Itron Inc (ITRI) 2006 Q4 法說會逐字稿

Good day, everyone, and welcome to the Itron, Incorporated fourth quarter and year end 2006 earnings conference call. Today's call is being recorded. For opening remarks, I would like to turn the call over to Deloris Duquette. Please go ahead, ma'am

Good afternoon, everyone, and thank you for joining us today. I have with me in Spokane LeRoy Nosbaum, our Chairman and CEO; and Steve Helmbrecht, our Chief Financial Officer. The earnings release that we issued today includes an updated outlook for revenue and earnings for 2007. Today's call also includes discussion that are forward-looking in nature. The business outlook and other forward-looking information we are providing is based on what we know today and is subject to a number of risks and uncertainties. I would like to encourage you to read the forward-looking disclosures in our press release which alerts you to a number of factors that can cause a difference between our expectations and our actual results. You should also refer to our 2005 Form 10-K for a more complete disclosure of specific risks and uncertainties related to our 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 non-GAAP financial measures that we believe 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 discussion of financial highlights for the quarter and after that, LeRoy will offer some additional insight and comments. We will hold a question-and-answer period after our prepared comments. Now I would like to turn the call over Steve Helmbrecht, Itron's CFO, for the financial highlights discussion.

Thank you, Deloris, and good afternoon, everyone. As you can see from our earnings release our financial results for the full year and fourth quarter were very good. Total revenues for 2006 of 644 million were a new record. New order bookings were 211 million for the quarter and 652 million for the full year. Non-GAAP diluted earnings per share of $2.39 is a new record for Itron and is 30% higher than last year. We generated cash flow from operations of 95 million in 2006, 19% higher than the 80 million in 2005. Now I will expand on our financial results in more detail.

Revenues of 160 million in the quarter were equal to fourth quarter revenues in 2005 and full year revenues of 644 million were more than 16% higher than full-year revenues in 2005. Electricity metering revenues for 2006 of 325 million were 85 million higher than 2005 due primarily to a 42% increase in electricity meter shipments. Meter Data Collection revenues in 2006 were 260 million, slightly lower than 2005 revenues of 262 million. Shipments of gas modules increased 44% in 2006, which offset a reduction in international handheld sales and stand-alone electric modules which decreased as expected due to a planned shift to selling new meters with AMR. Software revenues were 7.6 million higher than last year due primarily to licenses and services associated with new projects announced in 2006.

New order bookings of 211 million for the quarter and 652 million for the full year result in a book-to-bill ratio of 1.4 to 1 for the quarter and 1.1 to 1 for the year, above our expectations of 1 to 1 for the year. Total backlog of 392 million at December 31, is a new record for us. 12 months backlog of 225 million at year end is about 20% higher than 12 months backlog at the end of 2005, which gives us increased confidence as we look ahead to 2007. We are very pleased to have achieved this increase in backlog which means we more than replaced the 100 million related to the Progress Energy project in 2006. Total company gross margin for the year was 42%, equal to 2005. Total company gross margin for the quarter was 40%, down 1 percentage point from 2005. Our fourth quarter gross margin was impacted by the first shipments of our AMI product, OpenWay, as well as low-margin installation revenue.

We have improved operating income in 2006. Non-GAAP operating income was 19% higher in 2006 than 2005. As a percentage of revenue, non-GAAP operating margin of 15.8% in 2006 was up from 15.5% in 2005. While this was a smaller improvement than we had originally expected, we made a decision to increase our R&D spending on AMI technology. For the fourth quarter of 2006, non-GAAP operating margin of 12.4% was significantly lower than the 16.1% in the fourth quarter of 2005.

Operating margin in the fourth quarter was negatively impacted by the lower gross margin as well as higher R&D expenses from our AMI development efforts. We also had higher fourth quarter expenses for legal and accounting due diligence expenses related to an acquisition opportunity that we pursued but did not complete. Expenses related to our corporate headquarters move and an impairment charge related to our former headquarters building and expenses related to the implementation of a new ERP system. The margin impact and nonrecurring expenses totaled about 2.5 million and had about a $0.06 negative effect on diluted EPS for the quarter which was offset by a positive $0.07 from the renewal of the federal research and development tax credit.

Non-GAAP diluted EPS for the quarter was $0.56 per share compared to $0.59 per share in the fourth quarter last year. Non-GAAP diluted EPS for 2006 was $2.39 per share compared to $1.84 per share in 2005. Operating cash flow was approximately 8 million for the quarter and 95 million for the full year, compared with approximately 30 million and 80 million in the fourth quarter and full year 2005 respectively. Operating cash flow in the fourth quarter of 2006 was reduced by planned accelerated payments of accounts payable in anticipation of our cut-over to a new ERP system on January 1. Capital expenditures of 31.7 million for the full year 2006 were similar to 2005 capital expenditures of 32 million. We also invested about 21 million in several business acquisitions in 2006. Adjusted EBITDA, which excludes the effect of stock option compensation expense, was 115 million for 2006, versus 98 million for 2005. An increase of 18%.

We see 345 million in convertible debt in the third quarter of 2006. The net proceeds of the transaction are invested in secure high-grade short-term investments and cash equivalents. During 2006 the interest income earned on the proceeds of the convertible debt less the interest expense related to the debt had about an $0.08 positive impact on diluted earnings per share. Inventories increased slightly from 2005 to 2006 due to some proactive purchases of materials at favorable prices as well as inventory related to the Brazilian manufacturing operation we acquired in 2006.

Looking forward, our earnings guidance included guidance for 2007 -- earnings release included guidance. We expect revenues to be between 680 and 700 million. Non-GAAP diluted EPS, excluding stock-based compensation expense is expected to be between 2.70 and 2.90 per share. And adjusted EBITDA which also excludes stock-based compensation expense is expected to be between 130 and 135 million. Additionally, we expect that we will return to a more normal quarterly revenue pattern in 2007 where first quarter revenues are lower and trend higher over the course of the year.

In 2006, we excluded stock-based compensation expense from our calculation of non-GAAP earnings. As this was the first year of adoption of FAS 123R, we believe the exclusion would provide clearer comparability to 2005. Stock based compensation expense in 2006 was 8.6 million. Our non-GAAP EPS would have been approximately $0.28 lower had stock-based compensation expense not been excluded in 2006. In 2007, stock-based compensation expense is expected to be approximately 11 million. Our guidance would be lower by about $0.27 to $0.31 relative to the guidance we have given. We have not finalized a decision for 2007 but it is likely we will discontinue the exclusion of stock-based compensation expense from non-GAAP earnings. If we do so we will recast quarterly non-GAAP income, EPS, and adjusted EBITDA for 2006 with these amounts adjusted to enable to you make a more meaningful comparison of 2006 and 2007 results.

In closing, as we look back at 2006 we had a lot of highlights. We worked with Progress Energy to deploy a large scale, territory-wide AMR system ahead of schedule. We developed next-generation AMI technology, OpenWay, and shipped product in the fourth quarter. We saw broad based demand for our products and services and increasing capital spending by utilities as evidenced by our bookings and backlog. Revenues, non-GAAP net income, and earnings per share, adjusted EBITDA, and total backlog were all at record levels. Resulting in exceeding most of the expectation we had for our financial performance at the start of 2006. I look forward to talking with you about our results and opportunities in 2007. Now, I would like to turn the call over to LeRoy Nosbaum, Itron's Chairman and CEO, for some additional comments.

Thank you, Steve, and good afternoon, everyone. Thanks for joining us today. I'll only touch on a few subjects, in order to allow enough time for questions at the end. Let's start with some thoughts about the year end and quarter. As Steve mentioned in his remarks we had impressive financial results for the quarter, and were pleased with the way the year turned out. Records for revenue, earnings per share, cash flow from operations, and this time for total backlog as well. Many of you were concerned that we could not replace our Progress Energy order. I think the results and the backlog clearly show that we're able to do just that.

We had really impressive bookings this quarter with $211 million of new orders. Montana Dakota Utilities, fixed network for gas and electric, 277,000 points, Sacramento Municipal Utility District, an electric mobile rollout in California, 550,000 points. Detroit Water, a water fix network, 275,000 points. A nice quarter. And I made the 1 to 1 book-to-bill ratio that I was talking about for the second half. For those who are interested we booked over 11 million meters and modules in 2006, and over 3 million in the fourth quarter.

With all that good news, earnings were, frankly, not as good as I would have hoped for in the quarter. We shipped initial OpenWay units, our AMI product, at essentially break-even. It was the first product shaped. Very labor intensive, not yet cost reduced. As the year goes on that will get fixed. The product is working, customers are pleased. We're building a foundation for the future, so I'm okay with that.

We finished up the Progress contract with a large amount of installation work at low margins. Sort of a tail-out. Again, a bit of an unusual circumstance. As well during the quarter we chased an acquisition and we were unsuccessful. This was an opportunity not a must-have. It was not a target that was previously on the radar screen, but we were being a bit opportunistic. Unfortunately, all of the legal and due diligence expense shows up in the quarter. Again, a one-time expense, particular to a nonrecurring event. All in all, a great year with solid results.

Now, let me shift to some observations of macro changes and trends that are going on in the industry and use those to close with some thoughts about guidance for 2007. I recently returned from the Distributech conference in San Diego where thousands of industry participants gather to share information and discuss what is happening in the energy and water industry. I had the pleasure of giving welcoming remarks for the conference in which I touched on what I believe is the perfect storm for our industry. Four points that I believe mark a sea change. A general and pervasive concern for the environment by people everywhere. Rising costs of natural resources, gas, oil, water. The Energy Policy Act of 2005 and similar initiatives in our parts of the world. And finally, but not last in the order of importance, a growing number of utility executives declaring the environment to be their responsibility and pushing programs directed toward fixing the problem. All of these combined and individually stoke the fires of conservation, consumer options, and consumer communication around their use of electricity, natural gas, and water. That's the business we're in. With Itron's AMR products, with our Software Solutions, and with our new AMI offering, OpenWay.

During the Distributech and the AMRA conferences Itron gave private OpenWay demonstrations to 18 different major utilities from across the U.S. and Canada. A number we're talking about replacing AMR technology with OpenWay in order to address some of these emerging issues I just outlined. A number declared mobile AMR was sufficient for their needs. All were impressed with OpenWay and its approach, to standards-based open communication techniques via radio.

So what does this atmosphere mean for Itron in 2007 and going forward? It means that there are exciting opportunities. It means that there's material growth potential for Itron. It also means the industry is in a period of evaluation, experimentation, and huge RFPs that end with orders for trials. For 2007, guidance has not significantly changed from what we gave last quarter. '07 revenue up 6 to 9% over '06. '07 earnings up 13 to 21% over '06.

The first half of the year, as Steve mentioned, returns to the normal pattern of a low Q1 and growth throughout the year. I think there's upside in the last half of the year if we can move from trials to orders as the year progresses. That said, I very much like the potential of 2008, contingent upon the results of our '07 OpenWay trials, so far, so good. We have got 1,000 meters installed at CenterPoint. Our competitors also have to do well in their AMI trials. We need continued regulatory support and the potential adoption of tax or other incentives at the federal level would also be helpful. So I think we're looking into a good year for 2007 with the potential for up side in the back half and the potential as well for a great year. With that, let's open up for questions.

[OPERATOR INSTRUCTIONS] We'll take our first question from Paul Coster with JPMorgan.

Hi, it's [Amy Nom]for Paul Coster.

Hi, Amy.

Hello. My first question, I guess, LeRoy, this would be directed at you, just in terms of the acquisition that you were taking a look at this quarter, could you give us a sense of what the priorities or what the attributes of some of these targets that you're looking at have to be for you to be getting interested here? And also any changes in terms of the acquisition environment since last quarter.

Well, let me start with the back end of your question, Amy. I don't think there's any change in the environment from last quarter to this. To the first part, we continue to look at pretty much what I've said in the last couple of calls, things that are in the space we're already at. We don't intend to get outside of what I'll call our sphere of normal activities. So we think about on a worldwide basis, domestically and internationally, all three of the meter functions, electric, water, gas, certainly not electric in the U.S., anybody who is currently in the AMR business with a technology or space that we don't already have a material participation in, we look at opportunities around the world a little bit different than domestically where we have certainly great customer presence and great influence in the U.S. as we look domestically we look where we can establish a market or establish a presence where we don't have one today. You're not going to see us move outside the kind of business that we understand, that we know, and that we are already very very good at. So So sort of the same update. The acquisition that came and went was an acquisition of opportunity for us that presented itself in the quarter. We took a quick look at it. That cost some money. We didn't turn out to be successful. No harm, no foul, my view.

Okay, fair enough. Next, I guess, with regards to international growth generally is that measuring up to your expectations as we went through the year? What's the outlook as we head into 2007?

Great question, actually. As we come to the year, I've got some points of great accomplishment and some points that I'm a bit disappointed in. We're thrilled with what's going on in South America. Our acquisition of ELO technology in Brazil certainly marked not only a beachhead for us in South America but we have shipped more meters down there than I thought we would so I'm extraordinarily pleased with that and what we have been able to accomplish.

On the flip side of that coin, I would have liked to have been further ahead in Japan than we are today but we have a very nice water fix network trial going on in Nagano, a recent update on that it's going real well and so we would hope that that would turn some business as we move to the back half of this year and on into '08. We are still conducting some trials in the Middle East, both water and electric fixed networks. That moves at a pace that's probably reasonable. We continue to spend a lot of time in Europe selling software, very successfully, selling software frankly, all over the place successfully and we are still assessing how we might play in the bigger market of Europe and what I think is going to be a very nice opportunity over there in the AMR and AMI world. So I think in general on balance I'm okay with the way 2006 turned out internationally. We have put some growth targets in front of our folks for international growth. What I will call organic and I think as we come out through '07 and on into '08 we continue to look for acquisition opportunities that would scale that up materially.

Okay, great. I have one last question, and then I'll let somebody else get in here. With regards to the visibility of your turns business and your typical meters and AMR business, do you feel like anything from the utilities point of view is being put on hold as they evaluate AMI solutions and just kind of the product offering that's out there right now.

You bet. I think at some utilities clearly we're seeing business -- put on hold is maybe not the word I would have used, but we're seeing utilities that had considered one form or another of AMR, say, let us pause for a moment and look at AMI, let us respond both to the Energy Policy Act of '05 and to our Public Utility Commissions as they deliberate. We're seeing some commission rulings come down, some utilities doesn't have to do anything, although there's only a few of those. We see others encouraging utilities. I think there's some delayed action, if you will, at some utilities. On the other hand we have seen some that have taken a look come back into the what I'll call the funnel in a more positive view. So I think as I said last time, I'll say it again, we have an interesting first half '07, in terms of what exactly AMI is going to do. I think the long term we'll see people move on with fixed networks and mobile implementations, but we're going to also see some utilities move to AMI. Those are going to be attractive orders, they are going to be large, ultimately they will be profitable. So I think we just have sort of an interesting year as we look at '07.

Great. Thank you very much.

Sure, Amy.

Moving on to the next question we take a question from John Quealy with Canaccord Adams.

Hi, good afternoon.

Hey, John.

Couple quick questions. On the order book of 211 you stripped out three or four orders worth 70 million or so. Outside of that can you comment on water, gas, electric, how it was spread out in the quarter and what sort of momentum you are seeing there?

Actually, John, we were really pleased this quarter because we had a broad base of bookings. LeRoy mentioned three of them which crossed gas, electric, water, it crossed mobile, fixed network, et cetera, we also shipped some AMI during the quarter. So pretty much the customers that we mentioned characterized the bookings during the quarter, and we were really pleased with the breadth of that.

Okay. And then on the gross margin on the electric meter business, obviously I think most folks were looking for a drop-off given progress slowing, but it looks like it's about, I don't know, 440 basis points quarter on quarter. LeRoy, you mentioned both a sort of start-up of AMI batches as well as sort of higher installation revenues. Of that 440 delta quarter on quarter, can you comment how much you think was allocated on the -- my guess is mostly at CenterPoint meters and how much was sort of install wind up at PE, Progress Energy there?

Yes, John, I'll get at it, but I'll get at it a little bit different way than you've just asked. If you drop out the one-time stuff the progress end of year, the CenterPoint effect of essentially break-even, you get all the way back up to the low 40s in margin. So real traditional kind of stuff. I mean, what we're not seeing is the underlying business, is any big drop-off in margin, so I'm glad you asked the question. I mean, essentially it was the one-time stuff that we have talked about that caused a deterioration in gross margin in Q4.

And from your expectations, the more AMI you shipped early on the more it's going to depress margins but when do you think you hit that inflection point, LeRoy, whether it's CenterPoint coming on in the spring, when margins get to a more reasonable level, whether it's gross or operating?

It depends on who you ask. If you ask Malcolm, he will say towards Q3, and 4. If you ask me, I'm kicking them in the butt to do it quicker.

The last two questions. On the gas AMR business, you've had a lot of backlog tied up in gas. Can you remind us how that flows through this year of some of these guys ramping down in the year? I thought there were a couple of multiyear gas orders in there in the backlog from previous quarters.

Yes, Piedmont has finished up through '06 but remember we announced Southwest Gas in early '06. That's about a three year roll out, we expect that to continue. Montana Dakota has a component of gas in it. UGI that we announced has a component of gas in it. And Northwest Natural we announced early in Q1 also goes throughout the year, so we don't expect that business to be dropping off in '07.

The last two questions for LeRoy. Recently you had some quiet releases about increasing partnerships and I think you alluded to this with Eka and [Acteris], can you comment a little bit about, especially with Eka, almost a backwards looking solution on mobile for two-way functionality or what the strategy is, whether it's front selling OpenWay for a new sort of product line or retrofitting some existing stuff with some of these complementary relationships.

John, we're going to continue to do both. I mean, Eka folks have developed some nice technology that enabled us to enhance some of the things we're doing mobilely. We announced a great order in the quarter with San Diego Municipal Utility District for Mobile. It's all they need. It's the right application. I mentioned that one and I refer to it being in California because the whole world thinks California is going to AMI. In fact, it won't and it isn't. So we are going to push to be a broad-range and value supplier for customers whether they want mobile, fixed network, or AMI. We are the guys that can do that. It's one of the things that our size and scope allows us to do.

My last question, and I'll jump off, if I can ask you to prognosticate a little bit on the political landscape. In you view, what would you rather have accelerated depreciation on meters move forward next year, or energy efficiency wrapped up in federal renewable portfolio standards, in your view.

Off the top of my head I'd rather have the accelerated depreciation. I think the other one is a little bit more difficult to quantitate in the short term. We would push some utilities over the mark on accelerated depreciation. If it got bounded on the back end, if you've got to get it done by this date, otherwise you don't get the treatment.

Great. Thanks. Great year, guys.

Thank you, John.

[OPERATOR INSTRUCTIONS] We go next to Stuart Bush with RBC Capital Markets.

Good afternoon. LeRoy, can you give us any feedback on these initial AMI trials? Were there any concerns or successes in what your product could achieve that surprised you, or is it leading your R&D in a different direction or do you feel like your initial development plan is what the market is demanding?

So far in two dimensions we're real happy with where we are Stuart, realize, of course, we have about 1,000 meters installed, and a requisite network at CenterPoint. We have only a little bit of installation up at Manitoba Hydro because they are waiting for some Canadian standards approvals in the meter area. So far reaction good, product doing what we expect it to do. We are really energized about how those customers in particular have looked at what we have shipped. Another thing I'd say, as I mentioned in my prepared remarks we have demonstrated this stuff to 18 different utilities, and frankly, we are very, very pleased with the reaction we're getting from utilities and we're very pleased with, in general, the conversations we're having about our product that we've introduced. So I'm happy with what we've done.

Great. Okay. Then a question for Steve. I'm trying to figure out your comments here on when you might decide to transfer to a pro forma EPS that includes stock-based compensation. So how much stock-based compensation was in 2006 and can you just remind us, is it $0.27 to $0.30 downside to your guidance number that would be for 2007?

Yes. The stock based comp -- and just a reminder, again, it was about 8.6 million in 2006, and that was about $0.28 or so in terms of EPS, after-tax EPS. Our current forecast for '07 is 11 million, and that equates to about $0.27 to $0.31.

Stuart, I might just add, we really haven't definitively made that decision yet but he really are leaning in that direction. Our methodology for non-GAAP financial measures is generally to exclude one-time costs, and that's usually related to acquisitions. So we thought it was appropriate to do that in '06. Now that we are going into '07 and you have comparable year-over-year numbers we are leaning in that direction. As Steve stated in his remarks what we will do is retask each of those quarters and what they would have looked like had we not excluded that expense from our non-GAAP EPS, so that you will have comparisons out there for your analysis.

Okay. And so I assume that in this guidance number that you have given, also basically assumes the accretive interest from the convert for the whole year.

Yes. That's true.

So how many cents would that contribute?

It's about $0.21 next year is the expectation, and that assumes that there would be no acquisitions. That's just as the business is today.

Thanks a lot guys.

Thanks, Stuart.

Next up we have Christopher Summers with Greenlight Capital.

Hey, guys, I got two questions. An easy one and a hard one. Which one would you guys like first?

Take the hard one first.

Okay. If I look at your fourth quarter EPS and back out the accretion from the convert, the pro forma give-back on the option expense, the tax rate benefit, then give you guys the credit on the accounting charges related to your acquisitions you looked into, the business itself was kind of running at a $0.35 to $0.40 per share range that quarter. If I annualize that, that implies like $1.50 to $1.60 run rate core EPS. Then looking out to the '07 guidance with the high sales growth off of, I guess, what happened in the fourth quarter of '06, just want to understand where you're going to see the big margin improvement and maybe you could talk to the quality of the backlog today, and is it going to be mostly on the AMR side and higher margins there, or could you kind of talk a little bit around where you're going see the margin improvement that I think is implied in the guidance?

Well, I mean, I'm not implying any margin improvement in the guidance. I'm implying a mix different in some regard. I mean, clearly, we had, as we look through 2006 an awful lot of low-margin installation expense and in Q4 we got hit with a bunch of that on the cleanup end of the progress contract. We have been running, save that, in the low 40s, and we are going to stay in the 40s. That's a mix of an increasing amount of AMR in the electric meter world, which we have seen over the course of the last, oh, eight quarters or so. We continue, as we mentioned early, to have a very nice backlog of gas AMR module business, which is that really great margins, and we think water business is with us, as it has been with reasonable margins as well. Software continues to grow. It helps a little bit, but I don't -- we're not looking for great margin improvement on what I would say is the underlying core business. But acknowledge that we had more installation revenue that tends to be low margins, and we had some funny stuff in the fourth quarter.

Okay. I was also speaking to the operating income margin. Were you expecting some leverage on some of your G&A or sales and marketing at all?

We are actually, and we finished that as I mentioned at 15.8%. We would see ourselves trending into the 16% range, perhaps in the middle part of that range next year, really by holding our rate of growth in G&A and R&D. We ramped up, we got the people we needed in, we're doing the work on AMI particularly, but we don't incrementally see the need to really grow that into the next year as well. We got the product out. We are going to hold that steady, so as a percentage, it's really trending back towards our targets towards continuing to drive operating margin expansion out of the top-line growth.

It's fair to add two pieces to that, as we came through '06, which we have talked about in a couple of calls, we were installing a new ERP system that's gone live January 1, thrilled to say gone live without too many glitches, and feeling good about that. Guys did a great, great job. As well we certainly are not planning on moving into another new headquarters building in 2007, which we did in 2006, so we generated a bit of expense there, and clearly blew up some capital there as well. So we had a couple of things going on in 2006 to prepare for the future. Steve mentioned AMI. New ERP system. Ultimately that saves us some money. Should drive those operating margins higher, and as I said, the building. So a few one-time occurrences.

Got it. Then as you talked about a lot of this low-margin installation revenue in '06 that implies to me like a big sales number and a low gross margin number. So if we're not going to have that in '07 it actually implies even a higher rate of top-line growth on your core business. Is that kind of in line with what you're expecting?

To be honest, I didn't follow the logic of that. I'm not saying it's wrong, I just didn't follow it. I think our core business is going to be about what it it has been with -- as we said, a high single-digit growth potential. I don't see it any different than that.

Okay. And then the tax rate for '07 implied in the guidance?

Yes, it's about 37% for GAAP next year, 37.5, and about a point lower for non-GAAP, Chris.

Now the easy question.

Great.

The contracts that you've mostly announced in January, the contract wins, were those in the fourth quarter bookings?

Yes.

Yes.

great. Thank you very much, guys. Congratulations on a great year.

Thank you.

Next we move to [Jamie Lester] with Soundpost Partners.

Hey guys. Chris asked like six hard questions, one easy one, but anyway. Quickly, the unallocated corporate, is that the right run rate -- is the fourth quarter level the right run rate for 2007? I guess it was 26.5 in Q4. Is that the right base to start at after backing out the million bucks of the due diligence costs and then grow that a little bit?

Remember, there were a couple of charges in there. Actually, the one-time charges were closer to about 2.4 million when you aggregate it. It was the 1.1 million of due diligence. It was the building impairment of close to 700,000, and then we had some move and some ERP expenses as well. So you should back out about 2 to 3 million in there.

Okay, great. And then the second question I have is, have you guys thought about recasting your segment data? Obviously the sexy part of the business ostensibly is the data collection business, and that -- the operating profit from that has been flat for the last three years. Obviously a lot of that is shifting into the metering segment. The metering business is very -- I always think it's not as great a business. Is there any way you guys can -- have you thought about resegmentizing the returns to give people an accurate picture as to how much profitability is coming from the meters as opposed to the modules?

Yes, we think about it every once in awhile. We have debated it internally. But understand when you build an electric meter with AMR in it there is no module. The AMR portion of that electric meter is dispersed throughout the meter. It is integral to everything that goes on in the meter. It is the same microprocessor that does metering things that does AMR stuff. It's the same power supply that runs the AMR piece that runs the meter piece. So you just can't disaggregate it with any accuracy, and you certainly couldn't stand any audit to say, how did you come up with that number? So you are sort of stuck with that kind of aggregation, if you will. If anything, we have given serious thought to just pushing the two together, AMR and meters.

Yes, I know, I guess that to me would--. Sorry--.

What I might add to try to help you determine meters from AMR modules from AMR meters, we do break out the shipments of that to help, but I realize that it's not revenue and doesn't translate all the way through.

Yes, I mean, if you try and look at even the revenues by segment, divided by the units, it comes out to all sorts of different numbers that probably don't have much meaning right. I mean, I guess my opinion would be unless you guys think that unless those segments help you understand the business, to me, again, looking at the sexy part of the business being flat for three years and that the more humdrum part growing I think is probably sending the wrong message. Anyway, just a thought.

Thanks for your comment.

Roughly how much -- what was the revenues from international in the quarter?

They were 6% of revenue during the quarter.

Okay. And what was it for the year?

About 5 to 6. I don't have that exact dollar amount.

Okay. But roughly -- has there been any change in the competitive environment given the -- I guess the acquisition of Cellnet by Baird and putting it with Linus and Gear -- are they rolling out meters that are better integrated?

They only got that done about month ago didn't they?

Three weeks. But I don't know.

Yes. No, not yet. For one, Baird has been pretty vocal about saying they were going to run all that stuff independently from each other. I don't believe it for a minute, but that's what the man is saying. We're going to see a tougher competitive environment from the Landis Cellnet competition. It's worth saying we sell an awful lot of meters with solid state meters with Cellnet communication devices embedded in them. That, too, is a very integrated product. We sell those to customers who demand our meter and unfortunately also demand Cellnet's communication technology. I don't know that all that business goes away, but certainly if Baird's doing what they ought to be doing they ought to be able to produce a more competitive front when they combine their meter and their Cellnet AMR module. We'll see how that happens. We haven't seen it yet.

So the customer -- I guess, though, those customers I could see falling into two buckets. One, they want your meters because they already have your meters, and they want to consistent platform and maybe you don't lose that business, but the ones who were a little more meter agnostic, Cellnet can now probably sell a lower cost integrated product. Is that fair and is there any way you can ballpark?

No, the statement is fair. I'm happy to compete against them. I think we've got a lower cost base to compete with. I got a better sales force, and we've got a product that's at least twice as good.

Okay. Great. Well, congrats again, guys. I appreciate the comment.

No problem.

We'll now go to Sanjay Shrestha from First Albany.

Couple quick questions. Actually, a lot of them have been answered, but one, kind of wanted to talk about the whole AMI opportunity here again a little bit. Obviously a few things has to go well here, inflation, some large projects, and things of that nature but LeRoy as you weave fast forward call it 6 or 12 months given the benefit of AMI the meter reading benefit, right, and your hybrid approach to it could it be a situation when it's fully ramped and you're shipping products out the door on volume that this turns out to actually be a better profit opportunity for you than even some of the other segments of the business at this point in time?

Sanjay, I think you're right on with that thought, and one of the reasons is because the overall margin pictures of AM is going to be better. It's going to sell for more money, it's got more value and more functions. It will be higher sales price. We'll work margins. We do that better than anybody in the industry. And so I think the result in profit margin has the potential to be better. As well, I think this is going to be a material piece of business as we look into '08 and beyond. Certainly a lot of things are aligning as I alluded to and so I like the picture.

We sort of move through time, if you just think about electric meters, from selling electric meters as a commodity, tough margin business. You just have to know how to make it better. We were good at that. Then we moved into AMR. A little bit more feature and function, a little bit more margin. A nicer, sexier business, if you will. As we move on to AMI it even gets better. Because as we're looking at AMI we are looking at lots of functionality, we're looking at a lot of value for the utility, and we are looking at Public Utility Commissions that are willing to let all of that roll into the rate base, so I like that picture.

Exactly. Then kind of a follow-up on that LeRoy. Obviously you guys have always been conservative with your guidance and expectation and clearly there's a range here of earnings growth and revenue growth and you said there's a potential for some further upside. If I'm not reading it incorrectly you are saying if there's some potentially some AMI-related stuff you could actually end up having revenue range higher than your higher end of the guidance, but obviously we need to see how that unfolds but if that were to be the case numbers could be higher than that, right?

Certainly agree. I think you have potential of two kinds of upside. One, exactly what you described, some AMI stuff getting through both consideration and trial or pilot, call it what you will, and it hits. The other one I think is some utilities that are looking but won't touch AMI will move back to either fixed network or mobile AMI. Either one of those could bring upside in the back half of the year.

Great. One last question, LeRoy. With the arguably potential opportunity ahead of you here on the AMI side provided things work out, has that changed your view on need for an acquisition in the near term?

Not at all. Not at all.

Okay. Terrific. Good year, guys.

Thanks.

And now we move to Patrick Forkin with Tejas Securities.

Good afternoon. Congratulations on a good year.

Thanks, Pat.

LeRoy, getting back to your comments on the potential for upside in the back half of 2007 you mentioned moving from trials to orders, and I know you just talked about this, but I want to clarify it. Are you talking about OpenWay in that vain?

Certainly.

So you guys would be in a position if you got an OpenWay order of size in '07 that you have got everything set up to fulfill orders like that in '07?

Yes, as we move through year into the back half we have an increasingly better picture in terms of being able to supply customers.

Okay. And then on OpenWay, I know that you guys have been very upfront with your customers in sort of it's a more robust product so it's going to command a higher price than FN 2, for example. How would you characterize the pricing of OpenWay versus let's say the most robust AMI offerings that you compete against out there?

Well, I mean, competing against the most robust AMI offerings from our competitors, I think we're in the same ballpark those guys are. I'm not worried about competing on price on those things. We're fighting for functionality, feature. We push our open architecture and standards approach, which is being received really, really well. If you -- if you're looking for general ranges of price, if you look at the differential between a mobile and an AMI offering, I think you're talking between two and three to one on a comparative basis. Depends on the bidding situation, and volumes you're quoting.

Okay. And then you kind of talked about the competitive front on the AMR-AMI side of the business. How would you contrast that competitive front on the solid state meter business 2007 versus 2006?

Oh, our competitors are shipping more solid state meters than they were early in '06. So I think the competitive landscape has gotten a little bit different, but the pie has gotten bigger. More utilities have moved from mechanical to solid state meters, and so the competition is tougher but we're competing for a bigger pie, so in some respects, the result and effect has not been much different at all. We still command a huge market share in solid state. We'll continue to do that. We have got a better product, and we have got a better sales force.

Okay. Very good. Thank you.

Thanks, Pat.

Next we'll move to [Eric Erasa] with Cambridge Trust.

Hi. My question has been answered. Thank you.

Thank you.

We do have another question that comes from Steve Sanders with Stephens, Incorporated.

LeRoy, I wanted to see if you could drill down a little more on some of the international opportunities, specifically Asia and Europe. Seems like there's some good things going on in Europe. If you could just talk about your challenges and opportunities to participate there, and then a similar question in Asia. I think you guys have good relationships through the hand-held business. What are the challenges to really turning some of those relationships into a good AMR/AMI?

Let me start with Europe, then I'll go to Asia, Steve. In Europe we've spent a lot of time in Europe, I have spent a it lot of time in Europe looking at what's going on. There is no question that across Europe we are seeing a rise in interest, started in Scandinavia and Italy but it's going to move to the rest of Europe, at AMR, some places AMI. We have been having conversations with the utilities over there. Smaller ones to the very biggest, like Electricity de France. We are sorting out how best to participate as Itron. We have some expertise, we have technology, we don't build a meter currently that is suitable for Europe. We think about partners there in terms of meter partners. We think about partners there in terms of positioning partners, and it's an area we're sorting out. I think we can get placed there to participate in that business climate and be effective as those utilities as they have already begun in the United States move to AMR. So we're focused and we're spending a lot of time there. But we haven't got it completely sorted out yet, but do intend to.

If we look at Asia, it gets situational, depending on whether you're talking about frankly, water or electric. In water world, I'm really hopeful with some of the stuff we have been doing on fixed network water trials in Japan, I'm not as pleased with our ability so far to make inroads with our electric metering product. We continue to hold discussions with various metering partners over there. We continue to hold discussions with people like Tokyo Electric Power and how best we might influence the industry and make some inroads there. I'm not discouraged. I'm just not pleased with the pace of progress. But in Japan you need to get comfortable with not being pleased with the pace of progress. It is what it is.

I think there are some other opportunities in the rest of the Asia Pacific area. We continue to look for opportunities in Australia. We continue to look for other opportunities in Hong Kong and Singapore. I will say I think as we move through '07 that comes clearer.

Okay. And then a little more information on the gross margin in the metering business. Should we see that snap back to within historical ranges in the first quarter, or does it take a couple of quarters to get back up into the high 30s, low 40s there?

We think in that the first quarter it should come back to more normal levels. It was suppressed by the AMI and then the installation for progress this quarter. So we see it coming back fairly quickly in the first quarter.

Okay. And then a final question on the gas and water. Obviously the bookings on both sides that we've seen have been good. Are those both sort of in line with the corporate rate in terms of growth in '07, or is there a significant difference between the two?

No, I would say they're in line with the growth rate in '07.

Okay, thanks.

Thanks, Steve.

And there are no more questions in the queue at this time. I'll turn things back over to Mr. Nosbaum for any additional or closing comments.

We thank you all for joining us today. Pleased to be able to talk with you. I think we had a great year, overall nice growth rates top to bottom. We look at '07, as I said, it's a little bit of an interesting year, the good news is AMI is really picking up pace sort of on the other side of the coin. I think it has a bit of a slow effect, at least in the front half of the year. We're real pleased with where we have gotten to. So if we change our minds about guidance between now and next quarter we'll let you know but I don't think so. And we look for the call for Q1 earnings release. Thanks for joining today.

Ladies and gentlemen, 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 a passcode of 5745099, or go to the Company's website, www.itron.com. Thank you all for joining us. Please enjoy the rest of your day.