Itron Inc (ITRI) 2006 Q1 法說會逐字稿

Good day, everyone and welcome to the Itron Inc. Q1 2006 Earnings Conference Call. Today’s call is being recorded. For opening remarks, I would like to turn the call over to Mima Scarpelli. Please go ahead, ma’am.

Thank you. Good afternoon, everyone, and thank you for joining us. With me today in Spokane is LeRoy Nosbaum, our Chairman and CEO, Steve Helmbrecht, our Chief Financial Officer, and Deloris Duquette, Director of Investor Relations.

Our press release today includes an updated outlook for revenue and earnings for 2006. Today’s call will also include discussions that are forward-looking in nature. The business outlook and other forward-looking information we provide today are based on what we know as of today and are subject to a number of risks and uncertainties. I would like to point out to all of you that you should read the forward-looking disclosure in our press release, which will alert you to a number of factors that can cause a difference between our expectations and actual results.

You should also refer to our 2005 Form 10-K for a 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 some from time to time. Our earnings release also includes non-GAAP financial measures that we believe will enhance your overall understanding of our current and future performance. Schedules reconciling GAAP to non-GAAP 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 brief discussion of financial highlights for the first quarter and after that, LeRoy will offer some additional comments. At the end of our prepared comments, we will conduct a Q&A session. So let me now turn the call over to Steve Helmbrecht for the financial highlights discussion.

Thank you, Mima, and good afternoon, everyone.

As you can see in our earnings release, we had very strong financial performance in the first quarter. It was our best first quarter ever. In terms of revenue, the quarter was slightly less than our record revenue last quarter. In terms of earnings, our results were on par with the record results last quarter.

Pro forma earnings per share (EPS) were $0.58 for the quarter versus $0.32 in the first quarter of 2005, driven by higher revenue and higher operating margins. Revenues of $155 million were 34% higher than first quarter revenues last year, with growth across all of our segments. The primary drivers of growth in the quarter were increased shipments of AMR technology for gas meters and increased sales of electricity meters with AMR.

Shipments of gas modules were an all-time record, highlighting Itron’s leadership in this important market space. Increased shipments of electricity meters with AMR were driven primarily by our project with Progress Energy to install 2.7 million AMR-enabled meters over a period of about 15 months.

We shipped 1.7 million electricity meters during the quarter, 63% more than we shipped in the first quarter of 2005. Shipments of Itron AMR technology, standalone AMR modules and meters with AMR were $2.4 million for the current quarter, versus $1.3 million in the first quarter last year, an 81% increase.

Revenues from Progress Energy were approximately $34 million during the quarter, 22% of total Company revenue for the quarter and 42% of electricity metering segment revenue. Software revenues of $13 million in the first quarter of 2006 were 6.0% higher than the same period in 2005, due to higher license revenue from several different software products.

We had very strong new order bookings during the quarter of $206 million, which is a 1.4:1 book-to-bill ratio. This is the second-highest quarter ever for new orders and nearly equals our record bookings quarter of $212 million in the third quarter of 2005, which included $120 million for Progress Energy.

Total backlog of $387 million at March 31, 2006 is a new record and is more than double the $190 million in backlog at the end of March last year. Total backlog is up $63 million from $324 million at the end of December. Twelve-month backlog at quarter-end was $241 million, which is also a new record. The increase in 12-month backlog since the end of December is $53 million.

I do want to remind everyone that we have historically had fluctuations in new order bookings and quarter-end backlog from one quarter to the next. Those fluctuations result from the project-based nature of much of our AMR business. We are delighted with recent trends in new order bookings and backlog and are continuing to work hard to close new business. But we also remind you not to expect us to have sequential increases in new orders and backlog every quarter.

Total Company gross margin for the quarter of 43% was down 1.0 point from 44% in the first quarter of 2005. However, gross margin was up 2.0 percentage points from fourth quarter 2005 margins of 41%. Gross margins can fluctuate several percentage points from quarter-to-quarter and year-to-year, as a result of changes in product mix.

From a segment perspective, meter data-collection gross margin was 46% for the quarter, 4.0 percentage points higher than the same quarter last year. The increased margin was due to shipping an increased quantity and relative percentage of gas AMR modules during the 2006 quarter, compared to the first quarter of 2005.

Electricity metering gross margin of 40% was 5.0 percentage points lower in the first quarter of 2006 than in the same quarter in 2005. The lower 2006 margin is primarily due to the Progress Energy contract, which includes lower margin installation revenue. Software gross margin of 46% was comparable to both the first quarter of 2005 and the fourth quarter of 2005.

We had a great combination during the quarter of 43% gross margins and good expense control, which resulted in a pro forma operating margin for the quarter of 18.1%, again a new record. We expect that, for the year, our pro forma operating margin will be in the mid-16% range, which is a nice improvement over pro forma operating margin of 15.5% for all of 2005.

We had very strong operating cash flow and EBITDA during the quarter. Operating cash flow was $37 million, compared to $24 million in the first quarter of 2005. EBITDA was $29 million for the quarter, compared to $19 million in the first quarter of 2005. Adjusted EBITDA, which excludes the effect of stock-based compensation, was $31 million for the quarter.

Strong cash flow during the quarter enabled us to prepay the approximately $25 million balance remaining at the end of December on our variable rate debt. We also paid down about $10 million of real estate debt during the quarter. We ended the quarter with about $41 million of cash.

In April, we paid off the remaining $4.8 million of real estate debt and we prepaid all $3.0 million of project financing debt. So the only debt remaining today is the $125 million in senior subordinated notes. Debt as a percentage of total capitalization was 28% at March 31, 2006, compared to 58% at March 31, 2005. We don’t have any plans currently to accelerate repayment of the senior subordinated notes, but will instead begin to build up our cash to use for strategic opportunities in the future.

Accounts receivable decreased $21 million from December 31, 2005 due to collections during the quarter. DSO were down slightly during the quarter to 52, compared with 53 for all of 2005. Inventories increased by $3.0 million during the quarter, which was primarily related to the Progress Energy installation. Inventory turns were 5.2 during the quarter, compared to 4.3 in the first quarter of last year and 5.2 in the December quarter.

As you may be aware, last December the SEC enacted new rules for well known, seasoned issuers, which provides a more streamlined process for filing registration statements and raising capital. Since Itron qualifies as a well known, seasoned issuer, we took advantage of the new rules to file a Universal Shelf Registration Statement on April 6th. We have no specific plans for the shelf at this time.

In closing, we are very pleased with our financial results for the quarter and the strengthening of our financial position. Now I would like to turn the call over to LeRoy Nosbaum, Itron’s Chairman and CEO, for some additional comments.

Thanks Steve. Good afternoon, everyone. Thanks for joining us.

As Steve’s comments indicate, we did have a very good first quarter, which makes for a terrific start to the year. Industry momentum seems to be continuing on a strong direction and Itron execution on both the strategic and operational fronts is on target.

In reviewing our performance, there are two areas in particular that I’d like to discuss in further detail today - the two acquisitions we announced in the quarter in the strategically important areas of consulting and international and new order bookings and backlog.

Let’s start with new order bookings and backlog. We had our second highest bookings quarter ever, with over $206 million in new orders. Our hardware group was very successful, booking two large gas AMR projects this quarter - Southwest Gas for over 1.0 million AMR gas modules and Northwest Natural for 260,000 modules.

We signed a contract with Omaha Public Power District (OPPD) for more than 326 solid-state electric meters with Itron AMR. The press release on that order went out today, shortly after our earnings release. OPPD is worth noting, as they are converting all of their meters to electronic meters as part of this deployment. And while they will begin reading meters with mobile AMR, they plan to upgrade to fixed network technology within the next three years.

In total, our hardware group booked new orders to automate more than 3.3 million meters. That gives us continuing confidence that our utility customers believe in Itron’s strategy and product offerings relating to AMR.

Our software group also had a great quarter in terms of new orders. As we discussed on our last quarter, early in the quarter we completed signing the largest distribution line designed contract in the Company’s history with Pacific Gas & Electric.

We booked additional business with TG&E later in the quarter, as they selected Itron’s meter data management software for their commercial and industrial customers. At 7 other major customers, we are in the process of going live on Itron’s industry standard IEE meter data management platform.

Another success during the quarter was an expansion order with the County of Los Angeles using our energy management software. The County, in partnership with Southern California Edison and the Gas Company, has implemented comprehensive measures in 10 county facilities to move beyond traditional energy efficiency needs.

Since ’95, the County has invested over $50 million in energy retrofits throughout 45 million square feet of building space, currently producing over $10 million in annual savings. Itron’s software enables these savings and the County has validated our value proposition by expanding the number of points in the program.

For the entire Company, backlog at quarter-end was approximately $387 million, a new record, and the backlog shippable over the next 12 months of $241 million was also a new record. The level of new orders during the first quarter has not only helped solidify results for 2006, but it’s also building revenue beyond 2006 for ‘07 and beyond.

As many of the larger-sized new orders are multi-year deployments, it sets us up well, looking toward the future. Clearly Itron’s value proposition continues to resonate with our customers.

Now let me make some comments on the two acquisitions we announced in the quarter, neither of which was large in terms of dollars spent, but both of which are important in terms of our strategies for growth.

Starting with the acquisition of Quantum Consulting, for which we paid $4.0 million with the potential for an additional $2.0 million if performance targets are hit, we closed this acquisition on April 1st. As we look around the country and indeed the world, there is a great deal of program work on the horizon in the areas of energy efficiency, [solid] research, renewable energy, and distributor generation.

The evaluation, measurement, and verification portion of these programs is generally conducted by consultancies for either a utility company or a public utility commission. Two of the principle competitors in this space have been Itron and Quantum Consulting. We are now one.

Quantum brings 20-some skilled and respected professionals to Itron’s existing team of almost 20 people. Current customers for Q uantum include Florida Power & Light, Southern California Edison, Pacific Gas & Electric, Sacramento Municipal Utility District, San Diego Gas & Electric, Xcel Energy, various public utility commissions and others.

The directions utilities are taking in these important areas drive many of the requirements for customer data, data communication, data analysis and using that information to better run the utilities delivery system while better serving a utilities customer, the consumer. By being in the consulting business in these critical areas, Itron is far better able to understand utility trends and directions, as well as better able to address the needs of the utility of the future.

This acquisition is producing results already. Shortly after the acquisition closed, Quantum signed an agreement for energy consulting services with Pacific Gas & Electric, valued at approximately $3.0 million. Including that order, we now have over $6.5 million in Quantum backlog to study and evaluate performance and measure the energy savings associated with a number of California statewide energy efficiency programs.

We are excited about the opportunity to leverage Quantum’s knowledge and relationships with Itron’s core competencies in the consulting area.

In early April we announced that we had signed an agreement to purchase our distribution partner in Brazil, ELO Technologia. The initial purchase price is approximately $2.0 million, with an additional $6.0 million in estimated earn outs over the next five years. That acquisition is not closed yet, but is expected to, shortly. We see this as a strategic step towards our goal of growing international revenues to a significantly higher portion of the total Company.

This acquisition puts into place a very qualified team with years of Brazilian distribution and utility experience. Including two of the principles who are former Schlumberger Metering executives in South America, an assembly facility, which we are not constructing and the technology for solid state electric meters and AMR that has proven itself in the United States.

As we have previously reported in 2005, this team sold 85,000 CENTRON residential meters to 10 customers. It should be the beginning of an adoption cycle for solid state meters away from mechanical meters, while we proceed quite similarly to that of the U.S. In the first quarter, we have already sold an additional 40,000 CENTRONs. We are excited about the opportunities that lay ahead for both meters and AMR in South America and additional international areas of focus.

Now let me elaborate on changes to our outlook for 2006. In total, we’ve increased the midpoint of our revenue outlook for the year by $5.0 million and the midpoint of our pro forma earnings outlook by $0.10 from previous guidance. Some of you might ask, given the outstanding first quarter, why not raise revenue expectations a bit more for the year. The contract with Progress Energy is and will continue to drive very nice revenue. That contract will largely complete in the third quarter of this year.

While we’re delighted by the positive results so far, in particular the first half bookings performance, and while we feel good about the second half of the year, there is still a lot of work yet to be done to firm up the back half of the year. And so, at this point in 2006, we’re taking revenue up a little and with a slightly higher increase in earnings guidance. As our updated outlook reflects, 2006 should be another very good year for Itron.

Thanks for your attention today. Operator, we’re now ready to begin the Q&A session.

Thank you, Mr. Nosbaum. [Operator Instructions] Our first question comes from [Amy Now] with JP Morgan.

Hi, its Amy Now for Paul Coster. Thanks for taking the question. My first question relates to the guidance. Obviously LeRoy, as you just remarked, it seems a bit conservative in light of all the opportunities that there are in front of you, the second half of the year. Has your visibility changed there at all in terms of where you were in the last conference call?

No, Amy, I don’t think our visibility has changed. We continue to look at lots of available business out in the marketplace. We have a second half that has work to be done and we’re trying not to get too far in front of ourselves. So no particular change in our visibility and so we took guidance up a little bit, but are just not prepared to take it up any farther, at this point.

Okay. What are the upcoming catalysts for the business? And then I have one more.

Catalysts, as we look out to the end of this year, are certainly quite similar to what they have been. You know there’s an awful lot of utilities that began in ’05, looking at AMR projects. Those are continuing to come to fruition and closing.

We have other customers that are continuing to complete or continuing to install AMR and switching from mechanical to electronic meters. So, in some degree, it’s same old-same old. As I started me remarks, I think the momentum in this business, both AMR and for Itron, in solid state electric business continues strong.

As we look out beyond ‘06, certainly we’re delighted with the announcement we made on ELO Technologia. We think that sets us up very, very nicely for some expanded international opportunities, a little bit of which will show up this year, but largely in ‘07 and beyond.

Okay and then on the supply side, are you feeling any capacity constraints or supply constraint issues that are affecting the business at present?

I think I said on the last conference call, we added a bit of capacity in Q4. We’ve added a bit more, as we’ve come through Q1, particularly in our meter factory. We’re in good shape there for the foreseeable future, at this point, certainly in our module factory in Waseca, Minnesota, we’re in great shape from a supply perspective. I’ll add to that that I took a look, quite recently, at what our suppliers are doing in terms of about pricing and availability of things we have to buy and that’s very firm and in good shape as well. So we’re happy, from that perspective, also.

Great. Thank you.

Steve Sanders with Stephens, Inc.

Good afternoon.

Hey Steve.

I had a question on the fixed network side, primarily electric, a couple of parts here. First, you’ve obviously got several pilots going on. I just wanted to see if you could give us an update on how those are performing, your strengths of where the electric utilities stand on the fixed network side, relative to a few quarters ago. And maybe specifically whether the demand side/conservation piece of the business case is starting to become more significant than it has in the past, based on what we’ve seen coming out of Canada and California.

Yes, Steve, I think I’ll preface all of the answers to those questions by saying it’s situational. It just depends on where you are in the country.

Certainly we’re delighted with the order we’ve announced today from OPPD, because they’re in a relatively rural environment [icon] with the winter. With what will start as a mobile network but progress pretty quickly to a fixed network deployment after they once get all of the electronic meters of AMR installed, they will start to convert to fixed network. So here’s an area where clearly a fixed network has come our way and we’re delighted with it.

We also have been able to get a bit of an expansion on the fixed network work we’re doing at the Southern Company. We’re very pleased with that. They tend to be a very critical [inaudible - technical difficulty] here and so we’re happy with that.

We continue to look, from a fixed network perspective, at what’s going on in Ontario. That one is progressing slower than everybody expected, but we actually think they’re likely to start installing the front end of pilots at a variety of utilities probably in Q3.

So, if you think about Ontario and California, still the demand side as driving all of that kind of business. I don’t know that I see across the country any more emphasis on demand side management or conservation at this point than we saw nine months to a year ago, at this time. I’m not seeing [inaudible] at all.

Okay. That’s helpful. And then on the standalone AMR side, what kind of mix should we be thinking about, I guess for this year, if you will, or a longer timeframe if you’re more comfortable with that, on electric versus gas and water? Obviously you’re getting a nice lift from gas. But what kind of color can you give us there?

Sure. Steve, this is Mima. That standalone electric AMR module piece of the business continues to decline. I mean, we’re just today, as utilities want AMR, they’re buying a solid state electric meter with AMR embedded inside. So that piece of the business is declining by quite a bit from what it was two and three years ago.

We obviously announced, last year and in the first quarter of this year, some very, very nice gas contracts. So the gas piece of our AMR business has clearly increased in the first half of this year. It’ll continue to drive business in the second half of the year. But we also are looking for a little bit of a pick up in water AMR activity in the second half of the year as well and that is driven by some large RFPs with municipalities that we believe we’ll be successful on.

Okay and then related to Steve’s comment about the pro forma operating margin for the year. Should I essentially assume that that ties back to your earlier comments about progress sort of winding down and still having some work to do to finish out the year?

Yes. I mean, sure.

I’m thinking about mid [inaudible - multiple speakers] --?

Sure. We [inaudible - multiple speakers], obviously, as volumes start to wind down for that contract. There may be some new paths in terms of gross margins we’re just not utilizing the factory as much. Now clearly, as we listed earlier, we have a lot of time left in the year to try to find business to offset that. But in terms of the projections, today we’re projecting a little bit of an impact from that.

I think the other piece, as Steve was referring to, is gross margin will bounce around from quarter-to-quarter a point or two. We do expect to see some increased operating spending over what we just saw in the first quarter. Some of that is related to the new ERP system upgrade. Some of that is related to the move into a new headquarters facility. There are a variety of other projects that will cause operating expenses to go up a bit, Q2 through Q4, from the quarter we just had.

Okay. Thanks very much, great quarter.

Thanks, Steve.

Thanks.

John Quealy of Canaccord Adams.

Hi good afternoon, great quarter.

Hey John, thanks.

Thank you.

A couple of quick questions here, first on the competition. You folks have done a fairly good job here in the last 18 months of handling competition, given that bookings number. What about competition going forward in the next few quarters? Do you see it getting any tougher? You’ve had some M&A activity with some big private equity shops this past quarter. Can you just comment a little bit of the landscape, any way you could?

Well, I think, as we look at competition, it depends on the marketplace. Clearly in water, which we’ve been saying for a number of quarters, [Net Stream], Badger and Census are all out there. They’re good companies. They do a good job and that whole water arena is getting more competitive than it has been in prior years. So we’re seeing ourselves facing a little bit more pressure there.

In electric, clearly ESCO is getting a lot of attention from the investment community because of some of the things they’ve been able to do, so they can be problematic here and there. Although we’re delighted, as I mentioned earlier, with our prospects that we just announced at Omaha and some other things.

In the gas business, we’re comfortably entrenched almost everywhere. So we like it there. So, I think, on an overall basis, I don’t know that competition, looking forward, is any stiffer than it has been in the last six to nine months, John. But it’s out there and we’ve got to keep our diligence up. And I had the opportunity to meet with our sales guys just last week and they seem pretty confident in their ability to compete with the products we’ve got.

And then also another sort of macro question, in terms of new energy policy acts. I think you’ve said before that you didn’t expect much business out of that, over the ‘06 period. However, we’re starting to finally see public utility commissions come up with what they think their answer is to some of the automatic meter reading and AMI initiatives. I think Illinois had some decent language out. Can you comment? Is it still in that sort of discussion phase or is it inching along, getting utilities to call your sales folks up and to at least start some dialog?

A bit of both. You’re right about Illinois. Certainly we’ll watch in Illinois a lot and that looks like a force we’ll push forward. There is a reality to all of that and that is that all of these things take time after they work through commissions, to work through utilities and see the filings that come back and then sort of the negotiation back and forth about what actually gets done.

I think we will, as we progress through the rest of this year and on into ‘07, see more commissions opining on the result of the Energy Act. And so I think we’re going to see some that are going to ask for a bit more either automatic meter reading or time-of-use meter reading or some demand side stuff. For some utilities, that’ll be continuation of modest programs they have underway; for others we may, in fact, see a drift towards fixed network programs. I like, frankly, our positioning in that regard, given the things we’ve talked about in the last call and our overall network and AMI efforts.

Okay, the last two questions going back to the utility channel. Clearly it looks like utility managers are spending a lot on automatic meter reading equipment. As of late, the rising interest rates have certainly taken down some of the utility stocks. Do you think that impacts at all capital spending plans where changes seem to be holding up okay here? And then I just have one more follow on.

Yes, John, I haven’t seen it so far, if it’s having any affect. One of the things that we’ve got sort of keeping momentum going is the fact that a lot of serious utilities, big utilities, are showing just wonderful results from AMR implementation. So I think there’s probably, at the commission level, an awful lot of pressure to move forward in order to reduce expenses for utilities and give the consumer a break.

Great and my last one. Debt to Cap continues to go down pretty nicely here. In the past you’ve talk a little bit about opportunities in geographies that you’d like and some of these have come to fruition. Can you give us an update on the M&A appetite as it stands now?

Well, the appetite is certainly out there, alive and well. We’ve talked about a couple smaller acquisitions in our recent quarter. I think those are indicative of some opportunities that occurred for us that we took advantage of. We continue to look around the world for opportunities to do more and more with both our technology and our positioning. So I’d say our appetite remains pretty healthy.

Great, thank you.

Stuart Bush of RBC Capital Markets.

Good afternoon. Congratulations on a good quarter.

Thanks, Stuart.

Thank you.

I had a -- I wonder if you could give a little more color around the outlook on the Brazil acquisition. Sort of how this distributor -- does it give you exposure to the whole country and what some of the opportunities are there for the market size and what we should look for going forward there?

Stuart, there’s about 3.0 million meters in Brazil. We look at all of those.

On an annual basis.

On an annual basis, purchased by utilities. And we look at that annual opportunity as being certainly all right for Itron efforts with the acquisition we’ve made. We sold, as I mentioned, about 85,000 products last year to 10 different utilities, call that seed stock if you will. They have been evaluating. We continue to sell in the first quarter with another 40,000 and we look for the possibility to be selling solid state electric meters to virtually all of the utilities in Brazil.

We’re not just distributing them. We are, in fact, through the good offices that we’ve acquired and some efforts that we’ve undertaken now we will be building product in Brazil. We’ll build some high technology components in the U.S. and then building out the rest of that product in Brazil.

One of the important parts about that acquisition is we bought not only a company but we bought a lot of expertise. I mentioned a couple of guys who are really going to run that business for us, being ex- Schlumberger electric metering guys so they know the market really, really well. They have the contacts. So I think, as we look forward, we’ll continue to update you all on what we think the potential is down there. But as we said, 3.0 million meters a year and we’d like to get a healthy portion of that.

Okay, great. And sort of broadening it a bit, when you sort of look at the international market as a whole, over the next two years. Can you give us any idea about which end segments directionally look more interesting to you?

Well, if by end segments you mean electric/water/gas, all of them, but you have to attack them differently.

From the electric perspective, we look to take the technology that we have developed here in the United States and in some cases, as we’ve done in South America, buy a company. In other cases we will establish a partnership to move that fine core metrology technology into other countries, whether that’s Japan or the Middle East, and we think we can do that successfully.

If we think about water, that’s an AMR play for us today. And so we look, for instance, as we’re currently doing in Japan and I’ve talked about doing some water trials with automatic reading of water meters. If we think about gas, our gas effort outside the U.S. today are relatively minimal, except for handheld meter reading.

That being said, a material acquisition could change our strategy, depending on where that acquisition was and so we could look more to either meters or AMR, depending on what kind of presence we could acquire and what country that was in.

Okay. Thanks and then just a couple of quick modeling questions from Steve or Mima. With the consulting business, what business segment should we be looking to roll that into and what sort of growth profile should we be looking at it, from its current run rate?

Yes. The consulting business for Itron historically has been in the software solutions segment. The Quantum acquisition has been merged in with our existing consulting group and so we’ll continue to report that in the software solutions segment.

We talked last quarter about the fact that our expectations for that segment as a whole reflect higher growth than the traditional hardware businesses. So, if you look at the projections that we’ve given this year for the business as a while, we are projecting software revenue growth overall somewhere in the high teens percentage.

And so would that change with the new consulting acquisition?

Stuart, we factored in both Quantum and ELO in the guidance we gave last quarter. We were far enough along on both of those acquisitions that we were fairly confident they were going to happen.

Okay, great. And then, lastly, what sort of income tax rate should we be modeling through ‘06?

Again, that tax rate during the quarter for GAAP was somewhere around 44%, 45%. We think that’s still the right rate for the rest of this year. Pro forma rate was a little higher than we had projected. We had talked about a 38% pro forma rate. It’s actually coming in closer to 39%, so somewhere in between 38%, 39% is realistic.

Okay, Thanks a lot.

[Inaudible - multiple speakers] that could be high by about a point. Actually, it’d be probably one percentage point lower than that, in terms of what we’re seeing right now for the year for pro forma.

Per person on that, okay.

Yes.

Thanks a lot.

David Smith of Citigroup.

Yes, good afternoon, guys.

Hi David.

Just rounding out this acquisition discussion. Do you guys really believe that internationally that you have to do an acquisition or is it possible to cultivate a business in some of these countries organically?

It depends. Some places you can grow a business from the ground up. But one of the things you have to consider when you’re trying to do that is whether or not you have the appropriate contacts. Or whether you’d need to take on a partner of some sort and how patient you are about growing the business.

One of the things that an acquisition does for you is it jump-starts both your local presence, your knowledge of the customs and customers and as well, it gives you some instant credibility if, as we did in Brazil, acquire some people that have been around the utility business for a very long time.

If, however, you’re a newcomer to the marketplace, I mean, even in the U.S. startup companies have a tough time competing against entrenched, local suppliers, somebody like us, because they simply don’t have the presence. And utilities are not willing to make those big bets.

So it depends, David. But I think generally somehow you have to sort of partner with or acquire sort of local knowledge and local credibility and unless you’re willing to wait a very long time for substantial results.

In all --[Inaudible - multiple speakers]

[Inaudible - multiple speakers] not quite that patient.

In all likelihood, then, you’re probably looking more at meter guys, I guess, in these international markets. Is that fair to say?

Oh, either meter guys or in our software businesses. There’re some software things that could be interesting. Or if you think about a partner, a partner could be somebody who is selling lots of things to a utility or to utilities but have never been in the AMR or the meter space.

Okay. All right. That makes sense. I may have missed this, but in terms of the meter margins going forward, what with progress continuing through third quarter. Should we expect the meter markets to stay around this 40% level?

Yes. That is certainly what we have targeted in our guidance for the year, that it’ll stay around the 40% level and again, a big piece of that is the implementation revenues that go with progress that are obviously lower margin than hardware.

Okay. One thing, Mima, maybe you can discuss this. I know that unit shipments on AMR were up 80%, sales rep 24%. But I know there’s a big disparity. Some of it gets included in the meter segment, some gets included in the AMR segment. But can you address pricing trends, maybe even kind of a sequential basis and then what you’re seeing year-over-year to kind of round out that discussion on competition?

Sure. As we’ve been talking for about the last 12 to 18 months on the meter data collection side of the business that we were selling standalone modules, we have seen ASPs coming down.

I mean, clearly most notably it was in the electric piece of our business, which has become a much smaller piece of that overall business. But we’ve seen some ASP declines on the gas side of the business. Nothing as dramatic as we saw in the electric side. I think, in terms of water, we’re starting to see some ASP declines, but again, driven more by the size of the orders that are out there as opposed to the fact that competitors are lowering price just to win business.

On the meter side of the business, again, if you were to look at ASPs this quarter versus last quarter, you would see a decline. But keep in mind, two-thirds of the meters that we shipped this quarter were to Progress. That was a very substantial order. So we did bring ASPs down on that. You didn’t see much of an impact of that on gross margin because, again, costs came down as a result of the size and the quantities that we’re building there as well.

Across the rest of the meter business, if you ignore Progress from it again, I think over the last 12 to 18 months we’ve continued to see selling prices come down a bit as some of the other meter manufacturers have introduced their solid state products to the market.

Okay and then if I look at the margins, I would see improving then in the marketing, so I guess that’s mainly mix then is what’s driving that?

Yes.

Okay, on the gas side. You talked about gas market share very briefly. Can you give us a sense of what you estimate your gas market share is right now?

Yes. We estimate that our share of gas AMR that’s been done to date, so cumulative AMR gas installations over time is about 80%. And I think that we would probably estimate our share of the last couple of years at slightly north of that.

Okay. That’s great. Thank you.

Chris Sommers of Greenlight Capital.

Hey guys, congrats on the quarter - a few quick questions. The contract announcements that came out after the end of the quarter, were those all booked in the first quarter, including the Omaha one today?

Yes. There were three contract announcements, one with Southwest Gas, one with Northwest Natural and one with Omaha. All three of those were Q1 2006 new order bookings.

Got it and then earlier you spoke about some RFPs on water AMRs. Are those seven-figure unit numbers or are those small -- can you give us an idea of kind of how big those contract ones could be?

You don’t generally see RFPs, on the water side, much over 500,000 units, because again, think about how the water industry is structured. It is 50,000 small water utilities and then a number of larger municipalities and so, for example, the City of Houston. The order we got there for the City of Houston was about 400,000 meters.

In Denver it was a little over 200,000 meters. So those are more typical sized kinds of orders for a large water muni contract. But I can also say that the ASPs, the average price that we sell water for is much higher than electrical or gas.

And does that equate to much higher margins or are those higher cost to manufacture as well?

No, they’re higher cost to manufacture. It’s a much more complicated product.

So I guess the meter data collection margin in the quarter was kind of higher than its really been in well over a year and I was under the impression kind of the gas AMR was at about a 45% margin and then there some mix. So I would have expected the margin to be closer to 42%, 43%. Could you refresh my memory on kind of where the gross margin is for gas and water AMR modules?

No. That’s not a detail that we share. We’re sharing gross margin percentages at that segment level, but we don’t get into them on an individual market basis.

Okay. Well, thank you, guys, and congratulations.

Thank you.

Thank you.

[Patrick Fortin of TGI Securities].

Good afternoon and congratulations on the quarter.

Thanks, Pat.

Thank you.

LeRoy, last quarter you had talked, you gave us an update on your product development programs, mostly centered around AMI activity and was wondering if you could give us another update. And specifically, are those programs centered on sort of evolution of your fixed network product or are you looking at other technology platforms as well?

Pat, I’ll give you a brief answer to that and it sort of goes like this. I mean, we said last time we had close to 40 people that were dedicated to the next generation of what all of the industry would call largely AMI products. And that product is, from a technology perspective, taking stock of what the world is doing these days, both in terms of broadband over power lines, Wi-Fi networks, other available technologies that people are using to communicate, both wirelessly and in wired means.

So all of those things are things that we have been looking at. The program is going along just fine. We are on track. I check in with it quite often and we’re very pleased with progress to date.

Okay. Any input as to would that be sort of a 2007 or 2008 type of timeframe for a rollout?

We have not publicly disclosed that and I’m not willing to, for a while at least.

Okay. And then on Progress you mentioned you did $34.1 million in revenues for the quarter. What are the remaining revenues on that? Will that be spread out pretty evenly over Q2 and Q3?

Yes. There’s about $65 million remaining on Progress. Most of that will happen in Q2/Q3 timeframe, a little bit, as that project ramps down in Q4.

Okay, very good. Thank you.

[Operator Instructions] There appear to be no questions at this time. I would like to turn the call back over to you.

Great. Thank you, everyone, again for joining us today and as always, please feel free to get in touch with us with any further questions that you have.

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This concludes the conference call for today. Thank you, everyone, for joining.