Itron Inc (ITRI) 2002 Q3 法說會逐字稿

Good afternoon. And welcome ladies and gentlemen to the third quarter earnings release conference call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the company, we will open up the conference for questions and answers after the presentation. I will now turn the conference over to Mima Scarpelli, Vice President, Investor Relations and Corporate Communications. Please go ahead, ma'am.

Thank you. Good afternoon everyone and welcome to our third quarter earnings release conference call. Members of management participating in the call today in addition to myself includes LeRoy Nosbaum, our Chairman and CEO and Dave Remington, our CFO. Dave will start the prepared comment portion of our call today with financial details for the quarter. LeRoy's comments will cover a more high level perspective on market conditions, competition, and strategic and other operational results and as always we will have a Q&A session at the end of our prepared comments.

Before starting the call, please note that our press release includes information about Itron's future financial expectations in the business outlook section. In addition, we will be providing more detail on future expectations during the prepared remarks portion of the call as well as the Q&A session. Expectations about future financials and operating results of forward-looking statements. The forward-looking information we are providing is subject to risks and uncertainties such as the timing of customer orders, our ability to achieve projected financial targets for acquisitions, and a number of other factors, which are fully described in our 10-K for the year-ended December 31, 2001 and on Form 10-Q for the quarter-ended June 30th, 2002, both of which are on file with the SEC.

This forward-looking information is being provided based on our expectations as of today, October 16th, 2002 and Itron does not undertake any obligations to update or revise forward-looking statements and with that I would now like to turn the call over to our CFO Dave Remington.

Thank you Mima. As you can see from our press release, we had an exceptionally strong quarter. This follows on the heels of our performance last quarter on which we set several records for new quarterly heights, a number of which is to be passed again this quarter.

Our press release today, you may have noticed includes a bit a more detail on trends and explanations of financial results that we have typically included in the past and we hope that it is additionally helpful. Given this, we won't go through all the details we normally do in the call today, but will instead focus more on the key financial highlights for the quarter as well as give you some additional performance indicators not contained in our release.

Here are the highlights with some details. Revenues of 73.1 million were new quarterly high, exceeding the previous heights of last quarter by roughly 600,000. Comparing third quarter revenues this year to last, revenues were up over 20 percent approximately 3.5 percent of this is related to the LineSoft acquisition with 16.5 percent coming from organic growth, i.e., the reminder ex-LineSoft. On a year-to-year basis, revenues of 207.6 million or 29 percent higher that they were in 2001 reflecting organic revenue growth of 24.5 percent, i.e., excluding LineSoft.

As detailed in our release, increased sales of automatic meter reading or AMR systems are the primary driver of organic growth. During the quarter, we shipped just under 900,000 AMR meter modules, approximately 100,000 more than in the third quarter last year and year-to-date shipments of meter modules total almost 2.7 million, which is 800,000 or 43 percent more than we shipped in the first nine months in 2001.

In addition, we are on pace to set an all time annual record in 2002 for module shipments. Partially offsetting the increased demand for AMR systems will weaker sales for our commercial and industrial software systems out of our energy information systems or EIS product group in Raleigh (ph) . Sales of those systems, one of the substantial portion of our business are down. Roughly 3.5 million or 29 percent from last year on a year-to-date basis. Well, we do not break out EIS revenue in our segment reports. We know that about 50 percent shows up in our electric segment and 25 percent in our water and public power segment. Also offsetting increased domestic AMR business is a 56 percent year-to-year decline in international revenues. As we have noted in the past; however, revenues last year included significant hand-held shipments to Japan, which we have not yet replaced with other comparable international business this year.

As an added note, we are expecting increased international business in Q4, but even with that, we expect international revenues for the year will be lower than last year. In light of the above, we are actively working on ways to improve performance in EIS and international. We took some action in Q3, which resulted in severance expense that shows up in G&A with regards to international. Turning to bookings, an item of great interest, new order bookings of 87 million dollars were up considerably from the first and second quarters were we booked 38 million and 45 million. As terrific as the 87 million in bookings is; we cautioned that quarterly booking by themselves are lumpy. That said, as would be expected with strong third quarter bookings, backlog grew by 21 million during the quarter to 200 million at quarter end and the portion of backlog we expect to revenue over the next 12 months grew by 14 million to 109 million. This 109 million figure in 12 months shuffled (ph) backlog along with another 45 to 50 million in additional contract to provide services, such as maintenance over the next 12 months to a total of 154 to 159 million results in good visibility into Q4 and 2003.

Turning to gross margins, margins have been very good this year as detailed in our release and at 46 percent year-to-date; they were up 3 percentage points from the last year. We note that the short fall in LineSoft revenues this year has resulted in a slight delusion of gross margins roughly one percent year-to-date as detailed in the release higher in AMR (ph) meter module production volumes and related manufacturing efficiencies were again the primary drivers for gross margin improvement.

Operating expenses for the quarter totaled 25 million up almost a 150,000 from last quarter excluding a small IP, R&D adjustments and up 5 million from last year with roughly 60 percent of the increase from last year's results coming from the LineSoft acquisition. As a percentage of revenues operating expenses were 34.2 percent for the quarter almost the same as last quarter, but up from the 32.5 percent last year primarily due to the additional LineSoft expenses without correspondingly higher revenues.

Also as noted G&A went up due to an international severance expense. Turning to interest and other net, interest expense was much lower for the quarter of year-to-date compared to last year primarily as a result of the conversion of our subordinated debt specifically year-to-year, excuse me year-to-date interest in other net expense was 29,000 in 2002 compared to a net expense of 2.9 million last year.

In addition to the lower interest expense, the 2002 number includes an 840,000 dollar gain from the sale of the Raleigh (ph) facility in the second quarter, as well as a 200,000 dollar gain from extinguishments of debt in the first quarter. Net income was 6 million for the quarter, down slightly from 6.3 million for the previous quarter, which included the gain from the Raleigh (ph) building sale, but was 53 percent from 3.9 million in net income in the third quarter last year. The net income margin was 8.2 percent better than the 8 percent produced last quarter after normalizing for the building sale. Pro forma basic net income which excludes three items, IP, R&D, intangible asset amortization and restructuring charges and credits was 6.4 million for the quarter down just slightly from the last quarter but significantly up from 4.1 million last year. As a percentage of revenues pro forma basic net income was 8.7 percent compared with 8.3 percent last quarter normalized with the building sale and 6.8 percent last year as we continued to realize good operating leverage. EPS numbers then of course reflect equally impressive growth.

GAAP diluted earnings per share was 27 cents compared to 28 cents last quarter and 21 cents last year. Pro forma diluted earnings per shares was 29 cents the same as last quarter but up from 23 cents last year. Some may see pro forma results this year as 24, 29, and 29 cents and wonder if we have flattened. No, adjusted for the building sale in Q2 and severance in Q3 the pattern is 24, 27, 30 cents. and on a year-to-date basis pro forma diluted EPS for the first 9 months was 82 cents up 64 percent from 50 cents last year.

Turning now to the balance sheet and cash flows, cash flow was strong while cashed investments declined 4.1 million during the quarter to 38.4 million at quarter end . The only significance use of cash during the quarter was 12.3 million for the repurchase of approximately 4 percent of our outstanding common shares in July. So before the stock purchase there was net cash generation of 8.2 million. Turning to the typical source and uses presentation operating cash flow was 11.1 million for the quarter and 32.8 million year-to-date, up 70 percent over the last year. We are expecting to continue to generate good operating cash flow in Q4.

As our press release indicates, EBITDA has grown very nicely this year to 35 plus million year-to-date compared with 24 plus million last year. On a normative basis, annualized EBITDA and free cash flow are running close to 50 million and 40 million respectively. Day sales outstanding were 59 days for the quarter compared to 57 days for last year and 65 days for the third quarter last year. Some of you may remember that during the Q&A portion of last quarter's call, we advised that we thought DSOs would be higher than they came in, we were wrong. To explain, DSOs for Itron are impacted more by specific contract billing terms and collectables issues and the mix of contracts kept the number down.

Inventory turns were 4.5, comparable with the 4.4 for the previous quarter and 5.1 a year-ago within a tolerable range of variance. That concludes our financial discussion. We hope, you are pleased with this quarter's results; we are. I will now turn the call over to LeRoy.

Good afternoon everyone. Thanks for joining. To say the least, we had another remarkable quarter result, financial, operational, and strategic. Good revenue growth, particularly strong in our domestic AMR markets, good EPS, strong cash flow and I'll just say it again, a new record of over 87 million dollars in new ordered bookings.

In addition to great financial results, we have also been extending our value proposition to customers. Expanding our knowledge base and capabilities through targeted acquisitions and strategic partnership with industry leaders are directed towards strengthening and expanding Itron's role as a strategic partner to the energy and water industry creating a different Itron with a richer value restrain to our utility customers in a more sustainable Itron through good economic times and bad.

What I can do today is share with you some high level prospective on the drivers behind their financial results this year and solid expectations for next year, give you an update on the competitive landscape and say you when on the integration status for the acquisitions we have announced as well as our acquisition plans going forward.

I will be giving you a bit more detail than usual on many of these subjects as some of you have been asking for an increased level of information. First, let's start with what is driving our strong financial performance and results this year, hence supporting our expectations for next.

Itron is producing great financial results and want to stand in extremely challenging business environment for most other companies. As all of you know, far too well, the US economy is in tough shape and utilities have not faired much better as evidenced by numerous announcements deferring or cutting back on capital spending and some facing serious declines in credit ratings.

Yet, in face of those industry challenges. Itron has grown revenues, earnings, and cash flow, not just for this year, but for the past three years in a row. The current utility industry conditions help Itron much more than we heard off.

Let me talk about both beginning with how they help us. Utility budgets have become increasingly tight and commissions made it much tougher to get rate increases to result cost savings on top of mind for most utility executive. Many of them see automation particularly in meter data collection as an important technology that helps save money, improve operating efficiency, and balance budgets. Mobile AMR technology is particularly attractive with its very short payback of typically 3 to 4 years. One real life example of compelling benefits of Mobile AMR is the city of Houston who is about three quarters of the way to installing a water AMR system from Itron. One meter reader at the city of Houston can now perform the work in one day that previously required 62 meter readers to accomplish. The city's projected annual rate of return is 55.3 per cent. And the amount saved annually on direct labor and other costs is estimated at $ 4.3 million. Real savings, real efficiency, real results. Serious numbers to get the attention of utility executives and result in AMR being viewed as necessary as opposed to discretionary capital expenditures.

Our new order bookings were $ 87 million during the quarter. Largely the result of additional orders for this kind of equipment, Mobile AMR. Orders to begin initial AMR deployments were received from Niagara-Mohawk and the City of Charlotte water both of which we announced. We also had orders during the quarter we were not able to announce including orders to expand deployments of existing AMR systems with two large customers Duke Power and Baltimore Gas and Electric. Net net we believe that the demand for AMR will remain strong despite the weak economy and continue to look for growth in AMR market to be around 10 to 15 percent annually. Our expectations for continued growth in AMR are shared as well by others in the industry. The 2002 Chartwell AMR report which examined AMR technologies and trends by surveying a 115 utility executives and managers recently reported the following statistics. The number of utilities using or at least considering AMR has increased from 85 percent to 96 percent. The number of utilities planning to automate all of their residential meters has increased from 53 percent to 61 percent. Chartwell also projects growth of new AMR deployments at a healthy growth rate between 15 and 20 percent over the next 5 years. Slightly better than our own projections. Now let's flip the discussion a bit and talk about how the utility environment is not helping us. To start with we've noticed that some contracts and orders are taking longer to close. Not all, but some. The piece of our business that has been most impacted by drawn out negotiating is the software side of our business. A quarter ago, we told you, we are looking for LineSoft to contribute between $16 and 20 million in revenues in 2002. We are now looking for revenues from LineSoft to be closer to $10 million for the nine months that they have been part of Itron. Roughly half of that difference results from contracts that took much longer for us to close, such as Tampa Electric and Center Point formerly Reliant Energy, both of which, are now booked will result in revenues in 2003. The other half of the shortfall can be attributed to tighter budgets and some utility executives whose attention is currently being devoted to more critical things. As we look to 2003 we look for increased business from our T&D Solutions Group at LineSoft that belief is supported by very active sales pipeline for T&D Solutions and/or the approximate 8 million dollars that we signed in T&D software, Joint Use, in engineering contracts this past quarter only a quarter of which was included in bookings and backlog. To conclude this portion of our discussion let me leave you with the following few thoughts.

In the main, tightening utility budgets and focus on their core business has been good for Itron not bad. The softness we've seen in transmission distribution solutions acquisition of LineSoft has been more than offset by continued strong demand for AMR, which looks to remain solid for some time to come. Economic conditions for utilities will improve. Using electricity, natural gas, and water are not discretionary and the demands for the commodity continues to rise. Relative to T&D opportunities exist. Large expenditures are in planning for transmission line over the next 10 years, totaling more than 50(ph) billion dollars. Surely utilities will look to optimize those designs precisely what Itron T&D Solutions Group does. And lastly, a diverse base of industries and product lines position Itron to perform well even in these tough times. I would like to switch gears and talk a bit about competitive landscape in the AMR market. For the last three years, Itron has maintained a very steady market share in terms of AMR unit shipped, of roughly 35%. In addition we licensed certain of our AMR technologies in Schlumberger, which accounts for another 5-8% more in terms of market share in each of the last few years, which puts Itron's total annual market share for the last three years at a little bit more than 40% based on technology. The next closest competitor is Schlumberger whose shipments result in approximately 27% market share for their own technology. After Schlumberger, there are roughly a dozen other notable vendors in the market including Badger Meter often selling Itron products, Hunt Technologies, and BCSI. Badger and Hunt have maintained approximately 5% market share over the last couple of years with BCSI coming in at around 9% market share. If we compare overall industry wide announcements so far this year and the level of bookings we just announced for this quarter, Itron is continuing to win a good share of the business in the AMR market. Itron will ship approximately 3.5 million end points this year. Recent industry reports estimate that there will be roughly 5.5 to 7 million AMR end points delivered by all vendors in 2002. Our own estimates were a bit towards a high end of that range. If those estimates hold Itron shares of AMR market will increase to 50% or more in 2002 that will be a 15% increase in AMR market share. Are we winning every order, of course not, but we do continue to get the lion's share of the business. One of the ways we continue to win business is through investments and enhancements to our core product offerings through strategic relationships with other industry participants. As we indicated on our call last quarter, this year we have, or will release, across the twenty new products to our customers in electric, gas and water markets. Twenty new products to increase the value proposition to our customers. Twenty new products to stay ahead of the competition, and twenty new products that will produce more revenues in years to come. Just the last couple of weeks, we announced commercial availability for a number of new products that generated high interest levels from customers attending the Automatic Meter Reading Annual Symposium in San Antonio at the end of September. Those products include Fixed Network 2.0, a highly scalable solution featuring neighborhood concentrators that plug and play into publicly available communication networks. And a product that integrates Itron's AMR technology with a new Solid State Meter from Invensys. In addition to internally developing new products, we also announced at the show, an exclusive distribution rights arrangement with SmartSynch for their C&I metering solution, which utilizes the SkyTel paging network. This technology is easy to install and significantly lower monthly communication cost and also generated high interest levels at the AMRA conference and two new orders already.

Now let me make a few comments on Solid State Electric Meters as they pertain for the competition in the AMR marketplace. Sales of new residential electric meters for normal expansion, replacement, and AMR are running at about five million units per year domestically. Wholesales are split primarily between four major electric meter manufacturers. Schlumberger and ABB, which have the largest share of the market and GE and LineSoft (ph) with smaller shares. Of those meter manufacturers only Schlumberger currently has a residential Solid State Meter product that is being shipped in any volume. Although, it's reasonable to expect that the other major electric meter manufacturers will follow suit in the next year or so. As well Invensys has mentioned a new entrant to the electric meter market, just announced the Solid State Meter product fuel embodying Itron technology. We believed it is likely over the longer term, say five years that utilities will move towards Solid State Meters away from electro-mechanical meters for new and replacement meter purchases. How does that impact Itron and our electric AMR market, which is now about 50 million dollars each year. As most of you know, Itron does not make meters, but we do make AMR technology recollection process of data from meters. As electric utilities continue to fall, AMR will earn revenues from the sale of our technology in a number of ways. We will sell our existing AMR meter modules for installation on existing and new electro-mechanical meters, and we will license our technology to meter manufacturers for incorporation into Solid State Meters. Today, we have such licensing arrangements in place with both Schlumberger and Invensys on residential meters and ABB on commercial meters.

During the quarter, we announced a large order from Niagara Mohawk for mobile AMR system. I like to talk a bit about that because many of you have asked questions and I'll fill in those that haven't. This order is a bit unusual in that Niagra Mohawk replacing 100% of our existing electric meters with new size tape meters as part of the AMR deployment. This is not typical as electric utility AMR deployment and was driven largely by the age of the electric meters at Niagra Mohawk. Itron got the system order a large contract for gas modules Schlumberger did get the order for all of the electric meters with Itron technology inside.

In our view, the market for Itron just in power electric AMR modules for installation on new or existing electromechanical meters will remain robust for sometime to come. As evidence of that, we need to only point out new order bookings for the past quarter alone. When we sign contracts for approximately three quarters of a million electric AMR endpoint using Itron modules to be installed under new and existing electomechanical meters.

In those situations where utility elect to about solid state metering products, we have the licensing arrangements in place to offer Itron technology. And we summarize relative to competition with the following. We are confident that our current and future product offerings and technologies will continue to be highly competitive. And we are confident that our customer relationships, industry knowledge, and technical expertise position us well to continue to capture a large portion of the AMR market for the foreseeable future.

Now, let me conclude my portion of today's comments by giving you an update on our recent acquisitions. In addition to the great financial results thus far in '02, we've been busy the expanding our knowledge base and capabilities beyond meter reading. During the third quarter we announced two acquisitions with broader value delivered to our customers. First eMobile Data, is a software company that helps utility [Inaudible] service and equation by combining the power of wireless communications with the internet and realtime information exchange. eMobile's flagship products, service link enables utilities to streamline and automate many of the processes associated with [Inaudible] service including turn-ons, turn-offs, gas leak detection, credit and collections, meter services and trouble call.

Overtime this business will be a great standalone business in its own right. However, the synergies between workforce management, meter reading, AMR installations, and field services related to T&D infrastructure offers additional opportunities to help our customers streamline and consolidate operation.

We also announced the acquisition of Regional Economic Research better known as RER, the San Diego company specializing in the energy consulting analysis and forecasting software and services. RER offers consulting an analysis services including planning and evaluation of energy efficiency and renewable energy, analysis of energy usage patterns including load research forecasting and load profile development and as well management consulting in the area of retail competition.

RER's forward-looking heads up capabilities add an important new dimension to our translucent (ph) portfolio. As we work toward helping our customers make sense of the changes in their world and better plan for their future. After these two acquisitions are closed, we are accurately working on integration activities to bring these companies into the Itron fold. EMobile data will become part of our mobile and network calamity solutions group and will be principally managed out at Spokane. RER will become part of our ESI group in Raleigh and we manage principally out of Raleigh.

These two acquisitions follow last spring acquisitions of LineSoft. The company that provides leading edge software tools for transmission and distribution design as well as engineering consulting and joint new services. As we move forward, we will continue to target additional acquisitions and strategic partnerships but built upon our core business and technology and deliver the knowledge our energy and water customers' need. But great financial results so far this year and healthy cash flow. We have had the financial strength that brings additional acquisitions to life.

Let me finish today by simply saying that a great appreciation for your interest and support. We will forward sharing Itron's successes with you in the future. Jemima to have has a few closing comments.

Thank you LeRoy. Before we start the Q&A session, I wanted to provide some additional comments relative to our guidance for the remainder of this year. As our release indicates our guidance remains unchanged for 2002, revenues will be between 275 and 285 million and we expect pro forma EPS will be between a dollar six and a dollar 10 and given the great results we have had so far this year and the strong bookings in Q3, it is not likely we will hit to the low end of that revenue range, whether or not we hit the high end, we will be largely dependent on upside orders from utilities for utilizing remaining yearend budget dollars not yet spent. Our range for EPS of a dollar six to a dollar 10 for the year result in a range of EPS for Q4 of roughly 26 to 30 cents. We are looking for gross margin in Q4 to come down by a point, maybe two from the 47 percent gross margin we had this quarter primarily related to a higher mix of international revenues that we are expecting for Q4 at lower margin.

In addition, we will see slightly higher operating expenses in Q4 related to the eMobile acquisition with minimal evenues from eMobile in Q4. We would expect a minimal impact on EPS from the RER acquisition in the fourth quarter as revenues should come very close to offsetting whatever expenses there are for RER in Q4. And with that we conclude the comment portion of our call and operator we will now open the call for questions.

Thank you. The question and answer session will begin at this time. If you are using a speakerphone, please pick up the handset before pressing any numbers. Should you have a question, please press star one on your pushbutton telephone. If you wish to withdraw your question, please press star two. Your question will be taken in the order that is received. Please stand by for your first question. Your first question comes from Bill Fogel. Please state your affiliation followed by your question.

Wachovia Securities. Good afternoon.

Hi Bill.

Hi LeRoy. Just a couple of questions. I was just wondering if you could give us some more details on your feel for the pipeline going forward, specifically for the next quarter where you see strength and where you might see some weakness?

Yeah, in general, we continue to see good strength in the electric area and the water area. Bill, as usual, gas is relatively flat and frankly the weaknesses come both in our EIS area and in our international area, even though we are going to have a -- we hope a better quarter internationally that we had in the third quarter. It's still weak relative to year ago. So, good area is electric and water, flat gas, down some internationally, down some in EIS. So, frankly, over the coming months be looking to take corrective actions both relative to focus and people who are deployed in those areas.

Great, great. Also I was wondering if you could just give us a little more details on that, what kind of interest level in the fixed network 2O (ph) solution that you introduced and when, you know, we might expect some sales in that unit?

Yeah, the last part of your question, when we might make exploit some sales, I mean, I don't honestly know at this point, but I can say and I think most of the people that were at the show would say that we had an awful lot of utilities beginning to look at that and, you know, I'll characterize that looking at it is okay. We think that we are going to have some areas of our territory where we are going have to install a fixed network and get either daily or more frequent meter reads at the whole service territories or part of it. We had awful lot of utilities where we have already sold on mobile AMR networks. Very happy to see the addition of that product to our product base, that is because we didn't have a fixed network before, which we certainly did, but that one allows us to connect to public network such as CDPD (ph) or PCS (ph) or even a plain ole telephones system for that and avoid having to build any back call (ph). So, we will see how orders develop for that. We don't expect any inflex of orders to affect us this year is all in the product line and we will foresee our next year, Bill.

Great and you are equipped from a manufacturing standpoint, if orders were to come to that fixed network to meet some volume orders or when will you be?

No, that is not a problem actually. That particularly, particular product line, we would outsource here locally in Spokane, but we are well set up from a volume basis to take on any orders that might come our way.

Okay, thanks a lot, LeRoy.

You bet.

Thank you. Your next question comes from Steve Sanders. Please state your affiliation followed by your question.

I am Steve Sanders of Stephens Inc.

Hi Steve.

A couple of questions, you mentioned the acquisition integration. I wonder if you could talk a little more specifically about integrating the various sales forces you have, obviously people who are more focused on selling RER, eMobile, AMR, LineSoft. So I wondered if you could just give me a little more detail on how that process works now?

Sure thing, in fact I'll run down on all three acquisitions LineSoft, eMobile, RER. If you look at, let's start with eMobile as usual. If you look at eMobile our guys have been for some time now selling eMobile products as we have been largely the exclusive distribution channel for some months now for eMobile. We are selling through our traditional sales force, the same guys that sell AMR, sell handheld technology in both our electric business units and our gas business units and we also think there is some good capabilities of that in international and of course a good capability in our water and public power business unit as well. It is our traditional sales force there. As we acquired LineSoft we took the sales force of LineSoft and we have actually blended it in with our electric Utility sales force and we have been cross integrating the two sales forces since March. We are training the LineSoft people on traditional Itron products, training Itron sales force on LineSoft products and allowing each to sort of carry the weight in their own technology areas thus far. We will continue that cross training and by the end of this year we would expect that all of the training to be complete and you won't able be to tell one sales person from the next, so everybody's selling both LineSoft and traditional Itron products as well as eMobile.

The RER acquisition is a little bit different in that above half of RER is software sales, which we will go ahead and begin training up on and begin selling not only domestically but around the world in our existing sales force. The other half of RER is hard core consulting work and there the consultants tend to be their own best sales men, we will lever the consultants during their own sales work with our traditional sales force doing references and spreading the word as you will, but we do acknowledge that the consulting world from a sales perspective is some different and some customers of RERs are people we don't traditionally sell things to, generally commissions, both energy commissions and Utility commissions and some governmental entities as well. So we'll maintain that directly out of RER.

Okay and then a follow-up question on LineSoft, may be related specifically to center point in Tampa first, just what were they doing before, how full of an implementation is this from your perspective at those utilities with LineSoft's products and then kind of a second part of that, is did you head LineSoft for a while, you obviously know that Utility customer base very well, are you finding that the product or the service or the pricing needs a little bit of work or are you attributing most of the weakness recently almost exclusively to market conditions?

Let me start with the market conditions and go backwards on your question. The market is a bit weak for software products, you know whether you are selling LineSoft software or you selling other stuff, it's been, there is some tough in utility industry itself software these days. Utility is just, you know slimming down on budget expenditures and is well taking longer, frankly, to just get orders placed and interestingly enough, if you look at the slow down we've seen in the LineSoft area it has been largely slowdown and not melting of orders and so we've had things push out as I said in my prepared comments. In case of the orders we have talked about our relative [Inaudible] , we've been doing some service prep work for nine months or so and this is not a full roll-out. It's about a 100 or so seats and that can be followed with a several times as many seats as we go through time and how they like the product depending on how much center point would get geared up to do additional work. So not a full roll-out, rarely do we get a full roll-out at any Utility or has LineSoft in the past. As we look at other orders we've talked about Tampa being one of them, clearly that's a pilot at this stage and it's probably going to look at three roll-out stages over time. We would look at some of that next year and we would look for some of that possibly the year after.

Okay and then, I guess you kind of answered the product offering from LineSoft is as you see it today it seems to be the right one, you're not making any significant changes there on user product or repricing side?

No, neither on the product or repricing side are we making significant changes, we are happy with the product we have, we are spending money however to expand the product line to push into the areas we are not doing now, to give some additional automation for design in some other areas as the utility and looking at some products that expand beyond the large utility world into the smaller utility world are more than we have recently and we have recently announced a product call PLpro (ph) which has a different transmission focus than we've had in the past. So we continue to expand the product line, but we're really happy as far our customers and as well we have some work going now on some testimonials that we will talk about, you know as much as 20 percent savings in the area of transmission and distribution design.

Okay thank you.

Thank you, your next comes from Steven Colbert, please state your affiliation followed by your question.

Thank you, JMP Securities. Hi good afternoon.

Hi Steve.

I just wanted to know [Inaudible] you had mentioned in the last quarter conference call about some pricing issues that you were facing or is just that on a quarter, well what's happened I guess subsequent to that quarter, has it worsened, have you seen more or the same or where does that stand?

You bet, that is the comment I made at probably this point, which I never thought to make. You know we talked about things and pricing pressure not so much in AMR but from the meter side of the equation and particularly Schlumberger we did see that pressure. We haven't seen it increase any, but we would expect pricing from meter vendors to be aggressive. Schlumberger is not going to go away and so we work with our other meter suppliers to be able to combat that whenever we need to. We haven't lost except neither Mohawk order that I talked about, we have not lost any big orders in the intervening time.

In talking about meters, you talked about in your prepared text about the trends to the solid state meter and you said, you know, that you still have strong orders on the electro mechanical, but it seems that longer term as the solid state meter becomes a more important factor, net net of bottom line is a modest negative to Itron's earnings?

Well, you know, it will impact Itrons earnings if we do not do something about it. We are not going to sit here and let that impact go on without doing something about it. So, we have continued to work with other meter manufacturers to embed not only our technology in their products but as well to build parts of their product which take up some of the shortfall and we actively look at what else we might do relative to solid state electric meters. So we are not going to sit here and do nothing and we will...

Again Steve this is Jemina, I would just add that, you know, keep in mind that utilities have huge dollars invested in existing populations of electric meters and it will take sometime before they swap out existing meters for brand new meters and, you know, clearly as we talked about our 3Q booking number on the electric side we got substantial orders this quarter on this certainly indicate that to be the case.

And were there any other orders, that were, let us say, north of 10m besides beside the one's that you mentioned in the . . . during your prepared comments?

Yeah, Steve, there was one order during the quarter that was about 14 million dollars, the Niagara Mowhawk order as you all know came in somewhere around 30 million dollars, than everything else was 10 million or below in terms of size.

Okay thank you very much.

Thank you, your next question comes from Lisa Callahan. Please state your affiliation followed by your question.

Good afternoon, Think Equity Partners. What would need to happen for you to be interested in investing power line carrier technology? Leroy.

Yeah, Lisa. Essentially, one of the following things would have to happen. We have routinely over the last several quarters said we haven't been interested in investing in power line career technology because we feel and we continue to feel that the applicable niche the power line carrier applies to in the market is relatively small and we can compete with it well in most of the market. If we would find that niche would grow to be substantial and we thought that they had either a economic or technical competitive advantage over what we can do with radio than we'd move either to invest -- either through acquisition of the technology or to develop the technology on our own. Number of small companies out there involved in power line carrier and you know we watch it closely but we had to convince ourselves that that niche would be more substantial then we think it is today.

When you say niche do you -- maybe -- a 10 percent of the market share in going forward power line could go after?

Well if you sort of look at the shares out there now there is certainly at this point no more than about a 10 percent range and at that point I am fairly comfortable with letting that piece of the market go.

and Lisa just to reinforce the power line carrier 10 percent of the market that we were talking about is applicable to the electric market. We really have not seen power line carrier technology in terms of the gap in water market.

All right and then one other question would it ever make sense for Itron to get into the meter manufacturing business?

Certainly we can describe the situation of getting into the meter manufacturing business would make some sense if it was the electric business. Gas and water business are so far away from us technologically that one for me would be a stretch. I don't think you would see that. We are not going to massive integration of say AMR technology into gas and water meters but electrically, it would make some sense and I won't say that we are never going to do that nor will I say at this point that we are going to do it. I will say that we have considered it in our own strategic planning.

Thanks. I'll jump back in the queue.

Thank you.

Thank you. Your next question from Gary Holdsworth. Please state your affiliation followed by your question.

Good afternoon, Wedbush Morgan Securities Inc. This is kind of a strategic question, I guess, for LeRoy. I see in the recent acquisition some moves more to services as opposed to hardware or software, I guess software means services, but, and especially in relation to LineSoft and the engineering and consulting work that they do, would you ever see the need or feel the need of aligning yourself more closely with some of the engineering firms that work on, you know, the T&D side leading to perhaps some acquisitions in that area?

Yeah. Gary, good question. Let me take it in two parts. First of all as we have looked at acquisitions generally, we sort of have a filter that sort of points to soft line services and hardware. Not that we shy away from hardware, but you get better leverage off soft line services and they don't get commoditized this quickly as the hardware business does even though even we do very, very well in hardware business.

As we look at the LineSoft acquisition, we think about, you know, what we do with LineSoft. provide software design tools for translation and distribution in delivery systems. We both try with some consulting organizations as well as work with some consulting organization. From our own perspective, we do a bit of consulting, engineering consulting in LineSoft and that gives a couple of things for us. For one, it gives us the badge of credibility to our utility customers because we are out there in the trenches doing engineering and using our own software tools. Two, it also sets us up a forefront of various types of line designs. So there are many ways we get to not only test new products but also invent new products in our own consulting group. Need we some time in the future be better aligned with existing consulting engineering groups or when I talk to my sales forces, I tell them that you better be into the engineering consulting groups and convince the middle management that our software tools will help them to quickly compete designs and be able to compete in utility world going forward. Do I think we need to buy or be closely partnered with engineering consulting firms. At this point I would say no.

Great. Thank you very much.

Your next question comes from Patrick Forkin. Please state your affiliation followed by your question.

Wonderlic Research. Good afternoon. On the Niagara Mohawk contract. Was that 30 or 35 million?

In total we will bring in about 35 million dollars in revenues from that contract, which does include some of the licensing fees from Schlumberger typically when you have a large contract it will book in stages were you might book the hardware and the software and then you book in the next quarter since following implementation. I think in terms of the 87 million dollars in bookings in the third quarter only about 28 million or so of that was related to that contract, so we do expect a little bit more follow on bookings this quarter to go with that and then overtime again the revenue Schlumberger for licensing the technology.

Okay, so the largest piece of that was gas and how long do you think that will stretch out over is that a year or two years?

On the largest piece, that was gas as well as software reading technology project management and as we indicated in the release we are looking at about a three-year installation timeframe.

Okay. On the electric piece that you are getting licensing fees on, what under your previous dealings with Schlumberger were they didn't go direct to the customer were you guys were supplying the technology, my understanding is that Niagara Mohawk is about one - - over a million end points, what ...........

The electric is about a million and a half.

Pardon me.

The electric is about a million and a half.

Okay, if Niagara Mohawk would have done what the other participants in that national grid network have done with you in the past would that have been certainly a contract between 50 and a 100 million for you guys?

Well it certainly would have been a little bit higher because that we would have sold end points directly for installation on their existing meters, I understand (ph) I don't know in terms of the dollars [Inaudible] would have been about two times the size of the contract as it currently stands.

Okay and then the rest of the national grid business that you've got in the pipeline, was that substantially wrapped up in the September quarter?

It will carry on a bit into the fourth quarter and may be even trickle into next year but it is no down to fairly small amount on a quarterly basis, I'd say under 5 million dollars a quarter this quarter and likely a similar number in Q4.

Okay and then the other two new clients that you, the other two bookings that you announced Duke Power and Baltimore, where they existing clients, are they new clients and is that gas, water, or electric?

They are existing customers; in the case of Duke, they are electric only in terms of what they are ordering from us at this point. In the case of Baltimore, gas and electric, it's a combination of both. You know, if you look at what Duke has installed with it so far, well actually both of them have installed right about three quarters of the million end point so far.

Okay and then on LineSoft, the, I guess the time frame that it has taken to get some of these deals signed, is part of the problem really getting LineSoft integrated into Itron and LeRoy does it change at all, you know, the acceleration that you are looking at sort of this total value proposition?

I'd say Patrick that it has not changed the amount of time it takes a deal to get done. We do think the pipe is filling a little bit quicker because LineSoft is a part of Itron and what I mean by that is a number of customers have told us quite directly that they were suspiciously doing business with LineSoft because of their financial health and they were on their own, now that they are owned by Itron, they are quite comfortable with the financial health of the overall entity and they are moving forward. But as to closing deals, we are just seeing a bit of a slowdown, utilities always do it when economies get tough, they negotiate every line item in a contract and it just takes longer. Typically, it will take us normally 9 months to close; it has taken us 12 and so forth, nothing to do with integration or anything else.

Okay last question, it looks like this, the September quarter was the first quarter in sometime that we had a sequential decrease in electric revenues, can you comment on what you are seeing through the proposal pipeline or major contracts, you know in excess of 50 million or so and maybe differentiate, you know the mobile proposals versus the fixed network proposals.

Sure. Let me jump in on that one, Patrick on a quarter-to-quarter basis you do need to be a little careful when you are comparing performance by business unit because in one quarter you may have installation revenues that go with the contract and in the next quarter the mix of business might be largely, you know business that doesn't work where we not doing the installation site are certainly not seeing any slowdown in terms of electric systems. In fact, if you look at the 87 million dollars in new bookings during the quarter, you know roughly two thirds of that was on the electric side, so still continuing to see some very strong interest there. I think again, we are largely seeing proposals in terms of real interest from mobile AMR, we've got a tremendous amount of interest, as you'll know that AMR ready for the fixed network product, but I'd describe it more as people wanting more information on how it works, you know, more of an educational as opposed to the fact that they were about to let loose with, you know, substantial RFP.

Okay, I guess what I'm getting to back to LeRoy's comment on PLC and the earlier question, you know, I guess, I'm struggling what has been described as a niche if you are seeing it, you know, we are seeing some of the major contracts, it will be awarded like PP&L and then last week there was some news on a proposal with progress energy that could be for two and half million end point, you know, looks like they have narrowed that vendor list down from eight to two that being an active and DCSI, you know, even though historically PLC has been a small portion of the market, do you see it picking up momentum?

I think we've seen in the co-op market power line carrier pick up momentum, I think if you look at the two orders they have gotten, DCSI has gotten an order from Wisconsin Public Service couple of years ago and from Pennsylvania Power & Light here as you have mentioned. Yeah that momentum has picked up a little bit and I'm still of the opinion that we will compete fine and we'll continue to grow our market share substantially but if you look at the service territory for Wisconsin Public Services and Pennsylvania Power & Light, we will just see is the largely rural areas with little towns and I'm comfortable that we can compete in more urban areas with extensive populations with a radio system. When I look at this from a couple of perspectives one of it being, you know, if they continue to grow in size of that addressable market where they can win business continues to grow, I'll get interested in them, but right now I'm not. I don't want to manage yet another technology here and we seem to be doing pretty good.

Yes, Patrick the other thing I'd refer you to is the latest Charlotte (ph) reports that LeRoy talked about in his comments portion where in their surveying of utility executives and mangers about the types of technology that they are looking at implementing in terms of AMR, you know, the scales are resoundingly towards mobile AMR and not necessarily large fixed network deployments.

Okay. Thank you.

Next question comes from Jarett Carlson. Please state you affiliation followed by your question.

Yes, RBC Capital Markets, good afternoon. The contract with Charlotte-Mecklenburg, I just want to go back and touch on it a second. Is that indicative of some of the order pattern that we're seeing develop out of utilities in that, while they plan to do 200,000 and you've got an order for 30? You know, you didn't necessarily book the order for all 200 yet, you might arrive at the same kind of total revenue overtime and perhaps, that leading to backlog maybe becoming less of a predictor of the prospects of the business, I think going forward.

Yeah, I do think we are going to see a trend to that overtime. I don't really have any real statistics to give you as to how much of that we have seen, but that is a great example of utility that has, you know, qualified Itron as AMR vendor, but does want the ability to work with a variety of meter manufacturers over the course of the three to four years. So, in terms of what Itron reflects as a booking and backlog is really a pretty short-term basis of what we're getting in terms of the order for the modules from the meter manufacture and this is a case obviously on the water side, where the utility is choosing to put in brand new meters in addition to the AMR technology.

Okay, on the SmartSynch, the SmartSynch link up that you announced at the AMR conference, in talking with those guys, they seemed to have had a pretty nice roll out of metering systems over the last, but say pretty aggressive over the last 18 or 24 months. Where do you see that piece of the business going and how that's going to develop for you?

I think it's fair to say that we think we will see a similar kind of roll out over the next period of time, Jarett. You know, SmartSynch has an advantage we recognize. You know, they can go in a single customer location and install a product. You very quickly install, you pull out one meter, you put in a meter with their gear in it and you are virtually up and running. Utilities are going to continue to look to expand to an ever-increasing population of large commercial and industrial customers. And work their way through those populations so they can offer a good rate fixtures to those utilities and as well be able to offering incentives to get those customers off their delivery lines when their loads are in their peak period. We already have two orders for SmartSynch we would anticipate that would continue, we are very excited about that deal going forward.

Does that, let me, because it's a lower kind of continuing cost system, would you presume that utilities would go back and in some way kind of expand their commercial and industrial base i.e., it's a lower cost system so we can kind of go down to smaller commercial customers and then implement the major and so therefore kind of create a market because you got a lower cost solution?

Well, certainly the market size expands because of solution set is smaller and because cost of the solution is lower. Market will also expand because Itron is better distribution with utilities. We call on a huge number of utilities and we are well regarded. So, I think everything causes the market to expand there. I mean, quite frankly, SmartSynch was interested in us, because they simply did not have a distribution channel that was anywhere near as or large or strong as Itron's.

Okay, thank you.

Thank you. Next question comes from Dave Jury (ph) . Please state your affiliation followed by your question.

Please wait while your call is being transferred.

Thank you, the next question comes from Bill Dezellem. Please state your affiliation followed by your question.

Thank you, it's Davidson Investment Advisors. I have two questions. First of all, severance that you paid in the quarter was that about 200,000. Is that a right calculation?

You're pretty close, Bill.

Okay, thank you. And then second question, I have been asking a long time. What's the overall penetration rate of AMR today?

Bill it is Mima. We started the quarter - - the year with right about 14% if industry statistics are accurate, which, you know, we think we are there in terms of 5.5 or 7 million more. As we come out of this year, we will be somewhere between 16 and 17 percent penetration overall.

And that compares with 60 or so percent utility executives to say that they want to have complete AMR penetration in their geographic area?

Correct. Of the utility executives that were surveyed by ChartWell (ph) , which were about 115, and I don't remember off hand, but representing somewhere right around a quarter two or third of all the meters that are out there in the US, in Canada. 60% of them have indicated that they do intended for the AMR technology on every single residential meter.

And so, let me just ask the, maybe it's the obvious question, lets make the math easy, we assume that penetration rate is 20% today, which I realize is under that. But if it were - - are those numbers indicating that to satisfy those executives, assuming that they are representative of the industry at large to satisfy those executives' plans, or, which is that the installed base would need to triple?

Yeah Bill, I trust you may accept it something like that.

We basically was doing at 60% penetration versus a 20% penetration today and ....?

Yeah.

Yes. Absolutely.

You would allow a couple of things to stay steady state, which I don't think will. One is the size of meter population, it continues to grow. Two, is the number of executives who will either respond to the survey or, you know, change their position relative to automation of meters, which I believe this also continue to grow.

And then also given that I was conservative in terms of the existing penetration, in fact, those three factors mean that there should be more than a tripling of the installed base potential?

Yeah, again I agree with you on that.

Okay. Thank you.

Thank you. Final reminder ladies and gentlemen, if you do have a question please press start one at this time. Thank you. Your final question comes from Eric Prouty. Please state affiliation followed by your question.

Actually it is John Quealy for Eric Prouty at Adams Harkness. A quick question. What is the latest do you hearing out of the energy bill and how as it relates to AMR and also on TND issues?

You know, John, at this point our best guess is that it is somewhat of a lame-duck issue, you know, certainly there are lot of people, you know, working very hard on the bill, but at this point we are not - - not for certain anything is going to get signed before the legislature adjourns for this session.

John, lots of other things on people's mind are still some wrangling over the annular (ph) , you know, so we would look to engage our elected officials to push after probably the election at this point. I mean, now I is clearly top of mind for all of those people and it is going to stay that way for a long.

Great thank you.

There are no further questions. I will now turn the conference back to Mima Scarpelli to conclude.

Great. Thank you everyone for joining us. We realize this one is a little bit over what people typically allocate in terms of a call. So, we appreciate your attention and support and I look forward to talking with you subsequently. Thanks.

Ladies and gentlemen if you wish to access the replay for this call, you may do so by dialing 100-428-6051 or 973-709-2089 with ID number of 261627. This concludes our conference for today, thank you all for participating, have a nice day. All parties may now disconnect.