance for 4Q. How much of Duke -- or what is the level from Duke that you're anticipating in 4Q? And then, kind of part B to that, considering that Duke and Fortum are both winding down and you have some other projects in the background, can you provide maybe a little color on what you expect your Systems revenue line could dip to in '13? Whether we should consider that dipping into single-digit millions in '13? How likely could that be for one or more quarters based on your project and overall business outlook today?

William R. Slakey

Sean, this is Bill. I don't want to get into forecasting particular customers one way or the other. Telvent or Fortum, which shows up on our Significant Customer Revenue list as Telvent. Telvent and Duke were $17.8 million in Q2 and dipped to $9.2 million in Q3. I expect they will dip again in Q4 and again in Q1 possibly, but I'd rather not get into projecting specific numbers. As to whether our System revenue could drop to single digits in a particular quarter, I don't want to rule it out, but that would be at the low end of what I think is possible.

Sean K.F. Hannan - Needham & Company, LLC, Research Division

And then second question, if I could. There was a pretty good dip around the non-Enel subsystem business in the quarter. I think some of this was spoken to in terms of a little bit of market share loss, as well as macro softness. That's the lowest quarter we've seen in some time. So just looking to see if you would elaborate on some of those lower contributions? Maybe are there other components, perhaps of customer base where there's demand response, or other areas that are a little bit more pronounced as downward pressure today? What do you suspect are some other overriding trends, either today or next few quarters?

Ronald A. Sege

Sure, Sean. It's Ron. So the decline was quite broad-based across products and geographies, which tells me that it really is a combination of the ongoing slowness in the macroeconomy and then share loss to BACnet and other technologies. Unfortunately, I can't tease the two from one another. I'd probably say since the macroeconomy has not gotten a ton worse in the last year -- and by the way, I remind you that we're -- our demand is driven by investment in buildings and tenant improvements, people have to be moving. So it hasn't gotten a lot worse but it hasn't gotten a lot better. So I would say that, probably, share loss is a little bit more explanatory now than it has been historically, and that's, we believe, singularly down to the historic lack of investment in that part of the business.

Operator

Your next question is from the line of Patrick Jobin from Crédit Suisse.

Patrick Jobin - Crédit Suisse AG, Research Division

So just a follow up on that, I guess there's 2 questions. The first is, should we expect some of the market share loss to continue in the subsystem business excluding Enel? And if it takes investments, how are you trying to position Echelon to try to combat some of that, given it is a nice margin business? And then secondly, somewhat related is, Bill, I think you mentioned that you see some opportunities to reduce OpEx in '13. Can you maybe riverbank that for us on what you're thinking about?

Ronald A. Sege

Let me take the first part of it, of the question. So our traditional Commercial business is a design-in business. Therefore, it's got a -- generally, it has a long sales cycle. We, like you, would like to find ways to slow the decay of that business. We are looking at a number of options, maybe that could help a little bit in the shorter term. But if we decide to do them, they'll have more of an impact over the longer haul because it is a design-in business, but we are exploring ways. Nothing to announce right now.

William R. Slakey

And Patrick, on operating expenses, some of the things still open to us are we can lower our facilities cost. We have less headcount now than we did a year ago or a year before then. There's opportunity to reduce facilities cost -- those take a little while because you have to get tenants, subtenants, et cetera. But that's an opportunity that I think we can take advantage of in 2013. With our JV up and running, we now have an opportunity to take advantage of a lower-cost area for R&D development of meters and such. So we're doing some of that now, and I think we'll continue to benefit from that. So there's a couple of areas where we can reduce expenses. And while I think that this quarter, they're like -- this quarter being Q4 -- they're likely to be up a bit from Q3, with year-end expenses and such. I think we can get it to 14, maybe get it below 14 at some point next year.

Ronald A. Sege

And I'd say most generally, obviously, we're fixated on preserving cash while we transition through these difficult industry times.

Operator

Your next question is from the line of John Quealy from Canaccord Genuity.

John Quealy - Canaccord Genuity, Research Division

So 2 questions. So Kapsch, they're a little bit more on the transportation/industrial side, at least how I know them. Is this sort of an entrée into that area for you folks? Can you expand a little bit there? Or is it more just building out the European ecosystem? And then I have a follow-up.

Ronald A. Sege

Yes, it's -- don't read more into it than is there. They actually have an energy services division. They're a bit of a conglomerate. So this partnership is through that division, and it's targeted at the low voltage portion of the grid, so very much our traditional business.

John Quealy - Canaccord Genuity, Research Division

Okay. And then secondly, in keeping with your comments about cash conservation and things like that. At the same time, we're seeing a lot of businesses potentially for sale and/or closing in Smart Grid value chain, technologies up for sale, channels, et cetera. How are you guys thinking about that given you're very good from a cash balancing perspective and certainly have the legacy in the industry?

Ronald A. Sege

Sure. So I agree with you. There are a number of assets that are for sale at what appear to be attractive prices, in some cases, $0.30 on the invested -- the cumulative invested R&D dollar. Some of them fit very well with our mission of automating the low-voltage portion of the grid. The challenge, John, as you know, is finding a deal that can be sufficiently accretive -- both on the growth line, but as importantly on the EBITDA line. And so far, we haven't identified anything magical there. Okay, John?

David Giesecke - Wedbush Securities Inc., Research Division

Yes, that's great.

Operator

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

Joseph A. Maxa - Dougherty & Company LLC, Research Division

Just looking at the number of pilots you've won in China and Brazil, and that looks promising. Can you refresh us on the ASP on those subsystem sales versus -- obviously, your higher price when you have a direct meter sale, and how that may progress as these projects become rolled out be turning the pilots until real projects?

William R. Slakey

Joe, this is Bill. On the subsystem side, our ASPs look more than $5 to $15 a point. That's the case if were selling sub-systems in China, for instance, if we're selling street lighting sub-systems. In Brazil, as we get going there, the ASPs will be higher than that initially, but I think we'll -- in that, we'll eventually get back into that sort of a range. So it looks a little more like a commercial sale to us, lower ASPs, but much higher gross margins.

Operator

[Operator Instructions] Our next question is from the line of Pavel Molchanov from Raymond James.

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

You guys are obviously active in chasing business in places like China and Brazil, but of course lots of your competitors are doing the same thing. As you try to capture commercial-scale projects in these emerging grid markets, what do you see as your principal differentiators compared to some of the other players that are out there?

Ronald A. Sege

Sure. So first of all, there's a number of technical differentiators. We've been in the power line communication market for almost 20 years and have perfected that technology. So we have a very strong reputation for quality and reliability. And our deployments at Duke, for example, are a testimony to that. And we've had very recent independent audits that say -- that support that claim of reliability. It's a broad platform, so it doesn't just -- it's not just a smart meter, it's also a grid sensor and can do outage management, revenue protection, transformer monitoring, and so on. So that's from a technical perspective. As importantly, is our go-to-market in general, but particularly in those 2 countries. So we are partnering with local providers, generally of more legacy electromechanical meters, for example, who have large market share and want to move quickly and at low risk into smart metering or smart grid. So we are able to partner and get the best of our technology, their footprint, brand, distribution, in-country presence. And so we're partnering with ELO in Brazil. We're partnered with Holley in China. And we think that gives us a very significant advantage over, in the case of China, any other Western provider that may move into that region because they would be selling their own typically branded product -- and the same in Brazil. Especially in Brazil, there's very high tariffs. If you don't have an in-country manufacturing facility, then you end up being priced out of the market and so on. So really is a cornerstone of the competitive advantage of our subsystem strategy that's the business advantage for us. Does that make sense?

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

Yes. Can I just ask a follow on, and this goes back to, I think, one of the earlier questions. Your balance sheet is obviously very cash-rich. A lot of your competitors are essentially venture-backed startups. Is that relevant as you try to win business?

William R. Slakey

Yes, absolutely. There's no doubt that having a strong balance sheet is just as important as having a great reputation. And as John [ph] mentioned in an earlier call, there's some potential that we can offer an even better solution if we can find a way to aggregate some of this technology up.

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

If I can squeeze one more in, I think I touched on this 3 months ago. Obviously, in the 600 million-person blackout back in July, do you see that as a market of opportunity, or are you pretty much exclusively focused in China and Brazil in terms of building partnerships locally?

Ronald A. Sege

Our broad strategy is simple, go where the money is, and that means going where the fundamental economics take us. So while government mandates have in the last few years driven the market, I think increasingly it's going to be economics, reducing theft levels, improving efficiency, labor savings, and so on. And so China certainly falls in that category, as does Brazil, Middle East, Russia and so on. Very much India falls in the category of -- if we can deploy Smart Grid technology, there will be strong economic benefit. As you know, the challenge is how does one do business successfully in India, make money, especially as a Western company and so on? So we think it's eventually going to be attractive, but we haven't yet found the right way to go into country.

Operator

Your next question is a follow-up from the line of Sean Hannan from Needham & Company.

Sean K.F. Hannan - Needham & Company, LLC, Research Division

Just a question around margins, and I guess it's a little bit more for Bill. Thanks for some of the color earlier on your thoughts around OpEx in 2013, but when I look at the GM structure today, just trying to get a perspective of whether you're seeing any structural changes, perhaps forced by the market even, on the system or subsystem side. Obviously, we can lose a little leverage as the system business declines a little bit here. But can you talk about how we should be thinking about these businesses today, and what may lift or pressure these numbers?

William R. Slakey

You bet. So the System business, with the business overall being as tight as it is right now, you can imagine that the tender is going out now. There's a lot of price pressure there. So that's going to be downward pressure on that system side. At the same time, a little over 9 months ago, the company put into development a number of cost reductions on meters, both meters that we ship now, as well as new meters at new lower-cost points that we can bid on those more competitive tenders. So you put those 2 things together, and I actually don't feel too bad about the future trend of the meter gross margin business -- or excuse me, the gross margins in the meter business, I should say. And then as our subsystem business grows in quarters where it is a bigger part of the total revenue, our sub-systems margins are much better than our meter margins, and so that helps as well. You put all of that, hopefully at some point along with some volume increases on the lower-cost that we have now, and I think we've got an awful lot of irons in the fire that can help us sustain gross margins or potentially increase them even in a very competitive market.

Operator

Your next question is a follow-up from the line of Joe Maxa from Dougherty & Company.

Joseph A. Maxa - Dougherty & Company LLC, Research Division

Just wanted to -- on the Duke and Fortum, as they ramp down through the next couple of quarters, do you see a base level once they're basically got the main rollouts? I mean, are we looking at maybe $1 million, $2 million a quarter, just kind of base level maintenance repair, that type of business?

William R. Slakey

There will be a maintenance and repair. I wouldn't try to hazard a guess as to the magnitude. But look at the Enel business for us. That project has been complete for quite some time and the follow-on revenue is all maintenance-, spares- and repairs-based.

Joseph A. Maxa - Dougherty & Company LLC, Research Division

Are you getting any sense that Duke may be able to move to another territory in the next year or 2?

Ronald A. Sege

Don't -- I wouldn't speculate on Duke. We're hopeful they're very pleased with the performance of the system, the benefits it's conferring. But there's a lot of moving parts between sort of regulatory hurdles, and then, of course, their merger with Progress. So many balls in the air over there.

Joseph A. Maxa - Dougherty & Company LLC, Research Division

And last for me, you mentioned the joint venture is up and running. Are you manufacturing now at that facility?

Ronald A. Sege

No, right now, that JV consists of engineering and sales.

Joseph A. Maxa - Dougherty & Company LLC, Research Division

And when would you expect to be manufacturing product?

Ronald A. Sege

We don't have a specific timeframe. Although I do want to say that there's 2 dimensions to the joint venture. One is, it's a vehicle to get our technology into China, which is what we've been talking about on this call. But then also to, as Bill mentioned, to get lower-cost basis meters developed and sold outside of China. And we actually have products available in that category from the JV as well.

Operator

At this time, we have no further questions. I'd like to turn the call over to Mr. Ron Sege for your closing remarks.

Ronald A. Sege

Okay. Thank you, all, very much. And again, a speedy recovery from the hurricane. It's a difficult market, as we know, but we remain very optimistic about it over the long haul. We feel good about our strategy, our position in the market and our assets, and believe there's big upside as a pure-play as the market improves. And so we're going to adopt a little saying around here: "When the time comes, we'll be ready." Thank you very much. Have a good evening.

Operator

And ladies and gentlemen, this concludes your presentation. You may now disconnect. Have a good day.

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