Itron Inc (ITRI) 2003 Q3 法說會逐字稿

Good afternoon, and welcome, ladies and gentlemen, to the Itron third quarter earnings conference call.

At this time I would like to inform you that the conference is being recorded and that all participants are in a listen-only mode. At the request of the company we will open the conference up for questions and answers after the presentation.

I will now turn the conference over to Mima Scarpelli. Please go ahead, ma'am.

Thank you very much. Good afternoon, everyone. Thanks for joining us.

With me here in Spokane today are LeRoy Nosbaum, our Chairman and CEO, Dave Remington, our CFO, and Rob Neilson, our President and Chief Operating Officer. Before we get into our prepared remarks today, I do appreciate your patience as we review the Safe Harbor statement and pro forma disclosure.

Our third quarter earnings release includes predictions and estimates about our future results that are forward-looking. In addition, on the call today we will we providing additional details and information that may be considered forward-looking.

The forward-looking information we are providing is based on our best judgments and expectations as to what the future holds, and is subject to a number of risks and uncertainties such as rate of customer demand for our products, in particular the timing of large orders, timing for closing on the Schlumberger Electricity Metering acquisition, and a number of other factors. You should review our 10K for the year ended December 31, 2002, as well as our Form 10Q for 2003, for a more complete disclosure of risk factors. 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 earnings release includes pro forma information, and that we will be discussing pro forma information in our prepared remarks. We believe our pro forma results provide useful information in terms of enhancing the overall understanding of our business. Pro forma results are one of the primary indicators that we use for evaluating historical results and for planning future periods. Pro forma results should be viewed in addition to, and not in lieu of, GAAP. A schedule reconciling GAAP to pro forma is included as an attachment to our earnings release, and is available on our website.

I'm going to start the call today with a review of financial and operating results for the third quarter. LeRoy will follow that with an update on the acquisition of Schlumberger's Electricity Metering business, as well as comments on other items of interest for the quarter. And as we normally do, we will hold a Q&A session at the end of our call.

Let's now turn to our review of financial results for the quarter. As you can see, we had a good quarter with revenue and earnings in line with estimates, and both showing nice increases over last year. Revenues for the third quarter were $82.1 million, and that's a 12% increase over the third quarter of last year and represents a new quarterly high.

Increased revenues primarily result from higher unit shipments of AMR meter modules. We shipped a little more than a million AMR modules this quarter. That's a 12% increase over third quarter last year.

Higher AMR hardware revenues during the quarter, however, were offset by lower installation revenues as we are providing less installation services this year, and lower related meter reading software revenue, as a number of the AMR unit shipments this year are expansions of existing systems. Two acquisitions since October 1 of last year, Silicon Energy and RER, contributed $5.5 million in revenues during the quarter.

On a year-to-date basis for 2003 our revenues were $237 million. That's 14% higher than revenues in the first nine months of 2002. That increase is, again, primarily driven by increased hardware revenues, as on a year-to-date basis AMR unit shipments are up 10%, and we shipped more handheld computers in the first nine months of this year compared to last year.

Also on a comparative basis, revenues from our transmission, distributions, and solutions business were also up by a small amount. Again, those increases on a year-to-date basis were offset by lower AMR installation revenue and lower meter reading software revenue. Acquisitions since October 1 last year contributed approximately $13 million to revenues in the first nine months of 2003.

We did not have any customers in the quarter that were greater than 10% of revenues, although we did have one greater than 10% customer in both the first and second quarter of this year. Year-to-date in 2003 we also do not have any customers that are more than 10% of revenues. By comparison, one customer in 2002 was approximately 12% of revenues for the first nine months.

New order bookings were $67 million during the quarter, up nicely from $41 million in bookings in the prior quarter, but down from the record $87 million we had in bookings in the third quarter last year. Included in last year's third quarter bookings were several large AMR orders. An initial AMR installation with Niagara Mohawk for $29 million, and a follow-on order from Duke for $14 million.

We had been quite hopeful that third quarter AMR bookings would be higher, but we had several customers push out AMR orders as they were dealing with the effects of the blackout and the hurricane. Will those orders happen in Q4?

Well we are certainly far enough along with several customers that we could see higher bookings and backlog in Q4. But in a number of customers they are wrestling as to whether those dollars will come out of the 2003 capital budget or whether those orders will happen in 2004. And at this point in the quarter it's just too early to tell which side of this quarter some of those larger orders will land on.

Total backlog was $169 million, down $4 million from the end of June. 12-month backlog was $69 million, down $10 million. Or excuse me, 12-month backlog was $69 million, down $10 million from June, and $40 million less than 12-month backlog at this same time last year. By the end of Q4, as we just talked about, that could be a very different picture. And as we discussed many times in prior calls, backlog is highly variable from one quarter to the next, and even from one year to the next.

Gross margins was 48.2% for the quarter, up from 47% gross margin in the third quarter of last year. Year-to-date gross margin was 48.8%, almost three points better than the 46% gross margin year-to-date last year. The higher gross margin in 2003 is coming principally from higher manufacturing volumes, lower component prices, along with some changes in product mix.

Looking at operating expenses during the quarter, sales and marketing, product development, and G&A totaled $28.4 million, $4.1 million more than the third quarter last year, but approximately $350,000 less than in the prior quarter. On a year-to-date basis, sales and marketing, product development, and G&A have increased almost $16 million over the same 9-month period in 2002.

The increases this year, compared to last, are largely due to the four acquisitions we have completed since March 2002. In total, sales and marketing, product development, and G&A were 35% of revenues for the third quarter and year-to-date periods in 2003, down from 36% in the prior quarter, but up from 33% in the comparable periods in 2002.

And again, those percentage increases are mostly attributable to acquisitions, where in the near term spending is higher as a percentage of revenues than what we have been experiencing in our meter reading systems business, with some increases also coming from internal product development for next generation hardware and software products. As we talked about last quarter, G&A is also up this year as a result of outside consulting related to Sarbanes-Oxley compliance, and due to legal costs associated with the Benghiat patent litigation. In total, those two items have -- we've spent about $1.1million so far this year.

Intangible asset amortization expenses were $2.4 million for the quarter, up from $642,000 in the third quarter last year. Again, the increase coming as a result of acquisitions.

We had net interest expense in the quarter of $764,000, which is down from $901,000 last quarter. Net interest expense this year is largely due to the debt we brought on in March to finance a portion of the Silicon Energy acquisition. The original debt was $50 million, and the current balance on that debt is a little under $42 million. By comparison, we had net interest income in the third quarter last year of approximately $90,000, as we had net cash investments and minimal debt.

Included in other income for the quarter was a Washington state business and occupation tax refund of about $359,000, which is a one-time refund resulting from an outside review of several years of previous filings.

The pro forma income tax rate for the quarter was 39.5%, two points higher than the rate used in the previous quarter, and which brings the year-to-date pro forma income tax rate to 38.5%. That rate is about one point higher than the full year 2002 rate. And the increased rate this year results from changes in the mix of revenue from various states, as well as domestic versus international revenue mix issues.

For GAAP purposes we had net income of $5 million during the quarter, compared with $6 million in the third quarter last year. The decrease in GAAP earnings this year coming primarily from the additional intangible asset amortization expense. On a year-to-date basis, GAAP net income in 2003 is higher, $12.1 million this year compared with $9.3 million last year, with the increase in intangible asset amortization expenses this year more than offset by the fact that in 2002 we had $7.2 million of in-process research and development charges related to acquisitions.

Pro forma net income for the quarter was $6.6 million, or 8.1% of revenues, compared with $6.4 million or 8.7% of revenues in the third quarter last year. Pro forma EPS was 30 cents for the quarter, a penny higher than the 29 cents in the third quarter last year. For the first nine months of this year pro forma net income was $19 million, or 8% of revenues, and that compares with $17.5 million, or 8.4% of revenues for the first nine months of 2002. Year-to-date pro forma EPS is 88 cents, and that's a 7% increase over 82 cents for the first nine months of 2002.

Turning to our balance sheet and cash flows. Our operating cash flow for the quarter was $7 million, up from the $2.9 million in operating cash flow in the previous quarter, but down from $11.1 million in operating cash flow in the third quarter of last year.

Year-to-date cash flow from operations was $16.2 million. That's about half of what we generated in the first nine months of 2002, the biggest change coming from higher accounts receivable balances this year. In the first nine months of 2002, decreases in accounts receivable generated $9 million in cash. So far this year accounts receivable have increased, resulting in a use of cash of approximately $4 million. That $13 million swing explains most of the decrease in operating cash flow this year compared to last.

And the increase in accounts receivable this year results primarily from higher days sales outstanding. Our DSOs this year have increased, and were 66 in the quarter, compared with 61 last quarter and 58 in the third quarter last year. Our overall experience this year is that customers are taking a little longer to pay. And in addition, DSOs this year have been impacted by the timing of a few large customer payments.

Other decreases in operating cash flow in 2003, compared to 2002, include that we are accruing at a much lower rate for bonus and profit sharing this year compared to last. We have some expenses associated with the SEM, Schlumberger Electricity Metering, acquisition this year, and in the last quarter we had a one-time $4 million payment to a customer for a modification to a long-term contract. So we estimate that our annual operating cash flow for the full year, excluding the $7.9 million Benghiat litigation settlement will be between $30 and $35 million.

Property, plant, and equipment additions were $2 million during the quarter, and are $7.5 million year-to-date, both of which are comparable with additions last year.

At quarter end we made our second payment on the term loan that we brought on in March to partially fund the Silicon Energy acquisition. That payment was just under $4.2 million, bringing the remaining term debt balance as of the end of September to $41.7 million.

Cash was $10.5 million at the end of September, up slightly from $9.9 million at the end of June. And final comment from a balance sheet standpoint, inventory turns have increased this year. And were 5.9 for the quarter, compared to 5.7 in the prior quarter, and 4.5 in the third quarter last year.

So in summary, this is the 15th quarter in a row where Itron has either met or exceeded our financial expectations. We're very pleased with our overall financial performance so far this year. And at this point I would like to turn the call over to LeRoy Nosbaum, Itron's Chairman and CEO.

Thanks, Mima. It's nice to have all of you on the phone today. We appreciate your interest in Itron.

As you've heard from Mima, and if you've read our press release, you've seen we've had another good quarter of financial results, steady progress in a tough year for our customers. Ice storms early in the year, economic conditions certainly not optimal. Blackouts, and most recently hurricanes. All issues that cause utilities to either not spend money or spend it on the wrong things, at least from Itron's perspective. Even with that reality, good steady progress.

Today I'd like to cover three areas: An update on our acquisition of Schlumberger Electricity Metering, I'd like to talk briefly about the Benghiat patent litigation settlement, and I'd like to share with you our high-level perspective going into '04.

As most, if not all, of you know, in July we agreed to purchase Schlumberger's Electricity Meter business for $255 million. Between then and now we have been busy in three areas: Pulling together financing plans, and working those plans, working the Hart-Scott-Rodino process with the FTC, and to the extent possible, setting in place integration planning and activities. Let me speak to each.

First financing. As we said in our last call, this is an all cash deal and our intention is to do all debt financing to close the deal. With a combined EBITDA for the two companies at approximately $80 million in '02, and so far even better in '03, we're very comfortable with this level of debt. And as we have said earlier, we continue to consider raising a modest amount of equity next year to pay down a portion of the debt.

We have met with our bankers and our Board of Directors to determine what makes sense from an overall balance sheet and capital structure standpoint. But other than that, there are no details we can share with you today, except to say a few weeks ago we meet with two rating agencies and expect to receive ratings on the debt. That could be as soon as next week. Also we've met with a variety of lenders, and those meetings have all gone well. The acquisition is expected to close as soon as the Hart-Scott-Rodino process is through and we have obtained approval, so let's go there next.

As mentioned in the press release, we have been given a second request for information by the FTC, with which we will expect to comply within the next 30-45 days. Schlumberger has a similar request. Once both parties have substantially complied with the second request, the FTC has 30 days to look at the documents before their ruling. So we are hopeful that we will get HSR clearance by year-end, which means a closing likely early in '04.

We remain very confident that we will get HSR approval for this transaction. Although we were originally hoping to avoid a second request, this is a complex industry, and somewhat difficult to understand in terms of the interplay between AMR suppliers and meter vendors. It is not surprising that we have received the second request. It's normal process from the FTC as they try to understand the dynamics of the industry and the economics of the acquisition. We are making good progress gathering the data they've requested, and we are having a good dialogue with the FTC.

If there is good news to the delay, it's in the area of integration planning. More time means we are able to do a better job in the areas where we are allowed to move forward. We have made good progress putting plans together for human resources, IT, finance and accounting, and are moving forward on those fronts. Until we close, we cannot have detailed integration discussions or planning in terms of sales, marketing, or product development.

I would emphasize we view the overall integration risk for this acquisition as being very low. We have licensed technology to, and worked with, Schlumberger's Electricity Metering business for over ten years. We know their people well. Some of you may recall I was with Schlumberger for 20 years, managing various portions of the operation we are acquiring, and actually working in the factory we are acquiring, for quite some time. We know the business well.

We are very excited about this acquisition. The overall response from our customers has been similar, as it has been very positive. And as we mentioned in the press release, it will immediately be accretive to Itron's revenue, earnings, and cash flow.

Now a few words on the Benghiat patent litigation settlement. Yesterday, you may have seen our press release wherein we announced a $7.9 million settlement with Mr. Benghiat for all outstanding claims for royalties, interest, attorneys fees, and other items. In addition, ownership of the patent was transferred to Itron. Recall that we had previously reported a $7.4 million charge for this action last December. Results for this quarter reflect an additional $500,000 accrual, a total of $7.9 million.

While we continue to believe that our products do not infringe Mr. Benghiat's patent, and that our chances for a successful appeal would have been very good, the settlement avoids our having to go through a lengthy and expensive appeals process with the U.S. Circuit Court of Appeals, and instead allows us to focus our efforts and our resources in a positive direction for our customers, our employees, and our shareholders; the issue is now at end.

Let me close with a few words about 2004. We are not going to share specific guidance ranges with you today. We are in the middle of our planning process from which guidance numbers will flow. As well, those numbers will be adjusted for our acquisition of Schlumberger Electricity Metering. At this point our intention is to provide guidance for '04, along with financial details on the Metering business at the close of the acquisition.

What we can share today are perspectives as to how '04 is shaping up. We have talked for some time about Itron's expected annual growth rates for AMR being in the range of 10-15%. In '01 and '02 we experienced significantly higher growth, partially as a result of a few large contracts, partially as a result of overall market growth.

Growth in '03 will come in at the low end of that range, 10-15%, as we finish up several large installations, and as we deal with the reality of ice storms early in the year and hurricanes just recently. We look for growth at AMR in '04 within the normal range of 10-15%, acknowledging, certainly, that one or two big orders could move that rate higher. AMR momentum on the international front could also positively impact that '04 projection.

Software and services revenue from our acquisitions needs to grow in '04 from the roughly $30 million total in 2003. Clearly, we have been in an investment mode this year. As we look to '04, pipelines are building for these products. Projects are coming on the table, versus being taken off the table, as they were at this time last year. All areas, energy management and asset optimization,short-term and long-term forecasting, transmission and distribution design and optimization, as well as work force automation, are showing promise for next year.

Starting last spring we began a very targeted campaign directed at higher level electric and gas utility executives. The focus of that campaign was Itron's vision and how it fit with the utility of the future, as well as the utility of today. We talked not only about AMR, but the focus of the discussion was really around our software and services products and how they could improve the bottom line for our utility clients, as well as other market participants. At a number of accounts those conversations have moved well beyond executive chambers, resulting in an active pipeline of software and service opportunities, potentially in Q4, but largely for next year.

The blackout and hurricane, while in the short-term not particularly helpful, has stimulated interest and brought to the forefront the need for a more efficient delivery system, thus, sales of line design software and knowledge-based applications for enterprise-wide energy management and asset optimization software. As well, the need for a more productive work force, thus, sales of work force management software. And obviously, the need to look and plan ahead and provide more accurate forecasts, thus, sales of forecasting software tools and services.

Our software and services add an important new dimension to Itron as we work to help our customers better plan for and shape the future. We believe we are seeing a loosening of utility spending in these areas for next year, which should result in reasonable growth for these portions of our business in 2004.

A couple of more data points about '04. From an operating leverage perspective we have some room to move positively. We would look for somewhat higher volumes in AMR. That will produce leverage throughout the organization.

Software and service sales should be up, as I've just talked about, on essentially the same number of people supporting that activity. While we have not factored any synergies with our new metering group into our valuation process, there are synergies, and some of them will be meaningful.

Acquisition activity will not consume us as much in '04 as it has in '03. We will take that opportunity to focus on making sure we are running the business right, and being as efficient as possible.

Let me close with some comments on our upcoming Users' Conference which will be held at the end of this month in Tucson, Arizona. There will be over 410 utility customers from more than 200 utilities, representing virtually all departments within utilities. As well, other nonutility market participants, including ISOs and public utility commissioners, will be in attendance. That's almost a 40% increase since last year.

It is also well to point out that most of the increase in users comes from our non-AMR software, our recent acquisitions. 130 different educational sessions will be offered, with approximately half taught by our customers. Attendees to the conference will have a tremendous opportunity to collaborate with each other regarding the pressing industry issues they are facing today, and to share knowledge about how Itron is helping them solve many of those issues. 400 attendees at the Itron's Users' Conference, where they pay their own way in a year when utilities are still looking for ways to stop spending money. Utilities and their people looking for knowledge from Itron to shape their futures. We must be doing something right.

With that, we'll open up the call to questions.

Thank you. The question-and-answer session will begin at this time. If you are using a speaker phone, please pick up the hand set before pressing any numbers. Should you have a question, please press star one on your push button telephone. If you wish to withdraw your question, please press star two. Your question will be taken in the order that it is received. Please stand by for your first question.

Our first question comes from Alan Robinson. Please state your company.

Alan Robinson, Delafield Hambrecht. Good afternoon.

Good afternoon.

Mima or LeRoy, could you just comment a little on the international situation in terms of whether you are pleased or otherwise with the revenue from that sector this quarter?

And also, it seems that margins in the international arena seem to be picking up nicely. Do you think that we're at the long run level for margins there now?

Allan, a couple of thoughts on international. We are really quite pleased with how international is beginning to, sort of, lift itself out of what has been a rather humdrum existence for Itron's entire life. The team is really working well together. The new leader, Steve Helmbrecht, is doing a tremendous job. They have been able to focus a lot on some of our new software products, and so that is helping the margins uplift, and I would actually look for them to increase over time.

They can get swamped by any large AMR order that might come along, but in general we're doing very well selling all of our new software products, as well as existing software products. We've seen some real breakthroughs in market acceptance and activities in Europe, in Australia, in parts of the far east. We certainly have seen some recent activity in the AMR world in the Caribbean and Mexico, which we are excited about. So we are very pleased on the international front. We think we've got the equation right, and we look for an '04 that is certainly going to be better than '03. And, frankly, we look for a nice contribution in Q4 from them, as well.

Okay, good. And domestically, on the water meter, AMR installation front, are you seeing a big pickup in interest there subsequent to some of the recent installations you've put in?

Yes. You know, as we've been talking about for some number of quarters, we continue to see a lot of growth in the water and public power segment. A lot of the growth this year not coming from large installations either, but really spread out amongst quite a few number of utilities.

Okay. And final question, the one-time -- the other income there that you mentioned, that was just a one-time refund? I missed part of that.

That's correct. We had an audit of some business and occupation taxes in the state of Washington, and that resulted in a one-time refund of about $359,000.

Okay, thank you. Good job.

Thank you. Our next question comes from Bill Deslund. Please state your company name.

Davidson Investment Advisors. Thank you. I've got a group of questions. First of all, LeRoy, did I hear you correctly that your user conference attendance is up 40, 4-0% this year?

Bill, you are right, 4-0%. Now to be fair, know that we have looped our recent acquisitions into that conference, and so it's not that the AMR portion alone is up, although it is up, but we have also looped in our software and line design, and enterprise energy management in the RER group, the forecasting group. And it is really refreshing to see the interest in that conference. Quite amazing.

LeRoy, to what degree when you start pulling in some of those individuals at the utilities that would be prospective customers for REI-type products, that having them also more exposed to the AMR side and vice versa, does that cross-fertilization of knowledge end up benefitting you on the sales process going forward?

Yeah, actually a couple of different things begin to happen there, Bill. While we run quite parallel sessions so that everybody has their area to focus on, we run joint sessions where lots of interaction takes place. And so goodness comes in terms of, as you mentioned, cross-fertilization and pollinization, where people begin to see various things that can be done. As well, goodness comes from getting an overall feel for Itron's capabilities being much more than any of the individual segments, and so the general feel of Itron as a potential partner instead of just a supplier comes to the forefront.

The other thing that happens is we get some serious people that begin to come to this conference, both in terms of utility management, and as well, I think I did mention people from the likes of public utility commissions who are both speaking and participating as conference participants, and as well, people from ISO organizations and other, sort of, non-utility organizations. So the goodness sort of flows in all directions. We're really looking forward to this year's conference.

And it's sort of amazing. You know, we've been to three or four major conferences this year where attendance has routinely been quite down. If you look at the recent AMRA conference, our take on that was that attendance was rather disappointing. But here just a month later at Itron's Users' Conference we just have an incredible amount of attendance, and I would guess, while not twice as big as the AMRA show, nearly.

That's helpful, thank you. Let me shift to another area, the hurricane. You had alluded to the fact that the blackout and hurricane were both long-term positives. I can understand how that's the case with the blackout. Would you walk us through how the hurricane ends up again, how that works to your advantage longer-term?

Yeah, the hurricane gets to be one of a work force management opportunity. It really is an interesting time in work force management for utilities because they are becoming keenly aware at how automating the way they dispatch their people, and how they push work orders electronically to them, can really make them more productive. And while that's good on a day-to-day basis, in an emergency situation we really begin to lever the power of that optimization of our people.

And so this will really begin to help us as we talk to utilities about -- you know, we can take dollars out of your work force expenditures, but we can also make you much more customer service oriented, and those kinds of just justifications play big time in front of public utility commission.

So as I said, while neither was good, perhaps, in the short-term, both of them, I think, will have a positive result going forward.

And the final area that I'd like to address, the -- year ago there was a feeling of slowing or a challenging 2003 coming into play, as is you've mentioned in the call, projects are being taken off the table, where as now it appears that projects are being put on the table and there seems to be some acceleration in the opportunities that you have sitting in front of you.

Walk us through from an industry-wide perspective why a year ago dollars were being put back in the kitty, essentially, whereas there seems to be a shift for 2004 for opening the kitty back up and spending some money.

Yeah. I would look at two fundamental reasons, and then I'll ask my cohorts here to add anything that I might have overlooked. And the first reason I would immediately jump to, Bill, is, you think back two years ago, we were in the middle of energy trading, and as we came out of '02 and we started going into '03, the results of Enron, and I know people get tired of hearing that, but it was true, were at the front end of disaster. And lots of utilities were caught up in that, and in investigation. Some of them were doing things they shouldn't have been doing. Some of them, because of those kinds of scandals got their -- both their balance sheets and their stocks in horrible trouble, and that whole situation sort of rattled through the utility industry. And as we have gone through '03, what we've seen utilities do, sort of come out of that troubled time. Their stocks have started to look better. Their balance sheets have started to look better. Many of them took the opportunity to downsize or rightsize or whatever euphemism you care to use, but all of that was going on, so reason one.

Reason two, as we brought utilities through that time, a lot of them took a lot of people out of the equation, but as well, a lot of them began to say, we're getting back to being utilities and running the fundamental utility the way it ought to be run. And when you do that, and begin to think again about, how do I optimize people, and begin to think again about, how do I do the work of being a pipes and wires company more efficiently, and all of the products we've looked at and acquired and all of the products we are internally developing, sort of point to all of those things.

So I'd say those two big reasons: Refocus on being a utility and coming out of the disaster of energy trading and all of the falloff from that, are the two big things that come to mind for me. I think Rob wants to add something to that.

Yeah, Bill. I would say there's a third, which is our broader solutions set as a result of the acquisitions has really raised us up on the radar screens of utility executives. We have many of the large consulting firms that are working with utility executives on new strategies working with us together to help them form those strategies. So, that heightened awareness of utility executives and our own campaigns on that front have played a role in this, as well.

Thank you both.

Thank you. Our next question comes from Jarett Carson. Please state your company name.

Yes, RBC Capital Markets. Good afternoon. On the slight sequential downtick on gross margin, is that -- that looks to me to be more just a bit of a mixed shift, a little higher coming in in the water and public power area. Is that a fair assessment?

Yeah, that is correct, Jarett. On the mix shift in any quarter, percentage of handheld versus AMR, and the difference between one segment and another can have a minor impact on gross margins.

Sure. LeRoy, talk to me, I guess, a moment about -- once again it gets back to, certainly, a couple hits, particularly where you are concentrated fairly strongly in the eastern section of the U.S., with the hurricane, and some utilities, you know, with some pretty decent size bills of $25, $50 million plus, plus that.

Is it just buckets in terms of -- has that taken money, do you believe, out of projects that would go in for solutions that you would provide, or is it just kind of a trying to find out, okay which bucket do we take it out of, 2003, 2004? And I know you talked a little bit about it earlier, but maybe give us a little more color.

A couple of points come to mind. No question the kinds of moneys that have been spent rebuilding systems, and in the case of the blackout, doing investigations into serious play. I read a $128 million figure this morning in a press release. So it's serious money being sucked out in a pretty short period of time.

You know, that money for the products we do is going to come back on the table. The question is, is it going to come back in Q4 or is it going to come back in Q1? And utilities, we know because we have been talking with them, are fighting about whether or not they want to spend any more capital this year or just delay it into the very front of next year. I expect we are going to end up seeing some of both of that.

The other thing that for sure is bothersome in both situations, more so perhaps with the hurricane, is if you think of utilities spending, say between $30 and $100 million, there's people doing an awful lot of stuff while they're spending that money. And it's not installing AMR or installing software systems, it's just putting the utility back together. And so we've had a lot of mind share from the very topmost utility officials and executive, all the way to the crews out on the street in other places for a good period of time here, and now that's got to, sort of, get reorganized.

They will clean up what's left of any destruction, and, you know, we'll see some decent activities for us in Q4. We know that. We also know that we are likely to see some stuff that would have ordinarily, quite frankly, occurred in Q3 and Q4 push out into '01. Not a disaster, we're not trying to get you guys all going south on us, but we do want to be some cautionary that that is just going to occur whether we like it or not.

Sure. I think that's fair to highlight that kind of a temporary dislocation.

Maybe one final question. With regard to the software side and exiting a blackout scenario, and what utilities need or maybe have heightened awareness of what they need to be doing, and your potential leverage there. The opportunity to see, you know -- software has certainly been one that, I guess, you know, we haven't been -- has been a little disappointing relative to, you know, where we might have thought it would have been a year ago. As the opportunities start to move more things in the pipeline across the goal line, if you will, and the intensity, can you speak to that a little more?

Yeah. Let me -- let me say that with the blackout in particular, I think we some long-term goodness and we probably have some medium-term goodness. I doubt we have much short-term goodness that will actually result in revenue in, let's say, either Q4 or I doubt much in Q1. I think what we have seen is, we've seen an awful lot of light shed on the transmission grid. I think that will turn itself into public utility commissions political bodies and other governmental agencies really beginning to step up pressure to build a bit of a sounder grid at capacity and locations. That is all good for line design tools coming out of our TDS group, so software tools to help design transmission lines, and we are seeing that, there is no question about it.

As well, I think if we look at a -- at the situation that actually exists, as people were trying to bring customers back online, many of them would have dearly loved to be able to control the loads on some of those customers. We did have a situation at one where we got some benefit of that, so our enterprise, energy-wide. or enterprise-wide energy management software, largely coming out of the Silicon Energy acquisition, comes into play there, and we have had, most fortunately, a very active dialogue with many of the utilities that were under outage conditions around those products. That dialogue I think is taking on a bit quicker pace than it was before.

But I wouldn't want you all to think that all of a sudden we're going to have a Q4 full of TDS line design product sales or Silicon Energy sales. We will have some of those sales in Q4, but I think the real result is to see some -- more interest throughout Q4 and Q1, and then some nice pickup in the latter half of next year.

Okay, thank you.

Thank you. Our next question comes from John Quealy. Please state your company.

Good afternoon. Adams Harkness and Hill. A quick question, LeRoy. On the pipeline for new customers, the orders moving into '04, can you talk a little bit about the split between existing customers, no matter if they are a handheld or an AMR customer, or whether they are a new customer, specifically on the software side of things?

And also, where do you expect that mix to move as we get into '04?

John, that's actually a great question. I'm going to bifurcate into domestic and international. I'll start with domestic. We are continuing to see about as much activity, as Mima said, in the water part of our business as we have in the recent year, it's been brisk, lots of interest. Water utilities got it. They are automating their meters. They're tough to read, and perhaps the hardest meter of the three, electric, gas and water, to read.

So that business remains brisk. The pipeline there is from the traditional customers. Most of them are, from an AMR perspective, are new for us. We're probably in a more bit of a lull on the handheld side as we went through a pretty good changeout cycle of handhelds over the last year and a half or so, and so our handheld is probably going to be more flat than up as we look into '04.

Our software business, quite frankly, I -- you know, we've struggled all year long. You guys are tired of me saying that software business has been tough to deal with, but I will tell you, I've spent a lot of time in the last month with our sales forces and our sales management. When you talk to them about software pipeline, what you get is smiles instead of frowns, and when you ask them to put names on that pipeline, it's not, well I think, it is, here's the five or six or ten utilities where this salesman thinks he is going to be selling software products in '04. So there's names on strong pipeline and I'm real pleased with that.

And, you know, from a software sales perspective, those are all new customers, although many of them are customers we've either sold AMR or handhelds to, which really -- really do help. In many cases we are in at the very same utility talking about forecasting software with energy -- enterprise-wide energy management software or asset optimization software, right along with talking about line design software. So it's really a great opportunity for us at those utilities.

I'll shift now to international where, as I mentioned, I couldn't be more pleased with the amount of effort that our international people are putting into our new software acquisition sales. They are delighted with the acceptance of those software products in Europe and Australia and parts of the Pacific Rim. I think we're going see nice revenue coming from those areas in '04. We certainly see a good pipeline of activity. There again, with names on it. Not just, I think we ought to be able to sell software in Australia, but here's the four customers we've talked to, and we have interest. Now we've got to turn part of them into actual sales.

In Europe the closing of the deal at Red Electrica on line design software has definitely caused a number of other utilities across Europe to talk to us, and some of those are going to turn into orders in the coming quarters. So I think good news all the way around. It's a pleasure to talk to sales people and have them talk about projects coming on the table instead of going off.

Great. And one last question. In terms of your fiscal '03 new product rollout schedule, can you comment where you are through nine months? Do you have any more new introductions to hit in Q4?

And lastly, can you give us an indication of '04 new product rollouts? If it's going to be evenly split between hardware/software, if possible?

You know, John, last year we talked about the fact that in 2002 we released about 20 new products for the meter reading area, and that was a combination of either mobile data collector units for smaller utilities, it included, obviously, our new fixed network collection unit. We not had that same kind of new product rollout this year, although clearly, as we look to '04, we do expect to have some product releases, both on the software side for meter reading, as well as on the hardware side. And, you know, it doesn't really make a lot of sense to hand out numbers.

Sure. Great. Thanks a lot, good quarter.

Thank you.

Thank you. Our next question comes from Sanjay Shrestha. Please state your company name.

First Albany. Great. Couple of quick questions, guys. First one, I'm just hoping to understand a little more about the competitive landscape within the metering business, given that a lot of Chinese meter manufacturers are trying to tap into the North American market. How do you, sort of, really see that playing out for you guys going into 2004 once the Schlumberger Metering business becomes part of Itron?

Sanjay, we took some care to look at what we thought was the capability --

Okay.

-- of Chinese meter manufacturers to enter the market as we were considering the acquisition. We just don't think that that is going to be a factor in the U.S. market for a very long time. I won't say that they can't sell product. They will figure out how to sell it and they will probably compete on price. But I am very confident that we can compete on price. We can more than compete on quality. And we can greatly more than compete on local presence and support of our customer base here in the United States, and, quite frankly, many places around the world. So of all the things I worry about before I go to sleep at night, that's not one of them.

Yeah, but apparently -- I actually remember reading something on a trade journal about the shipment of the Chinese meter manufacturer being up something like 60% year-over-year into 2003, so, you know, what gives you, kind of like, the level of comfort here that you guys are actually going to be, again sort of, completely fight that wave, you know, sort of like the Chinese guys trying to get into this market?

Well, Sanjay, after we have actually acquired Schlumberger I would be pleased to answer that in more depth, but let me say this, I spent --

Fair enough.

-- 20 years of my own life in that industry.

Yeah.

I know what it takes to sell meters in the U.S.

Okay.

I know how tough it is.

Okay. No, no, that's fair.

-- it will be a very long time before --

I appreciate that.

And another question, kind of related along the same lines. Post acquisition, you know, you guys would be both the AMR module manufacturers, as well as the meter manufacturers, so in a way, when you're, you know, when the meter manufacturing companies are looking at your AMR modules, you are in turn competing with them, as well, and as an AMR module manufacturer they are also competing with you guys when you're, sort of, trying to sell them the metering product. How do you, sort of, see crafting your sales strategy in terms of really convincing the both side of the parties?

We have to look at a couple of things as we look at that whole dynamic, and it's certainly something we've spent a lot of time on.

Yeah.

The very first thing we will do is, we'll have, from a product development perspective, some fairly stiff Chinese walls if you will --

Okay.

-- between development groups, so that we give comfort to our partners, both on the meter side and on the AMR side, that we're not, sort of, moving technologies around willy-nilly.

Okay.

So, that's part of the equation, and we need to be able to give people comfort in those areas, which, by the way, we have a good history with. As we work with all of the various meter manufacturers we know a lot more about new development of metering products and existing development than the rest of the world does.

Okay.

We think we are under MDA in all of those areas. The next thing we do, and we did, was upon announcing the acquisition, we went around and visited.

Okay.

We were very diligent to visit with all of the meter manufacturers and all of the AMR manufacturers, and let them know that we would continue mix and match products.

Okay.

So that at the end of the day, our customers will demand that. And all those participants in the market know that and they know it well.

Okay. That's fair. That's great. Thanks a lot, guys.

Yep.

Thank you. Our next question comes from Steve Colbert. Please state your company name.

JMP Securities. Good afternoon, LeRoy. A couple different questions here. First of all, can you give us an update on the Silicon Energy operations in terms of, is -- are the volumes in line with where you had targeted when the deal was completed?

And also, where that stands in terms of profitability of those acquisitions?

Yeah, Steve, I'll talk to -- talk to the volumes on Silicon specifically. We're slightly under where we had expected them to be. And the principal reason for that is the end user segment, i.e. sales to people like GE Plastics, Ford Motor Company, General Motors, are really down. That piece of business has really turned off the back half of this year. As companies, quite frankly, still are not spending money in those areas. We look for that to pick up but it's certainly not there now, so Silicon's slightly less than we targeted for it as we made the acquisition.

As we look at all four of those acquisitions, I would say that RER is clearly making money. They are growing. They were making money when we bought them, we expected them to continue to do so, and quite frankly, they've had a great year with forecasting, both long-term and short-term forecasting products.

So look at the other three. So Silicon Energy, Linesoft, the transmission distribution line design group, and eMobile Data, work force management, which when we bought them was, you know, reasonably a startup company --

Right.

-- and in many ways still is. Those are investments, we are not making money on them this year. We are investing in them. Parts of them we will continue to invest in, i.e. we will not be making money, part of next year. My hope is that we come out of next year making money in all of them, but even better than that, by putting parts and pieces of them together we will be leveraging the investment we made in '02 and '03.

Can you give us some kind of a framework to think about, or to relate to, in terms of the bottom line or the pretax lack of contribution?

I tell you what, sometime next year I will do that, but I'm not going to today.

Okay. Second question. Just a housekeeping question. On the tax rate going forward, what do you think we should generally be thinking about using?

Steve, 38.5% is the right rate for pro forma.

Okay. And just a third question, the last question. You talked a bit about, or mentioned, the fact that your customers were pushing out right now, taking -- or pushing out the bookings of some contracts. Can you give us some, again, some framework, some idea of the magnitude of that pushout? I mean, if your orders were $67 million in the quarter, and you did not get this kind of push -- these kind of pushouts, what's a rough range of thinking we should be thinking about in terms of your bookings for this past quarter?

Well, you know, it's really tough to give you a bookings range for Q4, because the --

Q3.

I'm sorry, what?

Q3.

Q3 bookings were 67 and --

Right. But what -- I mean, but you said was -- if you did not have those pushouts, for example, what's the rough range, maybe, if those bookings would have been up to?

Well, again, we're not going to give you a number, but, you know, I think we said that we're dealing with a -- quite a few customers, and that looking at those Q4 bookings could be much higher. But again, it doesn't -- you know, doesn't really, you know, matter whether or not, you know, we give you a number, because it's just tough to call when they would have landed.

In the case in the fourth quarter, do those bookings typically come in at the end of the quarter as these companies want to spend their budgets? Or do --

Well, yeah, what a lot of utilities are doing right now is sorting out how they are going to spend their budgets and which budgets those are going to come out of. So for example, if they make the decision that it will be an '03 capital item, you could see a fairly large booking. If, however, they make the decision that most of it will be a Q4 capital item, you could see a PO in the fourth quarter so that we can start shipping and start an installation with the bulk of the booking to come in Q4, or excuse me, Q1. So again, just really, really tough to call because it varies so much from one utility to the next.

So if you -- received a PO, then you will report that in your bookings number, I assume do you not?

Yeah, correct.

Okay.

Included in bookings are new contracts, as well as purchase orders.

Okay. Okay, thank you.

Thank you. Our next question comes from Steven Pinault. Please state your company.

Hi. This is Steve Penault with Imperium Capital. I had a couple of just quick questions for you. If I look to your pro forma numbers and you have 30 cents this year versus 29 last year, did that 29 last year include the earnings from the acquisitions as if they had been acquired from the beginning of the -- beginning of the reporting period?

No, this is not Reg. SX pro forma.

Okay, okay. Well, if I look at -- basically, if I take your -- I mean, you report the impact on the revenue, which is nice. And I think that last year you guys got into around 15-17% growth. And in that I had a question, was the acquisition included in that or was that purely organic?

I'm sorry, we're not clear on what number you're comparing.

Last year, when -- when we talked about revenue, I think the guidance was for about 15% increase in revenue growth. But right now, if I look at your, basically quarter-over-quarter, you grew about 13%, but if you strip out the acquisition revenue you grew about five.

Right, correct.

So, if you're guiding -- I want to know what your guidance takes into account as far as acquisition growth, internal growth, et cetera, going forward?

Well, the -- obviously, the full year guidance this year for $320 million in revenue includes all revenues. So it includes the core meter reading. It also includes acquisitions. You know, we have from time to time, actually split out growth from acquisitions versus, you know, what we expected in the core business. I know coming into this year we talked about a growth number with and without Silicon Energy, which was the company that we acquired this year. And I'm sorry, I don't remember what that was, but it made a difference of about 2-3% overall, is it.

You may remember that in LeRoy's prepared remarks he talked about the acquisitions, all four of them coming in for the year at about $30 million. So that's $30 of the $320.

I think important to consider on a go-forward basis going into 2004 is the fact that excluding acquisitions, as Mima said, there's been a downturn on a year-to-year basis for installation revenue, just given the nature of the projects that we've had, and the timing of projects in 2003 versus 2002.

The hardware portion of our business, which you can, as well, associate with our core AMR business on a year-to-date, year-to-year basis was up in excess of 15%, actually around 18%, which we think is a better indicator of the core growth of the business year-to-year, which I think is also something that tends to validate our view of the core business, 2003 to 2004 continuing to grow in the range that we have talked about before, which is 10-15%.

Okay. If you went to look at year-over-year for the quarter, assuming that all the acquisitions had been made last year, what -- what would your EPS have been? Would it have been more like 25 cents, more like 35 cents last year? I mean, I'm just looking to try and understand the comparability of period-to-period of profitability --

LeRoy mentioned that we are in an investment mode, in aggregate for all four acquisitions, albeit RER is making money, and so, actually, our EPS will be less with acquisitions and more without them.

Okay. Great, thank you very much.

Thank you. Our next question comes from Chris Hanrey. Please state your company name.

Steedman Capital. Good afternoon. I had a question on the software side. What was Silicon Energy? What did it contribute for the quarter?

Yeah, we didn't give a separate split for Silicon Energy. We talked about Silicon Energy and RER in a combined basis were 5.5 million of revenues in the quarter. Most of that was Silicon Energy.

Okay. Well, I mean last -- last quarter you guys said it was $3 million, so would that be like $4 million? I guess what I'm getting at, are you still on track for $15 million for the year?

No, I think I answered a little bit earlier, we -- we're slightly below track on Silicon, and the downfall there, or the shortfall, is in the end user group where we have seriously been under target. We've made a little bit of it up in other areas, but Silicon, as a whole, is somewhat below that $15 million target.

Okay. Okay, I'm just a little confused as to earlier question. Regarding the acceleration. It was actually comments on that. On the acute end, about the acceleration, about the excitement around your business going forward. And I'm just seeing bookings down year-to-date. Total backlog down year-to-date. Seen guys pushing out contracts. DSOs are high. Customers are taking longer to pay. You have guided to the low end of your recent guidance. Maybe if you can help me reconcile what, maybe, '04, like -- if you're seeing specific, you know, proof and or confidence in getting back to 10-15% type of normalized year?

Yeah, let me -- let me start with that. And then if --

I mean, it's just -- it's just a little -- it's just a little confusing, just looking at the numbers, just on a -- just first glance basis.

Let me work backwards and handle a -- a minor item about DSOs being at 66 days and our comment about customers slower, slower paying. Much of that has been remedied since the end of the quarter. It has to do with the timing of large contracts. We were at 66 days in Q1 of this year, as well. So that is not something we worry about. So we're not trying to signal there, merely to explain, so we don't think that is at all an indicator with regards to future business.

Yeah, let me add to that, and I'll say it a little bit differently than I've said it so far, if we hadn't had a hurricane on the east coast, two of them actually, one in Canada and the one that we're all real familiar with, I have no doubt that we would have seen additional orders in Q3, and we would have probably seen a larger Q4 than I am somewhat fearful we will see. I could be proved wrong on the latter part of that, and we might have a joyous fourth quarter. I think we're going to have a good fourth quarter, but I do think we're going to be some affected.

That having been said, that would have produced a backlog number higher than what you're seeing today. And it would have, also, obviously produced bookings numbers higher than you are looking at. I think we have to look at the transition from '03 to '04 in light of a couple of things. One is, the economy is getting better and utilities are better positioned in it. And if we can get people doing more things, we will use more electricity and more natural gas, and that will be good for utilities in '04.

But as well, as we are sitting here today in the middle of our '04 planning process, we are very encouraged by what our sales people are beginning to say in terms of '04 opportunities for our software products, '04 opportunities for our AMR products, and, in general, the level of business that utilities are talking about -- about doing. So, I mean, I would add those comments to Dave's on DSOs, and I think maybe Rob has something he wants to say, as well.

Yeah, just one last comment. Keep in mind, we have doubled the size of our sales force, virtually over the past 12 months as a result of the acquisitions. And we have had to cross train that sales force on this much larger product line offering that Itron brings and the whole new value proposition. And that sales force, those sales forces within our business units, are now clicking much better. It's much more business, straightforward, a lot less training, and a lot more customer engagement. And -- and we're seeing the results of that with pipelines starting to fill, and we're watching that very, very closely.

Okay. So as far as acceleration, then you're -- you haven't seen any specific orders or things that would go into backlog and/or, you know, things picking up in the sense, it's more just pipeline being filled?

That is correct. What we have seen is perhaps an uptick, if you will, in serious requests for proposal, although that has been fairly high. I think it's a bit higher today, and we are seeing a lot more negotiation going on on potential contracts that are serious in nature.

Okay.

Keep in mind, also, that bookings and backlog, as we've said many times, is a manufacturing concept. Sometimes there is some backlog for software, but most software is book and ship. Something like 20% of our business is book and ship and that will grow over time. So we're using other indicators here internally, with regards to the prospects for the software business or acquisitions. We ourselves don't use bookings and backlogs to figure out where those businesses are going.

Okay. The -- as far as '04, have you given any type of guidance on the software side?

No, we haven't given any '04 guidance specifically beyond my prepared comments today, and at this point, don't intend to until after we are closed on the acquisition with Schlumberger.

I believe earlier you made a comment regarding the equity offering, if that will, in fact, be a piece of the financing puzzle. When would you anticipate that happening?

Not until after the actual close of the acquisition, so late Q1, Q2 is a likely timing.

Okay. And one last question. As far as your -- the new guidance, does this assume that some of the individual -- individual parties that are wrestling with their '03, '04 capital budgets, does this assume that some, none, all, maybe help me --

A reliable amount.

I'm sorry?

A reliable amount.

Will come back?

Will show up in Q4.

Okay. Okay, thank you.

Thank you. As a reminder, if you do have a question, please press star one on your push button telephone at this time.

If there are no further questions, I will now turn the conference back to Miss Scarpelli.

Thank you, everyone. We appreciate your time today. As always, you can reach me for further questions, and we look forward to talking with you then.

Ladies and gentlemen, this concludes the conference for today. 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 307430.

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