Itron Inc (ITRI) 2004 Q4 法說會逐字稿

Welcome to the Itron, Inc. fourth-quarter and year-end 2004 earnings conference call. Today's call is being recorded. For opening remarks I would now like to turn the call over to Mima Scarpelli. Please go ahead ma'am.

Thank you. Good afternoon, everyone, and welcome. Thank you for joining us on today's call. With me here in Spokane is LeRoy Nosbaum, our Chairman and CEO, and Steve Helmbrecht, our Chief Financial Officer. Before we begin today's call, I appreciate your patience as we review our Safe Harbor and pro forma disclosures.

Our earnings release includes predictions and estimates about our future results. On the call today we will also be providing additional detail and information that is forward-looking. The forward-looking information we are providing is based on information available to us today and is subject to a number of risks and uncertainties as described in the forward-looking statement disclosure in our press release. You should review that disclosure, as well as our Form 10-Ka for the year ended December 31, 2003, and Form 10-Qa for 2004, for a more complete disclosure of risk factors. I would also point out the disclosure in our press release today that our financial results for the fourth quarter and full year 2004 are preliminary. We knew that it would take longer to prepare and close our books this year and get through the audit process due to numerous finance and accounting activities all occurring at roughly the same time, which is why we had scheduled today's earnings release date this far out. And while we are close to being complete, we have not yet completed our assessment as to whether goodwill or intangible assets have been impaired, which is an analysis we perform each year in the fourth quarter. And our independent auditors have not yet finished their audit field work nor the audit itself. We are not currently aware of any adjustments that would require a material change to the financial results we released today. However, it is possible that adjustments may occur between now and when we file our Form 10-K for 2004, which we currently estimate we will be filing on or around March 8, and therefore, at this stage we have labeled the financial results as preliminary. Itron does not undertake any obligation to update or revise the forward-looking information that we will be discussing today, although we may do so from time to time.

Our earnings release today also includes non-GAAP financial measures, pro forma results, as well as EBITDA information, and we will be discussing those in today's call. We believe these non-GAAP measures provide useful information in terms of enhancing your overall understanding of our current and our future financial performance. Schedules reconciling GAAP to non-GAAP financial information are included with our press release and are also available on our Website under the section entitled About Itron, News Releases.

Steve is going to start the call today with a brief discussion of financial highlights for the quarter and the year. After that, LeRoy will offer some additional comments. And at the end of our prepared comments, we would be happy to answer any questions that you have.

I would like to now turn the call over to Steve Helmbrecht, Itron's CFO, for the financial highlights discussion.

Thank you, Mima, and good afternoon everyone. I think our press release and financial statements do a good job of presenting the detail behind our financial results for the quarter, so let me use my time on the call today to expand on those areas of financial performance in the quarter that I believe are worth highlighting, and also to share with you some of what my initial priorities are as CFO.

As you can see from the release, revenues for the quarter came in slightly better than we had expected. Revenues were 131 million for the quarter versus our projected range in November of 122 to 125 million. Pro forma EPS came in at 41 cents for the quarter, which was at the high-end of the 38 cents to 41 cents range we projected.

In terms of the revenue upside, we did see better-than-expected year-end budget money at several utilities, and we had a good quarter in terms of upgrades to a new commercial and industrial software product we released midway through 2004 MV-90 xi. With the higher revenues, some of you may have expected slightly better performance from an EPS standpoint, so let me give you some perspective there.

While total revenues were higher, including a higher mix of software, the hardware mix between segments was a little different than what we had projected, with slightly higher revenues in metering and slightly lower revenues in Meter Data Collection. The gross margin differential between the two will vary, but in this quarter, metering margins were roughly 3.5 points lower than Meter Data Collection.

We also had more G&A expenses in the quarter, including professional service fees related to Sarbanes-Oxley compliance and audit services. So, with revenues of 131 million and pro forma EPS of 41 cents, both set new quarterly records for Itron and we are very pleased with those results.

In our release, we talked about a transition that is happening in our Electric AMR business. We are shipping more electricity meters with AMR embedded inside and less stand-alone AMR modules for installation on either new or existing electromechanical meters. Because of that transition, period-to-period financial comparisons for certain aspects of our AMR business become less meaningful due to the segment classification differences. Stand-alone electric AMR models are reflected in our Meter Data Collection segment, and meters with AMR inside are reflected in our Electricity Metering segment.

Beginning July 1, 2004 with the acquisition of our Electricity Metering business, revenues, new order bookings and backlog related to electric AMR can be reflected in either segment, depending on the nature of the order. This is an important change for you to understand when looking at any of those items on a segment basis, and we did cover more about that in the release as well.

We had a great quarter in new order bookings, with 74 million from AMR and software and 54 million in meters. Again, keep in mind the 54 million in meter orders has some component of AMR. Total bookings in Q4 were 128 million, resulting in a book-to-bill ratio for the quarter of 1.1 to 1. For 2004, our book-to-bill was slightly more than 1 to 1. Clearly, that is a very nice improvement over recent history and our book-to-bill ratio in 2003, which was approximately 0.8 to 1.

12-month backlog at the end of December was 97 million, up from 62 million at the end of last year. Our meter business tends to be book and ship, versus the project-based nature for portions of our Meter Data Collection and software businesses. With the addition of our metering business, we expect less of the variability we have seen in our historical results, which resulted largely because of the timing of orders for large projects.

As noted in the release, we completed our evaluation analysis in the fourth quarter for the allocation of the 256 million book purchase price for the Electricity Metering acquisition. We allocated roughly 26 million of the purchase price to goodwill, approximately 167 million to intangibles, 57 million to the fair value of net assets assumed, and 6.4 million to in process research and development -- IPR&D.

As required, we expensed the IPR&D immediately, and you see the 6.4 million charge included in our fourth-quarter results. You also see a big increase in intangible asset amortization expenses in Q4, which is related to the amount of the purchase price allocated to intangibles. The higher amortization expenses in 2004, as well as the IPR&D charge, resulted in a GAAP loss for the quarter, but did not impact our pro forma net income or EPS. We expect to file a Form 8-K shortly with the SEC that contains all the detail of the Electricity Metering purchase price allocation, so I would refer you to that to the extent you want more details.

During the fourth quarter, we began our annual impairment testing of goodwill and other intangible asset balances. We evaluate goodwill and other intangible balances as of October 1 each year. We reorganized our reporting units into hardware, Meter Data Collection, and software solutions, and have conducted our annual testing on the basis of this new structure. We have not completed our annual assessment of whether goodwill or intangible assets have been impaired, and as a result, our financial results are at this stage preliminary and subject to change.

As we mentioned in our earnings release call last quarter, in October, we received SEC comments in connection with an S4 registration statement to exchange notes issued in a private placement for registered notes. We have now cleared all of those review comments with the SEC, and last week we issued an amended Form 10-K for 2003, as well as amended Forms 10-Q for 2004, in order to reflect the reclassification of warranty from cost of service to cost of sales, and to restate segment information to conform to the new structure we implemented in 2004.

The warranty reclassification did not have any impact on total gross margin or on GAAP or pro forma earnings. The SEC declared our S4 registration statement effective on Friday, February 11, and we have begun he process to facilitate the exchange of unregistered notes for registered notes.

Let me end the financial comments with some comments on cash flow -- obviously, another bright spot in the quarter. We generated a little more than 24 million in cash flow from operations in the fourth quarter, resulting in operating cash flow for the last six months of 2004 of approximately 45 million. Capital expenditures in Q3 and Q4 were minimal, and as a result, in the last six months of 2004, we were able to pay down 35 million of the 185 million in bank debt we issued in July to fund the Electricity Metering acquisition. And this is consistent with our post-acquisition priority to integrate the Electricity Metering acquisition, generate strong operating cash flow, and to use free cash flow to pay down our debt.

That concludes my comments today on the financial results. Let me now say a few words about my background and near-term priorities as CFO

I bring to the CFO position at Itron a background in finance, operations and sales, having served in those roles at Itron and other companies. For the past two years I was responsible for Itron's international operations covering all markets outside the U.S. and Canada. In that role I worked with Itron operational staff in our U.S. and international offices and gained an understanding of Itron's products, customers, channel partners, as well as key business drivers in the utility industry. I built good working relationships with the operations and support groups in Itron, which are carrying over well in my role as CFO. Now, a bit about my priorities and focus.

Clearly, my primary focus right now is the completion of our audit, Sarbanes-Oxley 404 Attestation, and the finalization of our year-end reports. We are well through this process. And going forward, the financing and accounting group will continue to focus on transparency, controls and compliance.

I have two areas in particular I will highlight. The first is related to internal processes and efficiency. Itron acquired five companies in the last three years, including the largest of those in the last six months. The integration of the operations and sales aspects of these acquisitions has largely been accomplished. Now we need to turn our attention to maximizing the efficiency and operations of financial systems, infrastructure and people, and I'm working with our President and Chief Operating Officer on several initiatives he has identified to improve operating efficiency and cost management.

Second, we're going to focus on our financial systems and processes to improve our ability to measure costs and profitability, to improve our financial planning and analysis capabilities, and to provide better and more timely financial information.

In addition to spending time on internally-focused issues, I'm spending a fair amount of time on developing sound financial growth strategies. Our business model has been made stronger through our acquisitions. We are focused on delivering earnings and cash flow growth through a combination of revenue growth and good cost management. And, with LeRoy and the financial experts on our Board, I am looking at Itron's optimal capital structure as part of our business planning process.

In closing, the transition as new CFO is going well. I'm fortunate in that our prior CFO, Dave Remington, recruited and built a professional, talented and hard-working finance and accounting team. I look forward to working with Mima and LeRoy and meeting with investors and analysts, and delivering Itron financial presentations. And I'm really looking forward to meeting and working with many of you over the next few months and year. I will now turn the call over to LeRoy Nosbaum, Itron's Chairman and CEO.

Thanks for those comments, Steve, and thanks for taking the reins from Dave Remington, who, by way of comment, did just an excellent job in handing those reins off to Steve in the transition period in Q4 of last year. You and your group have done an outstanding job during a time when there has been a huge amount of work in our finance and accounting area, and we're operating under the closest scrutiny ever with Sarbanes-Oxley and our year-end audit.

As you've all read and Steve has highlighted, we have had a solid fourth quarter and a very strong finish to the year overall. Clearly, the acquisition of Electricity Metering has had the effect we were all looking for. We're not only maximizing our AMR opportunities, but as well enjoying the benefits of a great new business helping to generate earnings and cash flow. The integration has gone very well, including the combining of the metering and AMR sales forces, which we talked about on the last call. As well in the fourth quarter, we did see signs of an upturn in utility capital spending, a trend we believe will continue into 2005.

We made a number of changes to our organizational structure in 2004, some as a result of acquisitions, some as we worked hard to rationalize the Company around effectivity, efficiency, and financial results. Across the Company, we worked hard on all levels to reduce manpower, to remove ourselves from profit-draining activities, and to put together an organizational structure that provides for maximum operational efficiency. We are more targeted, we are more focused, and we are better able to produce earnings and cash flow, even at only a modest growth level in utility capital spending. We do have a restructuring charge in our fourth-quarter financials. I would not anticipate anymore in 2005. The restructuring work is complete.

Our two operating groups, hardware and software, are really starting to take shape, advancing the technology we have internally developed and the technology we have acquired -- effectively positioning Itron with our customers as more than a hardware or software company, but rather, an end-to-end provider of data, data collection and analysis, and applications expertise. No other vendor has assembled a comparable portfolio of solutions for the marketplace.

Itron can now participate in more capital spending areas with any utility than ever before. We like what we see as we look to 2005 and beyond. The overall financial health of the industry has improved greatly. Industry sources indicate that capital budgets are increasing. Proposal activity is very high.

Our guidance for '05 at 505 to $515 million in revenue, and an earnings per share number of $1.40 to $1.45, is moderately conservative. Good things are out there that could improve this outlook, but we're not running the Company as if they will occur, nor have we remodeled our financials to take these into account.

One of the more noticeable activities in the market right now is the AMI, or Advanced Meter Initiative, in California. Itron is pursuing the opportunity with AMR products, metering products and software solutions, three opportunities for us to be successful. This activity is a long way from producing meaningful orders and is certainly not in our '05 numbers, but we have hopes for '06.

For Q1, we're guiding to numbers that are very consistent with the normal first-quarter turndown in our business as a result of weather and utility buying patterns. We enter 2005 with healthy cash flows, solid financial footing, and a great management team in place that is dedicated to improving shareholder value.

With that, why don't we open up to questions?

(OPERATOR INSTRUCTIONS). Steve Sanders, Stephens Inc.

A couple of questions. First, just a comment on the competitive environment and pricing in the meter business. You talked about that somewhat on the third quarter call and, I think, at the analyst day. I just wanted to get an update from you.

Steve, the competitive environment in the meter business has perhaps changed only in a very modest form. Certainly, we have seen all major meter manufacturers in the U.S. now introduce solid-state electricity meters for residential consumption. And so, we are seeing more competitive bidding in that area. Price levels are holding, we think, fairly steady in that regard. But we do have more competition, so it will crop up over time in the solid-state area.

As I say that, I want to make sure everybody knows that if that happens, we reduce the market for electromechanical meters but we increase the market size in the solid-state arena. As those other folks are bidding on solid-state meters, they will discontinue bidding and receiving awards on their electromechanical products. So, a little bit of a shift in the market dynamic there. We don't think that affects us very much, to be fair. But we are seeing an awful lot of metering products being bid with AMR products embedded in them it, particularly our solid-state stuff. So, we are pleased with what the market dynamic looks like in that area. But, clearly, we are seeing solid-state products from everybody these days.

Again, specific to the meter business, what about the international opportunities in '05? Is that something that could start to develop in a meaningful way during the year?

We've got some activities that are going on internationally, but certainly none are baked in our forecast, and we think it's probably seriously premature to even describe those activities, except to say that there are some potential activities out there in certain places in the world.

You had a comment in the release about expecting to close some IOU orders in the quarter. I just wanted to see how the IOU orders factor into your guidance for '05. You gave some indication about saying guidance was moderately conservative, but I just wanted to see if you would drill down a little more on that.

Sure. That's a fair question. We have seen in the last quarter and on into '05 a very heavy activity schedule in our proposals. There's an awful lot of work going on now with a number of large utilities, with all of the competitors trying to close AMR business. Some of that has meter business incorporated into it. Certainly as we gave that guidance for '05, we have some number of large utility orders in there that we know we are very close or expecting to get. We have not, however, extended ourselves to be optimistic about that revenue range that I gave you.

On the segment margins -- again, sticking with meters -- sequentially, I think we saw some gross margin improvement, about 100 basis points. Given the volumes and the mix with AMR embedded, I thought maybe that would be a little higher than that. Can you just comment on that a little bit?

Steve, obviously our margins improved from Q3 to Q4, partly because in Q3 we had a little bit of downside from the purchase price adjustment. We did still have a fair amount of services related to the former affiliate that occurred during the quarter, and so those were at somewhere around a 7 percent overall margin. But overall, we are pretty pleased with our metering margins in the quarter. And again, as we've commented in the past, on a quarter-to-quarter basis they will fluctuate around depending on the mix of meters that are sold with AMR, without AMR, and with various other functionality choices as well.

And then, within the meter segment, operating margin about 22 percent versus 31 in third quarter. Beyond the things you just commented on, anything specifically in there?

I'm sorry, Steve. Could you repeat that please?

I show 22 percent operating margin 4Q in the meter business versus 31 in 3Q, and I may be looking at bad numbers. But again, just a comment on the sequential trend. You want to follow up?

(multiple speakers) I just haven't really spent that much time looking at the cost on a segment basis.

Just one final question. The operating loss in the software business was, obviously, significantly below what it has been for the past several quarters. I know you made a comment about the MV-90 on the C&I side, but I suspect there have also been some pretty significant expense cuts there. I wonder if you could revisit the revenue breakeven rate in that business, and just sort of generally your outlook on software operating profits or losses in '05.

Steve, I'll talk to that on a general basis. You're right; as we came through '04, we repeatedly had reductions in staffing in various parts of the Company, and in particular in the software area. And we removed some of the clearly unprofitable areas. If you look at software as a whole, you get kind of an unreliable picture, because there's many parts of the organization that are making very nice money, and some getting very close as we came out of '04. And, certainly, as we move through '05, we're going to move toward increasing levels of profitability.

That having been said, embedded in the software business is a couple of areas that while we don't make much money on them, they help to pull a huge amount of AMR activity. And so you get sort of an incorrect view when you just look at software as a whole.

As we go through '05, I don't look for anymore staff reductions per se, but we do see some growing opportunities for software revenue. And that, obviously, changes the picture rather dramatically.

The other thing that's probably worth saying is as you look at our software business and you compare it to other software businesses, you can easily make the mistake in looking at the margins to say both look awfully low. They do until you realize that we have a very large service component in our software business in most areas. And those services, clearly, are not like selling software licenses. And so the margins tend to be a bit lower. But for some, yes, we're going to have increasingly good prospects for profitability in our software business. We made some great strides in '04. And certainly the gang in our software group is working hard to make some larger strides in '05.

Sanjay Shrestha, First Albany.

First of all, congratulations on a great quarter here. A couple of quick questions I have. First, on the AMR side (indiscernible) I was hoping if you could talk a little bit more about that intensive level of activity that you are seeing. Is that on the mobile AMR side or on the Fixed Network AMR side? And I have a follow-up question just on the Fixed Network AMR side after that.

That one is easy to answer, Sanjay. We're seeing a lot of activity in both areas. We have strong mobile prospects throughout '05, both near-term and long-term. We have seen in '04 and continuing on into '05 a very high level of Fixed Network activity, both RFQs for deployments and pilots, and requests for information. So, I think there is clearly an industry trend in a number of areas to look at Fixed Network activity. We are participating in it beyond the gigantic opportunity in California. There is certainly a lot of Fixed Network activity around the rest of the country.

Staying with the Fixed Network 2.0, can you give us some sense in terms of the other similar technology (indiscernible) even (technical difficulty) the power line carrier side with your price per end-point having come down significantly versus Fixed Network 1.0. The recent announcement with the Ontario -- is it like the beginning of the trend, and we're going to really start to see a lot of traction on the Fixed Network 2.0 side this year?

I think it's clear to say that we're going to see traction on Fixed Networks R 2.0, and frankly, across the entire competitive landscape. One of the things that has happened over the last four or five years is cost per point for all that stuff has gone down. Some of that is technological innovation, some of it is chipsets, some of it is competition, to be fair. And so, as we look out through '05, we are clearly seeing more competitive situations on Fixed Network than we did let's say at the beginning of '04, and certainly far beyond what we did in '03 and '02.

That having been said, we think we are positioned well in the Fixed Network area to compete against other Fixed Network providers; to compete against power line interior in the right application, that being reasonable density as we see in urban environments; and, you know, there's sort of -- because you're going to get there, I know you all -- just to tack on -- there was the specter of broadband over powerline out there. And as we look at that, we think that's a great backhaul. And in fact, we're working with all of the broadband over powerline technology people to look at how we might embed that directly in our meters and take advantage of that. I think that meaningfully is beyond '05 but we are going to see some of that activity and we're going to see some technology development in that area. And I think potentially that could get very interesting as we look at '06 and beyond.

Sanjay, let me just add that one of your questions was you mentioned the AMR initiatives in Ontario and California, and do we consider that to be a trend that we will see sweep across other areas. I think there is still just a lot that has to be sorted out (technical difficulty) process before we know we'll be looking at any kind of a trend. We are clearly working with all the utilities there, regulatory bodies, in helping them try and figure out requirements and move from nice to have to want to have, and all the cost issues and alternatives for funding that kind of deployment to go with that.

But just to kind of recap than, then, it is fair to say that definitely with the technological enhancement cost reductions the level of activity on the AMR side, especially on the fixed network, is clearly going to be on the uptrend going forward?

I think that's correct, absolutely.

One more question. If you could get into some more detail in terms of looking at the low-single digit growth on the hardware revenue side. And if you could also tie that together with how much of that -- how much of the expectation for your recently introduced hand-held units to really kick into that potential high -- low-single digit growth here -- if you could elaborate on that a little bit.

Let me give you a little bit of elaboration on that. As we look to '05, LeRoy has already indicated that we believe our guidance is moderately conservative. We have said many times in the past that we think the AMR market has the potential to grow at 10 to 15 percent per year. We're clearly coming off a year like we had in '04; we're not projecting that. We're projecting growth that is more of what I would describe as the low-single digits. But nicely I would add we're looking for some nice growth across all three segments, both electric and gas, as well as water.

I think we are also, in terms of hardware revenues, looking for electric meter growth somewhere in the 2 to 3 percent range, which is, again, at the low-end of what that market has grown on, excluding any kind of kickers from selling AMR.

Software growth looks good in '05, partly due to interest in the MV-90 xi product that Steve mentioned. That has continued so far into '05. So, for software, we're looking for what I would describe as more high-single digit growth, although software is still not as meaningful in terms of the impact on the businesses' hardware.

One last question, more on the (indiscernible) front. Mima, the amortization of intangibles number here in the fourth quarter of 2004 -- is it a good number to sort of take a look at and use it from the modeling purposes for 2005?

Not necessarily, because in the completion of that purchase price allocation, there are some things that got written off very quickly. So, on a going-forward basis amortization in '05 of somewhere around 9.5 million a quarter (multiple speakers) -- yes. So, just under 40 million for the year is what we think is a reasonable number today.

So that's kind of how we get to that 70, $80 million in cash from operations, kind of like that's the amortization portion -- 15 or so on the depreciation side net income, and fluctuation on the working capital. And that's really what gets us to that 70 to 80. Right?

Right.

Paul Coster, JP Morgan.

A couple of quick follow-ups for Steve first of all. Steve, can you just talk about customer concentration and the tax rate looking into '05?

Let me answer the latter question first. The tax rate looking into '05 we're seeing at right around 40 percent or so. And, in terms of customer concentration --

Steve, let me add some information there. Paul, we did not have any 10 percent or greater customers in '04 or '03. We have to go back to 2002 before we see any kind of significant customer concentration. So, we did, obviously, in the fourth quarter have a nice order from Xcel Energy. Earlier in the year we had a nice order from Duke. But in '05 we're not looking for any major customer concentration issues.

LeRoy, perhaps you can just talk about seasonality. I'm going back through historical results to try and figure out if there's any pattern within the segments. And it looks to -- I mean, I can see that sequentially it is consistently down in the first quarter in aggregate. But is there any color you can add in terms of specific end-markets there?

That one tends to be more in the meter reading area. You're just not going to go out and install new meters for AMR purposes in the middle of the winter. So, that area gets hit a little bit. The other thing that happens, and it is both AMR, and it is, as well, in the electric meter area is there's an awful lot of year-end buying that goes on. And so, a lot of utilities sort of bulk up their inventory at the front end or in the fourth quarter, and December particularly, and then first quarter get the effect of having more inventory than needed.

My last question is -- I think I've asked this several times before. Any sort of feeling about the legislation going through Congress and in the energy bill, and what's going to happen in '05, and whether that will have any impact at all on your business?

It had sort of an off-again on-again effort in Congress to do some energy legislation. And in fact, this week we have had legislation introduced in the House which, quite frankly, we would love were it to get passed. The real question is will it?

Clearly, the two sides of the aisle have been (technical difficulty) at loggerheads on the whole situation. As well, I think we have to look with some open eyes as to what the real priorities are going to be in Congress coming out of the Bush administration. That having been said, even if we pass the bill as early as this quarter, we will see no effect of that in '05. It will take too long for the utilities to gear up to do anything. I just don't think we see anything until let's say '06.

What is the benefit you would see in '06, or whenever? Is it to do with the distribution infrastructure or the metering itself?

The bill that was currently introduced this week actually has some very nice tax treatment of automatic metering and smart metering. It would help both from an AMR perspective and an electric meter perspective. It's got some very nice incentives for utilities to look at installing advanced metering in general. And it would be in those areas. We're not seeing anything that helps in the transmission area or the distribution construction area at this point.

Alan Robinson, Delafield Hambrecht.

A couple of quick questions. In the past you have talked about capacity at the Yakami (ph) facility. Are there any plans to vertically integrate, backwardly integrate, any acquisitions there on the solid-state side, or are you full there now?

We're not full, but there are no plans either, Alan. We're running less than complete capacity in Oconee and less than complete capacity in Wasaga, but I judge that on running three shifts a day which we could easily do in either place were we pressed to that. There's no good reason to collapse those two locations into one or, to move product from one to the other. We have, and I think we might have talked about it on the last call, recently closed a facility in Canada which we are moving to Oconee. And that process is all but complete as we talk today.

Finally, have there been any specific extreme weather events so far this year that are likely to impact the first quarter?

I'm glad to say no; none at all.

Jarett Carson, RBC.

Can you give us a little more color with regard to some synergies and how that is progressing? I think you were maybe looking at some possible sales force consolidation, and also on the purchasing side.

You bet. We had -- I said we would keep those sales forces intact, the AMR sales force and the metering sales force, until the end of the year. And in fact, as we came across the end line between '04 and '05, we did put both sales forces into one organization. Hardware has now got a joint sales force that includes people that used to be in the meter group and people that were in the AMR group. That in total, including people moving around to different areas, took 10 to 15 people out of the equation. Not a big move, but certainly does produce some synergies.

We have a good focus now both on what I will call selling routine hardware products, AMR and meters, plus selling systems. And in the same process we also broke off a separate software sales force that now looks at enterprise and application software and is selling our software products. And we feel real good about that.

Another synergy you mentioned, Jarett, where we have been working very hard -- and in fact, we have a very effective team of people that is looking not only at the purchase price of parts, where we are looking across '05 at some very nice gains there -- to date, north of $1 million. But we know we have some better opportunity.

We also have Steve Helmbrecht and a very small team of executives quite focused on operational benefits of pulling all of the various pieces of the Company and looking at systems, and they are identifying as well some very nice opportunities for expense and cost savings as we move through the year.

Jarett, let me just add to what LeRoy said. Clearly, I think LeRoy did a good job of addressing the cost synergies. But I think there's another important synergy that we shouldn't forget, and that is that we 'are now selling meters at customers where Schlumberger was not selling meters before. And I think that the recent order from Xcel Energy is a good example of that.

LeRoy, I think one of the, clearly, probably the weak link in 2004, and then in the electric side -- one of the issues I recall that you cited over the course of the year had been the large amount -- excessive amount almost of rate case activity, and likely owing from the dramatic rise in the fossil fuel side. So basically, the utilities going back to their state commissions to increase rates. Can you give some qualitative thoughts on that activity? Where is it relative to 6 or 9 months ago, number one? Number two, some of the feedback maybe that you're getting. So, a utility is going to raise rates. It would suggest that the opportunity to find operational efficiencies they would want to be more focused on that -- how maybe that is playing?

Jarett, certainly, we did talk about that last year. We saw a lot of rate activity. That has either tailed off or come to a close, depending on the particular utility. And, I think, in general utilities got pretty good treatment from their commissions, which is good news for them.

Utilities, clearly, as we go to industry conferences and we talk to utilities individually, and we talk to public utility commissioners which we are doing an awful lot of these days, utilities are looking for ways to reduce their costs and become more efficient. It is the one way they can improve their bottom line. Very difficult for a utility just to outright grow unless they're going to go ahead and acquire somebody.

We also see -- and I'm delighted to report this -- that utility commissions are being very strong in their encouragement for capital expending that does improve the efficiencies in the operations of utilities. So, I like what I see in terms of balance sheets; I like what I see generally in terms of utility earnings being in better position than they were at this time last year. And I'm certainly delighted by the fact that utility commissions in general are encouraging their utilities to spend money to improve their efficiencies. A good environment.

Final question, just on the -- you talk about kind of CapEx guidance in the 15 range. I kind of had in my head maybe 20 to 25, if I was trying to throw the two organizations together. Has there been something where you just kind of relooked at the combined entities, or is it just that the number was actually likely lower.

I think a good bit of that was the number was likely lower, Jarett. We scrub budgets from top to bottom, including where we're spending capital dollars. And we are real comfortable with that $15 million number in terms of generally what we're going to spend on CapEx. Part of that is a result of taking a very hard look at where we needed to spend money and where we didn't in our IT infrastructure. Part of that is acquiring a Schlumberger, quite frankly, electricity metering group that was in good shape in terms of their capital and what they have got in terms of property plant and equipment. So we are pretty pleased with that $15 million number. We like it.

John Quealy, Adams Harkness.

One question on the margins. If you could, just revisit the meter data collection was up nicely over 200 basis points quarter-on-quarter. The electric meter business, up 100 basis points. Can you talk a little bit about the changes there quarter-to-quarter. Was it volume? Was it the mix of business, gas, electric, water, etc.?

Sure, John. On the Meter Data Collection side, the main reason for the better margins is the mix shift in hardware. We had volumes actually overall in terms of the standalone AMR modules that we shipped stayed pretty steady from Q3 to Q4, but we did have a higher number of gas end-point shipments in the fourth quarter, and a little bit lower number of electric AMR end points. And that does impact margins, depending, obviously, on the contract and pricing related to it.

And on the Schlumberger side, with those margin improvements was that just based on how many meters went out with AMR, or what was the main factor in that piece of the business?

There were -- there was a higher number of meters with AMR embedded inside that they shipped in the fourth quarter compared to the third quarter, and that does contribute to margin improvement there. But also, third-quarter margins were artificially low as a result of the purchase price adjustment related to inventory.

Okay, great. In terms of the booking number you did and the 74 million, can you give us a relative characterization of how the three end-markets participated there?

Yes. Without getting into too much detail, it's because the audits haven't (indiscernible) the numbers that much. We did see some very nice software bookings overall. I think we also saw a pretty nice mix of business from both gas and water and combination utilities, or excuse me, gas and electric and combination utilities. We also saw some nice bookings in water. So there's no one particular sector that stood out. I think in general we saw some pretty nice strength across all of them.

My last two questions -- first, on the component costs? Can you talk about how the cost environment is for you folks on the raw materials or component costs looking forward into '05?

We have -- if it wasn't for the acquisition, and what I would say to you, John, is that we see '05 much as we saw '04. We'll see a little dither on specifics, but generally flat. We still don't see any move upward. The good news is with the acquisition we've actually been able to pressure our suppliers quite nicely and have gotten some price decreases in several areas. And we're going to continue to do that, but I think generally in the market we are not seeing upward price pressure across the board.

LeRoy, on the free cash flow, the guidance of -- if you do the math, about 55 or 65 million for fiscal '05. Can you comment a little bit about what the priorities are for that, whether it be debt reduction or whatever you have in mind?

You named it; debt reduction. We have said and continue to say that the vast majority of our free cash flow will be used to pay down the debt, and we have showed that over the fourth quarter, and we will continue to follow that pattern.

Patrick Forkin (ph), Rockhouse Research.

LeRoy, you said that you expect to close to some borders in the current quarter with several IOUs. Do you anticipate that those would be on your fixed network product or your mobile product?

I think there's a good chance that we could close some borders in both places, but the majority of that will be in the mobile arena.

Okay. And would that be with new clients or expansions of existing relationships?

It will be both, Patrick.

Steve, with respect to other noncurrent assets, it looks like they went from a little bit below 2 million in the September quarter to about 15 million at the end of a fourth quarter here. Could you comment on that please?

I'm sorry; was that the other noncurrent assets?

Right.

I think that some of that is deferred revenue. We do our (indiscernible) no, actually that would be a deferred. Excuse me; that's not liability. I don't have the answer on that. We can certainly get back to you on that.

Let me get back on that. (multiple speakers), prepaid, so we'll get back on that.

We go next to Tudor Midas (ph) from sales (ph).

A question on the AMR market. At least a portion of the market is moving toward to-way indications. Can you talk a bit about your plans to address that part of the market?

There's an awful lot of buzz in the marketplace in some specific areas about two-way communications. Whether or not a material portion of the market actually does move in that direction, we, frankly, believe it remains to be seen. Clearly, when we talk about two-way communication we get into the whole arena of what are we talking back to and what are we trying to say?

Are we trying to communicate to a customer about how they are using energy or are we turned to turn loads on or off. Are we trying to reset registers inside a meter in some form of fashion. We clearly have demonstrated the ability to communicate with customers in pilots we have run in '04 and '03 about how they are using energy. We have had some pilots running in '04 and '03 adjusting loads. We have some difference of opinion as to whether that communication ought to go through a meter, because, quite frankly, technologically we believe that is a very inefficient way to do it. And so, those kinds of discussions are going on all over the place.

Technologically, can we communicate the meters? Yes, we do it all the time; particularly in commercial industrial applications. I think we can all have an interesting debate and we do it with utilities routinely about why one wants to communicate with the meter versus reading it frequently which we can do with Fixed Network and getting all the same benefit.

Bill Dezellem, Davidson Investment.

In Q4, if we're hearing you correctly, these bookings was not an anomaly. And you're seeing strength, it sounds like in a number of areas, both in terms of large MOUs and others. Would you give us some additional perspective as to why you're seeing this rebound or strength, or what is behind this please?

Bill, I think there's a couple things going on. One is, as we were foretelling and complaining about both last year, I mean, utility capital budgets are beginning to increase. Their balance sheets are better, and we're seeing a decided turn up in utility capital spending, and in particular, in some areas that are benefiting us. So, point one. Point two, we see a lot of utilities right now taking a very hard look at automation of their meter reading. Some of it is fixed network based, because they're anticipating the need 10 to read meters more frequently or to try and provide their customers with some additional benefits, which Fixed Networks can do for them. Some of it's quite frankly -- it's in the same old mobile form it's been for years. It's just let's get people out of the equation and reduce the costs. And we're seeing as I mentioned utility commissions being very encouraged, and encouraging their utilities to get on with it and to reduce costs.

We're seeing a lot of pressure, and I think we'll see it over the course of the next couple of years, for utilities to improve their earnings. But when you look at a utility today, most of whom are saying back to basics, we are going to be a pipes company or a wires company or a pipes and wires Company, the only way to improve earnings, quite frankly, is to reduce their costs and meter reading does that. It's been proven to do that routinely. And so I think it also helps with the fact that utilities don't have that elephant in the boardroom, which is either earnings or sucking wind or their balance sheets are in terrible position, or they're trying to do something they probably shouldn't be trying to do. So, I mean I just like the environment as we move into '05 here and look forward.

With all that having been said, what is the length of time that you currently believe this breath of fresh air, this upturn, can last?

Why did I know you were going to ask me that? I think we're looking into a couple of years of it, for sure. To the question that was asked earlier about the political environment, I think if we could get some good energy legislation, I think it probably pushes on beyond that. So, I am feeling pretty good for a couple of years here. And quite frankly, I like the way we are positioned. We are playing in the marketplace in three distinct segments. I think the AMR market, the meter market and the software market -- we're also playing on a combined basis which is giving us opportunities where we've never had them before, and giving us a broader opportunity across the utility spectrum. And then, a point we haven't said much about today, but I certainly like the way our international market is shaping up for the length and breadth of '05.

(OPERATOR INSTRUCTIONS). Gregory Macosko, Lord Abbott.

I have one question. Early on in the call you talked about all of your competitors have a digital meter out there. Could you talk about how much activity you're seeing? And with regard to the AMRs that you are shipping out into the marketplace, how many of those would be going into new meters that are competitive digital?

That's a many-faceted question. Let's see if I can walk through that, and if I don't quite get all the questions answered, just please readdress. First of all, when we think about the competitive landscape for electric meters in the United States we think about ourselves, we think about Elster, we think about Landis+Gyr, we think about General Electric, and we think about Invensys. And all of those companies have introduced and are beginning to ship -- GE being the latest in the bunch -- solid-state electric meters.

Everybody in that group is talking about shipping solid-state electric meters with AMR technology in of one form or another. Of those five I mentioned, clearly, Itron is shipping our AMR technology; we are shipping DCSI, or ESCO’s AMR technology; we are shipping a couple of other people's -- Hunt's AMR technology, and probably one or two (indiscernible).

GE has the ability to ship Itron AMR technology. I don't know of anybody else in their case. Invensys is shipping Itron AMR technology. The folks at Elster are shipping ESCO or DCSI's technology. The folks at Landis+Gyr are shipping Elster or (indiscernible) ESCO or DCSI's technology at Landis+Gyr as well in their solid-state meters.

Now, everybody who produces electromechanical meters -- so Elster, General Electric, and Landis+Gyr -- are all shipping Itron modules, electric modules, in their product. We ship -- oh, let me think for a minute what the numbers are we ship with AMR -- about a third of the meters we are shipping have -- currently have AMR in them, our AMR. And roughly about a sixth of the meters we ship have somebody else's AMR, by and large.

Greg, let me just give you some cumulative total shipment data that I also think helps put this in perspective. If you look at the solid-state meter market, we have shipped about 12 million solid-state meters to date. If you add up all the other major vendors that LeRoy just mentioned, in total, they have probably only shipped somewhere around 500,000 modules combined.

But with regard to the utilities, are all those meters approved pretty much, and if they could sell them they will be sold? They don't need an approval period with regard to the utilities for those meters?

No. In fact, that's not the case, with the exception of Itron. It is one of the great advantages we have. Approval cycles at utilities are long. They do not, generally speaking, trust each other's approval process. And so, whatever utility you do go through an approval process, it's not unusual for that to take more than a year before you start getting significant orders. We are through that with the exception of one major utility in the U.S. and one around the world outside the U.S. So we are largely through that.

Are you seeing that approval process, though, sort of accelerate, and more going on for your competitors at the utilities? Are they looking to have a second supply or even a third possible digital meter?

Most utilities look for alternative sources of supplies for meters. So, I think it's fair for us to say that certainly utilities are looking for more than just Itron to be a supplier, and are in the process of looking to approve other meters. Let me make a point here that I made earlier, and I just want to reemphasize it, because it can get somewhat confusing.

That process goes on, but we're not getting all the meter business typically at the vast majority of utilities. So utilities are buying our solid-state meter and they're buying somebody else's electromechanical at the same time. And as they look to that other meter vendor for a solid-state or digital meter, they will start buying their digital meters and they will stop buying their electromechanical meters. And that is sort of the way that process is going to be ongoing for a while here.

There are no further questions at this time. I will now turn the conference over back to you, Miss Scarpelli, for any closing remarks.

Thank you everyone. We very much appreciate your time today. And as always, if you have any questions feel free to follow up with me; my direct line number is listed in the release. Thanks very much.

Ladies and gentlemen, if you wish to access the replay for this call you may do so by dialing 888-203-1112 domestic, or 719-457-0820 for international, with an ID number of 364612. This concludes our conference for today. Thank you all for your participation and have a nice day. All parties may now disconnect.