Itron Inc (ITRI) 2005 Q4 法說會逐字稿

Good day everyone and welcome to the Itron Incorporated Q4, year end 2005 earnings conference call. Today's call is being recorded.

For opening remarks, I would like to turn the call over to Mima Scarpelli.

Thank you very much. Good afternoon, everyone, and thank you for joining us. With me here in Spokane today is LeRoy Nosbaum, Itron's Chairman and CEO, and Steve Helmbrecht, Itron's Chief Financial Officer. Our earnings release today includes information on our outlook for revenue and earnings in 2006, and in today's call we will also be including discussions that are forward-looking in nature. The forward-looking information we are providing is based on what we know as of today, and is subject to a number of risks and uncertainties.

I would like to encourage all of you to read the forward-looking disclosure in our press release, which alerts you to a number of factors that can cause a differences between our expectations and actual results. You should refer to our 2004 Form 10-K, and our 2005 Form 10-Qa, for a more complete disclosure of specific risks and uncertainties related to Itron's business. 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 nonGAAP financial measures that we believe will help enhance your overall understanding of our current and our future performance. Schedules reconciling GAAP to nonGAAP financial information are included with our press release, and are also available on Itron's external website. Steve is going to start the call today with a discussion of financial highlights for the fourth quarter and the full year 2005. After that, LeRoy will follow up with some additional comments. As always, at the end of our prepared comments, we'll be happy to answer any questions that you have for any of us.

I'd 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. As our earnings release reflects, our financial results for the quarter as well as the year were very strong, with record-breaking results in almost every area. We exceeded the high end of our October estimates, and were also better than Consensus estimates for the quarter and year. Revenues of 553 million were $13 million more than the high end of the range we gave at the end of October. Our installation at Progress Energy is going very well and as a result, we had more revenue related to this project in the quarter, than we had previously projected.

In addition, year end order activity was very strong, which resulted in higher sales during the quarter. Pro-forma earnings per share were $0.59 for the quarter, and $1.84 for the year. The $1.84 for the year is $0.09 better than the $1.75 high end of our guidance given at the end of October. About half, roughly $0.05 of the upside, is due to a slightly better than expected income tax rate for the quarter and the year.

Revenues were $160 million during the quarter, which is an increase of 22% over the fourth quarter 2004. Progress Energy contributed a little more than $20 million to revenues in the quarter, almost 13% of total revenues for the quarter. By comparison in the fourth quarter of 2004, we had a different customer, Xcel Energy that contributed almost $14 million in revenues, or 10.4% of total revenues for the quarter.

For the full year revenues were $553 million in 2005, compared with $399 million in 2004. A good portion of the growth in 2005 resulted from a full year of revenues for electricity metering, versus six months of revenues in 2004. But importantly, we had strong internal growth across all of our segments in 2005 compared with 2004. That growth is most visible when you look at total AMR unit shipments in 2005 compared with 2004. Since both of our hardware segments contained sales of AMR, it is not always easy to analyze trends in the AMR from just comparing segment revenues.

As a result, we have added a new table to our release this quarter, which is included in our segment reporting schedule, that provides information on Itron AMR unit shipments from period to period, regardless of what form they take. Standalone modules we manufacture and sell, electric, gas and water. Itron electricity meters with our AMR inside, and other electricity meter vendors that embed our AMR technology inside through licensing arrangements with us.

The table shows Itron AMR unit shipments in the fourth quarter of 2005 were almost $2.4 million, or 81% more than the 1.3 million shipped in the fourth quarter of 2004. For the full year 2005, Itron AMR unit shipments were 7.4 million compared to 5.5 million in 2004, 34% higher.

Moving to software, revenues increased 2.9 million in 2005. However, I would point out that revenues in 2004 included $2.8 million for businesses we exited in 2004, transmission line design and joint use. Excluding revenue from those businesses in 2004, provides growth for our software segment in 2005 on a more comparable basis, of approximately $5.7 million, 12% higher.

As we announced last month, new order bookings in the fourth quarter of 2005 were very strong. New orders were 149 million in the quarter, an increase of 16% over fourth quarter new orders in 2004. For the full year 2005, new orders were 655 million, almost twice what we booked in all of 2004, which as a reminder, only included six months of new orders for electricity metering.

Our total Company book to bill ratio was 1:1 for the fourth quarter of 2005, which is comparable with the fourth quarter of 2004. For the full year 2005, our book to bill was 1.3:1 compared to 1:1 in 2004. Backlog increased nicely in 2005, and total backlog was 324 million at the end of December, compared to 179 million at the end of 2004. 12 month backlog was 188 million, compared with 97 million at the end of 2004.

This increased 12 month backlog gives us very nice visibility heading into 2006. There is quite a bit of detail in the release, comparing gross and operating margins in the fourth quarter and full year 2005, to the same periods in 2004. I will not go through those details in the call, but will instead make some additional comments about sequential quarter changes in gross and operating margins.

Total Company gross margin was 41% in the fourth quarter of 2005, that's down slightly from 43% in the third quarter of 2005. Meter data collection gross margin was 40% in the fourth quarter, compared to 45% in the third quarter. About half the decrease resulted from writing off excess inventory related to stand-alone electric AMR product and service inventories for a handheld meter reading product. With the balance of the decrease related to changes in the mix of products sold from quarter to quarter.

Electricity metering gross margin was 39% for the fourth quarter, compared to 41% for the third quarter. We incurred a charge in the fourth quarter of approximately $2.4 million, or 3.6% of revenue, related to a warranty charge that primarily affected two customers. On the other hand, a favorable product mix partially offset the charge. Software gross margin in the fourth quarter was 47%, up from 39% in the third quarter due to the increased portion of software revenue driven by licensing sales.

Pro forma operating income was $25.7 million, or 16.1% of revenue for the fourth quarter, compared to $23.9 million, or 16.9% of revenue in the third quarter. Decline in pro forma operating margin was primarily due to the lower gross margin in the quarter. Pro-forma operating income for all of 2005 was 85.5 million, or 15.5% of revenue, compared with $45.5 million, or 11.4% of revenue in 2004.

During the fourth quarter, we recognized income tax benefits of approximately $8 million, from the realization of prior years deferred tax assets related to foreign subsidiary operations. We were able to realize the benefits as a result of work we completed during the fourth quarter related to legal entity restructurings, that resulted in a net tax benefit during the fourth quarter for GAAP purposes of $4.6 million. For 2005, we had an overall net tax benefit for GAAP of $5.5 million, which is the normal tax provision offset by the $8 million tax benefit this quarter, and the $5.9 million tax benefit in the second quarter, related to prior year R&D tax credits. Pro forma net income excludes tax benefits for those two items.

Pro-forma net income was $15.3 million for the fourth quarter, or $0.59 per share, which is the best quarterly earnings performance in the Company's history. Pro-forma net income was $45.6 million for 2005, or $1.84 per share also a new record. EBITDA was $28.7 million during the fourth quarter of 2005, compared to $12.7 million in the fourth quarter of 2004. For all of 2005, EBITDA was $97.7 million, more than double the $42.4 million in 2004.

We ended 2005 with approximately $33.6 million in cash on hand. That is a higher cash balance than we normally carry. Approximately $10 million will be used in a few weeks to pay bonus and profit sharing earned in 2005, and as noted in the release, in the first six weeks of 2006, we have already made $9.7 million in optional repayments on our variable bank debt bringing our remaining balance to $15 million.

Accounts receivable increased by $9 million during the quarter, due to the increase in revenues. Day sales outstanding or DSOs have remained relatively constant, and were 54 in the fourth quarter of 2005, compared to 55 in the third quarter, and 57 in the fourth quarter of 2004.

Inventories decreased by approximately $1.2 million during the fourth quarter, as we began recognizing revenues for the Progress Energy installation. Inventories had increased in the second and third quarter of 2005, as we built inventory for that project. Inventory turns were 5.2 during the fourth quarter, compared to 5.0 in the third quarter, and 4.4 in the fourth quarter of 2004.

Our total debt balance was $167 million at the end of December, up slightly from $156 million at September 30th, but down significantly from $278 million at the end of 2004. We added new debt during the quarter of 14.8 million for the purchase of a new headquarters facility. The rate on that debt is slightly lower than the rate on our bank debt. So we will continue to pay down the 15 million in remaining bank debt, before paying down the 14.8 million in real estate debt. Debt as a percentage of our total capitalization was 34% at December 31st 2005, compared to 60% at December 31st 2004.

It is worth pointing out in terms of balance sheet changes that our retained earnings at the end of December were $4.6 million. This is the first quarter that we have had a positive retained earnings balance since 1999.

In summary, as we look back at 2005, we saw increasing customer demand for our products and services, and increase in capital spending by utilities. We began to see the bottom line results of changes made during the last 12 to 18 months to run the business efficiently. And we surpassed almost every expectation we had for our financial performance at the start of 2005. That concludes my remarks today on our financial results.

Now I would like to turn the call over to LeRoy Nosbaum, Itron's Chairman and CEO, for some additional comments.

Thank you Steve. Good afternoon everyone. Thanks for joining us today. Always nice to set records, and 2005 was certainly that kind of year for Itron. We exceeded our internal targets for revenue earnings, cash flow, and a number of other key operating metrics. And with $655 million in new order bookings during the year, we head into 2006 with a backlog more than double what it was a year ago, giving us confidence that '06 will be a good year for Itron. I want to take a few minutes to review our successes in '05, and talk about our expectations for '06, in bit of a different light than Steve just took you through.

Let me start with revenues for 2005. Hardware revenues were over $500 million during the year, driven by an economic value proposition for our electricity metering and our AMR products that is very compelling.

During the opening speech at last week's DistribuTECH Conference, the president of Tampa Electric talked about the returns that TECO is experiencing, as they transition from mechanical meters and handheld meter reading, to solid state meters and mobile AMR. TECO's meter reading costs have dropped from an average of $0.50 per read, to an average of $0.05 per read. That's a cost decrease of 90%.

He also talked about the decreases in safety incidents for their meter reading staff of over 50%. Those kinds of impressive results have led TECO to the decision to continue the deployment of solid state meters with mobile AMR throughout their territory. They have already committed to another 70,000 units in 2006, and to the decision that all new construction would be done using solid state meters with AMR. A review of our top customers in 2005 indicates that TECO has a lot of company, in terms of utilities taking advantage of the benefits, that Itron's hardware solutions provide.

Let's look at revenue by market segment. We had a phenomenal year in gas AMR, with significant business from customers such as Piedmont Natural Gas, Public Service Electric and Gas in New Jersey. Atlanta Gas Light, Equitable Gas, Southwest Gas, and Xcel Energy. We had a good year in water AMR, with significant business from Badger Meter, AMCO Water Metering Systems, and Aqua America. We had a great year in electricity metering and electric AMR, with significant business from Progress Energy, Xcel Energy, Dominion, AEP, Con Ed, National Grid, Florida Power and Light, San Antonio Public Service, Southern California Edison. And from business with other companies in this industry, such as Telnet, General Electric, and SmartSynch. All-in-all a great year for hardware sales in 2005.

And as I review the pipeline for hardware orders in '06, it is clear many opportunities exist. We have multiyear contracts with a number of gas customers I mentioned earlier, and are working to close significant expansion business with others. In the water arena, we are currently working to close business with two large municipals for fixed network, 2-way AMR deployments. When we can, we'll announce those orders and the customers.

In electric, we've just received an order for solid state meters from a major customer who is the last holdout buy mechanical meters, solid state momentum is strong. Itron is the leader. As well in electric, we have over 2 million units in the revenue plan for Progress Energy.

We have over 20 major utilities with serious potential for orders in 2006. And we're in the middle of a successful fixed network AMR trial at the Southern Company, that we expect will expand this year. While we're not the only technology on trial at the Southern Company, our meter data management suite of software, is the software platform that is gathering and managing reads from all of the trials. And we're still in the game in California. Working with the large IOUs, as well as major municipals.

Let's talk a bit more about software. In 2005 we had our best year ever, in terms of new orders for software, which led to increased revenues in '05, but which also gives us nice momentum going into 2006. We had over 160 customers upgrade from our industry standard software for commercial and industrial metering, the MV-90 product, move to our faster more user friendly MV-90xi solution. We have a similar number remaining to be upgraded, which bodes well for 2006 and beyond.

We joined forces with the U.S. Navy, to provide software tools, and consulting and analysis, to support more efficient management of the Navy's energy resources at its facilities and bases worldwide. Our work with the Navy had just begun as we exited 2005. It will continue into 2006 and beyond. We anticipate similar opportunities with other governmental agencies.

As we announced in January, we have just signed our largest order ever for our distribution line design software with Pacific Gas and Electric Company. With more than 123,000 miles of electric, and more than 40,000 miles of gas distribution lines, PG&E operates and maintains one of the world's largest energy delivery systems. In 2006, PG&E will implement Itron's LD-Pro software tools, for use by the utility's 800 design engineers for both electric and gas distribution.

Itron's LD-Pro software significantly reduces cost for utilities by automating design, saving on materials, and saving on labor. Cost reductions in the 15 to 20% range are typical. Data management systems, such as the one I mentioned earlier at the Southern Company, are now well defined on all of the large RFPs.

Meter data is now clearly of importance to utilities beyond billing, with applications aimed at revenue assurance, distribution asset analysis, energy management, and energy forecasting to name a few. Other competitors are helping to build interest in meter data management market, as evidenced by ESCO's recent announcement of their acquisition of Nexus. For both our hardware and software businesses, our expectation is that the industry momentum we experienced in 2005, will continue into '06.

Let me now spend a few minutes on operating margins 2005 and expectations for '06. Our Perform operating margins improved from 11.4% of revenues in 2004, to 15.5% of revenues in 2005. Our acquisitions are now well integrated. Our focus on internal focus improvements is showing. We are proud of our ability to have managed a very large acquisition, while improving efficiency throughout the organization. Most notable is the decrease in product development spending as a percentage of revenue, from 10.1% in '04, to 8.5% in '05.

In 2005, we invested over $47 million in product development, launching over 25 new hardware software products during the year. New capabilities that further expand our opportunities with existing and new customers. This include such products on the hardware side, as water fix network 2.5, water fix network 433 for international, mobile collector 2.5, high powered CENTRON meters with integral data and positive outage indication, new handhelds the FC-100, and the FC-200r. The new AMR modules for gas customers.

On the software side, new product launches included, integration of Itron, enterprise edition and MV-90, new products for distribution design, new products for meter reading fuel collection systems, and new products for capacity forecasting and planning tools.

For those who think we're standing still waiting for others to catch up, think again. In 2006, we'll continue to invest in new product development at a rate of about 8.5% of revenue. A serious portion of that will be directed at AMI. While we believe that for a number of years most customers will be continuing their interest in mobile AMR, we are seeing increased interest in advanced metering, and communication means, which many are calling AMI. We all know about California and Ontario, and there is also activity in Texas and Oregon.

One of our key product development programs in 2006 includes an investment for products targeted at this currently small, but potentially significant segment of the market. That is interest in AMI in one of its many forms. We currently we have a team of 39 of our best hardware and software professionals dedicated to this project, which includes developments of Itron proprietary communication means, public communication means such as Wi-Fi, Wi-Max, BPL, and others. Integration of technology into our centron and other solid state meters. And chip-based development to compliment all of the above. We are not ignoring AMI.

Let me turn to some comments and thoughts on our international business. In 2005, our international was about 7% of our overall revenues, up from 6% of revenues in '04, and 5% in '03. In 2005 our international operations were profitable. Compared to a small loss in '04, and a larger loss in '03. Truly trends that are moving in the right direction.

In 2005 we commenced a handheld system upgrade for Tokyo Electric Power in Japan. That's about 5500 handhelds reading 27 million meters. In Qatar, our customers Itron handhelds to read out in Arabic, to reduce the cost of meter reading, and to pilot radio base on-site meter reading. And in [Doha], we have a high-rise water fixed network trial, where we have already proven our capability in leak detection.

We have begun selling electricity meters into Brazil. To date, we've received orders for approximately 85,000 CENTRONs, of which a quarter have already been shipped. The Brazilian economy is growing. The electricity metering market in Brazil is as well. Foreign owned utilities are investing there for growth. We like our opportunities in Brazil, and other parts of South America.

I just returned from a two-week visit to Japan and Europe, and I'm very happy to report that we're seeing momentum in the Far East, and in Europe. Itron has been doing business in Japan for over 15 years. While in Japan I spent time with customers, distributors, meter manufacturers, and strategic partners. I came away very impressed with the opportunities that are taking shape, and with the great relationships we have built with numerous Japanese companies.

In Europe we acknowledge that there's a lot of AMR activity in Sweden and other parts of Scandinavia, in which we are not participating. So we spent some time with various parties in Europe, finding how to position Itron to have some meaningful play in that market. We're not there yet. We will be. Itron has a lot of activity in international markets, setting the table for some growth in '06, but for more meaningful growth in '07 and beyond.

I have one other topic I want to bring to your attention today before closing. Mima Scarpelli, who has headed up our Investor Relations program at Itron for the last 12 years, will be retiring this coming September, in order to devote more time to her family. Mima has been with Itron for over 20 years, and has played a key role in Itron's success, and in developing the successful Investor Relations program we have in place today. We will certainly miss Mima, and I know many of you will as well. While departure's such as Mima's are never easy, I'm pleased to announce that we have named someone from within the Company to take Mima's place. That person is Dolores [Ducett].

Dolores has been with Itron for over 17 years, serving in a variety of roles, financial operational and sales support. Dolores brings a deep understanding of Itron and the industry, as well as a strong financial background. This will make for a smooth transition for Itron and you over the next six months time.

Let me close the call today with one final thought. Not on was 2005 a year of outstanding performance for Itron, it was a pivotal year from a market perspective. As the market has matured, we no longer have to convince utilities, that solid state meter technology and automated metering are good ideas. That challenge is long behind us.

As utilities have established proven business cases for the economic and other business advantages of these advanced technologies. Now the conversion conversation is around price, timing, and commercial considerations. Various in which Itron is the industry leader is strongly positioned to be the technology partner of choice.

Itron enters 2006 leveraging the fact that every time we play, we have three ways to win. We can win with AMR business, we can win with meter business, and we can win with software business. Quite often, we win with all three. Thank you for your interest and attention today.

Operator, we're now ready for the question and answer session to begin.

Thank you sir. Today's question and answer session will be conducted electronically. [OPERATOR INSTRUCTIONS] Our first question comes from Steve Sanders with Stephens Incorporated.

Good afternoon.

Hey, Steve.

Impressive quarter. First, Mima, thank you to you for all the help over the years. It won't be the same, but we're looking forward to getting to know Dolores.

Thank you, Steve. I trust, I guarantee she'll come up to speed very quickly.

And LeRoy, just very broadly. In your comments it sounded like you were obviously excited about '06. You go into the year with a great backlog, and what sounds like a very good pipeline. But it sounded like you were potentially more excited about '07. Is that a fair characterization?

Steve, I'm actually really excited about both years. I think clearly as you point out, the back log going into '06 gives us an opportunity to have our sales guys working on the back half of '06, rather than the front half, which is really, really important. And in that process, I think that just sets us up for '07.

The stuff I talked about Re:international, I'm very pleased with some things we started there, and frankly excited coming off the brief trip I have made, and the stuff we're doing in South America. So, yes, I love '07. Generating the kind of cash we're generating, I think we've got some exciting opportunities ahead of us, to expand the business beyond just organic growth.

Okay. On the progress installation specifically, obviously a big fourth quarter. How should we be thinking about that, in terms of a run rate for '06?

Steve, this is Mima. We have about 2 million meters left to revenue on-progress. And that will roll out, you know, pretty close to what it did in the fourth quarter for the first three quarters of the year. Then it will start to taper off in the fourth quarter, and maybe tail a little bit into 2007.

Okay. And then on the gross margin, it sounds like if we adjust for a couple of charges that the meter side of the business is still in that 41 to 43% range, and AMR is also running in the low 40s. Is that a reasonable way to think about it going into '06?

Yes, it is.

follow-up on the software. You obviously had some nice wins recently, macro factors seem to be in your favor, the products seem to be there. Do you view '06 as a breakout year on the software side, or are we thinking about that more in terms of '07?

I mean, breakout is probably in the eye of the beholder. I think we're going to continue to see good growth. As you note in the financials, we're still not making money on software, but I think by the end of the year, we have a good chance of doing that. What I really like about software, as I mentioned, utilities now are figuring out that if they're going to do complex things with meter reads, they simply have to have meter data management software.

I think a lot of utilities are going to take notice of what's going on at PG&E with line design software, so I'm enthused there. So, yes, we could see a breakout year. We'll wait and see that. But certainly we're going to have a better year in '06, than we did in '05. Feels like the corner's turned a bit there.

Okay. On the handheld business, a similar question. It sounds like momentum built throughout the year in '05. You are going into '06 with some good indications on that business. Is that a significant growth opportunity, '06 versus '05?

No, Steve, not necessarily, no. Handheld revenues will come, and go as the upgrade cycle comes and goes. We obviously had a very, very nice second half '05 with the upgrade that LeRoy mentioned with Tokyo Electric Power in Japan. We actually would expect to see handheld revenues flat to maybe slightly down in 2006. Obviously that will be offset by growth elsewhere on the hardware side.

Okay. Just a final question LeRoy, the balance sheet is obviously in great shape. The cash flow is strong, how should we thinking about M&A going forward? Are you seeing some opportunities that might make sense?

Steve, I think as we look out both domestically and internationally, there's a number of opportunities. We certainly have been spending a good deal of time in the last couple of quarters, thinking about how we might expand our presence in the international market through acquisition.

Part of what I was doing around the world, was getting my own mind wrapped around some of that. I think domestically, there's probably some things that we have done as well. So yes, I would say acquisitions are in our mind in '06, and we probably has the ability to focus there a little bit more than we did in '05.

Thank you very much.

Next we will go the line Paul Coster, JP Morgan.

LeRoy, perhaps going back to the growth rate question, looks like it's about $0.10 top line in '06. Sounds like '07 similar kind of expectations. Is this the sort of long term growth rate that we should be thinking about?

Paul, I think 10% to 15% on average is the kind of growth rate that the AMR market plays, meter business around 3 to 5 depending on a little bit on AMR. So for us, 10 is not a bad number. The whole number is getting pretty big. To grow that faster organically is difficult at best. Acquisitions certainly make a difference there.

Got it. And the business model, as we look out sort of two, three years from now, do you think it's going to be much different? It feels like gross margins should benefit a bit from software, as we go forward.

If we can get the software business to grow a little bit faster, we'll get some goodness there. Clearly that's hopeful as we look out, hardware margins, we think we can maintain while we've seen some industry price pressure with big deals, our cost capabilities in that arena have, by and large kept up. So, yes I think model should be about the same.

Are you experiencing any gating factors or component constraints?

Yes. You can get components, whenever you want to. From time to time, you'll see a particular component will get tough because a vendor's got a problem. It's not a supply problem overall. So still lots of components out there.

How much spare capacity do you think you have until you have a step function increase in investment?

Capacity's an interesting question for us. As we sit today, one of the things that we're somewhat blessed with, is we have a lot of physical capacity, both in Waseca and at [Alcony] so we have floor space. The next question is, do you have manufacturing capacity? We clearly have four modules om Waseca, lots of spare capacity.

Progress has chewed up a lot of capacity in Alcony. However, coming in the fourth quarter, I was concerned about capacity, I turned to Malcolm, and he turned to his guys, and they started doing some pretty quick adds to where we made it through the fourth quarter, we're not into Q1, and we have good production levels, that if we more capacity we can add that quickly and inexpensively, so I would say generally speaking, we don't have any capacity problems as we look from now, out for the foreseeable future.

Okay. Last question, to what extent is the improved visibility a result of the 2005 Energy Act?

None. Absolutely none. We have seen no significant 2005 Energy Act effect. The place we get closest to seeing some is the contract with the Navy, although that work had started long before the Energy Act got passed.

I do think the Energy Act is probably going to pressure some of the other governmental agencies, to do exactly what the Navy is doing. I think as we get more toward the back half of '06, we are going to see some utilities and some commissions sorting out what that Energy Act actually means, and so we may see a little bit of upward momentum back half of '06/'07. So far Paul, we have no appreciable impact whatsoever.

Great. Thank you very much.

Now we'll turn to John Quealy, Canaccord Adams.

Good afternoon. Congratulations folks!

Thank you, John.

LeRoy, more broadly first for you, by my numbers you are about five quarters into an uptick in AMR metering spending. Can you characterize for us how the flow of business has changed in these sort of mid-term innings, where the book of business you're getting is impressive, but can you characterize who's coming to the table now to sign up for AMR, and how that factors in the competitive landscape for you folks. We all know the big guys out there, in terms of the big jobs, but clearly this is more than just big jobs coming to the table.

I think you look in two places, John. One, you look at existing customers that continue to expand, and I talked about some of that. You look at other big customers that for one reason or another, just simply refuse to let people do press releases on them. I rattled off sort of two handfuls of them. In the gas area, we have had a significant increase.

And it looks like it's going to keep on going at least for a while in '06. In large gas companies doing AMR. Those have nicely been long term contracts that build backlog not only for '06, but '07, and in some cases even beyond that. So that's been very much the case, and as I think about the electric market, we see some of the same, I mentioned some utilities today that I haven't mentioned before, and it has been the large, but not mega-deals.

So you know, everybody knows about Progress, but we've had a lot of size $20 million orders that we either said, we got a $20 million order with no utility on it, or didn't mention it at all, because we just have been precluded from doing that. So it's that mid-level utility that says, okay, here we are and we're going, and we're going to do AMR.

We just aren't having to convince utilities anymore that AMR is the right thing to do. We are often having to compete or to look at price versus, what is pay back for a utility. As I've said to my guys here, I think we've turned the corner in the market, it's maturing, it's now a matter of price and competition, rather than concept selling.

On the fixed network products, it seems like you're getting some early traction with the 2.5 version, can you just give us a little background, how long has that been put into the market in componentry form, and it sounds like it's getting well received here right out of the blocks.

Yes, we've had stuff out at one customer or another for about 6 months now. And 2.5 is a 2-way water fixed network product. Really working well, very pleased with it, and expect to see some expansive business there as we continue on to '06.

Just a last couple numbers questions, looks like you did about 48 million in free cash flow in '06, any estimates of what that is in '06?

This is Steve. Let me speak to CapEx spending next year, we see probably about 20 to $25 million range next year, a little higher ex the building, simply because we'll be moving into that building in 2006, and we'll be focusing in areas like capacity, as LeRoy mentioned, and some other internal projects as well. I think we provided some other guidance as well.

John, from an operating cash flow standpoint in '06, we're looking at rough numbers, of somewhere around 90 to 95 million, so free cash flow would be that minus less the 20 to 25 that Steve mentioned.

Last question, LeRoy you talked about the meter data management, gaining, that platform across the industry gaining importance as hardware risks, so to speak, decreases, can you speak about competition there. It seems like a lot of folks are bolstering meter data management potential. Can you just address that if you would?

Certainly we're bumping up against Nexus, we're bumping again to SCL, and they are good guys, they understand the market as we do. Certainly our offer is more broad, we have got more product out in the field, largely coming out of the silicon energy group we acquired, so I'm comfortable with the space. I think more importantly is utilities are coming to understand that they need that product.

And I'm perfectly willing to duke it out in the marketplace, and the more competitors we have there, to a degree, the better off we are, because we just raised awareness of what that sort of product does for a utility. So as utilities are thinking about, how do I revamp my process, how do I do more with metering data, that not only bodes well for meter data management, but what we try to do then is go in, either in parallel with that or after it, and say there's a whole lot of software modules you can buy and tack onto that, that can really do spectacular things for you, in terms of process improvement, and understanding your delivery system.

Congratulations Mima, great job!

Thanks John very much.

David Smith, Citigroup.

Good afternoon guys. Can you talk briefly about the order cadence that you are seeing in the first quarter, what you've seen so far?

We didn't understand the order of what?

Order cadence. Sounds like obviously in the fourth quarter you saw pretty robust trends. But is that continuing what you are seeing in the first quarter so far?

We don't generally give mid-quarter bookings numbers. Because what you see in any one month, might not be indicative of what you see in the quarter. Clearly as we were indicating, we are having a lot of activity across the spectrum, whether it's in the solid state meter market, whether it's in the electric AMR market, gas market, water market. So we would expect to see some nice orders, new order bookings in 2006. Predicting it on a quarter-to-quarter basis a little bit tougher to do, but overall, we should see some nice activity.

Can you give us a sense then, of what the sales mix was between electric, gas, and water in the fourth quarter. And then what you see it playing out in '06 as?

Yes, I would was probably the one big difference is we didn't see a lot of new business on the water side in the fourth quarter. In general, if you look across the marketplace, there were not a lot of large water AMR deals industry-wide in 2005.

However, as LeRoy mentioned a couple that are actively in the works for 2006, so we would expect as you look at our meter data collection business in 2006, that water will be an increasing portion of that business, gas is going to continue to be quite strong in the meter data collection side, and both of those will be offset by the fact that we are continuing to see lower volumes for our product for out standalone electric module. Because again, more and more customers are ordering the solid state CENTRON meter with AMR inside.

So if you look at our revenue profile in '05, we were roughly 90% hardware, 10% software. I don't think that profile changes a lot in 2006. But what you will see is a nice increase in the metering side in '06, and that will be offset again by a little bit lower revenues on the meter data collection side.

Okay. In that kind of leads into your comment about 3% to 5% growth on the meter side. Is that something that obviously we are seeing much stronger than that in the quarter, and then it sounds like you're guiding towards a higher number for the year. Is 3 to 5 still a good number? Seems a little light to me.

It's a good long term number for electric meter growth, not considering AMR. Clearly what the Progress order, we'll be shipping to over 2 million endpoints in 2006. We're going to see much, much higher growth in our meter business in '06, than 3% to 5%. I think what LeRoy was trying to give people a feel for, was normal kinds of growth in the meter industry, not considering any large AMR deployments.

Then on the software side, I have heard some comments just in the past few minutes on that. What would it be a breakeven, a reasonable breakeven level to think of, in terms of software sales?

70 to 80 million probably gets us there, in revenue.

One last point, on the AMI comments that you made, is it the regulators driving that, the AMI push, or is it the utilities? Any comment on that?

I think to a degree in the order in which you said them both. Certainly, probably an opinion here, but If it wasn't for the regulatory underpinning of AMI, there wouldn't be any going on. If California wasn't willing to allow PG&E and others to put billions of dollars in the rate base, which by the way, they haven't completely allowed yet. It wouldn't happen.

If Ontario wasn't pushing it at the province level, it just wouldn't be happening. There certainly has to be regulatory underpinnings. Having said that, in both of those locations, I think you have to look at the utility and understand that they have capacity constraints and in California, clearly the capacity constraint there is largely a transmission capacity problem. And a bit of a distribution problem that is localized, and certainly not generation.

In Ontario, they have a bit of the same thing. They have transmission issues and distribution issues. Those underpin as well. So if you've got those kinds of things coming together, then you have people looking at, how can I reduce the load and system peak, and AMI helps with that. Yes. That's part of the underpinning there. You look at where we're doing mobile AMR, it clearly is in areas, which is the better part of the country, where those kind of capacity constraints just simply are not present.

Okay. Are there any other states that are moving in this direction? I know you did say Texas, and I think Idaho?

You see some activity in Texas, particularly TXU. And they're sort of on the backs of broadband over power line, Center point doing some things as well. Oregon is very deep into the process right now looking at AMI, and we're much involved with that. As that process plays out.

Okay. Is there any update on Ontario. I know this went on a little longer.

I mean, the update I think I can give you is probably not going to be very specific. I have made some inquiries just recently, about what our people feel is the state of progress up there. And I think we're going to see a month to two months, before we're going to see some real orders let. And then I think we're deep into the year, before we see some pilots being installed.

It certainly is not progressing as quickly as I think anybody thought it would. And we're a bit in spec writing and reviewing mode right now. But we'll come out of that eventually and move forward.

Sounds great. Thank you very much.

Next we'll move to Patrick Forkin, Tejas Securities.

Good afternoon and congratulations on the year and Mima, congratulations on your retirement.

Thanks.

You're much too young to retire, but I admire the commitment to your family. LeRoy, you seem to be a little more bullish on the prospects for AMI, and you also talked about the amount of money that, you know, north at $45 million that you're spending on product development. Going forward, can you give us a sense of how much capital, and the resources that will be allocated to the AMI potential?

Pat, I'm not going to say anything more than having said that we have 39 very high priced engineers, both hardware and software, and then several marketing people as well, dedicated to that project. That's a big spend for us. It's a big spend for anybody.

We think that, you know, the reality of AMI in the United States and around the world, in whatever form it tends to take, or whatever people choose to call it. If you go to Europe they call it smart metering. Here it's AMI, or a variety of other things.

People are going to start doing that, it's important that the issue for Itron has been, let's get the product structure right. Let's understand the variety of communication means that can be done. Let's introduce product when people are actually going to start buying things, not just talk about buying things. And so, you know, I like our positioning in terms of timing.

And I like the ability, quite frankly and here I'm bragging a bit, that we have the ability to spend a lot of money in a short period of time on a project like this. We generate a huge amount of cash here, and we generate lots and lots of profit, that allows us to do that sort of thing.

So I'm feeling pretty good about it. It is major investment. It will last not only through '06, but well into '07 and beyond.

Okay. And then you did mention some, I think, new names, FP&L, and I really didn't catch the context in which you mentioned that. Was that a pilot, or a deployment?

That particular one is a relatively healthy pilot.

Okay. So Cal Edison, I know you guys have done some business with them in the past, on a pay for [read] type basis. Is there more activity down there?

I think most of the activity was both Florida Power Line, and Southern California Edison was electricity metering.

Okay. Thank you.

At this time, we do have one question remaining in the queue. It is from Stuart Bush, RBC Capital Markets.

Yes hi, good afternoon.

Hi, Stuart.

Hi. Just follow-up on your comments about the international market. What sort of levels of substantive pilots should we be looking for reasonable to expect, that might help us get some visibility into '07?

Stuart, I'm not going to answer that question specifically. We have a lot of activity going. I mentioned a couple places, certainly in South America. We have been selling CENTRON meters, 85,000, a quarter of which have been shipped, so sales are going to continue on in '06 and on into '07, and they're going to grow larger.

We've got some very interesting business brewing in the Middle East. We talked about a water fixed network, water project there. We're also involved in putting radios and handhelds, and reading modules that are on meters. I think that one could grow nicely. So I'd like for an announcement of that indication.

Certainly as we think about Japan and other parts of the Far East, we're spending an awful lot of time, and an awful lot of investment dollars tailoring products to run at the appropriate frequencies, and so I think as we go through '06, we're likely going to be talking about some specific pilots there. But not ready to tip that hat just yet.

Okay. Maybe you could discuss around what you see as the balance at the PUCs, from passing along the CapEx projects to the rate base, possibly being [tripped] by higher energy prices, with alternatively potential catalysts from more emphasis at the utilities for cost reductions, given those higher commodity prices?

The equation you just described is is a highly complicated one. It sort of starts with, you know, utilities and PUCs coming to grips with the capital adds that are needed for some of these complex metering projects, or any project, and you know, heretofore utilities have been reluctant to allow utilities to put into their rate structure, the capital adds needed for that kind of stuff. Certainly higher energy prices along with capacity constraints, have caused, in the case of what I mentioned, California, a little bit in Texas, and certainly the province of Ontario, and then Oregon. To say wait a minute.

One of the ways to avoid building transmission facilities which cost hundreds of millions of dollars, and one of the ways to avoid potential huge bills to some of our consumers, is to give them alternative rate structures that require more sophisticated metering. So, I think that whole equation plays out there. But I do have to say that you know, sooner or later somebody has to pay for all of that stuff.

So if we're thinking about a California, where the current plan is over the course of the next decade to spend something in excess of $2 billion, that's going to roll to the rate payer. And you know, sooner or later, the rate payer's going to get to voice an opinion on that. I think when all of the details finally come clear. So, you know, all of those things have to sort of string together and line up. These are very, very complex equations that we look at here.

Thank you so much for your time.

Sure.

There are no further questions at this time.

Great everyone. Thank you very much for joining us today. We appreciate your interest in Itron. As always, I and Steve Helmbrecht would be more than happy to answer any questions that you have. Thanks very much.

Again, ladies and gentlemen, that does conclude today's call. There will be an audio replay of today's conference available this afternoon. You can access the audio replay by dialing 1-888-203-1112, or 1-719-457-0820, with the passcode of 3754612, or go to the Company's website www.Itron.com. We thank you for your participation.