Itron Inc (ITRI) 2005 Q1 法說會逐字稿

Good afternoon, and welcome, ladies and gentlemen to the Itron first quarter 2005 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. At the request of the Company, we will open the conference up for questions and answers after the presentation.

I will now turn the conference over to Ms. Scarpelli. Please go ahead.

Thank you very much. Good afternoon, everyone, and thank you for joining us today. With me here in Spokane is LeRoy Nosbaum, our Chairman and CEO; Rob Neilson, our Chief Operating Officer; and Steve Helmbrecht, our CFO.

Before we do begin today's call, I appreciate your patience as I review our Safe Harbor and pro forma disclosures. Our earnings release includes predictions and estimates about our future results. And on the call today we will be providing additional detail and information that is considered forward-looking. The information we are providing (technical difficulty) on what we know today, and is subject to a number of risks and uncertainties as described in the forward-looking disclosure in our press release.

You should review that disclosure, as well as our Form 10-Q for 2004, 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.

Our earnings release also includes non-GAAP financial measures, pro forma earnings and EPS, as well as EBITDA information. And we will be discussing both in today's call. We believe these non-GAAP measures provide useful information in terms of enhancing the overall understanding of our current and our future performance.

Schedules reconciling GAAP to non-GAAP financial information are included with our press release, and are also available on Itron's web site at www.Itron.com under the section titled "About Itron News Releases".

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

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

Good afternoon, everyone. As you can read in the release, we had a terrific first quarter, with revenues and earnings coming in higher than we had projected. Earnings in particular coming in much stronger.

Let me give you some insight into some of the drivers of the upside we produced this quarter. Revenues of 116 million were a little above the high end of 110 to 115 million range we had projected. And pro forma EPS of $0.32 were a full $0.10 better than the high end of our projected range of $0.20 to $0.22.

The upside in revenue and profit for the quarter came from all three segments of our business. Software was 1 million over plan, roughly half of which was license revenues at high margins. We also had more billable hours for Professional Services than planned, an area that we have had some focus on.

In our hardware business, we had a little better than expected revenues for Electricity Metering. The higher volumes plus a higher-than-expected mix of meters with AMR, resulted in gross margins per metering a little better than projected.

And finally, while our AMR revenues were close to plan, the mix of gas shipments was a little higher than planned, and that drove some margin upside in AMR as well.

Operating and other expenses came in very close to plan. So the EPS upside for the quarter was driven by the higher revenues and gross margin contribution I just mentioned.

In the quarter, our Meter Data Collection, MDC, gross margins were 7 points lower than the first quarter of last year, and 2 points lower than MDC margins in the fourth quarter. Average selling prices for stand-alone electric models declined this quarter as a result of AMR module sales we made at cost to another AMR vendor, Hunt Technologies, along with general market pricing pressure from Hunt and other vendors.

The sales to Hunt were pursuant to a licensing and sales agreement we have with them that was required as part of the consent decree entered into with the Federal Trade Commission in connection with the acquisition of Schlumberger Electricity Metering in 2004. The sales portion of the agreement expires later this year.

In addition, MDC gross margins were lower in the first quarter of 2005 compared with the first quarter of 2004, as we have less royalty revenue this year due to the Schlumberger Electricity Metering acquisition.

While our total Company gross margin of 44% reflects nice improvement over the prior two quarters, I do want to point out that gross margins will move around from quarter to quarter, depending on the type of AMR modules we sell, the level of embedded AMR in our meter sales, and the specifics of our software sales for a given quarter. While 44% is a good center number for the rest of the year, we could easily see a several-point swing on either side of that in any quarter, just due to product mix.

Total backlog grew by 11 million during the quarter to 190 million, with 116 million of that deliverable over the next 12 months. We had another solid quarter in terms of new order bookings, 117 million in new orders during the quarter. That results in a book-to-bill ratio for the quarter of 1.1 to 1. We are delighted with those trends, and are working hard to close more business.

We have had some nice bookings so far in April, and revenues for the year are beginning to firm up. LeRoy will say a little more about order momentum in his upcoming remarks.

As I mentioned earlier, operating expenses, interest, and other came in close to plan. And operating margins for the quarter, excluding intangible amortization, were 13%. That is down about 1% from the fourth quarter. However, 13% operating margin in Q1 this year is more than double the operating margin in the first quarter of last year.

The metering acquisition is producing great results. And we are seeing the benefit of a number of actions we took last year to get more focus and improved efficiency across the Company, including our new organizational structure, which is now in place and running well. And our acquisitions over the last few years are now well integrated. We will continue to focus on operational efficiency and look for additional financial leverage as business scales up.

On a GAAP basis we have profit of 817,000 for the quarter, or $0.04 per share. Excluding intangible and debt fee amortization expense, and a small amount of restructuring leftover from actions in Q4, we had pro forma earnings of 7.3 million, or $0.32 per share, which is the best first-quarter financial performance in the Company's history.

We also had a very strong quarter in terms of cash flow, with 24.9 million in cash generated from operations. Capital expenditures in the quarter were just under 2 million, resulting in free cash flow during the quarter of approximately 23 million. We used 20 million of that during the quarter to make optional repayments on our long-term debt, leaving a balance of approximately 130 million on the term loan at the end of March.

As we have said, our primary use of free cash flow will be to repay debt, and there is no change in our plans in that regard. As noted in the release, we have made another 5 million optional repayment on that debt yesterday.

We completed two amendments to our senior secured credit facility during the quarter, which resulted in a 50 basis point reduction in our long-term interest rate. We also increased the maximums on our consolidated leverage in consolidated senior debt ratios for the second and third quarters of this year.

As you likely noted from our year end release, we have roughly 35 million of our long-term debt classified as current at the end of December. Not because of mandatory repayment requirements, but because we needed to make that level of payments in the first two quarters of 2005 to maintain compliance with our two leverage ratios. The increases to the maximum ratios provide us with a more comfortable level of cushion. And as a result, at the end of March we are only reflecting as current the mandatory repayment amount, which is just a little more than 1 million.

We filed a 100 million shelf registration statement in mid-March. As you all know, we issued a significant amount of debt to finance the Metering acquisition last July. From early on in the stages of that acquisition, the plan was to file a shelf so we would be in a position to take advantage of favorable market conditions for either an equity issue or other possible financings. The shelf was declared effective by the SEC at the end of March, and as a result we are in a good position to evaluate and monitor both the debt and equity markets and make decisions for any financing actions based on what we see. The benefit of having a shelf on file is that we can act quickly once the decision has been made.

In summary, our solid financial performance this quarter is the result of upward momentum across many fronts. We continue to focus on initiatives to improve earnings and cash flow through operational efficiency. And we like how 2001 (ph) is shaping up. I look forward to sharing our financial results with you over the next three quarters.

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

Thank you all for joining us today. We have had a gratifying and interesting quarter on a number of fronts. Obviously, we had a good quarter in terms of the results Steve has outlined. Clearly, this quarter's results continue to verify our assumptions regarding the acquisition of Electricity Metering. Strong orders, strong earnings, strong cash flow, we expect that trend to continue.

We also expect to see a continuing trend of electric AMR sales in our CENTRON residential meter versus stand-alone electronic modules, as more and more of our customers acknowledge the benefits of our solid state residential meters versus retrofitting existing meters.

We generated almost $25 million in operating cash flow in the quarter, and used the majority of it to continue to pay down our existing bank debt. The top shelf prepayment through yesterday now totaling $59 million. That trend will also continue.

We had a good bookings quarter, as utility spending continues to improve. The benefits of AMR continue to attract new customers in electric, gas and water. But Itron continues to win a serious piece of the available market.

Our software results were slightly ahead of expectations for the quarter, with which we are very pleased. The momentum in this area of our business is growing, driven both by the success of the group and by AMR sales, which further drive the need for Itron's valuable data application software.

I just came back from a visit to our software facility in Raleigh, where I met with engaged developers and marketing people beaming with the light of the success of our MV-90xi product, which is selling all over the world to replace the previous generation system.

We are pleased with the results of our Sarbanes-Oxley efforts -- no material weaknesses, a modest number of significant deficiencies, and a control structure that stood up to an incredibly rigorous review. We move forward into '05 with work yet to be done on Sarbanes for our Electric Meter Group; however, serious expertise and a framework has been built in 2004. A big thank you is owed to a number of people in Itron's Finance and Accounting Group for a job extremely well done. All of the above was the gratifying part.

The interesting part has occurred in the last 30 days or so, where we have seen a trend by our customers and potential customers who announce AMR implementation plans, some of those plans in great detail, prior to actually giving Itron or other vendors an order. Let me say a few words on that subject.

First of all, we are delighted. We are delighted as we now clearly see evidence that utilities are getting increasingly serious about AMR and its potential benefits. We are delighted because utilities are putting material capital expenditures in their budgets. And we are delighted because Itron is well positioned in the current environment to sell all three of its major products, AMR, electricity meters, and meter data management software systems. From my perspective, three opportunities for success at each potential customer.

While we are delighted by the very positive turn of events, we are also somewhat cautious. We are cautious for a variety of reasons. There is a long road between talking about an implementation and shipping product. Budgets get reviewed and reviewed again as conditions change. Pilots don't always turn into major rollouts. Utility Commissions can cause forward progress to stop on a dime. External issues and distractions can come into play, as we have all seen -- hurricanes, ice storms, financial issues at our utility customers.

We are cautious as there are more serious competitors in the market than ever before. Some are serious because they have good product. Some are serious because they are hungry. And hungry competitors generally mean price pressure, which we are seeing in the electric, gas and water AMR market. Some are serious because they really don't know what it costs to successfully implement a major AMR product.

So we are both delighted and cautious. We are delighted by the good forward momentum, and we are cautious because we have been in the utility business for over 25 years. The upward revision to our revenue, earnings, and cash flow guidance as detailed in our press release are increases we are comfortable with today, based on what we believe is fairly likely to happen as the year progresses

As our upgraded guidance reflects, 2005 will be a good year. It could be a great year. Time will tell. With that, let's open up for questions.

+++ q-and-a.

(OPERATOR INSTRUCTIONS) Steve Sanders, Stephens Inc.

LeRoy, I wanted to follow up a little bit on your comment toward the end. Obviously, there is a lot of agreement from public, private companies, consultants about the level of activity in AMR. That should obviously attract competition. You have been out there doing this for quite a while. Could you drill down a little bit and sort of characterize that competition as typical when you see a flurry of activity, or what looks to be potentially a shift in the entrance of some pretty significant new competitors?

Sure thing, Steve. We have an interesting level of competition today that we haven't seen oh maybe in a good while in the AMR business -- clearly increasing across the board.

Some of it is clearly being driven by the big deals and big deal prospects. And as deals get larger, you will look at them and you really don't want to lose them. They have wonderful things they can do to your factory. And so you are willing to let prices slide a little bit, because you are going make it up on the volume. And you are going to make it up on absorption in factories. So we are seeing a little pressure in that regard, just because some of these deals are big.

As I said, some of it is being driven by hungry competitors. You know we have got a -- all of us are now competing for a market that looks very attractive. And in some sense, the level of activity in the market is causing all of us to want to make sure we get a significant piece of the business. And so we are seeing just good old-fashioned hungry competition being driven.

We do have in some sense a bit of a new cast of players showing up in the marketplace, particularly on some of the big deals. And we see some of what I will call combines, if you will, players banding together. And as that occurs, everybody wants a piece of the business. But you can't have the same levels of pricing as you usually do, because there just is not enough room to go around. So we are seeing additional pressure across the board -- more in electric than we are seeing in gas and water, but we are seeing it begin to occur in gas, and we are seeing in the water world for sure. So a general level of increased pricing pressure.

That said, so far we have done pretty good margin-wise, because as the volumes have picked up, we have been able to reap some benefits as we have put the two companies together, our metering group and the rest of us, we have been able to get some synergies.

So as I look out toward the end of the year, let me say this as a heads up from Itron. We could see a point or two in margins slip. I don't know if that will happen. Time will tell. But competition is alive and well, and more so than it has been in the last couple of years.

Okay, and a follow up to that, when you look at sort of broadly the business case economics for AMR versus maybe two years ago, is it significantly better today? And this sort of goes to -- we have had the storms. We had the balance sheet issues at the utilities. And you have had big orders sort of come and go. But when you get back to the basic economics, are they getting significantly better as the installation costs go down and the functionality goes up?

Absolutely. They are getting better in a couple of ways. One, utility costs have gone up clearly. And they are looking at that harder than ever before. Two, I think utilities, as part of their business case look at kinds of reactions they are going to get out of their commissions. And their commissions are more encouraging than I think I have seen them ever in terms of reducing costs, looking at AMR seriously -- not just casually.

And then lastly, I would say, tagging right under what I just said, the cost of doing an implementation have reduced and they have reduced significantly. I mean one of the questions you could follow with, and I will answer it, is the cost for doing a fixed network installation are materially lower than they were two years ago. Everyone has worked hard on technology. As you guys read in our releases, we spend upwards of $40 million plus annually on R&D. And some of that is to drive cost out and provide better systems.

So I think all of those things have made a much more favorable business plan and economic outlook for a utility looking at AMR.

Two quick ones, and I am done. Did the Dominion order get booked in the quarter? And could you just provide a few more specifics on some of the purchasing and material cost savings initiatives that you have been undertaking?

Yes, the Dominion order was booked before the end of the quarter. And so that is included in that $117 million bookings figure.

As far as what we are seeing in component pricing all that, I will let Rob take a stab at that.

On component pricing, we are working real hard now that the synergies of the two companies' procurement divisions have been able to come together and work hard on everything from plastics to component parts, including all the way down to the IC level. Wherever there are common parts used in meters and in our standalone AMR technologies, we are going back to those suppliers and working hard on contract negotiations to bring our costs down. So that is an area of purchase leverage that we have seen start.

The other place as well is our absorption has been pretty looking pretty good in our factories, given the mix on volumes that we have been moving through there. As my Mima mentioned, slightly higher volumes in gas than expected. Water has held its own. That has held up our Waseca manufacturing facility. We did a little better than expected on the meters side. That helped absorption in our Oconee manufacturing facility.

John Quealy, Adams, Harkness.

On the margins -- the gross margins for the metering business, it looks like they came in roughly at 45%. I know you have talked about a couple of things affecting that. Can you give us a little bit more detail in terms of what was the greatest increase in terms of margin? For example, was it volume? Was it the level of embedded AMR on those meters? Could you just give us a little bit more color on what was going on there?

John, I would point to three things in particular, two of which you mentioned. Clearly, higher volume through the factory has been helpful. The proportion of meters with AMR, and also the type of meters that the AMR technology goes into. So a little bit of mix there.

And then the third thing is the fact that we are no longer providing the manufacturing support services for the former affiliate of Schlumberger that were very low margin services. We had phased out of those by year end. So it really it is sort of kind of evenly across the board coming from all those areas.

Let me emphasize one point Mima made and I made in my prepared remarks. We are seeing an increasing level of AMR inside the meters versus in the electric world, standalone modules. And to some extent we are driving that. It is obviously more beneficial if we can sell AMR inside a meter. And our customers are really moving more and more in that direction. So you are going to continue to see some margin goodness because of that. You are also going to continue to see a lower level of electric -- ERT product, or module product, than previous.

And as a follow up to that -- and LeRoy, I know you have said margins could bounce around a couple of hundred basis points there as we go through the year. But in terms of the overall capacity of margins on the metering business, a 45% level -- is that pretty much the top that you folks you think you can do in the near term, or is it going to really vary on volume and these types of things?

John, I think it will vary a little bit on margin and mix. And to just a give you a feel for how many meters we ship during the quarter that had AMR inside, roughly 35, or about a third -- 35% to about a third of them have our AMR technology in them. Another 20% have other vendors' AMR technology. And so we could see some improvement as that mix changes, but that could be offset by large volume discounts and many other factors.

Okay. And the final two questions I have -- staying with the industry side of things. This time around, with the apparent pickup in RFP activity for AMR across all three end markets, are you seeing a little different approach from Itron with your software offerings? I think it is a little bit more broad than it was, let's say, two, three years ago when we saw the last round of the major orders there. Can you talk about any new doors that software is opening, or is that just still an MV-90 upgrade right now?

We are -- and we really started this last year, but we are taking a more synergistic approach. Many of the large volume AMR customers are looking for other advanced uses of the information that the AMR devices are collecting. This is uses that are beyond billing. And we have a product called Itron EE, or Enterprise Edition. That technology is getting an awful lot of interest when combined with large AMR sales. We typically will almost always bid them together. But again, that is mostly focused on the large AMR deployments.

Okay, and the last question I have -- sticking with software, we are seeing some good growth in the top line, as well as some gross margin expansion (technical difficulty) line it looks like we are still at a loss. Can you give us some expectations of how that business is going to go in the next couple of quarters moving forward on the operating line?

Sure. As we have talked about in the past, John, we have clearly seen some improvements in profitability of the software operations on a stand-alone basis. We saw that in '04. We are seeing that in '05. I mean, clearly, on a stand-alone basis, it will be scale dependent. So to the extent that we see some nice increases in software revenues, the opportunity to get to break even are slightly better or a little bit more, but it is very much volume dependent and license dependent.

Still, I guess one other factor I would add that has been very helpful to our profit margins in software is a number of these software upgrades that Rob just talked about -- we are now able to see a higher installed base -- or a higher amount of revenue for maintenance off of that higher installed base. And so that is helping margins. That is a little bit slower pathway to profitability than clearly selling software licenses, but it does help the overall picture.

Sanjay Shrestha, First Albany.

First of all, congratulations on a great quarter. Just a couple of quick questions here. First one, what you guys didn't mention in your prepared remarks I believe the sales agreement that you had with Hunt Technologies for the AMR modules had a part of the SEM acquisition. That does expire at the end of this year, correct?

Sanjay, that is correct.

Okay. So should I read into that and say that maybe going into 2006, that should also benefit the margins?

Certainly, it will. And it depends on how much business they actually do for us this year, but yes. We have a bit of an anchor there that goes away.

Okay, great. And just to follow up on John's previous question, actually, you guys have done a great job here from an integration standpoint. But when we sit here and look at kind of like the levels profitably from the various segments of your business, Is there, other than software, is there some more that we can -- obviously, it is volume driven and all that. But is there some more that we can squeeze out of the overall expense structure that should be more than enough to offset that kind of a pricing pressure that you are seeing in the market from a competitive standpoint?

Sanjay, we are pressed in a couple of areas. We have got a lot of focus on making sure that we are squeezing out what I will call overhead efficiencies, wherever we can get them. And in fact, Rob and Steve are leading a group of people that we think are really doing some fine work. And yes, I think there is some goodness yet to be gained there, and we will see how it flows out through the year.

Sanjay, you can trust me, we work that issue every single day.

It seems that way. (indiscernible) agreed. And also a couple of quick ones, if I could. One, LeRoy, if there was any update related to the AMR opportunity in California or the Ontario market with the status on that -- what's happening? Could you get into some details on that?

Sure, Sanjay. This is Rob again. As you know, both our -- or may know -- both California and Ontario, Canada have government-sponsored initiatives for advanced or Smart Metering. We are working with the utilities in both of those areas, and their regulatory bodies stay abreast of not only changing regulatory moods and decisions, but also the directions that the different utilities are going in.

There is still a great amount of detail to be sorted out before we believe we will see any major activity in those areas. Utilities in California have all submitted AMR scenarios to their CPUC, or the California Public Utility Commission. The final CPUC decision is scheduled for sometime this summer, and could range from anywhere between a full AMR deployment on all meters to a partial deployment to no deployment at all, or to the possibility of just some trials.

In Ontario, there are approximately 95 utilities affected by the legislation. This is the Smart Metering legislation. Of those, 11 utilities that we are aware of are either implementing or have stated their intent to implement a proof of concept trial. We are working with approximately half of those trials in some different form or fashion. However, the ministry in Ontario has not yet issued its final rule. So we have not included any major activity in our guidance for 2005, and would not look for significant activity to develop until 2006 at the earliest.

Okay, that's great. And one last question, if I could. LeRoy, you actually mentioned in your prepared remarks that the pricing on the fixed network has gone down significantly. So could you share with us in terms of what has been the customer inquiries? And I take it that you are not expecting the fixed network to contribute a lot during 2005, but this certainly would represent a pretty significant opportunity going into 2006.

Sanjay, the level of activity on a proposal basis has just been astounding. We have got people working all hours of the day and night during fixed network proposals. And it is sort of interesting, because in some cases it is returning the same proposal over and over and over. Just float it (ph) and an utility comes back, take a look at it a little bit different way. And so it is not that -- there are a lot of different utilities looking for RFPs or RFIs on fixed network, but many of them on a repeated basis.

You know, my view between now and the end of the year, are we going to see a lot of fixed network revenue? Certainly not. We may see some modest amounts of that, but it is not going to be a big thing. There is just a long way road ahead in many of these things, because they are very complex. And there is always two or three people involved, sometimes even more than that. There's potential vendors. So, yes, I think you're right, '06 impact versus '05.

So then when the fixed networks system (ph) in 2006 and potentially the upgrade cycle that you might be looking at on your handheld unit could at least qualitatively suggest that we are looking at a pretty strong 2006?

I will let you come to that conclusion on your own.

Amy Mann (ph), JPMorgan.

It's Amy for Paul Coster. First question, customer concentration, any 10% customers this quarter?

No, there weren't, Amy. No 10% customers this year. We did have one 10% in the fourth quarter, but as you look at the first quarter results for both '04 and '05, there were no 10% customers.

Internationally, what type of momentum are you seeing, and then in what markets? Has anything changed, I guess, since the last quarter -- the last call?

I'll take that one. Our financial results are continuing to improve, and should continue to improve throughout the course of the year. We have some exciting new things happening internationally. We launched six new international products during Q1 alone. Two great examples of those were a new handheld computer for the Japan marketplace. We have very strong market share in legacy technologies there. And we already have some backlog for that new handheld computer, which we plan to start shipping here sometime later this quarter.

And a new wireless fixed network for Australia water utilities has gone into trial now, and actually been deployed in Australia at one water utility for trial purposes. We had great performance in Europe with our first mobile workforce sale. Just to take you back a little bit, that was a technology that came from our service -- or eMobile Data acquisition. That was exciting news to start seeing it get some traction, not only in North America, but outside of North America. And our profitability in Europe seems to be holding up quite well, as well.

Also finally in Mexico, South America and the Caribbean we are continuing to perform extremely well in those three areas. And those are three fairly new areas for Itron. Some of that came from not only Itron's hard work, but the Schlumberger Electricity Metering legacy that they had in those areas as well.

Do you have a geographic breakdown of revenue?

I do not have a geographic breakdown of revenue.

We will look for that, Amy, and we will come back up if we can find that on the call in just a minute.

Okay, great. My last question, LeRoy, there has been a lot of discussion I think around changes in the utility CapEx spending environment as of late. And I would be curious to hear your perspective in terms of how you see that changing this year versus last year?

Amy, we just see a much stronger outlook for our utility capital spending. And others do as well. We have seen enumerable articles and constant speakers talking about increases in CapEx from '04 to '05, specific increases in IT spending, all the way through '07.

We spend, as I think you know, an awful lot of time with public utility commissions in more of a consultive role. And they are very interested in utilities spending money that will make them more efficient. And one of those areas is certainly AMRs. So we are encouraged. We really are. So I think if we can keep utilities sort of focused on being utilities, and if we don't have any external jumps for any specific utility that is trying to do a major project, -- which by the way hurricanes and that kind of thing happen and will derail a project. But I am encouraged. I like '05 and '06 (indiscernible) capital spending.

Amy, just to follow-up on your question too. We don't have a geographic breakdown per se by country. But international revenues were about 7% of our overall revenues during the quarter. And that is a little bit higher than what we have been trending.

Bill Dezellem, Davidson.

In the concluding remarks, you all mentioned that it looks like the year is off to a good start, and it could be that you're going to have a good year, but you could have a great year. And yet, when talking about fixed network and Ontario, those are really 2006 phenomenons, assuming that they come together. So, again, it does like 2006 could be a great year, but what are the dynamics that need to come together to make 2005 not a good year, but a great year?

Bill, if you will looked out in our pipeline, if you will, you will see a lot of perspective orders for mobile AMR. You would see a lot of perspective orders for meters, solid-state electric meters. And you would see some interesting perspectives, even internationally.

As we give you guidance for the rest of the year, we are counting on what we know will very likely happen. There are some things in there that are very large that could happen. And we will see what the utilities do relative to how fast they want to implement. And if that happens, it is going to be a great year.

I don't hesitate a moment to tell you that that which is going on in California -- we just don't have in our financial planning. We are spending a heck of a bunch of time on it, but we are not counting on any of that in 2005. And frankly, I don't know that much of it will occur in '05, no matter who gets it, if it is ever awarded.

But we have some very nice stuff, some of which has been in the press lately, that has a high likelihood of happening. And depending on the schedule that the utility implements on, it could turn into a very, very exciting prospect for us.

And then relating to those comments, first of all, do we need to see some orders and announcements from you all in the second quarter, if we are actually in fact going to have some benefit to 2005?

And then the second question, somewhat related, and maybe you have already answered it, but if you can provide additional color that would be great. What does the prospect look -- prospect list look like for the big deals? The press release I received, the prospect list was omitted.

I am not sure what you're talking about in terms of a prospect list.

Mima, I was just joking relative to LeRoy making reference to, if I could see the prospect list.

Oh, okay, very good, very good. (multiple speakers) A little too intense. Bill, on the other question of, do we have to see orders in Q2 to have a great '05. Well, big orders in Q2, or serious orders in Q2, it would help to create a good '05. But I would make the point -- one of the things that I like about our position right now is we have a pretty good machine here that can crank out AMR and crank out meters, and we have a wonderful suite of software products. We can get orders late in year, and they can make the year very nice.

So you do not have to get the orders in the first half of the year to truly benefit the '05.

No, they don't, but I would say that if you look at the current guidance, that while we have given for the year, we certainly haven't internally projected a big hockey stick to hit those numbers.

And then, Rob, you had mentioned that you were looking for common parts between meters and AMR to try to get improved vendor pricing. And we were curious, to what degree do you see the opportunity in the future to design in more common parts, where today they are similar, but they are not the same, so you can't go to vendors, but you could if you did some redesigns?

That is being looked at. We have continuous meetings between our product marketing and engineering staffs to take a look at the feasibility -- sort of a cost/benefit analysis of the design cost versus the actual parts savings. And so far, we haven't seen a lot of that, other than continued integration wherever possible, and going back to common vendors on common parts and exercising our largest -- larger purchase power.

Jerry Carson, RBC.

Can you circle back on the competitive issues for a moment? First, to just try to get a little update of where we stand on the solid-state electric meters side, vis-a-vis GE, Inventis and those others. Are we continuing to see them become more active in the marketplace?

Yes, they are all increasingly being more active as they are trying to push their recently introduced products. And they are being successful in places, so we expected to see them.

Not to pretend to speak for them, but having introduced those products, I'm sure that they would love to begin to slow down sales of electromechanical products and increase electronic. And so we are seeing them all over the place.

And is that from a marketshare perspective or pricing that you might be feeling them or not? Is it just a total kind of upward lift, rising tide so to say?

Certainly from a pricing perspective we are not seeing any pressure from those entrants to (indiscernible) solid state. We are not seeing any loss of marketshare there at all. What I think we will see over time is a general winnowing of the amount of the business that is mechanical in nature, and an increase in the size of the pie, if you will, of electronics so that segregation is going to change a bit. But we are not seeing any -- or feeling any pressure on our overall marketshare in the electric meter business.

Okay, and next question, talking more about fixed network communications, it seems like some of your competitors are trying to position themselves as -- I am going to try to distinguish this and say they are calling themselves full, two-way communication. And perhaps some of your capability isn't what they might call full, two-way communication in the fixed network.

Can you talk about that a little bit in terms of your positioning, as it seems these are going to potentially be more and more the overall AMR pie, number one.

And then number two, do you believe the effectiveness of the technology is the number one driver, per se, or is it still cost?

A couple of questions, a couple of comments. Let me start by reminding, frankly, everybody on the call, because I know our competitors are trying to position us as being non-two-way. But every month Itron products communicate to meters in a two-way fashion over 2.5 billion intervals of data to over 600 customers.

The point is we know how to communicate two-way to meters. And we have been doing it for a very long time. We do it with a variety of technologies. And there are times when that two-way communication is beneficial. There are times when that two-way communication, we believe, is an excess level of complexity.

Now if the fundamental of your communication technology thrives on two-way, you promote that as being the right thing to do, whether or not it might be the right thing to do. We are engaged in a number of customers and discussions about two-way for a variety of things -- resetting registers in meters, turning things on and off.

And there are some of those things that require communication down to the meter. If there is a switch in the meter to prem (ph) service off, you need to be able to communicate to it to do that. If you want to do time of use or time of day or intervals, we don't believe that that is the most cost-effective way to build a network, and so we tell customers that, which our competitors at times accuse us of not being able to do two-way, which, in fact is not the case.

So you know, a lot of statesmanship (ph) goes on in fixed networks. A lot of statesmanship goes on along two-way. And in some cases, utilities want two-way because they like that meter to be the center of communications, or communication hub. As being a bit more of a communication person myself, I am fond of telling utilities that the meter is a pretty bad communications hub. There are better ways at times to do that.

And do you think -- in your view, that effectiveness, if you will, or overall effectiveness of the technology or cost is still kind of the number one ultimate driver?

Absolutely. At the end of the day, and it is some of the dust that is settling in California. It is certainly some of the dust that is going to settle in Ontario. All of this stuff needs to be paid for. Some Chief Financial Officer ultimately looks at it and does real analysis, and says, we don't need all of those things. But we do need these things. And that is what drives this business. It is economic.

And the final question related to capacity on the AMR side. I am trying to recall, it was maybe sometime in late '03 or early '04, you were doing some CapEx work to expand, I think, Waseca capacity. Can you kind of talk about generally where you are on utilization today, and how quickly --? Clearly, there is -- I am just trying to drive toward with kind of all this stuff that is kind of out there in the pipeline, if some of it heads south (ph), how quickly you could respond?

We are able to respond in both factories, whether it is meters in Oconee or AMR technologies in Waseca. We are probably roughly 70% utilized in Waseca at this point in time. And that could even be 50%, given some additional plant and equipment -- actually more equipment than plant.

If you recall last year, early in the year, we expanded our facility in Waseca and added to it. We are now fully moved in, and fully up and running in there. We are also investing in some new line manufacturing technologies that increase our capacity somewhat more than going into -- or coming out of last year. And can certainly handle the business. Even if it were all to come, we would be able to deliver.

John Horisonni (ph), Warrington Capital (ph).

Leroy, a quick question. If the, and this might be a big 'if', if the Congress manages to pass an energy bill and we get a repeal of the Public Utilities Holding Company Act, what is your thought? Do you think that utilities buying other utilities or outside companies buying utilities will stimulate your business or will it add to kind of put things on hold?

My personal opinion is, it will in some cases delay, but over the long term, stimulate the business. No question about it. Every time a utility buys another utility or an outside investor buys a utility, they are looking for cost savings so that they can continue to improve their earnings picture.

One of the things that utilities do when they buy each other is they always tell the public utility commissions that they are going to reduce rates or hold them, because they are going to have all kinds of synergies. That requires cost reduction. That is what we are in the business of doing -- hard, every day, reducing costs of meter reading and reducing costs of electric meters.

So over the long term, great, John. Every once in a while you will see a project delayed because in the middle of an acquisition, those kinds of things just get delayed. So that one is sort of situational. But I like it. And by the way, I think we are probably going to see some form of that, whether we get Public Utilities Holding Act repealed or not, we are going to see some acquisitions here.

Okay. And just is there anything else? And I'm sure you are looking at this a lot better intell on this than I do. But do you see in what is sort of proposed on the energy bill now that would help you or hurt you or whatever? Anything that is lurking there?

Sure thing. The underpinnings of the energy bill in general came out of the House, and now waits for whenever the Senate is going to do. (technical difficulty) are good. Lots of encouragement around time of use, around Smart Meters. Some encouragement around distribution efficiencies; all of that stuff is good.

There are only policy initiatives in the House, not what I will call incentives in terms of perhaps accelerated depreciation. Last time we went through this drill, the Senate was where all of the interesting tax treatment and depreciation stuff cropped up.

I am some encouraged, to be honest about it. I think everybody else is showing initiatives in the energy area. The real fight is probably not around the things that are of interest to us, which by the way is probably good. So I think you might in fact see an energy bill this year. I think it could have some good implications. It will not have any implications for '05, and the real result won't show up until, I suspect, probably into '06, because there is an awful lot of investigation language. Go investigate this; utility commissions investigate this; utilities investigate this. And that is just going to slow everything down. But I think net net, I like what I am seeing.

Great, thank you. And great work on getting the quarter through.

Patrick Sorkin (ph), Kahaus (ph) Securities.

A couple of questions on the California market. Rob, you kind of went through an update there. We took a look at the filing that PG&E did on their preliminary AMR business case. And it looks like they are proposing a full rollout of 5 million electric meters and 4 million gas meters. They indicated in there that the plan was to use electromechanical meters versus solid state. That surprised me a little bit. I wondered if you had any reaction to that?

And then the second question is, PG&E appears to be the more progressive out of the three IOUs there. I was wondering how you guys felt you were positioned on AMR with them, both on gas and electric?

Again, my response is based on not spending daily activity talking to them directly. And in fact, the process that they have been going through has been conducted in a very, very official sort of one-way manner. The different suppliers, including Itron, are brought in. We submit responses to questions. We don't get a lot of feedback, frankly. And I think part of that is just due to the way that it is working, given that it is kind of a government-sponsored program.

So my comments are somewhat conjecture in mind. I have heard the same think you have, that they are looking more at retrofitting in the area of their electric metering side. But we have not received any confirmation that that is flat out what they are going to do. And I don't expect us to until, first, the state decides what it is going to do on the AMR project. And then secondly, who they pick and what the size of the deployment is going to be.

My hope is that some of that changes, and that at least a part of that service territory on the electric side goes solid state, but we just don't know. The indication we have is the same one that you just stated.

Your second question had to do with -- I can't recall it, to tell you the truth.

PG&E's response looks a little more progressive than San Diego and SoCal Edison and -- 9 million meters, 5 electric, and 4 gas. I assume you could have a combination of technologies that has a place on their AMR platform. I wondered how you guys felt you were positioned, both on the gas side and electric side?

Well, we are certainly in the mix, very active with them, right as recently as now in responding to questions.

The one thing that seems clear to me is that no one technology is going to fly for 100% of, not only the functionality that they have requested, but also for the mixture. Is more aggressive. If you define aggressive, or progressive, as being a very large deployment, 100% of the service territory, and technology -- so they are going to do a lot of things, they are certainly at the top of the list. However, Southern California Edison would probably describe themselves as more progressive because they are looking for something that doesn't exist today, and at a price point that doesn't exist. And they would consider that to be more progressive.

So it is really hard to pin them down. And it is hard to ask them to pin it down, to tell you the truth, because they are some subject to whatever the state decides to do or decides is acceptable.

Well, would you refer to SoCal Edison, when you look at their filing, they make it sound like they are going to develop something that is better than anything that is out there. And that they are going to develop it internally. And I am just not sure that is realistic in a short timeframe here. And that is why I think PG&E is more progressive, because they are talking about a full rollout. They have told the investment community that they are going to spend in excess of $1 billion here. So I was just curious as to -- I'm sure you have different feelings on -- it seems like there are less stringent gas requirements than there are on the electric side.

Yes, well I have the same observation you do. I think we have seen the same kinds of things. Right now, we are respecting the process that they are going through and being responsive to any of the questions that they ask us.

Alan Robinson, Delafield Hambrecht.

I'm sorry; my question has been answered. I thought I had taken my question off. Good quarter guys, thank you.

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

Great. Everyone, thank you very much. We appreciate your participating today. And as always, if any follow-up calls, feel free to give me a buzz, 509-891-3565. Thanks so much.

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