Itron Inc (ITRI) 2007 Q1 法說會逐字稿

Welcome to the Itron, Inc. first-quarter 2007 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. On today's call, we have 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, which includes expected results from our acquisition of Actaris Metering Systems that we closed on April 18, 2007. Today's call also includes other discussions 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 disclosure 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 2006 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 thoughts and comments. We will hold the question-and-answer period after these remarks.

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

Thank you, Deloris, and good afternoon, everyone. Our press release and financial statements present much of the detail behind our financial results for the quarter. So I will expand on those areas of financial performance in the quarter that I believe are worth pointing out, and talk about the Actaris acquisition and our business outlook.

Revenues were $148 million for the quarter, down 5% from last year. Hardware solutions revenue for the quarter were $132 million, down 7% from last year. Revenues in the first quarter of 2006 were driven by increased shipments of electricity meters with AMR related to our project with Progress Energy. We shipped nearly 600,000 fewer electricity meters during this quarter than we did last year. Considering that we shipped over 900,000 meters in the first quarter of 2006 for Progress, a decrease was expected. Although we have replaced much of the backlog from Progress Energy with new business, we have returned to a more traditional quarterly revenue pattern this year.

Software revenues were $15.7 million, up 17% from last year, driven by growth in new licenses. Non-GAAP net income in the first quarter was $12 million or $0.43 per share compared with $13 million or $0.51 in the first quarter of 2006, both of which contain the effect of stock-based compensation expense.

As a reminder, starting this quarter, we're not adding back stock-based compensation related to the adoption of FAS 123R to our non-GAAP earnings or to EBITDA. Stock-based compensation related to the adoption of FAS 123R was $2.5 million or $0.06 per share in 2007 compared to $1.8 million or $0.07 per share in 2006.

Our earnings performance was impacted by a number of items. Total gross margin in the first quarter was 41%, 2 percentage points lower than the first quarter of 2006. The margin decrease was in hardware solutions, and was attributable to lower overhead absorption due to lower meter production volumes. Margin was also impacted by higher warranty expenses in the quarter. Software gross margins of 46% were comparable to the first quarter of 2006.

We had higher operating expenses in the quarter. The higher operating expenses were due to a number of factors, including increased R&D expenditures related to our development of OpenWay and higher general and administrative expenses for expenses associated with Actaris acquisition; professional services and depreciation expenses related to our ERP implementation; and maintenance costs for two corporate facilities.

We had new order bookings during the quarter of $118 million, which is about a 0.9-to-1 book-to-bill ratio, compared with bookings of $206 million in the first quarter of 2006, which was an unusually high quarter for us. LeRoy will talk a little more about order momentum in his upcoming remarks.

Total backlog was $376 million at March 31, a decline of $16 million compared to year end. Our 12-month backlog of 225 million at March 31 is the same as it was at year end, which helps to solidify our revenue outlook. Non-GAAP operating income in the quarter, which excludes amortization of intangibles expense was $16 million or 11% of revenues compared with $26 million or 17% of revenues in the first quarter of 2006. This operating margin is below our targeted margin for the year.

Our ERP system is live, and the Actaris acquisition is complete. We're now refocusing on managing expenses and improving our operating efficiency and cash flow.

Our cash flow from operations during the quarter was $9 million compared with $37 million in the first quarter of 2006. The decrease in operating cash flow was due primarily to higher-than-normal balances in accounts receivable. We went live on the new ERP system on January 1, but encountered issues affecting our processing and invoicing which resulted in much lower-than-normal collections.

This was an implementation issue that we have addressed. Cash collections have been good in the current quarter. And we expect accounts receivables to trend back to more typical levels soon.

Our capital expenditures in the quarter were $8.6 million. EBITDA was $22 million for the quarter compared with $29 million last year for the reasons I talked about.

During the quarter, we issued nearly 4.1 million shares and raised about $225 million in a private placement of common stock. As a result, we ended the quarter with about 622 million of cash, most of which was used for the acquisition of Actaris.

Before I talk about guidance for 2007, keep in mind we discontinued the addback of stock-based compensation expense to non-GAAP earnings. In 2007, stock-based compensation expense is expected to be approximately $11 million. Therefore, our guidance for 2007 is lower by about $0.30 relative to the guidance we gave on our year-end earnings call, as we have taken that addback out of our guidance.

In order to help with the transition and to provide comparability, we recast our quarterly non-GAAP financial information for 2006. And these recast results were furnished on a Form 8-K, and are available on our website.

We provided high-level guidance for 2007 in our earnings release today, which also includes the contribution from Actaris, which closed on April 18. For the full year 2007, we expect revenues to be between $1.4 billion and $1.43 billion.

Non-GAAP diluted EPS, which does not include the effect of adding back approximately $0.30 of stock-based compensation expense, is expected to be between $2.60 and $2.90 per share. Non-GAAP diluted EPS excludes any expenses related to the write-off of in-process R&D, amortization of intangibles and debt fees, and other business purchase accounting adjustments such as revaluation of inventory. We're in the process of performing valuation work on the Actaris acquisition.

EBITDA, which also does not include the benefit of adding back stock-based comp, is expected to be in excess of $230 million. And for the second quarter, we expect revenues to be between 370 and $390 million.

There are a few items worth pointing out when thinking about our expectations for the year. First is our North American business. As we stated before, we expect that revenue for the second half of 2007 will be higher than the first half. Our expectations for Actaris are based on an average foreign currency rate for 2007 of $1.34 per euro.

We're pleased with the results of our debt financing, and were able to secure approximately 1.2 billion in debt financing denominated in dollars, euros and pounds sterling at a 200 basis point spread over the relevant index, a spread lower than we originally projected. Additionally, our outstanding shares will be higher than we discussed on our year-end call because of the 4.1 million shares of common stock we issued.

In closing, we had a lot on our plate in the first quarter with the implementation of the ERP system and the acquisition of Actaris. We have completed the acquisition, and are now focused on integration, expense management and driving profitable growth and cash flow in the combined business. And I look forward to reporting to you our combined financial results for the rest of the year.

Now I would like to turn the call over to LeRoy for additional comments.

Thank you, Steve, and thanks to all of you for joining us today. Let me start with some comments on the first quarter. Revenue at $148 million -- okay, and about what we expected, as we returned to a year with a lower first quarter, which is more typical for us.

Our operating expenses are high. In research and development, we're spending more on OpenWay, Itron's AMI offering, than our normal level of R&D expense, which we will continue all the way through the rest of this year. It's affecting our operating results, but it's the right thing to do.

Our G&A expenses are high. We had some expenses in the first quarter that I wish we would not have had. Supporting two headquarters buildings while one is for sale is one of those expenses. And we went live on a new ERP system with related consulting and professional fees that go along with that transition. On the good side, the ERP system allows us to efficiently integrate an acquisition like Actaris.

So we spent more money than I would have liked to, but most of the expenses were for strategically significant programs. As we move through the rest of the year, we will be reducing expenses in a number of areas as programs and projects permit.

Now let me turn to the rest of the year. As I said on our last earnings call, the industry will have an interesting first half in 2007. The interest level for AMI, and with it, Itron's OpenWay, is extraordinary. Just last week, there was an intelligent grid conference in Washington, D.C., where every other word was "smart metering" followed by accelerated depreciation for this kind of equipment.

Currently in North America, there are tens of millions of points of AMI at various stages of the bid process. In Southern California, some things are moving along. However, they have announced that they're pushing their AMI award out to November, but will do a pilot or to. We feel good about that. San Diego Gas and Electric has stated they are releasing an RFP this month, in part to look at new technology. We feel good about that.

We're also delighted with the order for our meter data management software from San Diego Gas and Electric, which will be used in their AMI project. That was reported to the CPUC on April 18.

Other opportunities are progressing. Our CenterPoint phase one goes well. And we look forward to moving to phase two later this year.

The momentum for AMI continues to build. However, customers are still in a period of consideration, test and trial. So orders and shipments are moving to later in the year and into 2008, as we warned might happen.

At Itron, we continue to close business for our traditional products. The reality is that large orders were slower in the first quarter of this year than they were last year in North America. It's largely the result of AMI evaluations and deliberations, which are complex, but will ultimately be significant orders. In our view, it will get better as we move through the year, albeit with some uncertain timing.

All of this points to what could be a very nice bookings in the last half of 2007, and in '08, that has the potential to produce very exciting revenues and earnings. This is a year in which we will all watch for progress with RFPs, the results of trials and pilots, and new awards for business that will likely begin deployment next year.

As I have said in previous calls, don't look for big impact from AMI revenue in 2007. Accordingly, we could see revenue for Itron pre-Actaris be at the lower end of the revenue and earnings range that we have previously provided.

With that, let's talk about Actaris, the acquisition we closed on April 18. We won't go through all the details of the acquisition itself, as all of that information is very public at this point. It is an extraordinary acquisition, bringing to Itron electric, gas and water metering worldwide, along with a very impressive network of distribution when many parts of the globe are moving to AMR, and some to AMI.

Results at Actaris so far this year have been strong. We look to maintain that momentum as we move through the year. Malcolm Unsworth is already in Brussels, actively working with a very talented Actaris management team. Financial integration is well on its way, and we have started Sarbanes-Oxley training.

With the acquisition of Actaris, we're now dealing with a much larger opportunity to close business and produce steady revenue and earnings. As we move through the quarters this year, the color around Actaris will increase. We will begin describing the business in terms that outline for you how Actaris is doing and how it is contributing to Itron.

In North America, Philip Mezey is actively managing the traditional Itron operation, which we will call Itron North America. We will not give individual guidance for Itron North America or for Actaris. We will give guidance for the whole and talk to particular issues in each part of the business going forward that affect the whole.

Going forward, parts of the business will be combined. For instance, Itron's traditional international group is now working very closely with Actaris. I would not look for other material changes, however, until we have come to learn where change makes sense.

Actaris is extremely well run. There is no need for any immediate changes.

The acquisition of Actaris makes Itron a very different company. Our revenue projection, as Steve mentioned, for 2007 now jumps to 1.4 to $1.43 billion. Our earnings range moves from $2.60 to $2.90. Our EBITDA grows beyond $230 million.

We have taken on a large amount of debt with this acquisition. We also expect to generate a substantial amount of free cash flow between Itron North America and Actaris, which will be largely used to pay down that debt -- a repeat, if you will of what we did with the acquisition of our existing electric meter business.

I think we will look back on 2007 with two perspectives. First, this is the year in which AMI and Itron's OpenWay came alive in North America so that it could start contributing to results in 2008. Second, Itron became a player on the world stage with the acquisition of Actaris, an event whose timing may not have been perfect, but I think it is quite close.

With that, let's open up for questions.

(OPERATOR INSTRUCTIONS) Stephen Sanders, Stephens.

I wanted to come back to the integration if I could. You mentioned working closely -- the Itron international team working closely with Actaris. But in order to position yourself over the intermediate term to capitalize on some of the sales synergies you guys have talked about, what do you need to do over the next year or so on the product side -- manufacturing, distribution -- to put yourself in a good position there?

That's a fairly encompassing question. Steve, I think as we look at the next year or so, we will be somewhat situational in exactly what we have to do. Clearly, the first thing we have to do is get to know each other better. And one of the things that Malcolm and a small team of people are doing is sort of transferring information back and forth. Malcolm has spent a whirlwind month traveling around and getting to know places, facilities, and people.

I think to talk specifically about what you asked about, I will start with manufacturing and say I don't know that there's very much, although there are some places that Actaris makes things clearly with cheaper labor than we do in the United States. And so there might be some goodness there. Clearly, on a manufacturing basis, Actaris is making some things in United States. I don't see any particular combination there in the next year.

What I do think is we will look from a sales perspective in the U.S. at how Itron salesforce and our positioning in North America can help the Actaris groups that are selling gas and beginning to sell water meters in the U.S. be more successful than they are today.

Certainly, as we turn our attention to the rest of the world, and I think about Europe in particular, one of the reasons that I was anxious to move Malcolm to Europe was that he has a huge amount of expertise in automatic meter reading and, to some degree, AMI proposals -- implementation, certainly on the automatic meter reading side. And Actaris is just at the front end of some of those kinds of activities. So certainly Malcolm's job at this point is to figure out where there are synergies, where we can combine either expertise on how to do something, or literally technology, and make the best out of that equation.

I think one of the things we'll have to do over the next 12 months is to think about what we do with software. Certainly in the U.S., we produce a good bit of software that we have talked to many customers around the world about. The key now is to use the Actaris distribution channel to more effectively sell that software and to make sure that we are not missing opportunities where we haven't been able to get to because we have been such a smaller salesforce on a worldwide stage.

Certainly, I think as we move through the rest of this year, we will sort out some of that. And in fact, I know next week that Doug Staker, who runs the traditional Itron group for international is with Malcolm over in Europe having some tight discussions about how to not only look at opportunities jointly, but increase our potential to sell software. So I think in an overview perspective, that fairly well answers the question.

Thank you very much for the detail there. And then a couple of quick follow-ups maybe for Steve. How should we think about purchase accounting adjustments in 2Q? Can you just give us some guidelines there?

Sure. As I mentioned, we have a number of items in the second quarter related to in-process R&D, increased intangibles expense and some other business combination adjustments related to purchased inventory. We have begun the valuation work. We have a group out there, and we expect to have that information in place so that we will have that as part of our Q2 results.

We would expect likely to be in a GAAP loss situation in the second quarter, but we can't be more precise than that now, as we're just working through the particulars of the information we need, for example, to get the IP R&D number buttoned down. But those would be really the areas where we see those adjustments, even, as I said, we would expect that in Q2, and some impact of the GAAP numbers in Q3, as well as that inventory is released.

Okay. And then finally, the warranty expense that was referenced in the release -- could you just give us some more color there?

Steve, LeRoy. We had some higher warranty expense that was in our water area. And so we had evaluated what that expense was going to be. It was beyond the normal, and so we took a onetime charge there.

Chris Summers, Greenlight.

Two quick questions. First, what was Actaris's revenues in the first quarter of '07?

We don't have that information right now, and they were not part of us, so we we're not able to give that at this point in time.

Okay. And the second question relates to your customers' expectations for the lifespan of these AMI meters when they purchased them. What is the expected lifecycle for a product when they purchased an AMI meter?

Chris, there's probably two answers to that question. The first one is, how long will the product last? We think those products are at least 20-year products. They are no different particularly in electronic component than what we have been shipping in Centron meters -- millions of them.

I think that the second answer might very well be, how does technology either upgrade through time, or how does the customers' requirements change through time? I think for most of the customers that are installing product today, they're looking for it to last 20 years. Whether or not it's actually in service 20 years from now I think is somewhat debatable, because I think we see a very changeable energy infrastructure across the next 20 years' time, which could in fact render those things ripe for changeout for the end of that period.

John Quealy, Canaccord Adams.

A couple of questions -- the hardware margins. I assume the R&D and some of the SG&A and professional fees -- that was in the corporate unallocated bucket for the quarter. Is that right, Steve?

Yes, primarily, that would be related to the ERP system, and a couple of the other items we mentioned would not be specific to the hardware.

And just on the hardware business itself, it looks like the margins were down 30 bips quarter on quarter. I don't want to get too deep in the weeds here, but anything stand out on that in the quarter for hardware -- vis-a-vis meters or meter collection?

Not really -- you're talking about the fourth quarter to the first quarter, John?

That's right.

Yes, there wasn't anything dramatic -- [really] a little bit of mix changes depending on the shipments of that. So nothing that would be material.

Okay. And then -- so LeRoy, on the broader question, you talked about -- kind of as expected, utilities being very deliberate as they evaluate AMI for a lot of different reasons. My question is, is it along the timelines that you thought that they would be calling to push out some order flow or at least milestones?

And number two, the questions that they're asking -- I would assume it is more on the software meter data management side. If you'd just fill us in on -- is this tracking to your expectations? You have been through a couple of cycles in utility spend. So I'm interested in hearing what you think.

John, I have -- let me answer the second question first. The kinds of questions that are being asked are across the entire gamut, hardware and software. We're getting huge amounts of questions on the software side, frankly, about data throughput, and how many meters can you ramp up and move this kind of data on? And we have done some independent testing there that makes us, quite frankly, very happy. And so far, we have pleased customers in that regard.

On the hardware side, the questions run the gamut, from utilities visiting our factory in Oconee doing quality audits, to throughput capabilities of various RF portions, to wanting to trial meters and repeaters and put those things in their lab and work them over.

And so I think utilities, to their credit, are being extraordinarily thoughtful about this process. They're talking about spending hundreds of millions of dollars. And when they get into these things, they find that what they thought was maybe going to take six weeks is taking twice as long.

But we're not seeing anything come off the table at all. And as I warned sort of mid last year, and then again in the fourth quarter, and I will say it again now -- we just see these things pushing out into the latter half of this year, and on into '08. Even the trials where they have been able to implement stuff, and we have got two of them out, go slower than people thought, and I suspect our good competitors are seeing some of the same sort of thing.

So the process is, I think, moving along about as I expected it would. These are very large undertakings, and utilities are being very, very careful, because they have a lot at stake. And they will get hauled in front of a public utility commission over their prudency relative to deliberations on this stuff. So they need to be careful with what they are doing. So about on schedule, frankly -- my schedule, [when] I thought it would be.

On the integration side, and if we could just compare it back to '04 with Schlumberger in that September quarter, you really hit the ground running in terms of integration and closing the books quickly and having a lot of successive quarters of synergies after that. Obviously, Actaris is a lot bigger. What is your sort of timeframe for integration activities to be done? Is this like a 12-month timeframe, or what is your sort of litmus test for getting the businesses fully integrated?

John, this is Steve. I will start with this and then let LeRoy take over. And the shorter-term focus and integration is on the financing side. We have a 100-day plan in place. We have a project team working on the essential duties of integration in the areas you would expect. And we're making very good progress with that. LeRoy mentioned even focusing on Sarbanes-Oxley-related compliance already.

This is a well-run company that was accounting in accordance with GAAP already. And there's a lot of common backlog and systems that were used, because they both were originated in the Schlumberger operation. So that is also, we think, helpful in terms of a quicker start in the key areas of integration and finance and operational side. And then as you look out a little farther in terms of sales and marketing, LeRoy, I'll turn back to you.

John, one of the things that we had in the acquisition of Schlumberger's electric meter business was we actually as companies knew a lot about each other, because we were competing with each other virtually in front of most customers. And so the integration possibilities were taking a look at sales force, taking a look at actually integrating Itron technology directly into the meter technology. And we had, for good or for bad, a year to think about that, because the FTC had held us up so badly approving in the acquisition.

So I think about Actaris, I think the situation, one, is a little bit different because we don't compete with each other. We don't have all of that overlap. And two, I think as companies, we don't know each other so well because we haven't bumped up against each other so well -- certainly, I know a lot about Actaris. Malcolm knows a lot about Actaris. At the seniormost level, they know a lot about us.

So we're spending time right now getting to know each other. And we're moving people around. We're having meetings getting to know each other, talking about synergies that occur naturally, some that we'll have to work on a little bit more.

So I don't see a lot of quick results, if you will, coming out of putting the two companies together in terms of saving money or increasing revenue. So I don't think we're going to see too much this year. We may see a little toward the end.

I think next year, we look for more what I will call upside synergies. And we should have a better handle around cost savings that may occur in one form or another.

And then my last question for Steve -- on the foreign currency exposure, you picked up a little bit this quarter, it looks like. I assume natural hedging is going to take place, given the broad manufacturing base of Actaris. But can you give us a little insight as to how you're looking at FX as a management tool, or management tools for FX for the go-forward basis?

Sure, as you could see from the results, we did enter in some hedging related to the time span between signing the stock agreement and closing and hedging that. But on an ongoing basis, Actaris itself as a company is very good at hedging, let's say, naturally. They maintain most of their business in hard currencies, as they call it -- dollar, euro, sterling primarily.

Also, we structured the debt into three tranches, in a dollar, a euro and sterling tranches, respectively, to match on a ratio basis the EBITDA and cash flows coming out of the Actaris operation -- in doing so, again, increase the hedging there. We also will look at, if appropriate, other hedging transactions going forward if we see a change in the business in terms of a shift toward or away from any one of those major currencies. But as a go-in position, we worked fairly closely on our capital structure to ensure that we were fairly highly hedged, and are comfortable where we ended up.

Patrick Forkin, Tejas Securities.

LeRoy, in your prepared remarks, you talked a little bit about SoCal Edison and San Diego and the push out there, which I think at least with San Diego is mostly regulatory related -- how that might be beneficial to Itron. Are you kind of saying that as you continue to get more traction with OpenWay, that improves your chances at those two utilities?

Clearly at San Diego, we think we now have a far better ability to react to the proposal that they're going to request with OpenWay. We didn't have that product available last time, and so indicated to them, in fact, that we didn't have something that we could propose that we thought satisfied their requirements, but that we were soon to come out with that. So absolutely in San Diego, we're feeling much better positioned, and we are just delighted to have been awarded the software piece of that contract, and really thrilled to be able to talk about it today.

Edison is following the course that is absolutely no surprise. They are being very careful with their due diligence around manufacturers and around technologies. And we are extraordinarily engaged with them. We are certainly hopeful to be participating in a trial as they move forward to. We will see. That is still up in the air. But at this point, Pat, we're pleased with our positioning at Edison.

Okay. And then along the same lines, Dave McClanahan at CenterPoint has made some public statements that are pretty bullish about their plans for AMI. And even the technology that they're currently piloting, which is your technology, has indicated that there has been a few glitches. But they think everything is going to work out. And they also indicate that the regulatory environment is pretty favorable in Texas. And if everything goes according to plan, they should be in a position, I guess, to at least talk about full deployment at the beginning of 2008.

To the extent that you guys get more traction like that at CenterPoint, does that improve your chances at San Diego and a SoCal Edison? Or are those completely independent subsets?

Well, I think it improves our chances in two dimensions. Certainly, the more we can take other customers to CenterPoint, which they have been more than gracious to allow us to do, the better off we are, because we are showing lots of capabilities down there.

And I absolutely confirm what you just said. We have had a glitch or two there, but we have worked through that. It is one of the benefits of how we have architected and constructed that network.

On the regulatory front, again, lots of stuff happened on the 18th this month. The Public Utility Commission of Texas came out with a very nice commentary on their rulemaking on advanced metering, and essentially said that everything that was going on at CenterPoint satisfied the Commission's requirements for functionality.

We take that as certainly a badge relative to our OpenWay. And certainly, other public utility commissions, we would hope, would look at that vote of confidence relative to what OpenWay allows us to do.

So, as we have said on previous calls, we are coming to the AMI picture a little later than some of our good competitors. But we think it gave us the advantage of knowing better what the industry was looking for and what public utility commissions were looking for in terms of functionality and features and how to put a network together.

(OPERATOR INSTRUCTIONS) Paul Coster, JPMorgan.

It's actually [Mark Strauss] on behalf of Paul. Just one quick question for you. Can you guys tell us what extent AMI contracts are dependent upon some of the larger programs that are already underway? So in other words, are you seeing any of your customers waiting back at all to see the results of these programs before they go forward?

You know what? That is actually a great question. We have not seen that so far. We have not engaged with a group of customers generally that have said, we're going to wait and see what happens here. One of the reasons I don't think that is occurring is because the federal Energy Policy Act of '05 demanded that investor-owned utilities and public utility commissions look at some of these things fairly quickly. So utilities and commissions alike are under the gun to move forward and look at these things.

I think the other thing that I would say is over the course of the last couple of years, enough utilities have gotten to the point where they really do need to move on something, because they have either generation or transmission problems that utilities who are going to do something have pushed forward there.

Now, I would say that we've seen some utilities that might have otherwise have deployed mobile or fixed network AMR take a look at AMI, but not waiting for other utilities to make a judgment, but rather waiting to do their own due diligence process. Might there be one or two utilities out there that have sort of said, you don't have to do this now, so we will just wait? Perhaps, but I couldn't name them if there are.

And by the way, and just to redress that one -- a little different than usual, because oftentimes utilities do wait for others to be leaders. We don't see that happening this time.

Gregg Orrill, Lehman Brothers.

I was wondering if you could talk about sort of the next tier of opportunities coming, beyond sort of the SoCal Ed, SDG&E? Or maybe alternatively, what should we be watching for to help monitor the sort of burgeoning AMI backlogs?

A couple of comments there -- and some restricted, because we have seen more and more utilities in the request for proposal process make us signed NDAs that just simply don't allow us to talk about specifics. I'm not quite sure why they do that, but they do it. And so we're hamstrung a little bit.

Let me say that some analysts in the community at large, and there are some of them on the phone with us today, have said that there is between 50 and 60 million points of AMI currently in some stage of the bid process. We would concur that that is a range that fits the kind of activity we are seeing.

There are a number of very large utilities that are out, and they're doing RFPs. They are going to make some awards. We're going to see, I think, another trial or two out of California, probably one out of Edison, and perhaps one out of San Diego; maybe more than one out of either of them yet this year.

And I think we're going to see some trials on the East Coast or in the Northeast, one or two yet this year will start to pop up. And we have seen an announcement of an AMI trial by FPL, in fact, in the last couple of weeks -- not ours, unfortunately, but a trial.

So I think one of the keys to watch for all of you as we think about '07 is to watch for new requests, watch for trials, understand that as utilities published dates in the future, they are pressed by public utility commissions to try and be as expeditious as possible. Some of those dates are going to move out, so don't take them as gospel. And certainly, if you look at everything that's going on right now that everybody knows about, all the dates on everything have moved out. I think we continue to see that [kind].

I will say that for Itron, thank goodness, we're still seeing a fair influx of what we would call our normal business -- so it's mobile AMR, it's some fixed networks, it's some water activity. And so we're looking at the rest of this year saying, yes, we're going to see some nice orders on OpenWay, but we're going to keep the factories running hard and the earnings coming in off normal kinds of product business.

And you'll hear some announcements from us in that regard as we move through the quarters. We had a very quiet first quarter in that regard, but a quite first quarter produced a nice bit of bookings -- $118 million. And a little bit low -- we would expect that to improve over the next three quarters.

(OPERATOR INSTRUCTIONS) [Sun Li], [Royal Capital].

I've got a couple of quick questions here for you. Can you give us the dollar amount of the onetime expenses in the quarter related to the ERP implementation and the G&A that you said was related to Actaris?

Sure, just -- these are round amounts, the -- Actaris sort of expenses related with that that we couldn't capitalize were about $250,000. The ERP extra depreciation, as well as some expenses -- professional services was about 800. And then the duplication of two maintenance onto corporate facilities was about $750,000 total.

Do you expect to sell that?

Yes. And it is up for sale; it's just taking a little longer than we had expected.

Sort of a 2Q event?

We will see.

Yes, I mean we would love to say yes. But Q2, Q3 -- we will have to see as we go throughout the year.

Are you expecting to book a gain on that?

No, not a significant gain or loss on the building. It is held for sale right now.

We think it is appropriately valued on the balance sheet right now.

Got it. And then could you give us the revenue and operating income for your meter data collections and metering?

We don't break them out anymore, Sun; I'm sorry. We have discontinued that because they became so synergistic together that you couldn't break out meters from AMR, and the others were becoming enmeshed. And so we just decided that we will report hardware and software now.

Okay. I guess the reason I ask the question is I'm trying to get at what pricing trends are looking at for electric meters.

Right -- now, we do still provide the quantities to help you. And I would just say in general, we haven't seen any large price fluctuations in any of our products at this point in time.

When we're seeing price pressure now, it is all huge deal pressure. It is not competitive pressure on the electric side. But if you're proposing several millions of meters, that's at a price level that is certainly not close to 30 or 40,000.

And a qualitative question is, can you just take us in the mind of a utility who is trying to decide who to implement for their AMI project, what does OpenWay bring to the table that the other competitors, some of which have been in the business longer than you, don't have?

Yes, a couple of things -- and we think, quite frankly -- I will refer again to that most recent pronouncement by the Texas Public Utility Commission. If you look at that announcement, and it's dated April 18 -- they go through a fairly extensive laundry list of benefits that they are looking for their residential customers. And its two-way communication into the customer with some sort of home network from the meter, so that you can control those, adjust thermostats, and give the customer some idea of how much energy they are using, when they're using it, and how much it's going to cost. And that same dynamic we're beginning to see talked about in the European community as well.

We're putting a disconnect switch in the base of the meter, and they find great value in that. We think that that too is something that -- as utilities look at OpenWay, they say, oh, a potential for a reasonably costing disconnect switch in the meters so that we can offer consumers rate structures built around peak time usage limits -- is very, very attractive as well.

The Texas Commission refers to standardization, both in the home network and in the communications infrastructure so that other things can connect to that network. And that is one of the real features of OpenWay. And certainly, it was core to the way we designed the product. You want to connect it to broadband over powerline for backhaul? Fine. That's what CenterPoint does. You want to use GPRS? Fine. That's what's going on in Manitoba. You want to use WiFi or WiMax? Fine.

And so we think utilities as they look at Itron, they see more open standards communication. They see standards communication into the home. But to be fair on that one, we have seen a lot announcements about deploying ZigBee into the home by other manufacturers later than we first proposed it. But sometimes they get to catch up. And that disconnect switch as an integral part of the meter we think is just frankly a winner as we talk to utilities.

So do decisions rarely come down to price -- is that a big issue for them? (multiple speakers)

You know what, it's interesting. What we see playing out is utilities sort of sort out what I'll call the last one or two vendors that they want to think about on features and functions. And then they come back to you and say, okay -- now let's talk about price. And so you sort of get to play or you don't get to play on all of the features, and then they come down to price.

Now, we do have a couple of utilities where I would say they are on the border between fixed network and AMI, because AMI is more costly than just a bread-and-butter fixed network. And for them, the whole pricing situation and the business case is interwoven -- can we afford all those features and functionality? Do they do enough for us? Do we need all of that, or is it just nice to have? And so there's a couple of utilities out there sort of walking down that line and it's a bit difficult.

Chris Summers, Greenlight.

LeRoy, I wanted to hear your perspective and thoughts on something. As we talk about 50 to 60 million meters coming up in North America for potential AMI development over the next few years here, is the view of this opportunity that it's a growth opportunity and this is a growth business? Or is it more this is a cyclical opportunity and a cyclical business; we're at a favorable part of the cycle, and after these 50 or 60 million meters get done in the next few years, there could be a lull in business? How is the right way to think about kind of the long-term growth prospects versus the cyclicality in utilities kind of renewing their infrastructure?

I would say that this is a long-term growth prospects. And I think various utilities are going to come to different places on AMI across the next five years or so.

One of the things you have to remember about these deployments -- they are so big, they will go over a number of years, whether it's PG&E or Edison or San Diego or some of the others that are out there. We're not to talking about a year or two deployment. We're talking about five years deployment. Some are talking about deployment even longer than that.

The other thing I think you'll see is utilities who currently have either mobile networks or fixed networks deployed. Looking at OpenWay or other AMI technology and saying, you know, we have paid for what we deployed. We've gotten our money's worth out of it. It might not be fully depreciated, but we can afford to move on to a new level of technology because it affords us some benefits and functions that we don't have today. And so I think we will see those utilities come to the party, albeit later, but keep the momentum, if you will, growing.

And then I think it's fair to say that we're seeing an awful lot of activity with electric utilities and electric and gas combos. There is a ton of business in water, which is going to keep percolating. And we certainly see gas utilities still moving to automation, although they still certainly don't need AMI level of automation.

Got it. And then I guess a follow-up on this notion that these fixed networks will pay for themselves in a period of time shorter than the lifespan of one of these meters. That being the case, do you have any visions or notions for what the next stage of technology might be that would make the investment case rational the next time around? Because my understanding is now, there's a strong business case to be made going to a fixed network, because you can eliminate a lot of costs, which gives you the payback period. But once you have already gotten that benefit and they want to go to the next technology, is there any kind of industry discussions or industry kind of forward thinkers that have some notion of what that next thing might be? Or is that just kind of very far in the distance still?

It's too far in the distance. I'm sure there's something out there. You know, technology continues to move on. I think one of the things that is going to drive some level of new technology is grid automation in general, and trying to do things more automatically on the grid rather than -- so human interface. I mean, certainly, last week at the grid week that I mentioned in Washington, D.C., there was a huge amount of discussion talking about, how do we automate the grid, how do we lessen congestion on the grid, how do we self-heal parts of the grid -- all of that is going to want to know more and more and more about what individual customers are doing at particular points in time.

And so, I think that could drive some newer technology. It could enhance the technology that's out there. And I think we'll see an awful lot of movement in that area across the next bit of time.

You know, and by the way, in answer to the first question that Chris had there that's probably worthwhile -- you know, as we think about cycles, one of the things certainly that we look at as we acquired Actaris is this whole cycle is starting all over the world, certainly at a level in Europe that matches every bit the level currently in the U.S. But we're going to see that kind of activity move to the rest of the parts of the world. And I think that makes for a very exciting next 10 to 20 years. And it's going to be just fantastic.

Robert Jordan, Morgan Stanley.

First, a clarification. On the 50 to 60 million meters, that includes gas modules -- and so we're not just talking electricity meters, right?

It's all of them. It's gas, electric and water in all sorts of automation scenarios, yes.

Second, on load control -- now, a lot of the AMI projects in RFP and evaluation stage seem to be in areas that most need it, and particularly have tight generation. From an electricity meter point of view, when you look over the country, what percent do you think of the country is a place where load control can be a major driving factor in the AMI sale (multiple speakers) [if somebody is] looking for new meters?

I will restate that just a little bit, and say I think 50% of the country by and large is going to have to do something about loads at peak periods, whether it's controlling the load or some other economic form of getting consumers to reduce consumption during those peak periods. I think it's about half the country. I think there are great places where that is not needed, and not likely to be needed, at least for the foreseeable future. But you could certainly sort of cordon off about half the residential customers in the country, which is about half the utility space, and say there, it makes sense. (multiple speakers) That is certainly a big opinion on my part -- I don't know that there's a lot of hard data behind that.

That's good enough for me; thank you. With respect to meter feature set, as you deal with rolling out the OpenWay meters, other than the disconnect device, which I gather is a pretty costly add-on and you can either sell or not sell, how much can you tweak the feature set you're providing from a manufacturing and production point of view to meet the cost target or the price you need to meet to make the deal?

I will tell you, I think it's less tweaking of the feature set than it is integrating the feature set. One of the things we're spending a lot of money on as we move through 2007 is integration, integration, integration. It's mechanical integration. It's electronic integration. You're right; that switch is expensive, but if you do it right, you can take a huge amount of cost out of it. And the kind of stuff we're good at. So we've got engineers and manufacturing people just working night and day to take cost out and get integration down.

The one thing that you can remove is that disconnect switch. But it's so attractive to utilities, that we think better it is for us to be spending time -- engineering dollars now on integration and cost reduction.

With respect to the feature set, do you see a somewhat different optimal feature set developing for Europe than what might be prevalent in the U.S.? And if so, how? If not, why not?

I think that the one thing that is different in Europe is not so much the feature set of the meter or what we're trying to do with customers. It is more that I think you'll see early on more use of existing public switch networks to backhaul in Europe than you do in United States, because telecommunications providers there are far more attracted to that form of data traffic than we are here.

Just one odd to that to is that the form of smart metering in some markets like the UK also includes a different business model in the form of prepayment metering, which does also drive the feature set of the meter itself.

That's a great add, (multiple speakers) [particularly] for the UK.

Are there any utilities in the U.S. that are really excited about prepaid in terms of -- not just 10 years from now, but really rolling it out on a wider scale and doing it right?

There is a minimal number today that are looking at prepay or actually doing something with prepay. I mean, the culture in the United States is just different.

But having said that, an awful lot of inquiries that surround AMI -- that prepay functionality and feature is built in. So there are certainly a lot of utilities thinking about it.

And at this time, it appears we have no further questions coming in. Ms. Duquette, I will hand the conference back to you.

Okay, thanks. And thank you, everyone, for your participation. I just wanted to remind you that if you have any follow-on questions, please feel free to give me a call. And thanks for joining us.

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 pass code of 659-9584, or go to the Company's website, www.Itron.com.

That concludes our conference. Thank you for your participation. We do hope you enjoy the rest of your day.