Itron Inc (ITRI) 2004 Q1 法說會逐字稿

Good afternoon, and welcome, ladies and gentlemen, to Itron's Q1 2004 earnings conference call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. (OPERATOR INSTRUCTIONS). I will now turn the conference over to Ms. Scarpelli. Please go ahead, ma'am.

Thank you. Good afternoon, everyone, and welcome. With me here in Spokane today is LeRoy Nosbaum, our Chairman and CEO, Dave Remington, our Chief Financial Officer, and Rob Neilson, our President and Chief Operating Officer. Before we begin the call today, I do appreciate your patience as we review the Safe Harbor statement and pro forma disclosure. Our earnings release includes predictions and estimates about our future results. In addition, on the call today, we will be providing additional detail and information that is 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 the timing of large customer orders, timing purposing on our current acquisition and a number of other factors. You should review our 10-K for the year ended December 31, 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. In addition, our earnings release also includes pro forma information, and we will be discussing pro forma net income and EPS today in the call. We believe our pro forma results provide useful information in terms of enhancing your overall understanding of our current and our future financial performance. A reconciliation of GAAP to pro forma net income and EPS is included as an attachment to our press release and is also available on our website, at www.Itron.com.

I will start the call today with a review of financial and operating results for the quarter. LeRoy will follow that with some additional comments on the quarter as well as an update on our acquisition of Schlumberger's Electricity Metering business.

Now let's turn to our review of financial results for the quarter. Revenues for the first quarter of this year were 65.6 million, and that's roughly 12 percent lower than first-quarter revenues last year. As we forewarned last quarter, we expected our revenue this quarter to be down, possibly as much as 15 percent, due primarily to some order push-outs at three large electric market customers in 2003. And if you look at our segment revenues, you can see that the decrease in first-quarter revenues this year compared to last is all coming from the electric market. Electric market revenues were 24.3 million in the quarter, that's approximately 38 percent lower than in the first quarter of 2003. And the decrease primarily relates to lower sales of meter reading systems in 2004, predominantly AMR systems, but also handheld systems as well. And I would point out that while handheld revenues are fairly flat on a year-to-year basis, on a quarter-to-quarter basis, they can vary due to the timing of system upgrades. So nothing much to be read into the fact that our handheld revenues are lower in the first quarter this year. But we did have lower AMR revenues in the current quarter compared to the first quarter last year. And again, that's largely attributable to the order push-outs we mentioned at the end of December. In addition, in the first quarter last year, we recognized approximately $2 million in software license revenues related to a system at one customer for distribution line design software. And although we had a good first quarter this year in terms of new order bookings for software, we did not have a comparable amount of software license revenues in the quarter, which also contributed to a decrease on a comparative quarter basis.

Now offsetting lower electric market revenues were very nice revenue increases in our water and public power, international and end-user solutions groups, and those are all detailed in the segment portion of our press release. While our revenues were down in the first quarter, we did have a good quarter in terms of new order bookings. New order bookings were 66 million this quarter. That's up more than 20 million from the fourth quarter and also up nicely from 60 million in the first quarter of last year. Backlog was up at the end of March after declining for the three previous quarters. Total backlog was 155 million, which is up 10 million from the end of December; 12 months backlog was 79 million, up 17 million from the end of December. Gross margin in the quarter was approximately 46 percent compared to 49 percent in the first quarter last year, with a number of factors behind the net decrease for the quarter. Hardware gross margin this quarter was a few points lower compared to the first quarter last year. And that is largely attributable to a mix in shift -- or a mix shift -- in the hardware components sold during the quarter, and is not a trend we expect will continue the rest of the year as far as hardware gross margin.

Also contributing to lower gross margin in the quarter was the fact that we had the large software license contract last year, which contributed very nicely to gross margin in the first quarter of last year. Partially offsetting those decreases in gross margin were the fact that we had lower warranty costs this year compared to last year in the first quarter. Increases in operating expenses in the first quarter of this year compared to the first quarter of last year are largely the result of increased spending related to the Silicon Energy acquisition we completed last March. G&A expenses were up because of the acquisition, but in total actually declined in the first quarter of this year compared to the first quarter last year. Legal fees were higher last year as we had expenses related to the Benghiat patent litigation, which we settled in October of last year.

In addition, our results for the first quarter of this year do not include an accrual for bonus and profit-sharing, due primarily to not having made performance hurdles necessary in the quarter to accrue that. In contrast, in the first quarter last year, we had approximately 1.2 million in incentive compensation. Roughly half of which was reflected in G&A and the rest split between sales and marketing, product development and cost of sales. So I would point out that we do expect to have incentive compensation expense for the year, as we are projecting a significantly better financial result in the second half of 2004. And operating expenses in those quarters will reflect a proportionate share of incentive compensation expense. Net interest expense increased $450,000 in the first quarter of this year compared to the first quarter of last year, and that increased results from the term debt we issued in March of 2003 to fund the acquisition of Silicon Energy. Other net income in the quarter increased by roughly 200,000 this year compared to last, and the income this quarter results primarily from a small foreign currency gain on the settlement of an intercompany note.

The tax rate for the quarter of 51 percent results primarily from some minor adjustments to our year-end 2003 rate and is not reflective of the expected rate for the year, which we believe is closer to 38 percent.

Turning to our balance sheet and cash flows, let's first look at significant changes in the balance sheet since the end of the year. Accounts receivable decreased 24 million since the end of December. And as we discussed last quarter, our accounts receivable increased at the end of 2003 primarily due to timing of shipments late in the quarter. We had very good cash collections against those receivables in the March 2004 quarter. Despite the accounts receivable collection, our days sales outstanding actually increased, from 69 in the fourth quarter to 81 days in the first quarter. However, that's primarily due to how we do the calculation as opposed to customers taking longer to pay. We use a monthly average for accounts receivable, as well as for sales. And the averages for accounts receivable for the first two months were high, while sales were lower given our overall revenue performance this quarter. As the accounts receivable balance worked down during the quarter, our days sales outstanding improved quite a bit, since for March, our DSOs were actually 57 days. And I would also point out that the overall percentage of receivables greater than 60 days outstanding declined this quarter compared to last quarter. Inventories were up in the quarter by approximately 3.4 million. We did use some available capacity in Q1 to build inventory for the expected increase in demand that we have in the second half. So we will carry that inventory for another quarter and expect that our inventory levels will begin to decrease in the second half of the year. We have 5 million outstanding on the line of credit at quarter end, which is down from 10 million at the end of December. Current debt of 34.1 million consists primarily of the term loan brought on in March of 2003 to acquire Silicon Energy. The original amount was 50 million. And the remaining balance at the end of the quarter was 33.3 million, having made a payment on March 31 of 4.2 million.

Our credit facility does contain financial covenants, which require us to maintain certain liquidity and coverage ratios. And as you likely recall at the end of December, we had a technical default on one of our covenants. We also have a technical default at the end of March, as well. We have received a waiver of compliance from our lenders for the March covenant default, just as we did for the default at the end of December. Due to the fact that we have a fourth-quarter rolling calculation for our covenant, we anticipate a default on the covenant in the June quarter as well. And therefore, the entire balance outstanding under our credit facility is reflected as current. However, I would point out that that June covenant default will only occur if we are unable to complete the final closing of our new credit facility by the end of June.

Turning to cash flow for the quarter, we had a very strong quarter in terms of operating cash flow. Cash flow from operations was a little more than 14 million for the quarter. And that compares to 7.8 million in the first quarter last year. And again, the strong operating cash flow during the quarter -- reflecting the good cash collection of accounts receivable that we talked about in a (ph) minute previously. Property, plant and equipment investments were 4.3 million in the quarter and that compares to 2.7 million in the first quarter of last year. And increased spending this year relates to some internal IT software and as well, some expansion of our facility capacity or factory capacity in Waseca, including some equipment additions for testing. We do expect capital spending to be a bit higher in 2004 compared to 2003. We spent a little under 10 million last year and this year, we will spend closer to 15. We did make cash payments during the quarter of approximately 1.2 million to RER shareholders, due to the fact that the revenue targets related to that acquisition were exceeded in 2003. And those cash payments are reflected as an increase to an investment and an increase in goodwill.

And as I mentioned earlier, payments on our term bank debt during the quarter were 4.2 million. That wraps up our financial discussion for the quarter. I would like to now turn the call over to LeRoy Nosbaum, Itron's Chairman and CEO.

Thank you, Mima, and good afternoon, everyone. We will start by talking about Q1. In order to talk about Q1, it's important to have the context of Q4 and indeed, all of 2003. So let me very briefly start there, as many of you have heard this before.

In '03, Itron made the best of what was a tough year for the industry. With utilities starting the year in weakened financial condition and remaining cautious about capital spending throughout the year, ice storms, hurricanes, blackouts, across the Northeast, while underscoring the need for precisely the solutions Itron provides caused many of our utility prospects to face more immediate needs, dedicating money, resources and people to recovery and repair. As a result, we came into 2004 knowing that the first quarter would be a bit challenging for us, and it was. Particularly in our electric market, as Mima has mentioned, where new-order bookings in '03 late in the year were hampered by capital spending delays for the reasons mentioned, and that reflects itself in our ability to ship product in Q1 of '04. While our financial results for this quarter do not compare well with our financial performance in Q1 of last year, I can report our results came in right about where we expected they would.

As many of you know, earlier this quarter, we took a close look at expenditures versus revenue potential for the year and made some headcount reductions and other spending adjustments. We are working hard to ensure that Itron is running at top efficiency and that our processes and systems are the best they can be.

As we discussed last quarter, we are actively working many deals for AMR business, as well as many orders for software and services. We had some nice success during the quarter in getting some of those AMR deals to close with one sizable order in the $20 million range, and we receive an expansion order for additional work in the Bahamas, along with numerous other small to medium-sized AMR orders.

On the software and services front, we also had a good success during the quarter across a number of our new product and solutions offerings, with new order bookings totaling approximately $6 million, including one deal of 2 million and many other small to medium-size orders -- all confirming that we are beginning to see a loosening of utility budgets for software and services.

In addition to actual signed orders during the quarter, we made significant progress at a number of other accounts. As a result, we believe we have seen new-order bookings in the second quarter equal to or greater than Q1 and that we are on track to return to more normal patterns of growth for Qs three and four, as we have been talking about for a couple of quarters.

Now let me turn to Schlumberger Electricity Metering and make a few comments on the status of that acquisition. We routinely refer to it as SEM, Schlumberger Electricity Metering, and I will use that throughout my comments. As we told you last quarter, we are in substantial compliance with all of the Federal Trade Commission information requests. We also mentioned that in order to accommodate concerns about competition raised by the FTC, we were in negotiations with another AMR supplier, to license to them some of our electric AMR module and certain other related technology. We have since completed those negotiations and expect to execute those documents very shortly. As well, we have been negotiating a decision and order with the FTC. Some of you might better know that as a consent decree. That document is substantially agreed-upon with only minor clean-up left, which should happen shortly, as well. Thereafter, the FTC staff will make a favorable recommendation to The Commission. As mentioned in our release, the formal Commission approval typically takes two to three from the time they receive staff recommendation. As a result, we believe we are very close to getting FTC approval. We hesitate to estimate the expected date, given our previous track record with estimates on this issue has not been very good. But I can say we are very confident that we are very much at the back end of the entire process and close to the finish line.

As we mentioned in our release today, we were also in the process of working with Schlumberger to amend certain terms of the acquisition in order to address some issues that have recently developed concerning the sale of certain other assets at Schlumberger. We do not expect the amendments to materially alter the terms of the acquisition. However, completing the work required may extend the closing beyond when we receive FTC clearance, resulting in a closing date for the acquisition that may be a little further out than we had anticipated -- will be further out, but may be further out. I can assure you that both Itron and Schlumberger are working diligently to complete the amendments, and to be in a position to close on this acquisition as soon as possible. While our acquisition of SEM has taken significantly more time and FTC scrutiny than we had anticipated, SEM brings many good things to Itron, not the least of which is increased revenue, increased earnings, increased earnings per share and increased cash flow, as well, the ability to capitalize on the synergies of electric metering and AMR to bring our customers increased value, both from the standpoint of function and economics. I was in the Schlumberger metering factory last week. The people there is just as excited as we are to bring these two companies together. With the exception of marketing and product development where we cannot prepare ahead of time because of FTC integration -- is going well. Almost all of the SEM employees are signed up for Itron's benefit plans. Those plans will now automatically switch over on day one of the acquisition. Critical IT functions are ready to switch, as well on day one. Accounting issues are being worked, and there again, we're essentially ready. Although the delay has been a drag on all of us, we have been making progress putting the two companies together in those areas that we're allowed to by the Federal Trade Commission.

Let me turn now to some board changes that we have announced recently. We have one board member whose retirement we did announce last week, Mike Chesser, and another board member who will be retiring effective with our May sixth Annual Shareholder Meeting, that's Mr. Ed White. Mike Chesser is resigning because of Federal Energy Regulatory Committee rules, that prevent an officer of the utility from being on the board of a potential supplier. Ed is resigning to devote more time to his real estate development interests in the Raleigh area. Mike and Ed have both been valuable members of Itron's board and we will miss their contributions. We do not have any current plans to replace them or add to the board. If you recall over the past 15 months, we had expanded the board to 12 members, with the addition of two new members, Tom Foley and Sharon Nelson, both of whom who have been and will continue to be powerful resources to us as we broaden Itron's role and positioning within the utility industry. Certainly, Ed and Mike brought us utility expertise, however, we have five other board members that have spent most of their careers in the utility industry. Of our 10 remaining board members, we now have eight who are independent by any group's definition, four of whom are on the audit committee and qualify for financial expert status. The other two are Rob Neilson and myself. We're pleased with the current size and composition of the board. We review it routinely for skills and expertise. We are, however, always on the lookout for people who can improve the composition of the board and will continue to be so.

In addition to our board, we are always on the lookout for ways to increase effectiveness of our management team, and in that regard, I am delighted to announce to you today the appointment of Jim Kensok as Itron's Chief Information Officer. In addition to his role as CIO, Jim's group will also manage efforts in business process, improvement and strategic purchasing, all intended to improve efficiency throughout the entire organization. Jim comes to us from the Avista Corporation, the electric and gas utility in the in-known Northwest, where he has been the CIO and the Chief Security Officer. Jim brings expertise in IT, process engineering, as well as an insider's knowledge as to the future needs of utilities.

To wrap up, as we head into Q2, we look for a smooth integration of Schlumberger Electricity Metering. We continue to look at every corner of the Company to ensure that we're running at top efficiency, and we will continue to close additional business that will enable us to achieve growth projections we've outlined for this year, with a continued emphasis on ensuring that our past acquisitions in the aggregate move from investments phase to investment return phase. I look forward to a strong year ahead for Itron, to sharing additional successes with you in quarters to come and as well, some very nice numbers on Schlumberger Electricity Metering when the acquisition closes. With that, we will open up a question-and-answer session.

(OPERATOR INSTRUCTIONS). Alan Robinson, Delafield Hambrecht.

Good afternoon. With respect to the SEM acquisition, have you locked in your borrowing rates yet? And can you provide us with any detail on the likely re-payment profile?

We can (indiscernible) some of that, because some of the financing has been done and some not done. We have paper closed 240 million of what's required for the financing. And that financing is a combination of the revolver and the term loan. And that financing is LIBOR plus, based on a floating-rate basis. Because we have not yet closed financially and drawn the money down, we have not hedged that. Though after the closing, we would intend to do a swap and substantially lock in the term loan portion, which involves a seven-year term. If we let it go to full maturity ,our expectation would be, given our projected cash flow, that we actually pay that off substantially sooner than seven years. For the remaining piece, on advice of counsel, we cannot really comment on that except to say that it will be fixed-rate debt, and we expect a favorable rate on that piece of financing.

Okay, with the interest rate swap, is that likely to be a plain vanilla swap, or will it be structured so as to mirror likely cash flows from Schlumberger?

At this point, I think it's likely to be a plain vanilla swap.

Okay. And just secondly with the -- can I assume that the closing of the SEM acquisition is now going to be sometime around the end of May? And secondly, are there any SEM revenues in the backlog that you published today?

We would look, Alan, for the closing to be end of May or a bit sooner perhaps. And no, there is no SEM numbers of any kind in the numbers that are in our release, including backlog.

Bill Dezellem, Davidson Investment Advisors.

Thank you. Relative to the strength in the bookings, what do you attribute that strength to at this point?

Bill, this is Mima. If you look at detail in the bookings, that was really across the board in terms of our AMR business. We signed a very nice order, as LeRoy mentioned, with one large electric utility in that -- in our electric market, and as well, we had a number of small to medium-sized orders in electric, as well. We continue to have good bookings in water, as we have had for the past couple of quarters. We had a very strong quarter in terms of new order bookings in international. You may have seen the Bahamas press release that we put out last week, talking about a combination AMR order there as well as a metered services audit. And as LeRoy mentioned in his remarks, we are also starting to see things happen on the software front. And in total for the quarter, if you add it up, new order bookings across the various software and services acquisitions we've added, it was right around $6.5 million in new orders for those products.

And those orders then will be delivered, the software orders, primarily next quarter?

Typically, somewhere around a six-month timeframe between providing both the software and the services that go with those. We do do them on a percentage of completion basis. And there's one large order in there in particular that I envision will take probably two quarters worth to roll out. Some of the other smaller ones may happen faster.

So Mima, the implication for gross margin is that there'll be a favorable impact over the course of the next two quarters from the bookings of software and services that took place this quarter?

Yes. As I mentioned in my remarks, we do believe our gross margins for the quarter were lower than what we would anticipate going forward.

Thanks for the (multiple speakers) and I have one additional, (multiple speakers) relative to inventories. Given that you built inventories here in the first quarter for the second half, is the implication that Q2, you will also be building inventories for the second half?

To a modest extent, a fraction of what you saw in Q1. So I'd say a very modest use of cash for inventory build in Q2. We think the high watermark is probably this month. And we see a drawdown in the source of cash in the remaining part of the year.

And given that this month is the high watermark, the implication to that would then be that orders or pardon me, shipments, beginning to pick up relative to what they have been in the first four months of the year, in the fifth and sixth months?

Yes, that is our expectation, and again, largely driven by stuff happening and starting to move on the electric market.

Jarrett Carson, RBC Capital Markets.

With regard to the headcount reduction, have we seen the full benefit of that in the first quarter? Or is there perhaps another, I guess I would say stepdown in that -- just exactly, did you roll it out across the quarter? Or was it performed at the very beginning?

Jarrett, you won't see the full benefit of the headcount reduction, obviously in the first quarter because it happened towards the end of January into mid-February. So we won't see the full-quarter benefit of those headcount reductions until Q2. Now with the reorganization that we talked about as well, we are also adding some headcount. And I think LeRoy gave a great example of a chief information officer that we just added. So we won't I think see the full benefit of all 5 percent of those reductions, but we will see a good portion of that by the time we get to Q2.

And on the international front, it seems that software has certainly been working for you better there. What does -- and then recently with the Bahamas, starting to see more in the hardware -- will we expect to see more hardware action in AMR over the course of the year?

As we look at the international front, recall that when we think about hardware and software, software, in many regards, is an easier international seller (ph), because we don't have to do much modification to it. You can sell it anywhere anybody can deal with English, which is almost the entire world these days. On a hardware front, you'll see a lot of activity from us in places that used American National Standards in the coming year. And so you see some stuff in the Caribbean and we are delighted with that. Other things in Latin America. We are having some nice things going on in Mexico that hold promise for us. I think we are -- let's call it a year away or so, so maybe a bit longer than that, from hardware business picking up strongly in other places such as the Pacific Rim. But through all of that time, we will continue to see very nice software sales because it essentially can be sold today.

Finally, when looking at the electric utility customers, certainly, they have been under quite a bit of pressure. Is it -- and I respect -- the value proposition starting to just break through that barrier? Or do you feel that the customer group is -- overall health is improving? Can you give us a little more color on what it is that you're seeing there that continues to make you feel much more comfortable over the course of the year?

Let me give you a couple of thoughts there. First of all, as I think both Mima and myself said, on the software side, the value proposition is turning out to begin to cause some utilities to move. I think some of that is a matter of we've been at the plate a while and we've built relationships. And other of it is being able to show customers that are potential customers, installations and existing customers, and having some good success there on the software side. On the hardware side, we clearly have gotten beat up a bit by utilities getting in one form of financial trouble or another, whether it was having to rebuild or having their debt ratings lowered. And utilities in general are getting a little bit better than they have been from a financial perspective. And so we've stayed at it. And as we said in the fourth quarter, it wasn't that the orders went away. They did not evaporate. They pushed out. So we're -- at a number of those customers, we've stayed with it. And in some cases, the orders have been reduced to accommodate the financial condition of the utility in '04. In other cases, they're coming right back on the plate and we're seeing good progress in getting those things closed up. So in general, as we look out toward the end of the year, we see -- I think our own affectivity at selling software continuing to grow. We sell utilities being able to see their financial way clearer and get issues off their plates. In order to consider AMR deals that are of a larger magnitude, and all that's good for us.

George Nooney, LAr Management.

Hi. Question is, one customer, according to the K, page 24, has declined significantly in dollar value, electric utility. What is the status of that customer at this stage? And have we seen a bottoming in that business?

If you recall, we had one very large contract that we were awarded with Niagara Mohawk back in 2002. That was an electric market customer. They are essentially fully deployed at this point, in terms of the AMR business that they're going to do with Itron. So that particular customer contract is essentially complete. I think as we talked about last call, there are clearly a number of utilities of equal size or greater that are looking at AMR deployment, and again, a lot of stuff in the pipeline, but certainly have not closed in order of that size yet to replace it in terms of it being a customer concentration issue.

Eric Prouty, Adams, Harkness.

Could you provide an update maybe on the warranty charge and the installation charge taken in -- that was taken in Q4? Are those behind us now? I know there was still an issue around whether there might need to be some incremental charges made on those two issues?

Starting backwards, we don't believe that there need to be any incremental further accruals for that situation. If anything, I think there's some possibility that there may be something that goes in the other direction, though it's a little too early on that to make the call. With regards to that specific situation for that special ERT (ph) situation, there was roughly $3 million in claims that was spent against the special accrual in Q1, with about another half $1 million in other warranty claim activity, that you can see a total of $3.5 million, it's a delta by taking a look at the balance sheet.

Great. And then on the warranty side, I know at one point, there was talk about going after the component supplier. What is the status of that?

Eric, we've gotten some -- I will call it relief from the component supplier. We are pursuing some additional consideration. So those discussions are ongoing and they would better the promising view that Dave gave us.

Great. And then on another topic on the water side and public utility side of the business, one, what are the trends in the indirect sales channel? Is that continuing to increase at a rapid rate as it has in previous quarters? And then could you give a little update -- I know in Q4 you talked about perhaps three of the ten large cities in North America that were looking at water deployments, maybe just an update on that opportunity?

I will do the first part of that question. The indirect channel continues to be a very important part of the revenue generation for water and public power. About 70 percent of water and public power revenues for the first quarter came through the indirect channel and that is up about three percent from a year ago.

Eric, this is Rob Neilson. We have also launched some further campaigns and are about to launch a fifth one, I think this week or next. And that has actually resulted in creating some additional pull for us from the indirect sales channel. So we are expecting the trend of continuing improvement to continue for the foreseeable future out of the indirect channel.

On the three cities in the north, we are still actively working all three of those situations. And our -- in the heat of the battle at this point, in all of them, working on business cases very aggressively and still pursuing the sales activity like we would any other account.

Is there a feeling that these are on track, or are they slipping, or becoming more aggressive?

They seem to be pretty much on track. We haven't seen anything show up that would cause it to slow down. So I would say they are on track with where we expect it to be.

Great. And just a quick follow-up. On the indirect sales channel as that grows, how does that impact from an accounting standpoint, the bookings and the backlog numbers that you guys give?

Typically, indirect sales don't stay in backlog very long. So you know, obviously as bookings increase, whether they are from direct or indirect, that's good for bookings. But the one change we do expect to see as a higher portion of the business goes through the indirect channel, we don't expect that to do much to our backlog in terms of increasing that because we will typically receive and deliver on an order in a relatively short period of time.

Great, thank you.

Steve Sanders, Stephens, Inc.

Hello. A question on the fixed network side. I haven't seen a lot of discussion about this for awhile. I was just curious whether the product or the market was starting to show some more interest in your fixed network offering? It would seem that the broader adoption and some traction there might create some incremental software and service opportunity for you. So could you just kind of bring us up-to-date on that?

Sure, Steve. This is Rob Neilson again. Actually, we have seen an increase on the fixed network side, in a handful of utility cases, a couple of the large two or three and a couple of them small, on the water market side. And what we are finding is that when it comes to an electric and gas utility especially and they are interested in a fixed network for a part of or all of their service territory, it does come along with a real high degree of interest in all of our new software offerings, especially a product called Itron EE, which is a very large data warehouse, along with some other functionality that enable the utility to take fuller advantage of all of that data that they will be collecting. So yes, it actually has picked up. And in fact, it's having an influence throughout the Company, not just in the sales arena, but also in our marketing, developmented (ph) support groups, as well.

Thanks. And then a follow-up, I think the last call, you talked about three push-outs on the electric utility side. Obviously, you got an order on one of those. And this quarter, I think the comments were that one of those had probably been pushed out into '05, but that you were hopeful that another one would start to show up in '04. Can you just bring us up to date on those?

Steve, it's Mima. I would say there's no change to the expectations we talked about last quarter. The one order has been pushed out to '05. There is still a possibility that some of that might come back into the year. And again, as LeRoy mentioned, we are always actively in there working with that utility to see if we can aid that in any way. And continuing to make progress on the evaluation process for the order, as the other utility. And so, that one is certainly still in our plans for this year.

Steven Pennbolt (ph), Imperium (ph) Capital.

I want to just pose a quick question. We haven't heard much in the line of infrastructure security and management. And with the problems experienced and with the blackout last year, it strikes me as, this summer is going to have higher demand. And it doesn't look like there has been that much money spent on infrastructure or prevention measures by the utilities with maybe a couple of exceptions. Can you talk about how you might be positioning yourself for some more spending in those areas, and how you see that progressing through not only this year, but perhaps in the next two to five years?

This is Rob Neilson again. Three comments on that. First, you haven't seen a lot of investment in that front yet because most of the commissions, state commissions, FERC at the federal level and even the state legislatures, are -- in fact our federal legislative bodies, are all studying sort of the results that occurred from the Canada U.S. Northeast blackout. That report just came out about a week and a half ago. And so they are taking that information and trying to determine what kinds of corrective action should be taken on a going-forward basis, and then that will trickle down through the utilities, and we will start to see the effects of that probably in a year or so. We will begin to see it some second half of this year, but really it won't be tangible for maybe another year.

I did in fact just spend time with one of the Senators from the state of Washington, Sen. Cantwell last week. She is working within the Senate Commerce Committee on a bill that's related to reliability, not only at the transmission level, but we were talking also all the way through the distribution level. And so there is definitely traction going on from that standpoint, as well. It is not tied at this point to The Energy Bill that's still in process, but it could become connected to that at some point. And part of that was you know, how we can help, what kinds of technologies can be brought to bear to help increase and improve the reliability of the infrastructure. And then third, as LeRoy announced in his prepared comments, we added Jim Kensok to our executive team. And Jim, as part of his job at Avista, was Chief Security Officer, and that's exactly the area that he spent his life on. And so part of his duties here at Itron strategically will be to advise us on technology and direction on just this front.

Okay. So is it safe to -- what sort of spending increases should we look for in the next couple of years, or do you think it's premature to determine that?

It's premature at this point to determine that because it hasn't even scoped yet.

Peter Lew, Lew Capital.

Hi. I am encouraged to see the improvement in order activity, although you have elected to not change your guidance. Is this a little more conservative on your part because of the delay or whatever?

I mean, obviously I think our guidance for this year reflects some nice growth over what we had last year, particularly as we talked about, we were going to start off with a pretty slow first quarter. So if anything, we've had a lot of pushback from investors about our current guidance, given that there's a pretty big ramp up that has to happen in Q3 and Q4. So we are obviously very delighted with the bookings progress, that would at this point only cause us to feel better about our current expectations as opposed to start moving those around at this point in the year.

Mima, these positive trends -- do you think they are translated into Schlumberger's business, so that you would get a benefit as you acquire their revenue base?

Certainly, I think there's that possibility. Obviously, Schlumberger's business was up quite nicely in 2003. And a good deal of that was driven by utility interest and electric utility interest in AMR. So to the extent we're seeing those positive trends for Itron's business, you would certainly assume that Schlumberger is seeing them in their business as well.

Okay. Have you baked in any assumptions on interest rate rises into your interest costs going forward?

Yes, we have. I think that is built into our guidance that we've already provided.

Okay, okay. I guess it's a little bit too early to talk about next year, you know,, given the flux of -- timing of the --

Right.

Thank you, very much.

Let me just comment on that. Yes, interest rates have backed up a bit recently, as we all know. And we have one remaining piece to do. However, at the projected rate of that last piece, we will still be under the rates that we used for our original computation. So we think we are going to pay a little bit more than if we had done the financing in March, we will still be very favorable compared to our original estimates.

Well, you have a seven-year term proposed in your financing. I hope it's going to take a lot less than seven years for you to substantially pay for this --?

At our projected combined EBITDA, it will take significantly less, on the order of half.

Okay good, thank you.

Craig Irwin, First Albany.

First of all, nice job on the receivables collection and the new order bookings in the quarter. I have got a couple of questions. The first one really is on Q2 outlook for revenue. Obviously, you guys are guiding for 8 to 10 percent revenue growth in '04. But how do you really see the second quarter unfolding? Is this likely to be essentially flat with year-ago revenue, or somewhere in between slightly down to slightly up? I mean, how do you see this pursuing?

I mean, when we look at the second quarter of this year, we would expect it to be somewhere around the level it was last year, possibly a little higher than that, which would obviously be a pretty nice increase over what revenues were this quarter, somewhere around 20 percent. If you look at the analyst guidance out there right now, for the second quarter, as far as revenue, you know, there is a low 78, a high of 83; so clearly that is a range that we would be very comfortable with.

Okay, okay great. And then, obviously, comparison versus the first quarter of 2003 is a little bit difficult for this quarter. But when we look back to the first quarter of 2002, your actual AMR module shipments is essentially flat, but your revenue is up, so are your gross margins. Is this basically a mix shift issue towards software and some of the other higher-margin things here that's benefiting you guys?

To be honest, Craig, I didn't spend a lot of time comparing the first quarter of this year with the first quarter of 2002. So I can certainly go back and look at that. I mean, intuitively, I think what you said makes sense, but I honestly would have to go back and take a look at it.

Okay. But then did I get this right, that there was 6 million in your new orders, was actually from software; is that correct?

Correct.

So do you anticipate much of a mix shift toward software in FY '04?

Much of a mix shift is probably overstating it. An increasing shift to software, yes.

So there should be a little bit of an increasing mix. Great.

And the reason I can't really answer your question is there's obviously a lot of things that go into hardware besides AMR meter modules. There's handhelds, there's reading equipment, there's software that goes with that. And I really would have to go back and look at it. (Multiple speakers).

Things changed a lot since then. The third question really is, one of the things you mentioned in your release, I guess, is related to the term sheet you're signing with the FTC and the certain assets at Schlumberger that are being divested over there aside from SEM. Could you give us a little more color on this, potentially what's going on here and what this really means for you guys?

Craig, it's LeRoy. There's sort of two questions embedded in there and I will take both of them. First, let me talk about the agreement we have with Federal Trade Commission. Essentially, that agreement was a fairly simple process of getting there, has been some complex. The FTC claimed that our acquisition of Schlumberger Electricity Metering would produce a reduction in competition. And so what they asked us to do was to license some of our technology, our electric AMR technology, so electric only, to an independent AMR Company. In other words, create some competition. That required a license and a negotiation with that company, which has been completed. It required the FTC and both of the bureaus involved, the Bureau of Competition and the Bureau of Compliance, to weigh in on that. And at times there was a bit of a debate between the two of them as to what they were looking for. That has largely been resolved. And now we create a thing called the decision and order, which for years people called a consent decree. And that is a document which is essentially done, except for minor cleanup. The end result of that is that we have been required to give a little bit of technology license to a third party. And we have -- on the closure of this acquisition, that license will take effect. The other thing you talked about was where we are with Schlumberger. Schlumberger is an interesting company in that they are incredibly complex. They have lots of structures within the Company and lots of intercompany agreements that have been in place. A couple of those have gotten in the way of closing the acquisition so they need a little work. That is ongoing between Schlumberger and ourselves, and we expect that to get done fairly quickly. No material effect on the acquisition in that regard. But mainly, just some intercompany transfers and structures that need to be taken care of.

So just to be crystal clear, am I correct to understand that the third-party license is essentially complete but not yet signed?

That's a pretty good description.

Okay, excellent. Now just last question, if we could sort of talk about the outlook for the solid-state AMR market, you know, what you guys are thinking about this market, not necessarily in '04, but sort of out over the next few years and the potential likelihood for solid-state implementations to be widely adopted out there by utilities -- what are you guys hearing from your utility customers about the potential for using these products?

Well, clearly, as we look out into the '05 timeframe, we expect, and there is all evidence to support it, that utilities are increasingly adopting solid-state meters. There is no question that as you look at doing an AMR installation, if you're considering new meters, putting solid-state AMR into a solid-state meter is by far the most economical way. We are delighted with the acquisition of Schlumberger, because they have a very long head start on all of the other meter manufacturers supplying in the U.S. and many around the world, both in quality of the product in terms of having headed out there, worked through any bugs, but as well as going down the cost curve. So we look for an '05 and beyond, where, at a steadily increasing pace, solid-state meters will overtake any electro-mechanical. That is a far-gone conclusion at this point. We think that a lot of companies will begin to look at combining AMR on a favorable basis with that solid-state meter rather than trying to retrofit or re-work existing electromechanical meters. So we think we're positioned well for the '05, '06 and thereafter timeframe. And we think that that momentum, if you will, is clearly building in our favor.

Actually, just a couple questions to follow-up here. Do you think that the sort of I guess sales channel of the SEM solid-state meters through Itron has a potential to sort of accelerate your legacy products?

No. I don't think it has much of a change or an acceleration. I do think if you look at the solid-state meter plus AMR, plus all of the new software stuff that we've acquired and have developed internally, that we build a data value proposition that has the potential to accelerate from both directions. Information that comes out of a solid-state meter needs the software, and the software enables the information to be used in a lot of varying ways.

Okay, okay. And then Schlumberger has actually shipped quite a few meters around the world. Do you see this as potentially helping Itron with international sales going forward?

Particularly in countries that use American National Standards, yes, it will give us a larger presence in a few places. Where American National Standards have not been used, Schlumberger, the part we are buying, has no current presence. But we would look to that as being a fertile opportunity going forward.

Great. Thanks, a lot.

Bill Dezellem, Davidson Investment Advisors.

I would like to circle back to the restructuring charges here in the first quarter. And they ended up being a bit below your original guidance or thoughts at where they would fall. Could you provide some insights as to what was behind that positive surprise?

You know, Bill, I don't think anything in particular other than we probably were just a bit conservative in terms of what we were projecting when we first started putting together the headcount reduction. I still think we ended up at about the same level, in terms of where we were thinking. We just didn't have quite as high as (ph) restructuring (ph).

The only other thing, Bill, to add to that is that we did get out of two of our leases from two facilities. And I think that we got out of that a little bit better than expected as well.

That's helpful. And then let's circle back to SEM for a moment. Relative to some of the integration that is taking place, given that you do not own them, presumably, Schlumberger is bearing the cost of the integration that is taking place right now?

Yes, Bill, let me be some (ph) careful about that. It's integration preparation. Now having said that, certainly, as we look at the stuff I said on the HR front, our people have flown all around the world with Schlumberger people, because we have people all over the place, Canada and elsewhere. Yes, Schlumberger bore the expense of all of that. They have borne the expense of some IT modification. They certainly have borne the expense of some preparatory work on the financial front, as well. So, yes, they've been good guys taking on those kinds of activities as needed.

That's helpful. Finally, LeRoy, you had mentioned that you are having the board member changes. And your newest board member, Tom Foley, wasn't able to make it to the 75 percent of the meetings hurdle for the proxy. What insights can you share as to what held him from -- or kept him from attending at least 75 percent of the meetings?

Bill, Tom Foley is an interesting guy. I mean, this is the fellow who was the former speaker of The House and Ambassador to Japan. I would guess that someplace around 80 percent of the time, Bill, Tom is in the air flying to Japan or Europe or India or who knows where. Just keeping up with him is a chore. And so he ever so often finds himself caught just in the wrong place or conflicted on another board meeting. The good part about Foley is that he is actively participating. He has been a world of help as we try to open doors and move forward in Japan and other places in the Pacific Rim. And he is some (ph) helpful when from time to time, we have to make progress in Washington, D.C. when progress seems unobtainable otherwise.

That's helpful. Thank you, very much.

Eric Prouty, Adams, Harkness & Hill.

Thanks. Just another acquisition-related question. Any sense out of customers that might be looking at kind of a combined Itron/SEM installation that might be holding up their purchase a bit until the acquisition is completed? Is that occurring out there at all? And do you think that's a factor in some of your current negotiations?

Bill, I think it's clear that in a place or two, that is in fact occurring. As utility -- a couple of utilities have said, we think we'll just hold off until after you have this deal closed, and then you will be able to better advise us, where better we should install new meters versus retrofit meters and hold some things together. So we are seeing some effect in that -- on that -- in the electric marketplace. We know that. We don't particularly think that that's affecting us in terms of utilities trying to cut a better deal with us from a financial perspective. But we think it's an overall value evaluation that they are waiting for. Now, having said that, as this thing has pushed out, they have perhaps begin to question whether they should do that.

But Eric, understand that we are following no customer engagements together with Schlumberger to the letter of the law, being very, very cautious on that front. So we do not talk about Schlumberger strategy, product mix or any of that kind of activity with any of our customers.

I was just wondering if maybe you could quantify -- or it would obviously be guesstimate -- how much business might be held up in the channel here that might be released upon consummation of the merger?

Eric, an interesting question, but we would not care to try to quantify that.

Sure. I mean, would it be say a meaningful amount? Or is it a trivial amount? Or somewhere in between?

Let's say somewhere in between is a nice estimate.

Sure, okay, great. Thank you.

Alan Robinson, Delafield Hambrecht.

Mima, just referring to the tax rates again -- and I apologize if you covered this in your prepared comments, could you just explain again why the tax benefit rate for GAAP purposes was so much higher than 39 percent?

Sure, yes, the (multiple speakers) --

The provision rate for pro forma purposes was so much lower than 39 percent.

For GAAP purposes, we made some adjustments in the current quarter that were adjustments to our year-end tax rate that had to be run through the current quarter as opposed to spreading throughout the year. And that's why the -- both the GAAP and the pro forma rates for this quarter look so unusual. But as I stated, somewhere right around 38 percent is what we believe our effective tax rate is and will be for the rest of the year.

(OPERATOR INSTRUCTIONS). If there are no further questions, I will turn the conference back to Ms. Scarpelli for final remarks.

Thank you, very much, everyone, for joining us on the call today. As always, either LeRoy, Dave or I are more than happy to answer any questions you have after the call. Thanks, very much.

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 I.D. number of 348-888. This concludes our conference for today. Thank you, all for participating, and have a nice day. All parties may now disconnect.