Itron Inc (ITRI) 2003 Q1 法說會逐字稿

Good afternoon and welcome, ladies and gentlemen, to the Itron Q1 2003 Earnings Conference Call. (Caller instructions). I would now like to turn the conference over to Miss Mima Scarpelli. Please go ahead, ma'am.

Thank you very much. Good afternoon everyone. Thanks for joining us. With me here in Spokane today is LeRoy Nosbaum, our Chairman and CEO, Dave Remington, our CFO, and Rob Neilson, our President and Chief Operating Officer.

There are a couple of things I need to point out to you before we start our presentation. First, I want to point out that our press release includes information about our future expectations in the Business Outlook section. In addition, we will be providing further details on expectations during our prepared remarks and likely in the Q&A session as well. Expectations about future financial and operating results are forward-looking statements. The forward-looking information we are providing is subject to a number of risks and uncertainties such as the timing of customer orders, our ability to achieve projected financial targets for acquisitions, the inability to predict the outcome of appeals or negotiation efforts associated with the Benghiat patent litigation and a number of other factors, which are described in greater detail in our 10-K for the year ended December 31, 2002. This information is being provided based on our expectations as of today, April 17, 2003. Itron does not undertake any obligation to update or revise forward-looking statements, although we may do so from time to time.

I also want to point out that our press release includes pro forma information and that we will also be discussing pro forma net income and EPS in our prepared remarks. We believe the pro forma results provide useful information in terms of enhancing the overall understanding of our current and future performance. Pro forma results are one of the primary indicators that we use for evaluating historical results and for planning and forecasting future periods. Pro forma results should be viewed in addition to and not in lieu of GAAP results. A schedule reconciling GAAP to pro forma net income and EPS is included as an attachment to our press release, which is available on our Web site at www.itron.com in the "About Itron News Release" section.

Okay. Just to give us all a little variety from previous quarters, I'm going to start today with a financial review and that will be followed by some additional remarks from LeRoy. And as normally, we will hold the Q&A session at the end of our prepared remarks.

Now let's turn to our review of financial results for the quarter. As you can see from our release, we had a great start to the year. With revenues just under 75 million and pro forma EPS of $0.29, we did better than our own expectations coming into the quarter and, as well, better than the consensus estimates of 73 million in revenue and $0.24 earnings per share. Our better than expected performance being primarily due to delivering several orders this quarter that we had anticipated would take place in the second quarter.

Let's go through the results for the quarter in greater detail, starting with revenue. Revenues for the first quarter were 74.6 million, which is up about 20 percent from the first quarter last year -- roughly half of the increase coming from the acquisitions we completed in the last 12 months, including Silicon Energy, which we closed in early March and which contributed about $900,000.00 to first quarter revenues. On a sequential quarter basis, revenues were down about three percent from the fourth quarter, which is a pretty normal pattern of seasonality for us given winter weather and the installation difficulties that present. Roughly 72 percent of the quarter's revenues came from hardware and OEM sales, with the remainder of revenue coming from software and services. That compares with 66 percent hardware revenues in the first quarter last year and 74 percent in our December quarter. With the acquisitions we've completed in the last 12 months, we do look for a gradual increase in the proportion of software revenues as we go through 2003, although on a quarter-to-quarter basis, our mix will shift around.

New order bookings were 60 million for the quarter, which is up 58 percent from 38 million in bookings in the first quarter of last year. I would also note that the 60 million does not include any bookings from Silicon Energy products, as most of their first quarter bookings occurred prior to our March 4 transaction close.

Normally we do expect to see a decrease in backlog in the first quarter and, in fact, the first half of the year compared to year-end backlog figures. However, stronger than expected first quarter bookings along with approximately eight million in backlog from Silicon Energy resulted in an increase in total backlog at quarter end compared to December. Total backlog at quarter end was 203 million, which is up about five million from December and 12-month backlog at quarter end was 102 million, up a little bit from 100 million at the end of December.

Turning to growth margin -- 49.4 percent growth margin for the quarter is a new quarterly high and represents a two percent improvement over fourth quarter growth margin and a five percent improvement over 44 percent gross margin in the first quarter of last year. The increase in margin from our December quarter is driven by an increase in software license revenues this quarter for our transmission and distributions business, which is the business we acquired from LineSoft last year, which were at a very high gross margin, and we also had a bit of a favorable mix shift in terms of hardware revenues this quarter, compared to the December quarter. Those increases were partially offset by some increased warranty charges in the quarter, the bulk of which related to international products that we are no longer selling or supporting. Comparing growth margin this quarter to the first quarter of last year, the five-point growth margin improvement results primarily from higher software license sales with some improvement also caused by higher manufacturing volumes this year compared to last.

Turning to operating expenses, sales and marketing, product development and general and administrative spending combined were 26.4 million this quarter, about 35 percent of revenue, compared with 26.5 million in spending in our December quarter, about 34 percent of revenue. While the total of these expenses is comparable from Q4 to Q1, there were some noticeable fluxuations in product development and general and administrative when you compare the fourth quarter to the first quarter. Fourth quarter product development expenses were 8.9 million, rising to 10.2 million this quarter. Fourth quarter G&A expenses were nine million, falling to around 7.8 million this quarter.

I do want to point out that we did have a reclassification of expenses during the fourth quarter related to incentive compensation of a little more than one million, which caused fourth quarter product development to be lower and G&A to be higher than what is our normal pattern. Compared to the first quarter last year, sales and marketing, [inaudible] G&A expenses are up about $7.3m, which is almost a five-point increase as a percentage of revenue. A little more than half of the increase came from the acquisitions we completed, with the remainder coming from increased staffing levels, increased defense costs associated with the Benghiat patent litigation and increased IT spending.

Also included in operating expenses this quarter was the restructuring charge of 2.2 million, most of which relates to restructuring of our energy information system operations in Raleigh, and $900,000.00 of in-process R&D charges related to our acquisition of Silicon Energy. Intangible asset amortization, which is also included in operating expenses was 1.9 million for the quarter, compared with 337,000 in amortization in the first quarter last year. The increase resulting from the four acquisitions we have completed since March of last year.

We have net interest expense of $287,000.00 this quarter and that compares to net interest expense of 971,000 in the first quarter last year. The lower net interest expense in 2003 coming from our having converted 53 million in convertible debt to common stock in the second quarter last year and from an early payoff of mortgage debt in the first quarter last year. Now those decreases were partially offset by increased interest expenses this quarter due to the 50 million in debt we used to finance the Silicon Energy acquisition in early March.

We have an abnormal tax provision for this quarter of about 45 percent due to the in-process R&D charges, which are not deductible for tax purposes. Excluding the effective in-process R&D, our tax provision was 38.5 percent.

For GAAP purposes we had net income of 2.9 million, compared to a loss of three million in the first quarter last year. The loss in 2002 being primarily driven by the 7.4 million of in-process R&D that we had in the first quarter of last year related to an acquisition.

Pro forma net income, which excludes restructuring charges, intangible asset amortization and in-process R&D, was 6.3 million this quarter, or 8.5 percent of revenues, up from 4.6 million or 7.5 percent of revenues in the first quarter last year. Pro forma earnings per share were $0.29 this quarter, up from $0.24 in the first quarter last year, and as I mentioned, better than we expected coming into the quarter due to booking and then delivering on a few orders faster than we had expected.

Before moving to the balance sheet and cash flows, let me offer a few words about our guidance for next quarter. As mentioned in the release, we are looking for revenues in the second quarter between 75 and 80 million and pro forma earnings per share between $0.24 and $0.28. Now comparing those expectations to this quarter's actual, the slightly lower earnings per share on slightly higher revenue is driven primarily by two factors. First, we do not expect gross margins to be as high in the second quarter as they were this quarter due primarily to a bit of a shift in the mix of hardware. And, second, we expect to have higher operating expenses next quarter compared to this quarter, as we reflect a full quarter of spending for Silicon Energy and due to spending increases in several areas, including a number of items such as salary and wage increases, which were Itron's go into effect April 1 every year, trade shows and other marketing expenses as that activity picks up in the second quarter, some increase in product development consulting as well as some product development material costs and a little bit of consulting for financial and accounting regulatory compliance issues.

If you look at our expected results as a whole for the first half of this year, which had been midpoint of our range, is a little more than 150 million in revenue and about $0.55 pro forma EPS, we are performing very nicely against our plan and expect revenue and earnings growth this year compared to last year.

Turning to our balance sheet and cash flows, our operating cash flow for the quarter was 6.4 million, which compares with 6.7 million in Q1 last year. The lower operating cash flow this year compared to last year, despite higher earnings, results primarily from higher cash payments of incentive comp, profit sharing and accrued wages in the 2003 quarter compared with the 2002 quarter.

We had cash investment at quarter end of 12.9 million, compared to 32.6 million at year end, with most of the decrease in cash coming from having used approximately 23 million in cash for the Silicon Energy acquisition in March.

Accounts receivable DSO were 66 this quarter, compared with 62 last quarter and 72 in the first quarter last year. Inventory turns were 5.3 for the quarter, compared to 5.4 in the December quarter, and 4.1 in the first quarter last year.

In summary, we had a good first quarter, which always makes for a great start to the year.

And now, I'll turn the call over to LeRoy Nosbaum, Itron's Chairman and CEO.

Thanks, Mima, and thanks to all of you for joining us today. We appreciate your interest in Itron. I have two topics I want to discuss with you today. First, 2003 and how it's shaping and then, secondly, a bit of an update on the integration of our most recent acquisition, Silicon Energy.

Depending on your perspective, '03 is going to be a good year or a great year. When I look at the economy, the industry, even some of our competitors, Itron's having a great year. If we look at Itron compared to '01 and '02, however, I think a good year is a more accurate characterization. As we have been saying for a couple of quarters now, we're expecting an '03 with revenue growth centered around 17 percent, earnings gross centered around ten percent, reflecting minor dilution from our acquisition of Silicon Energy or about $0.05. A good year, not a great year, when compared to '02 when AMR market grew 20 percent and our market share increased to 37 percent, resulting in revenue growth for Itron of 25 percent last year. '03 a good year for Itron and a growth year, although clearly more moderate growth than we produced last year and the year before and, frankly, somewhat effected by capital budget constraints at our utility customers.

Let's take a look, first, at our core business and then we'll talk about the acquisitions. As you've seen from our release, first quarter booking at 60 million are nicely ahead of last year. A very good quarter in AMR bookings, including good-sized orders with two very large electric and gas utilities and an initial AMR order with a customer we can't yet name and a good order from Dominium Resources as well a nice flow of AMR orders during the quarter from our indirect channel which sells to over 60,000 municipalities and electric co-ops. This channel is part of our water and public power business unit.

On the flip side, during the quarter, we also had one large customer, Duke Energy, hit by serious ice storms, which is causing them to divert capital to rebuilding the system. As a result, in the last couple of weeks, Duke notified us that they were extending the installation timeframe for the current order we have with them from 12 months to about 18 months, pushing out around eight million in planned and booked shipments from '03 into '04. Our electric business unit is confident we can make up this shortfall with Duke with other prospects. Accordingly, we still feel our overall core growth projections for this year of 10 to 15 percent are about right.

Now let's turn to the recent acquisition. Sales and revenue activity for RER, Regional Economic Research, the energy consulting and forecasting business we acquired last October, are continuing at a steady pace and are on track for good growth this year. We have been seeing a continued increase in consulting activity this year and have been adding billable consultants to our staff.

Sales activity for the workforce management software we acquired from E-Mobile Data last year is also on track with great prospects developing internationally and domestically, impact in '03 will be modest as we had forecast, but we're pleased with progress at this point.

We had a great first quarter in our transmission and distributions solutions business, a/k/a the LineSoft acquisition of last March. We recognized software license and service revenues at two large customers during the quarter, approximately $4m, half license, half service, and are continuing to build a good pipeline of TDS opportunities domestically and, I'm pleased to say, internationally as well. We look for Q2 to be down from Q1, reflecting the lumpy nature of this business, as we are still experience the longer sales cycle than we would like to for IT and other business as a result of tight utility budgets. However, we are encouraged by our sales progress at a number of accounts during Q1 and are still looking for good comparative performance for TDS in the back half of '03 and for the year overall.

As we look to '04 we see good prospects partially driven by regulatory pressure for increased infrastructure capacity, reliability and security -- a transmission focus to get new generation delivered where and when it's needed and a regulatory climate that is showing signs of settling out, relative to standard market design and regional transmission initiatives -- all good signs for TDS, one of Itron's products helping utilities to optimize their delivery systems.

We are looking for Silicon Energy to contribute nicely to revenues in 2003 and are still on-track for roughly 15 million in revenues for the ten months of the year they're part of Itron. Roughly half of that is booked and includes a combination of software licenses, service and maintenance contracts, partly resulting from 1.3 million in a software license deal with large utility late in February, and a smaller order with a larger -- a large Fortune Ten company in late February, both of which will start to contribute to revenues in Q2.

We are very pleased with sales and prospects for sales of Silicon Energy products to commercial and industrial end user customers. Driven by high and rising energy costs, we see customers in a variety of segments buying software tools to analyze their energy bills and control their energy cost. A particularly interesting example is the industrial customer that saved $1m in the first six months of using the software and is now evaluating software and services from our forecasting group, RER, so that they can better predict their energy use. As a follow-on, a moved to metering inside their facility has provided even more information so that they can now better optimize their use of energy -- all from Itron, all made possible through the acquisition of RER and Silicon Energy and levering Itron's traditional product lines through our new channel to commercial and industrial end users.

Before we close out 2003, I'd like to spend just a moment on international. As many of you have watched over the last several years, Itron has struggled in international. Starting last year we began to make some moves that are now beginning to show promise. As you'll remember, we had a management change at the top. We have closed our operation in France and we have reorganized around selling products we can make and support out of the U.S., thus reducing the expense of our international operation. I'm very pleased to report the signs of good progress. Proposal activity is at an all-time high for products Itron offers today, both our traditional products and our newly acquired software offerings. Australia, Ecuador, Brazil, South Africa, Ireland, the Bahamas, Southeast Asia and elsewhere all are active prospects for very nice orders. In addition, we did receive a very nice hand-held order for Mexico in the quarter. I think, at long last, we have the formula right.

Wrapping up 2003, we're still comfortable with our overall revenue targets for the year of between $330m and $340m, and pro forma earnings in the range of $1.20 to $1.25.

Now, I'd like to turn briefly to an update on Silicon Energy. With the closing of the acquisition on March 4, Silicon Energy brings many additional value streams to Itron. Let me point out just a few. Sophisticated, knowledge-based software tools to manage and optimize energy usages and manage and optimize electricity distribution efficiencies. The core database and data management technology with flexible interfaces that manage information about energy usage and move that information throughout a utility and to a myriad of utility systems, as well a knowledge provider for all of the market participants we're seeing these days, utilities, energy service providers, host sale market participants, regulators and large energy users. Silicon Energy solutions store, protect, deliver, make use of the valuable data that many utilities are collecting -- collecting from Itron's meter reading systems and from numerous other utility systems. When we apply then analytical tools and decision support to turn that data into knowledge to more efficiently and optimally running utility and end user customer businesses.

Today, many utilities are making multi-million dollar investment decisions about their businesses without sufficient information. The story here -- on the day we closed the Silicon Energy transaction, I was having dinner of a CEO of a major utility. After the congratulatory toast, he said to me, "This is a great acquisition for Itron." "I need to get your people in here talking to mine. We are collecting data all over this organization and don't have the tools to use that data wisely. We need the kind of informed analytics and decision-making support that Itron is now capable of delivering." Naturally, I paid for dinner. That story is not isolated. We are delighted with the response from customers and other industry participants to this acquisition. And with it, Itron's ability to deliver on our promise of providing knowledge that can shape the future of both our customers and the industry.

Now let me make a few comments on the integration of Silicon Energy. As we mentioned last quarter, we're combing Silicon Energy operations with RER, our energy forecasting group in San Diego, and our energy information systems group, out of Raleigh, to form a new product group, Energy Management Solutions or EMS. That integration is progressing very well. We have completed the restructuring of our EIS operations in Raleigh. We have moved people around, both within the new EMS product group and within other areas of Itron. We now have management teams in place and organizational structures filled out in Alameda, Raleigh and San Diego.

Over the course of the last quarter, we have begun the process of looking at our various product offerings, with an eye toward combing products from various acquisitions to provide additional value propositions to our customers. We now have a product roadmap for the next two years that we will begin, and have begun, to communicate to our customers. As well, our sales force has undergone sales training and account reviews leading to outlying sales and marketing strategies and alliance development with a number of the large consulting firms.

With over 60 current target prospects, we are actively selling our new solution sets and value propositions, with one of the most active being Distribution Asset Optimization, or DAO. All in all, the integration of Silicon Energy is going well and is progressing as planned. And, as I mentioned earlier, we are looking for solid revenue performance for Silicon for the rest of this year.

Just a few more thoughts in closing -- as we mentioned last quarter, we think Itron's value proposition is targeting the sweet spot in terms of what the energy and water industry will be focused on in the coming years. With our acquisitions, 100 percent of the top 300 utilities in the U.S. and Canada are Itron customers. That's a strong position for which to deepen and expand penetration of our products and services. With the combination of our core businesses and our new acquisitions, we are weathering the forces beyond our control -- the economy, the utility capital issues, regulator uncertainty, and political indecision. We look forward to a good 2003 and we're very encouraged as we look to 2004 and beyond.

That concludes our directed remarks. We now open it up to questions and answers.

Thank you. (Caller instructions). Our first question comes from Steven Sanders with Stephens Inc. Please state your question.

Good afternoon. A couple of questions -- first maybe for you, LeRoy. It seems like on the one hand there's kind of a broad issue with tight budget among utilities, some uncertainty in the industry. On the other hand, you commented on the regulatory pressure, the increasing need for optimizing their networks, the data analytics, etc. I wonder if you could peel off a few layers and maybe talk a little more specifically about whether the tight budget issues are equally affecting AMR, LineSoft or TDS products, Silicon Energy or if you're seeing some relative strength or pressure in each of those segments.

You bet, Steve. Easy enough. We'll run down and we'll start with -- let's start with AMR. In the AMR world, fortunately, in a general sense, we are so good economically, at reducing utilities' cost that generally programs that have started are continuing. The one exception to that -- the Duke push-out that we talked about. But generally, we're continuing on with programs and we're expanding programs. Relative to starting new ones, we've had, what I would call in this economic climate, great reaction from utilities with many of them simply saying this is too good of a cost reduction. We need to begin this process now. And so as we've mentioned in our release and my comments, we see that continuing to move forward. So not as high a growth level as we last year or the year before, but nice growth nonetheless. And we're feeling good about that piece of the business.

As we look to TDS, one of the things that we continue to see utilities struggling with is increasing or even making purchases of IT and we're continuing to see that so that's made sales of transmission of distribution software tougher than it might have been a couple years ago. That's the bad news side of the equation. The good news side of that equation is I'm becoming more pleased, quite frankly, with what's going on at FERC, with what's going on at the states. And while there's still a lot of yelling and screaming, I also see a lot of background work going on with FERC and the states beginning to close on solutions because there's a very strong consensus, both with utilities, regulators, the federal government that we need to get moving on beefing up our transmission capacity, strengthening our distribution systems and getting on with assuring that we have a good infrastructure to provide energy. That comes off, for me, almost a week's spent in Washington, D.C. a couple weeks ago. We had a Pacific Northwest Energy Conference, in fact, this week, that I a participated in and I'm becoming encouraged at what regulators, both federal and state, are beginning to say about utilities need to get on with expanding transmission capacity. Although I don't think we're going to see anything this year from that, but I think as we look to '04, as I said, I'm becoming real optimistic about what '04, particularly late, could produce and then on into '05.

As we look at Silicon Energy, I'll bifurcate that into sort of two sides of a coin. One is the business we're doing with utilities, which is holding up and continuing to grow. I think if we weren't in such a tight capital constraint we'd see more of that at utility locations. But we're real comfortable with projections we've given. On the end user side, I continue to be more optimistic there than I have done in the past because energy bills are continuing to go up and we're seeing large customers and, frankly, even some middle-tiered customers really looking hard at their energy bills because it's becoming so much of a piece of their operating infrastructure these days, they simply have to reduce it. And every time we can point to existing results with an existing Silicon customer, that's good for us. And it might not have been obvious from the one picture I painted, we're seeing our Silicon Energy sales people who are calling on commercial/industrial customers now beginning to develop prospects and even sell some traditional products into that marketplace, which, of course, is a place we have, by and large, never been in before. I'm encouraged there. If we look at RER, they just continue to grow nicely. Now that's not a huge business, but they're continuing to grow because people are looking at what the future holds and planning new systems and planning, whether it's electric condition or gas or a water or wastewater system so that business is holding up nice.

Okay. A couple of follow-ups and I'll just ask them at once and maybe you guys could run through them. The EIS - EMS restructuring, you feel like that's behind us, that's one. Second one, probably more for you, Mima. If you could give any detail on operating cash flow, CapEx and cash tax trends that you expect this year. Also, if you could repeat your comment about the G and A re-class in the fourth quarter. And finally, this is the last one, just a little more detail on the increased warranty expense, maybe quantifying it and other than the international piece, what did it relate to?

Okay. Rob, do you want to talk about the EIS - EMS restructuring?

Sure. The short answer, Steve, is that yes, it's behind us. We've reorganized now. We've checked all of the different positions. Basically, everything is filled - no excess. And we're proceeding ahead. So, virtually everything on the restructuring side is done. There may be just a few small charges that are residual charges in Q2, but won't really show up much on the radar screen. By the way, the spirit of the group - and I commend the new management team for all of EMS for this. And the management team is, for the most part, at the top at least, led from the Silicon Energy management team and then the management groups at the middle level has really come out of RER and EIS and Silicon Energy. They've just done a terrific job. Morale is up. They understand what the mission is. They know where they're going. And their fully engaged now in training the sales forces and getting the new value proposition out to the customers.

Steve, let me answer your question. I mean, on cash flow for the quarter, again, it was 6.4 million, which is down just a tad bit from what it was in the first quarter and again the decrease being higher incentive comps this year, versus last year.

I was kind of looking a little bit more for an outlook, just general trend comments.

Sure. In terms of CapEx, we spent about 2.5 million this quarter, which is very comparable with what we spent last year. You know, this year, we're estimating CapEx of about 15 million, possibly a little less than that. Last year, cash flow from operations was a little under 50 million. We would certainly expect cash flow from operations this year to be around that level, if maybe not a little more.

As to cash taxes, there are minimal cash taxes, some due to State, some AMT, but very, very small. Essentially, we do not expect to be a tax payer to any meaningful extent until we burn through a substantial amount of NOLs and do not expect to be a cash tax payer to any substantial extent until about 2005. You'll see that deferred tax assets did increase substantially and that was because of the acquisition of Silicon. We do have a section 382 limitation on that as well as some other NOLs, but all in, 2005 is about when we expect to pay substantial taxes for the first time in some time.

Yes, Steven, I think your last question was on the re-class I talked about in the fourth quarter. When we did our bonus accrual throughout the year last year, we kind of do some estimates as to how much is related to product development, how much is related to G and A and sales and marketing and other areas, and we true that up in the fourth quarter once our actual performance figures are available, once our other performance figures are available, and that resulted in us actually doing a little bit of reclassification in terms of how we had booked those. So, if you look at the fourth quarter, G and A was a little too high, around 1 million 4. Product developments was a little too low, about 1 million. And then sales and marketing had about a $400,000 impact to that. So, I apologize, we should have pointed that out last quarter when we talked about the results. So, you know, just trying to give you guys a little bit of a feel for what a more normal pattern would look like if you were doing trending from Q3, to Q4, to Q1.

Okay, thank you very much.

Thank you. Our next question comes from Jarett Carson, with RBC Capital Markets. Please state your question.

Good afternoon. On the litigation expense, I presume - I think we talked about 300,000 in the fourth quarter. Can you give us an idea of what both the litigation expense is running this quarter, and also what the additional legal and product development expense associated with engineering your way outside of the handheld patent was?

In terms of the litigation expenses, real close to about a half million dollars this quarter, depending on everything that we may be including in that. I honestly do not know on the handheld redesign.

Jarett, this is LeRoy. I'll comment on that a little bit. The expense of that was not an increase over normal run rate. What we did was, we took about oh, 10 people and pretty quickly set them off to the side and said, work on this until it's done and get it done quickly. It took them about - oh, to get the first pass done, 15 or 20 days and then there was a lot of testing that went on behind that for maybe another 10 days. So, it was not a huge amount of expense, nor a detraction from other directions, fortunately.

Good. So, you just point to roughly 500,000 this quarter, associated -

Actually slightly less than that on Benghiat. And just to give you a size of the breadbox, life to date on Benghiat, is about 2.5 million and what we have going forward is very much a product of what happens when the judge enters the judgement.

Sure. Real quickly, Houston Water, can you give us an update there on what's going on if anything?

Yes, Jarett, on Houston we too saw the announcement that Badger put out, which sort of said, that part of their quarterly problems were due to Houston. Good partner of ours; we do a lot of business with Badger. We've not been as affected overall. What's going on at Houston is sort of interesting in that Houston, like other municipalities, are having a capital issue. So, we are currently scheduled, but have not made it to the City Council's agenda. We are however, earmarked as far as funds are concerned. We would expect to make the agenda some time in the next several weeks to a month out. When that happens, we will see a booking of $7-$8 million in revenues of which about $5 million will show up in '03, as the year closes out.

Okay. So, you basically did not see the kinds of things that - or at least certainly to the extent that they were talking about related to public water?

I'm sorry, Jarett, we can barely hear you. You're fading out.

I'm sorry. You basically did not see some of the things that Badger was talking about related to Houston Water?

No, we haven't. I mean, certainly we've been affected, because they haven't brought that expenditure in front of the City Council there, but we're not seeing any grand amount of drop off in our water and public power bookings. We are bolstered by lots of other activity across that whole marketplace.

Okay. And final question, if you could talk a little bit - I wanted to explore the international side a little more, in terms of what you're seeing develop in your product pipeline or customer acceptance pipeline there. Is it more related to the software products that you've acquired over the last 12 months, or is it still a significant piece, perhaps, of legacy Itron stuff? And also, if you could give us a quick update on AMR's side on international as well.

Hey, Jarett, this is Rob. I'll answer that one. Let's see, the increase in interest is really coming across the board. First we restructure international operation in the fourth quarter of last year. And we created three regions; what we call EMEA, which is Europe, Middle East and Africa, Pacific Rim Latin America, and then third is, Australasia. And with the new software products coming out, we're seeing a steady interest in our handheld meter reading business across the board. We are seeing very increased interest in the software components and products that the company has now that we've taken to market, virtually everywhere. And it's across the board. It's our EMS products, that include MV-90, Silicon Energy, our database products and data warehouse products out of that group. And over at TDS, really kind of a plus and an upside for us has been seeing an increased interest in our transmission and distribution line design software internationally as well. So, it's growing across all the product lines. Now, to AMR, what we have done with our AMR activity is that we've created very targeted accounts that we've gone into to do engineering studies and to do - and by the way, when I say engineering studies, I mean what kind of frequency, what does the meter look like that we're going to interface to, is it electric, gas and water, and what's the size of the opportunity. And we probably have four or five of those very targeted studies going on right now. And they're virtually on every continent as well.

Okay, thanks so much.

Thank you. Our next question comes from Bill [Desallen] [ph], with Davidson Investment Advisors. Please state your question.

Thank you. I wanted to follow-up on the comments that LeRoy, you had made in the opening remarks relative to the international market. My first question is what percentage is the international of sales today? And then, following-up on that and Rob's comments, you look at these three regions - basically, everything but the US, what is the potential size of that market -for those markets in total, relative to the size of the US market?

Bill, it's LeRoy. Right now, the international piece is about 5 percent of the total. And we're not looking for great amount of growth in that this year, but we certainly like our potential. You know, relative to the potential size of a hold in the future, that's sort of a time-bound question. I'm hoping that we're going to see nice, steady growth as we go out into '04 and '05. But the growth could be excitingly lumpy as well. The four targeted AMR opportunities that Rob spoke of, any one of those could essentially double, international, overnight, in the next three years. If two of them happen to hit - and I think there's a reasonable possibility that, in fact, could happen, we could effectively have, instead of a $15-$20 million international, we could have an international that was in the $50-$60 million range. If we add on top of that what I think are some great opportunities as Rob mentioned, to sell our new software products, which our - frankly, our international team is now becoming very excited about it, because they're seeing good reaction to it. You know, we can begin to drive that business as well. So, I'm looking, over the course of the next three year's time, for nice steady growth in international that could begin to approach the $75 million range in three to four years. Now, that's counting on some things in AMR happening. That's counting on our software to continue to penetrate, but I don't think those numbers are off the wall crazy.

Let me follow-up on that and ask, relative to the market as it exists today, not necessarily the business I try and gain, but as the market exists today, is it as well developed as the US market? Or are they where the US market was several years ago, in terms of their implementation of AMR technology?

For AMR technology in Europe, minimal development what-so-ever, except in Italy, which we've talked about on previous conference calls. Although, I think you can look at Scandinavia in general, and see an AMR prospect that looked like AMR prospects of four years ago in the US. If you look at Asia Pacific, I think we see an AMR opportunity that is maybe in full blast from three years away, but that market will not develop as the US market developed, which is very slowly. It will be more serious order, 100,000 to 300,000 units, bingo, first time out of the box, which of course, US utilities don't tend to do. So, the dynamic will be a little different, but that one certainly, I think three years away, at worst, in the Asia Pacific area. As we look at our software products, I don't know, I'll ask Rob to give that one some thought.

Sure, Bill. On the software products side, what we're seeing - we really track deregulation activities, especially as it relates to opening up the wholesale and retail markets. There are places that are ahead of North America on that front; the United Kingdom, Australia, the Southeast Asian market is moving in that direction right now very aggressively, if not implemented. Then we're seeing other countries or other areas that are soon to be deregulated on that front. Ireland is a good example in the next year or so. And then other countries that are a few years away; Japan being one of the ones that's very interesting to us over the next five to six years. And as those markets plan for deregulation, as they set rules, and as they become deregulated, the interest in our software products, primarily from EMS, the new product group, it gets very, very high.

And I beg your pardon, but I actually would like to ask two more questions in the same vein. The first one is, relative to the implementation in the international markets, LeRoy, you had said you thought it would be quicker. You were specific to Scandinavia. Let me ask, relative to the international markets in total, do you believe that the US experience is something that the foreign markets will draw upon and gain comfort in and therefore make faster implementations, generically speaking?

Two points, one of correction to start out. I don't know that implementation experience in Scandinavia will be largely different than US, but I think it certainly will be in Asia Pacific, as we're going to see there, once it finally breaks open - we will see very large trials, which will approach 100-200,000 units, as opposed to let's install 1,000 or 500 in the US. I think overall, the international market looks at the US and says, we've certainly seen technology proven out, we have certainly seen process proven out, so I think that's some helpful. And I think both in Scandinavia, which is looking hard now, and Asia Pacific, which is beginning that process, we will see a quicker implementation. Some of it, because we've seen some experience of the US, yes.

And then my final question is, relative to the last several years of your involvement in the international markets and a few false starts and just not quite getting it there, and in the early opening comments of this call, I think, LeRoy, you had said you felt like you had got that group or the international segment, properly dialed in now. Would you walk us through what you believe was the cause of your lack of success historically, to help us understand better the confidence in the future success?

Yes, and I think you can look to two or three specifics in that regard. One, I think we got too far afield in too many places all at once. And what I mean by that, Bill, is if you look to France, for instance, we were actually designing and marketing and in some cases, contract manufacturing out of France and it was sort of product and market du jour. We were designing things for the meter-reading market, but as well, we were looking at far-flung applications and lots of different ways and that was, in my view, lack of some appropriate control. And you know, for markets that never actually developed. So, we had fixed costs with minimal revenues. We have stopped all the madness, moved all of the design and product marketing back to the US. We have said that we will not allow ourselves to go out of our basic mission and our basic core competencies. And we will not chase revenue that requires us to design and build product that is not something we traditionally do. So, that's one thing.

I think the other thing that has really helped us is to be quite focused in terms of targeting not only locations, but opportunities. Some of the same disciplines that have allowed us in the US to become very profitable over the course of the last three years, we're now applying internationally as well. And then the last thing that I will say and I wouldn't under estimate the effect of this, is we have allowed international to be apart from, rather than a part of Itron. Historically we did it. We let them sort of be entrepreneurial, if you will. And we sort of put a stop to all of that. And the international group is very much a part of Itron now in that they must coordinate product development, they have tight financial controls, we are very careful about coordinating our efforts domestically with international's efforts. And all of that, I think, ends up making me feel actually quite good. Not to mention the fact that I'm really pleased with the guy we've got at the top of international today.

Great. Thank you, both, for your insights and I really appreciate you taking the time on all those questions.

Thank you. Our next question comes from Steven Colbert, with JMP Securities. Please state your question.

Thank you. Good afternoon. Let's see, first of all, can I get a number on the modules shipped in the quarter? And also, do you have a sense of, perhaps, how much was moved from the second quarter into the first quarter? As you mentioned, revenues were stronger in the first quarter, [indecipherable] at the expense of the June quarter.

Yes, Steven, in terms of modules that we shipped this quarter, it was a little over 900,000. So, down just a little bit from what we had in the fourth quarter. You know, I honestly don't have a feel for the magnitude of how many we shipped this quarter that we're expecting next quarter. I apologize for that. I just don't know. And I'm sorry, what was your other question?

Well, that was part two, but also a question in terms of, it sounds like the combination of Silicon right now is at least off to a very good start. Do you stand by the earlier comments you made in regards to the dilution that you expect from the Silicon deal for 2003, or do you think as you look forward now, with what you've seen so far, that perhaps the dilution might be somewhat less?

Well, Steve, I think we are at this point, still looking for around a nickel worth of dilution. Again, that is based on an expectation that from an operating profit standpoint, they will be relatively neutral, but we do have the debt and we'll see, obviously, a little bit of interest expense from that. So no, we're still sticking with that for right now.

Okay. And a question, if I could, for LeRoy. In looking at the strength in bookings in the first three months of the year, it would seem to me that the market is at least off to a pretty good start right now and ahead of a lot, I think, than many would say was expected. I'm more surprised I guess therefore, that your guidance for the rest of the year isn't a little bit higher than what it was three months ago.

Yes, Steve, we're pleased as well with bookings in Q1, but I would remind you not to forget that we're going to push a fairly sizeable piece of business out of the year, because of Duke pushing that contract from '03 into '04. And I'm certainly not bullish enough on the year to say we're going to make that up, plus more. So, not willing to increase guidance at this point.

Okay. And I'm sorry, just the last question and I'll let someone else jump in. If I looked at the operating expenses of each of the software companies that you've acquired over the past four years, I'm sorry, for the past four quarters, what do you think those expenses had been reduced, now in effect, going forward, from when they were acquired?

Steve, that was a great question. I don't know that in specific we can answer it. They've been reduced, to that there's no question. And I can't give you a good, specific answer. It would be a swag at best.

Okay, thanks, LeRoy.

Yes, and Steve, let me get back to your earlier question. I think I may have initially thought you were looking for how many modules we had shipped this quarter that we expected to ship next quarter and I don't know that, because I do know that within the orders that happened this quarter, versus next year's part modules, part some handheld technology and some of the stuff. But I can tell you it was right around $2 million in terms of the revenues we saw hit this quarter, that we had expected would hit next quarter.

Okay, that's helpful. Okay, thanks, Mima.

Thank you. Our next question comes from Patrick Swergen, with [Wonderlake] [ph] Research. Please state your question.

Good afternoon. Mima, on that $2 million that was accelerated into Q1, do you have any idea what the impact was on pro forma EPS for Q1?

You know, Patrick, I don't. I mean other than I would just estimate it was somewhere around 3 or 4 cents. You know, the issue is sort of, you plan on a certain number of orders happening, sometimes some of them push. And so what we're really looking at is a mix of a couple of orders that came in. You know, we didn't really say that necessarily this one would land this quarter, this one the next quarter. So, it's kind of tough to say. But, somewhere around 4 cents is probably real close.

Okay, and then could you update us on the Benghiat litigation. Are you still anticipating a ruling this month and has any kind of filing for an injunction on those handhelds been filed?

Patrick, it's LeRoy. Frankly, we expected some sort of ruling out of the judge by now. And while we're disappointed, I suspect the other side is really disappointed, he's looking for money. This judge, however, is historically slow. So, while we're disappointed, we're not real surprised either. The judge has got before him, a couple of different motions from us and some from the other side. From us, we've asked him to consider the validity of the willfulness verdict coming out of the jury, as we just don't think in any way, shape or form we showed willfulness in allegedly infringing on this patent. As well, we've asked the judge to consider the fact that Benghiat literally waited 10 years to inform us that he thought we were infringing his patent. Typically, that gets treated with a thing called laches, which reduces the overall verdict, because he should have been more prompt in defending his own patent.

On the other side of the equation, we, of course, have gotten motions from the other side that have asked the judge to acknowledge the willfulness and trouble damages and as well, some issues about filings injunctions about the not allowing us to sell the version of software, going forward, that allegedly infringes. The good news on that one is, our work-around sort of took that one off the table. We're not selling what was alleged to be infringing. And so that turns out to be a non-issue. So, fundamentally, you sort of get down to two things. Is the guy going to say 7.4 is the right number, is he going to knock it down, or rule positively on willfulness. And then, he has to decide. He can treble the damages, he can double them, he can multiply them times 1.5. In any of the latter circumstances, if this number gets above 7.4 million, we will look seriously at appeal.

So, if it stays at the 7.4, you'll just get it behind you?

If you ask me what my thinking is today, that's generally where our thought process would be. We'd huddle with our lawyers, but I'd like to have this whole damn thing behind us as quickly as we could. We have accrued that money, so it's already a fourth quarter last year event.

Okay. And then on the work-around, you're pretty confident that even temporarily, he couldn't disrupt the handheld sales?

Yes, we fundamentally have written opinions from two sets of lawyers on that, so yes, we're feeling real good about that. And customers have been more than welcoming regarding the work-around, which is delightful.

Okay. Hey, Dave, can you guys provide any guidance on a GAAP basis for the year?

Yes, I can give you some information on that, Patrick. If you look at the total of reconciling items for the year, which is again, intangible amortization, in process R and D, and the restructuring charges, those are right now projected to total about 13 million, of which a little more than 10 million is intangible asset amortization. So, on an after tax basis, that's about $8 million or somewhere around 36 cents per share. So, you know, very roughly, we would be looking for GAAP EPS of around 85, 86, 87 cents.

Okay. And then there was some mention on a softening in software, relative to Q1, in Q2. That came right after you were talking about LineSoft. Is that related to the LineSoft product suite, or sort of software across the board?

I'll answer that in two ways. First of all, yes it is sort of software across the board. It's been tougher to sell for the last - oh, almost a year now, to utilities, nine months at least. Just a real soft market out there. And the fact that you can't close business. It just takes you longer to close business. Relative to Q2, versus Q1 on PDS, I did say, Patrick, that we had had a good Q1 in PDS and we expected a softer, if you will, Q2 in PDS, which is consistent with both the fact that that business in lumpy on a quarterly basis, and as well, it's continuing to be tough to close that kind of IT business. However, having said that, we are pleased with the sales pipe and we are pleased with reaction to the software product and prospects for the rest of the year.

Okay. And last question, other assets increased about 3 million from the end of the year. Can you comment on that?

Now that was associated with Silicon and it was associated with prepaid loan fees.

Okay, so that will amortize over three years then, Dave?

Yes.

Okay. Thank you very much.

As a reminder, ladies and gentlemen, should anyone have any further questions, please press *1 on your push-button telephone at this time. Our next question comes from Eric Prouty, with Adams Harkness Hill. Please state your question.

Great, thanks. Very good quarter, guys. I thought I'd just ask the standard competition question, obviously, Schlumberger announced a large reorganization. A few other smaller competitors seem to have dropped out of the mix here. Are you seeing any difference out there in the competitive landscape on some of these large contracts that you guys have gone after in the 1?

Eric, thanks for the comment on the quarter. I'd say competition is about as competition has been. I don't know that it's gotten any tougher or gotten any easier either. Although, you know, we certainly haven't seen as much noise in the marketplace in the last quarter or two, for that matter, from some of the smaller guys. We continue to have to be diligent in our efforts and there just hasn't been a lot of change. Some of you guys may have noticed Schlumberger has probably taken a little bit of hit on market share as we look at '02. I think that's partly because they continue to reorganize and that makes it hard for sales forces to be concentrated. But certainly as we look back, our good competitor at ESCO has done a nice job at Wisconsin Public Service and at Pennsylvania Power and Light. And Hunt has continued to be strong in cooperative market. But we haven't seen any dynamic change. We haven't seen any new guy come in and get price aggressive on us. So, I think it's been pretty steady actually.

Great. And just one additional question. You guys have built out a nice portfolio of products, targeting the utility industry and now, I think, getting into the CNI end market also. Is there any other pieces of the puzzle that you feel you need to fill out, in the near term here, to have what you would consider your vision of what a complete product portfolio would look like, either on the utilities side or the CNI side?

Sure. That's a fair question. I think I would say that we're comfortable with Itron's existing product portfolio, particularly with the acquisition at Silicon Energy and the others in the last 12 months. We filled in a substantial portion of our vision. Now, having said that, here's the other side of the coin. There's other opportunities, of course, out there that - and as we look at them, they're going to have to be synergistic, they're going to have to fit the vision, they're clearly going to have to be accretive, if not immediately, very soon. But, if you ask me, are you comfortable with what you've done, relative to filling out your vision, yes, we're very comfortable. We'll continue to look at opportunities or we'll continue to look at technology on a bill, versus buy perspective. But, I like what I'm looking at today.

Great. Thanks, guys.

Thank you. Our last question comes from Robert Kelly, with SGH Management. Please state your question.

I have no further questions. Thank you.

If there are no further questions, I will now turn the conference back to Mima Scarpelli, for closing comments.

Great. Thank you, all for being with us. We do recognize that for most of you, tomorrow is a holiday. So, we appreciate you taking the time to be with us on the call today, and look forward to future conversations and any questions that you still need answered. Thank you.

Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 1-800-428-6051 or 973-709-2089, with an ID number of 289508. This concludes our conference call for today. Thank you all for participating and have a nice day. All parties may now disconnect.