Itron Inc (ITRI) 2007 Q3 法說會逐字稿

Good day, everyone, and welcome to the Itron Third Quarter 2007 Earnings Conference Call. Today's call is being recorded. For opening remarks I'd like to turn the call over to Deloris Duquette. Please go ahead, ma'am.

Good afternoon, everyone, and thank you for joining us today. Today's call is going to follow a little different format than we have had in the past because in addition to LeRoy Nosbaum, our Chairman and CEO, and Steve Helmbrecht, our Chief Financial Officer, we also have on the call today Malcolm Unsworth, Actaris' Chief Operating Officer, and Philip Mezey, Chief Operating Officer for Itron North America.

The earnings release that we issued today includes an updated outlook for revenue, earnings and adjusted EBITDA for 2007. Today's call will also include other discussions that could be 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 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 choose to 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 web site.

Steve's going to start the call today with a financial highlights discussion. After that Malcolm and Philip will both give operational updates for their respective businesses. And then LeRoy will wrap up with our prepared remarks with some of his thoughts about the business. We will hold a 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. We provided a lot of financial information in the press release today, so I will focus on several aspects of our financial results that I think are worth pointing out and discussing in more detail. Total revenues were $434 million for the quarter, which was about the mid point of the revenue guidance we provided in our last earnings call. This is a new record for Itron and is the first time in which we had a full quarter of Actaris revenue. Total company gross margin during the quarter was 33%. Itron North America gross margin of 41% was slightly lower than the 2006 gross margin of 42%, primarily due to lower absorption in our meter manufacturing caused by lower volumes. Remember that in 2006 we were still shipping large quantities of meters for our Progress Energy project.

Operating expenses during the quarter were $116 million. Corporate unallocated expenses were up for both the quarter and year-to-date periods from the previous year. Some of the increase in expense is due to the integration of Actaris, including tax consulting work and services related to internal controls and compliance. And we had an impairment charge of approximately $900,000 during the quarter for our old headquarters building, which amounts to year-to-date impairment charges of about $1.6 million. We have an agreement with the buyer and expect to finalize the sale of the building by the end of the year.

Non-GAAP operating margin which excludes expenses related to any inventory accounting adjustments and in-process R&D was 13% for both the quarter and year-to-date periods. Our non-GAAP operating margin continues to be lower than 2006 primarily due to our increased R&D spending as well as higher G&A expenses. Non-GAAP net income which excludes expenses related to the inventory accounting adjustment and in-process R&D as well as amortization of intangibles and debt fees was $21 million or $0.65 per share in the third quarter and $61 million or $1.99 per share year to date. I would like to point out that our GAAP results include a tax benefit related to legislation which passed during the quarter in Germany and the United Kingdom to reduce tax rates. Our non-GAAP rate was 31% for the period, and our non-GAAP results did not benefit from the tax rates decreases because the deferred taxes relate primarily to intangible assets which are excluded from our non-GAAP results.

Total company new order bookings were a record $440 million for the quarter, which is slightly more than a 1 to 1 book-to-bill ratio. Itron North America had a book-to-bill ratio in the quarter of 1.2 to 1, while Actaris' book-to-bill was .94 to 1. Total backlog was $668 million at September 30, compared to $656 million at June 30. Although our rate of growth has slowed in North America while AMI systems are in consideration, we do continue to book business on a regular basis and total backlog has now grown each quarter during the year.

Our cash flow from operations was nearly $90 million for the first nine months, compared to $87 million for the first nine months of 2006. We had some growth in inventories related to projected fourth quarter sales. Capital expenditures for the first nine months were $30 million and were $12 million for the quarter, approximately 3% of revenue. Adjusted EBITDA was $67 million for the quarter and $158 million for the first nine months.

As a reminder to investors in our bank debt, our reported adjusted EBITDA does not add back stock-based compensation expense which was $3 million for the quarter and $9 million for the first nine months. And our reported adjusted EBITDA for the first nine months of the year does not of course include any Actaris results from January 1 to the close of the acquisition in April.

We made prepayments of 5 million pounds sterling and 15 million Euros during the quarter, which equates to approximately 30 million in bank debt prepayments with a total of 34 million in principal reductions. During the quarter we entered into an interest rate swap to fix the Euro tranche of our senior debt during the quarter to mitigate any future increases in Euro [bore] rate. The interest rate on our Euro debt is approximately 6.7%. Additionally we entered into a cross-currency swap in which we effectively converted our pound sterling debt into US dollar debt. As of September 30 we had a balance of $1.14 billion in bank debt with a weighted average rate inclusive of the impact of the swaps of 6.95%.

Including our $345 million in convertible notes and $125 million in senior subordinated debt, we had a debt structure at September 30 of about 57% fixed rate debt and 43% floating rate debt. We are comfortable with that mix at this point, noting that all the floating rate debt is now indexed to US LIBOR rates.

During the quarter there were several changes related to our $345 million in convertible subordinated debt which we issued in 2006. Because of an increase in our stock price, we issued an announcement in early October that stated our convertible notes may be converted during the fourth quarter at the option of the note holder. Although the notes are convertible, we believe it is unlikely that a significant portion of the convertible notes would be converted at this time because the market value of the notes exceeds the value that holders of the convertible notes would receive upon conversion.

The changes had a few effects. First, the notes must now be classified as short term rather than long term. Second, our interest expense for the quarter was higher than expected due to accelerated amortization of $6.6 million in prepaid debt fees. Third, our higher stock price caused the convertible debt to become more dilutive during the quarter. During the quarter, the convertible debt added approximately 1.2 million shares to our fully diluted share calculation for non-GAAP EPS.

Now I will turn the call back to LeRoy.

Thanks, Steve. Before Malcolm goes through his operational update I just want to say a few words about our approach (inaudible) since this is the first time we've had a detailed operational update for Actaris, Malcolm will spend a bit more time today framing his thoughts for 2007 and updating us on what is going on in each of Actaris' businesses, electric, gas and water. After that Philip will speak, not in as much detail as Malcolm since this is more of an update on status in North America. And then I will come back and close. So with that, Malcolm.

Thank you, LeRoy, and good afternoon everyone. I wanted to take some time today to talk to you about some of the activities that are happening in the Actaris business segment, beginning with a brief review of our Q3 financial results, expectations going forward, and then go into some detail on what is happening in each of our markets, electric, gas and water.

If you look at Actaris' revenue for the quarter, it was $281 million. About 40% of our quarterly revenue was generated by the electric business unit, approximately 32% from gas and 28% from water. This is not unusual, although our businesses have fluctuations from quarter to quarter. Actaris ships over 4.1 million meters during the quarter, almost 1.5 million electricity meters, 30% of which were prepayment and [AMO] meters, 900,000 gas meters which is up from 775,000 meters shipped in the previous quarter, and almost 1.8 million water and heat meters which is comparable to the prior period. At this point we continue to see steady growth for our products. We have a very large geographically diverse customer base that is very beneficial to us.

Bookings for the quarter were $264 million, which represents a .94 book-to-bill ratio, from such key clients as electricity to France, gas to France, British Gas, [Endesa], E.ON, RWE, Veolia and National Grid, just to name a few. Our book-to-bill ratio is generally 1 to 1 on an annual basis but historically varies quarter to quarter depending on the timing of tenders. Gross margins were about 30% which was 1% lower than the margins in the second quarter but is quite normal for our business. Actaris gross margins vary depending on product mix. For example in the first half of the year we shipped higher volumes of heat meters and prepayment meters which are at higher margins and resulted in first-half margins of 31%. Shipments of prepayment meters are expected to be lower in the last half of the year, so 29 to 30% margins are more typical.

We see competitive pressure in all business lines, and we are improving product features and reducing cost to offset these pressures. In particular copper and aluminum prices remain at a high level. Operating margins of 7% for the quarter included about $19 million of amortization of intangibles. On a non-GAAP basis our operating margins would have been 14% which is consistent with the 13% that we had in the second quarter. Although we don't expect large changes in our operating expenses going forward, we will be increasing our R&D spending to capitalize on the continuing interest in AMI, smart metering and prepayment opportunities in Europe and the rest of the world.

Now I'll switch and discuss some of the industry trends, starting with an overview, and then try to give you a little color on what our business and geographies are seeing. In October I attended a conference in Vienna called Metering Europe that is similar to the DistribuTech and [AORA] conferences in the US. The conference was extremely well attended with an abundance of meter and communication suppliers, but what struck me the most was a significant interest in discussions around smart metering and AMI. This bodes well for the future growth of the company. Much of Actaris' business is for traditional meters with a growing number of communication technology embedded in these meters such as GPRS, PLC and RF.

But possibilities for large-scale meter change-outs is extremely encouraging due to mandates and liberalization across Europe which is a significant change in the utility landscape. Increased functionality, higher frequencies of meter reading and improved water and energy services is changing rapidly. Let me give you some examples. There are a large number of very large utilities in Europe, some with over 30 million customers. Because these utilities are so large, it is quite likely that they will mandate their own smart metering platform or design and will ask meter providers to build and provide products that adhere to their specifications. Interoperability between meter manufacturers and systems providers is likely to be required as these very large utilities want to ensure continuity of supply for their proprietary systems and therefore will require more than one supplier. Actaris is a trusted, reliable metering provider which helps us to participate in these large metering opportunities.

The remaining utilities comprising 200 million or so electric meters in Europe may follow a pattern more like utilities in the United States in which they look to [AMO] and AMI vendors to provide them with a complete integration solution. Effective July 1, 2007 the European Union issued a directive that customers will have the ability to choose energy providers. This directive again bodes well for Actaris and Itron solutions. In addition, the Europe Union drivers are environmental and conservation rather than just economic.

Now moving on to our gas business we continue to see steady growth in gas meters. At this point we are the leading provider to many of the large natural gas providers in the world, but especially true in Western ad Eastern Europe, which positions us well for automation plans that may come in the future. Gas metering at this point does not have the same drivers or urgency of automation as electricity does, but dual fuel utilities are including reading gas meters in their automation plants. However, many gas-only utilities around the world are talking about automation for their gas meters as well. Automation will be driven by more traditional means such as cost efficiencies and customer service and the prepayment gas meter business is growing in emerging markets.

And last by certainly not least let's talk about our water and heat business. Water is a smaller portion of our revenue at this point, but we see areas of growth such that it could eventually be a business that grows at a faster rate, such as we are seeing in India. About 30% of the water used in the world is not metered, an excellent opportunity for growth because without meters usage is impossible to control. Combine this with AMR and then add to the fact that most utilities replace the water meter when they convert to AMR, this is an excellent potential for both areas. Itron is the leader in both areas in providing meters and providing AMR solutions.

I would like to finish by touching on how the integration of Actaris is progressing. Steve and LeRoy stated that we have already completed most of the mechanical integration efforts, financial reporting, IT systems and day-to-day communication. So what's not done and what are we currently working on? I moved to Brussels in April, and I visited many of Actaris' manufacturing, sales and R&D locations, visited trade shows, met many customers, partners and system integrators in order to understand and take full advantage of synergies, technology, hardware and software from Itron into Actaris and vice versa for short-term and long-term gains. I am pleased to report that the opportunities are significant. As an example, 20 Actaris executives spent four days at the Itron User Conference in Orlando, reviewing products, talking about system sales, justifications and mass deployment experiences. And in addition Actaris showed Itron US customers what Actaris has to offer.

I am very encouraged by the efforts and progress that we have made in such a short time, and I've very excited about the potential for this business going forward. I look forward to talking to you in future calls, and with that I will turn the call over to Philip Mezey, Itron North America's Chief Operating Officer.

Thanks, Malcolm, and now on to Itron North America. Let's start with our third quarter financial results. Revenue for the quarter was $153 million, a decrease of $11.5 million from 2006, primarily due to two things. As we've mentioned, 2006 for Itron North America was a tough comp because of our contract with Progress last year. However, we did expect that second-half revenues in 2007 would be higher than the first half, so the tough comp explanation is overshadowed by the fact that AMI has slowed down our North America business even more than we had expected. Our gas and water AMR businesses is still quite strong, but our electric business has been affected. Shipments of electric meters in North America are down 27% for the current quarter compared to last year, and down 33% year-to-date. We think that revenue in the fourth quarter will be up from this quarter as we have more meaningful shipments against our contract with MidAmerican and Trinidad and Tobago, but for the full year we are expecting Itron North America revenue will be about $25 million less than it was in the full year of 2006. Gross margins and operating expenses should be similar to Q3.

We actually had a very strong bookings quarter. We booked $175 million in Itron North America, which equates to a book-to-bill ratio of 1.2 to 1. This was driven in part by a contract that we announced with Trinidad and Tobago in the Caribbean that was about $40 million. This is the largest international AMR deal that we have ever booked and validates that our traditional, migratable fixed-network AMR platform continues to be a proven solution for utilities choosing to automate.

We also received several large California energy efficiency contract awards for our consulting and analysis team, totaling $14.5 million. Additionally we announced a significant meter data management deal with Nuon, a Dutch utility, that we see as a model for taking our software offerings to other overseas customers. All in all a very good bookings quarter which gives us visibility going into next year.

So let's switch topics and talk more broadly about what's going on from a market perspective in North America. I'm going to start by first talking about two recent industry conferences, AMRA and our 25th annual Itron Users Conference that was held last week in Orlando in which we had close to 800 Itron customers attend. Both conferences were well attended and both validated for me the importance and attention that AMI is generating in the industry today. The tone at AMRA was very upbeat with many utilities looking at options for smart metering solutions to solve their problems today or to position them well for tomorrow. At our User's conference we saw a similar tone and level of interest, particularly in our AMI offering, OpenWay.

So let's talk a bit about OpenWay. I'm sure that you have read our release today on the work that we have done with CenterPoint. OpenWay has passed an important milestone of field deployment and market viability. We look forward to the next stage of deployment as our partner CenterPoint works to realize their vision of the smart grid. Our field trial at Southern California Edison continues as does our work with several other large-scale utility customers interested in deployment of advanced metering. Many of these opportunities have public filings including their deployment schedules, and since we are coming to a time in which many of these utilities have stated that they will make a decision and because many of these decisions require Board and Commission approval and may contain confidentiality language, we will not discuss them any further until customers have made their decision and are amenable to discussing their projects publicly.

So in summary we are competing for business every day. We're excited about the marketplace moving to advanced metering solutions. We are progressing with our products and field deployments. We will continue to deliver a broad range of solutions across water, gas and electricity with our existing products and increasingly with OpenWay. And while we are very excited about OpenWay and our market opportunity, we caution that these projects will generally not start significant roll-outs and therefore significant shipments of meters or gas modules until the later part of 2008. And with that, I'll turn it over to LeRoy to talk in a bit more detail about the business and 2008 expectations.

Thank you, Philip. Given the good reviews by Steve, Malcolm and Philip I'll make a couple supporting comments and talk a bit about 2007 and 2008. Let me start by talking about our expectations for '07 in the context of our third quarter results. Revenues of $434 million were right in the middle of our own guidance. We're seeing a North America market that is taking a bit of a pause as utilities that would have ordinarily been taking shipments of AMR are looking at and in some cases deciding upon AMI. While we've discussed this on previous calls, in all fairness we're not expecting as high a second half for our North America business as we thought a few months ago.

On the expense side we continue to spend on marketing, research and development for OpenWay, and in corporate unallocated we had expenses for some one-time items that Steve mentioned. In some respects Q4 will look quite similar, so we have tamped down our guidance for Itron for the rest of the year with revenues at $1.425 to $1.435 billion and earnings per share of $2.65 and $2.75. So if we are in the range on our last quarter's revenue guidance, why is our non-GAAP earnings guidance for the year down $0.10 to $0.25? On the expense side we have about $0.05 increase including the one-time issues that Steve talked about. On the revenue side we have more Actaris and less Itron North America which has a 10 point gross margin swing, 30 points versus 40, and results in about a $0.22 decrease. And our share count goes up due to the convert, which is about another $0.04. On the good side we do expect a somewhat lower tax rate, so that's how we get to the $2.65 and $2.75 projection.

A couple of other takeaways for the quarter. Include a book-to-bill ratio of over 1 to 1. So while we may have a bit of pause in North America, business is still good in North America and at Actaris. AMI opportunities are progressing very nicely in North America as well as beginning to show promise in Europe. The issues around AMI are not if but when, as exact timing is difficult to predict. As many of you have read in our press release we issued this morning, Itron's OpenWay technology has been thoroughly tested at CenterPoint where 10,000 points have been installed since spring. The results met and in some cases exceeded expectations. This is a major milestone, particularly as this is OpenWay's first large-scale deployment. Perhaps we can now talk about opportunities and less about whether or not the technology will work.

At this point AMI is the most important factor as we think about the market for the rest of this year and through 2008 and 2009. As you heard Philip say, we have many very promising opportunities for AMI orders for our OpenWay product. A number of those opportunities will start with Phase 1 or trial orders in the range of 10,000 units, not different from what we've seen at CenterPoint. Those initial installations will occur in 2008. The results will be judged toward the end of 2008. Volume shipments will begin at the end of 2008 and on into 2009.

As we give preliminary guidance for next year, we are forecasting these trial orders. We are not forecasting major OpenWay shipments until 2009. In some sense that is good news as we're working very hard during the rest of this year and into next to integrate and cost-reduce the OpenWay product offering. Some of you might ask, "Have AMI deployments in general slipped to the right?" For some utilities, absolutely. But not for any alarming reason. These projects simply take a long time to put in place. They are hundreds of millions of dollars and the utility process necessarily has to be prudent at the staff, the executive and the Commission level. While we're seeing flattish '07 for North America and modest growth for '08 because of utilities delaying AMR decisions and considering AMI deployments, the market opportunities appear to be very strong. Itron is doing well in the competitive environment, and I'm quite pleased with our progress and our prospects.

So what are our high-level expectations for 2008? Compared to 2007 there is a dramatic change resulting from the acquisition of Actaris occurring partway through the year. We think a 30% or so increase in revenue is appreciate. If you normalize 2007 for Actaris, Itron overall revenue growth is probably more in the 6 to 8% range '08 over '07. As far as EPS or earnings growth goes, that gets a little harder to bracket. On the expense side we have some goodness and we have some continued pressures. Some of the one-time expenses in 2007 will potentially go away. We should get the old building sold. Spending on the acquisition and all that goes with it will be down. On the other hand, R&D spending on AMI, OpenWay in the US and other AMI developments in Europe will continue at high levels. While we are in the heat of competition for this new market, it is no time to under-invest in this very important area.

AMI also causes some fairly large revenue and margin swings. Exact shipping schedules have not yet firmed up. We do know that initial product shipments will be at lower margins than we would like as significant cost savings on the product do not come into play until later in 2008. So if revenue grows 30% over 2007, a similar growth in earning is not out of line. However, it could also be 5 to 10 points less depending on how the year plays out. We'll firm this up on our Q4 earnings call.

Now I'd like to say just a few words about Actaris. The more we get to know the Actaris people, the more we are truly impressed. This is a really first-class organization. They have performed very well on all the integration tasks we have asked them to do. As we have discussed before, the opportunities with Actaris are tremendous. Whether it's growing market share in electric, gas and water meters or opportunities for advanced metering, we're really quite delighted. The potential market for AMI in Europe feels about like the US did two years ago, confirming our belief that increasing levels of technology will eventually be deployed on meter platforms, thus changing the nature of the industry in Europe just as it has in the US. We're getting this acquisition under our belts. We are readying our combined product platforms, and I'm very pleased with the potential opportunities in Actaris' markets. With that, let's open it up for questions.

Thank you. Certainly. (OPERATOR INSTRUCTIONS) And our first question comes from Steve Sanders from Stephens, Inc.

Good afternoon.

Hi, Steve.

First maybe a question for Philip on the meter side. I know you talked about the tough comp progress and some of the I guess lack of acceleration in the second half. But specific to the meter business, do you feel like you're holding your share around where it's been over the past couple of years?

Yes. Yes, absolutely, Steve. We had one very large project last year that really increased overall volumes in the market and we are holding our share quite well.

Okay. And then a similar question for Malcolm. I think you referenced increasing competitive pressures. Is it the same cast of characters or somebody new? Just some additional color on that would be helpful.

Remember, there's three markets, water, gas and electric. And we have similar competitors throughout the world. There are the Big 3 in each one of the markets. So yes, we get the same competitive pressures across the world with the same competitors.

Okay. And then congratulations on the CenterPoint trial. I know you don't want to go into a lot of detail on these big deals, but this one I think you've talked in the past about once they file with the regulators then it's maybe as long as six months before the final decision is made. Can you just remind us of how that plays out?

Sure, Steve. It's actually once the filing is made, which we anticipate later this quarter or at latest early next year, there is potentially up to 150-day comment period in the regulatory process in Texas. And that period can be shortened if a settlement is reached which would allow us then to proceed.

Okay. And I guess you don't want to talk about specific other large deals that we're certainly all aware of, but a general question. It seems like several of these deals, California and other places, are expected to be making decisions by early '08. Does it still feel like that kind of timeline is reasonable?

Yes, it does, Steve.

Okay. And then LeRoy, you talked about obviously some lower margins on the initial OpenWay shipments. But as you think about OpenWay going into 2009 when you get some of the cost-outs done and the volumes pick up, should we think about the margin profile for that product as being comparable to Itron's historical North America business?

Absolutely.

Okay. And then just a final question for Steve, I'm sure we can figure this out, but the share count in the fourth quarter, what is it going to be with the convert? And stock price, etcetera?

It will be approximately 31 million, 31.5 or so for the year. But it's a little hard--I just want to put a caveat there--the convert itself is affected by the underlying stock price. But when you look at the other known items, that would be the equity offering we did earlier this year and stock option activity to date, that gets fully reflected in the fourth quarter. That part I can speak more affirmatively. The convert has some variability, so I don't want to firm up specifically a count there other than to say that I see it as slightly higher than the count for the third quarter just because of the full-year rollout.

Right. Right. But you're using 31.5 for the year?

Yes, we're using about 31.5 for the year. That's exactly right.

Okay. Thanks very much.

Thanks, Steve.

(OPERATOR INSTRUCTIONS) We'll move now to Michael Horwitz with Pacific Growth Equities.

Hello.

Hi.

A question a bit about your commentary about '08. Your 30% number that you use both on the top and bottom line appears to be in line with what the street's expecting right now, and I'm assuming you have a tempered view in your mind based on what's occurring in your North American business. So for you to make those kind of comments I'm assuming that you've factored that in and what's going on currently.

Yes. I mean, Michael, it's fair to say that our '07 North America business has been shoved to the right because of what's going on with AMI. It doesn't continue to move right forever, and so we think that as business particularly in the back half of '08 begins to load back up and AMI decisions are made, trials are awarded and major orders will be awarded. They just won't start shipping until the very backend of '08

(inaudible)

I'm sorry, Michael. What I would just add on that is you're absolutely right, the street currently reflects about a 30% percent growth rate. What we think may change a little bit is the mix of that business. So with the North America a little bit slowed down, a little bit delayed in '08, Actaris' business properly takes over a bigger part of that and that's what may be affecting the bottom line which is what LeRoy reflected on.

Okay. Fair enough. And then I believe that it's consistent with the way that people have thought about AMI deployment for the end of '08 to get some of those trial orders going and shipments. And really this is an '09, 2010 deployment in volume. Is that correct?

Absolutely, Michael. Yes. For the industry. It's not just an Itron issue. I mean, the marketplace is sort of in that mode.

And then maybe a higher level question. Are you seeing any difference--as new applications are developed and we've seen kind of a taking off so to speak in the demand response area, is that causing discussions to change at all about AMI deployments? Are they looking to add on this additional functionality? Is that accelerating the thought processes as utilities see some of these applications that they can deploy in their networks?

Well, I mean, I'll make a comment and then turn to Philip. He might have a view different or additive. I think we did see in fact in one case PG&E come back out and think about in-home networks which would facilitate demand-side management off an AMI network. In general however all of the other stuff that's on the street has a very high-level of demand-side management already on it, so while I wouldn't say that they're seeing it added I would say that it was there from Day 1. Philip, you've got a view?

Yes, not a lot to add there, Michael. I mean, I think that the market coalesced very quickly on a richer function set than we thought a year ago that included a disconnect switch and home area networking in addition to downloadable firmware and these other features in these advanced meters because there were additional grid-based applications and demand response. So we have a richer set of functions which we have included in the OpenWay product.

And this may be obvious, but given your success and the history of the company and large-scale employment of AMR and other things, I mean, that's got to be helping you win some of these big AMI deployments. And it's hard for me to see a lot of other competitors, albeit I know it's very competitive, but that have shown that skill set. Is that a big argument in your favor? Do you find that that's what the discussion's about, how deployment's going to work and your ability to execute?

It's interesting. We see a lot of discussion around how deployments are going to go, but clearly in a couple of the majors, and in fact some of it's been talked about publicly, third-party deployment companies have been awarded the contract for the deployment. I think one of the things that we did get credited with is the fact that we do understand all of the ins and outs of those major deployments and that we do see some of the potential customers we've been talking to favorably look upon Itron because of our long and historied experience there. But to be fair, Michael, we see some third-party people who are willing to amass lots of bodies and do the deployment work. We will in many cases be managing them, but that is the way it is spacing out.

All right. Great. I'll jump back in the queue. Thank you.

Thanks.

(OPERATOR INSTRUCTIONS) We move now to Sanjay Shrestha with Lazard Capital Markets.

Hi, guys. It's actually Graham Mattison. Sanjay's stuck on a plane. How are you?

Hi, Graham. Good.

I just have a general question looking at--I mean, what do you see is the biggest thing that's changed in your outlook for 2007 just in the last three months? I mean, what's--is it just the AMIs are taking longer or taking market share away from the regular meters? Could you just give a little more color on that?

Sure. I'm going to start, and then if LeRoy wants to color. What we've seen change in the last couple months is AMI has delayed some orders that we thought may have come in. But we've replaced that business in general with Actaris business, so we really haven't moved much on the revenue line. However, it's a dramatically different margin as LeRoy discussed in his prepared remarks, and so what's coming through to the bottom line is a lower margin that is affecting us. It probably affected us by about $0.22 from what we thought it would be. Additionally we do have a little bit higher expenses than we projected. Steve talked about some of those one-time expenses we didn't see. And in addition quite frankly we didn't expect the large dilution for our stock for the convert, and that affected us about $0.04 as well. Does that answer your question?

Yes, definitely. But would this push out [mainly the] opportunity in 2008 and 2009 as bigger than if it's moving more toward (inaudible)?

Certainly, but you can ask yourself whether you don't have a snowplow effect. And we'll see. I mean, I completely believe that sooner or later these customers are going to buy either AMI or AMR. The question is when, not if, in either case. And they're trying to make decisions. So does that market opportunity push to the right and does it ultimately snowplow up? Potentially. I don't know that we know enough today to say that for sure exactly as to when.

But in terms of your long-term outlook and your market outlook, nothing's changed?

Fantastic. No, nothing at all.

Got it. And then one--

(inaudible). Go ahead.

I'm sorry. I was just going to ask a housekeeping question on R&D.

Sure.

Is the Q3--the number we saw in Q3, is that a good run rate going forward? Or as more of these AMI tests are successful will we see a sort of slowdown in R&D spending? Or is there going to be a jump in that in 2008?

Let me say that I think the Q3 rate's a good one going forward with a little dither on either side of it. And as we move into '08, I'm looking at these two guys, I'm hoping that ultimately we begin to see a tail-down in North America. But there is much that has to be done yet in Europe. We will borrow some of the North America technology but clearly Malcolm and his gang are going to have to spend some R&D monies that they are not currently spending. So I think if I was modeling, I would do exactly what you suggest and that's use Q3 with a little dither on either side.

Okay. Great. Thank you very much. I'll jump back in queue.

And now we move to Paul Coster with JP Morgan.

Thank you. So LeRoy, you don't believe there's a great deal of R&D left to do in North America to get AMI OpenWay ready. Is that correct?

No, I didn't say that, Paul, so let me be--well, I didn't mean to say that if that's what you heard.

I'll try not to put words in your mouth (inaudible).

So let me describe it like this. We have spent a huge amount of money this year and will continue through the very front end of next year on what I would call fundamental R&D. We will spend more monies next year in North America, particularly into the third quarter, on what I'll call cost reduction and integration. So what we're doing in that period of time is making what we are already successfully trialing at CenterPoint cost less and be easier for us to manufacture in volumes. So that number of sort of general R&D does not go down in the first half in North America. As we move into the second half in North America of '08, I think we'll begin to see some tail-off in pure R&D but we'll also see some build up in R&D. I'm guessing it's about that in Malcolm's Actaris group. For the very same reason, just a different customer set [of requirements].

So the AMI programs are going to proceed, but the complexity of these programs is such that it's going to take longer than perhaps some of us were expecting. Is there any common thread across all of the known RFPs, or is each one very different, the cause of the sort of perceived delay anyway?

Well, in some sense there is a very common thread. They're all real expensive and so you're talking about hundreds of millions of dollars. Let's just border it between $300 million and $600 million round numbers. And utilities have gotten very cautious as they build business cases, go to their Boards for capital and as well go to their Commissions for some kind of regulatory treatment, whether it's rates or some other mechanism. So I think everybody's gotten real careful. I do think that as we come to the end of the year here we'll see a number of decisions that people have been talking about as we sort of come into December and then go into January. So I don't know that besides that there's any common theme that has caused delays. These things just take a while.

But I'm not hearing that there's technical reasons for the delay. It's all to do with politics and budgets and so on. Is that correct?

All of that.

Okay. Malcolm, you said something which is intriguing to me. It sounded like you are getting higher margin from your I think you said heat products and also AMI products in Europe. If that's correct, why is it that you're able to get higher margins on AMI whereas (inaudible) North America at the moment is not enjoying economies of scale on that product suite?

So the definition of AMI has to be carefully reviewed because we have an AMI business that is our prepayment business, and our prepayment business is our own proprietary business which was the same a few years ago with our AMO business in Itron. On the heat side, we have a very interesting business on heat because you have to replace the heat meters every five years. And we have a very good design and very good products, and competition is still stiff but we have good margins there as well. But as a percentage of our huge amount of business, it's not really that large to be quite honest with you today. And that's what we're focusing on.

Okay. My last question is, Malcolm, now that you've had a chance to really get under the covers, the gross margin difference between Actaris and Itron, is it a true economic difference, or is it the accounting methodologies used in the two businesses?

Let me just cast that and do a comparison to the meter business that I took over in Schlumberger in 2000. Predominantly the meter business there was an energy-only business, and our margins were in the mid 20s. When you introduce communication modules and you own the technology, your margins will grow. So long as it's proprietary business, your margins will increase. And the margins today as you can see from Itron are in the 40s. That's the goal obviously that we want to do for Actaris. But it's not going to be done in five minutes. It's going to be the long haul. But that's exactly the same kind of thing we want to do.

All right. Got it. Thank you very much.

Thanks, Paul.

And Stuart Bush with RBC Capital Markets has our next question.

Good afternoon.

Hi, Stuart.

Hi, Stuart.

Hi. My question is about if you can give us an idea of the timing after an AMI commercial order is announced. How long it takes and what needs to happen before the shipments start?

Well, Stuart, it's Philip. We would of course start out with some kind of--typically a viability phase as you heard this phase that we've talked about with CenterPoint. And that will not be atypical at all. So some period from 6 to 12 months for an initial rollout evaluation and business case development. And then we are seeing three- to five-year cycles for full deployment of the product. Some of those actually ramping up in the back half of the project, actually.

Well, I guess my question is once you're able to actually put the order in backlog, how long then until you actually start shipping out and seeing revenue?

Oh, virtually immediately. Yes. Stuart, the issue is not one of our being able to ship the product. It is an issue of a trial in all likelihood being done at this stage of this market. But we can ship product virtually instantaneously. Now, there is a little bit of reality which is maybe the question you're looking for and we just haven't hit on the right answer yet, which is once you say go what do you have to do? Well, there is a certain amount of logistic stuff that you will do, and that logistic stuff is probably going to take a quarter or so. You set up cross stocks, so that's material being shipped in and then re-disseminated. You set up processes for hanging up in our case radio collectors. All of our RF competitors would have the same sort of process. And then you have a bit of work on the systems side, but much of the system work would have been gone through in the trial period. That's one of the things.

One of the real pieces of work that happens when you install 10,000 units is not the installation of those 10,000 units. It's getting al the data that they produce through both the data gathering, the data managing and then as well the knowledge applications depending on who provides those. So there's a lot of work there, but generally that gets covered off in the early Phase 1 period of time.

But maybe you were asking how long does it really take to get going? It's about a quarter.

Okay. Yes. And sort of tying into that, I know you said that the initial AMI margins will be lower than eventually they will be. Is the main impact here from price concessions to win reference customers? Or is there more of a--I guess there's also an element of scaling up that you get cost advantages over time. So how does that sort of map out? Which one is much more of a priority in the beginning on these first few?

Stuart, I'll answer that very definitively. There's not price concessions to win reference customers. [This is a] scale over time.

(inaudible)

This is a very interesting market in that in utility lore rarely do you see the utility industry, some en masse, buying literally millions of units out of the blocks. And that's what's going on here. And so the utility industry in general is shocking the vendor community with some pretty stiff ramp-up rates early on, and all of us just have a period of time when we are doing integration, when we are doing good work in factories. And frankly one of Itron's serious advantages is that we're very used to doing that kind of stuff. But it is work that has to be done and it's not done overnight.

Okay, great. And then one last housekeeping question. Maybe you can help me a bit on the tax rate. I know you mentioned you had some stuff out of Germany and the UK that affected some of the intangibles. It looks like the tax percent on the non-GAAP numbers was also reduced. What should we be assuming for non-GAAP tax rate blended for the whole year?

I would use 28% at this point in time, Stuart.

And so that would be much lower than for Q4?

Yes. So the full year we're thinking is more in the 28% range. That's correct.

That's a blended rate, Stuart. That takes into account some credits and discrete items.

So can you give me the--okay. All right. Thanks a lot.

Thank you.

Thanks, Stuart.

And now we'll move to John Quealy with Canaccord Adams.

Hi. Good afternoon. A couple questions. First on the meter volumes in North America, is it just the functionality of the market as a whole pushing off solid-state meters as the sort of core base of smart metering and AMI? Or is it a conscious decision of you folks to rather push out meter shipments in the near term to grab the AMI component in the long term, if you see what I'm saying?

Well, not really, John. I mean, the fact that we're talking about our AMR business has been delayed as well with the AMI decision. What's made up most of the bulk of our meters that we've shipped over the past couple of years, they've been predominantly AMR enabled. That's the business that slowed down, and so that's affecting our meter shipments as well.

Maybe I should ask you a different way. In terms of competition, the other solid-state folks, is it just a dearth of market opportunity or are you being a little bit more selective on the business you're going after in terms of volume?

No, not being selective at all, John. It is dearth of activity. If you look at us historically in the last several quarters, something like 75% of meters we ship have AMR embedded in them. We're seeing a material reduction in the number of meters we're shipping simply because utilities are slowing down their purchase while they're considering AMI.

And just a couple housekeeping. Free cash flow or operating cash flow expectations for '07, could you give us an update?

Sure. We expect operating cash flow combined base to be somewhere $115 million to $125 million. CapEx for the year of about $40 million, give or take. And free cash flow between $75 and $85 million. That's of course impacted by working capital assumptions, but we're comfortable with that right now. And just another housekeeping is depreciation expense for the year as well. It's about $40 million. It's about equal to CapEx and what we expected.

And I may have missed this one, but AMR units in Actaris, did you give those out for the quarter? I think they're about half a million last quarter?

Yes, we did not give those out but they are similar this quarter, actually.

Okay. Thanks a lot of.

Mm-hmm.

Jason Feldman with UBS is next.

Good afternoon.

Hi, Jason.

Just a couple quick questions. Most things seem to have been answered. But in North America, have you seen any kind of changes in the competitive environment? And specifically I'm kind of referring to GE's announcement with AEP several weeks ago?

Yes, Jason, we took great note of that. Obviously GE is a very large company that can spend money very quickly and in large amounts. We have been tracking with interest what they're doing with AEP which at this point is talking about a very comprehensive smart grid, intelligent grid application that has quick frankly a little bit to do with meters, smart meters or AMI, and a huge amount to do with automating the grid. And it's worth noting that APE and GE have a very historic love relationship. I mean, they do a lot of stuff together. So if GE was going to come and announce something we were not surprised particularly to see it there. That's the only place we've seen them make an announcement with a specific customer. That being said, they are going around the country talking about their concept for a quite expansive, intelligent grid. We'll see where all that goes. We have not seen it upset any apple carts anywhere in terms of utilities that were already in the process of an RFP for AMI. I'll leave it at that.

Okay. Also with respect to kind of the change in the outlook for the second half of the year, you noted a shift in revenues this year toward Actaris, kind of more than you thought. What parts of Actaris are just doing better than you expected three, six months ago? Because that seems to be the implication, right? Is that parts of it from a revenue perspective are better than you thought?

If you take a look at each particular business segment, water, gas and electric, each one of them are performing quite well. I think the gas side is doing very well. Electric has some very good production in the first half of the year, and it's tapered off a little bit in the second half but when you look at year on year, they've both done extremely well. And if you look at the water side it's continuing to gain market share. So each particular business segment is performing very well.

Okay. So just broad-based strength from Actaris as a whole?

Yes.

Okay. And then last quick question here. You were talking about the currency swaps very early on in the call, and I'm not sure if I understood properly. But it sounds like you're now swapping some of your pound sterling exposure to US dollar. And I thought the whole reason for the multi-currency debt finance thing was to match your cash flows to the underlying currency of the debt? Are you essentially reversing that now?

In some sense, yes. Our objective as well is to minimize earnings volatility on a quarterly basis from changes in exchange rate. And our Euro debt is a hedge of our net investment. Our Actaris investment is in Euros. We do have a reasonably large sterling business, but as we analyzed the impact of that we would have had to revalue that debt as there was fluctuations between the dollar and sterling. And we felt the best way to mitigate that fluctuation would be to swap that sterling debt back to US dollar. It's really drove that as well in terms of our analysis and again wanting to balance securing the lowest cost of debt, matching it with cash flows and EBITDA, but also minimize quarterly earnings fluctuations driven by revaluation of debt. And we feel that this was the best way to do that.

Okay. Got it. Thank you very much.

Thanks, Jason.

And we'll now move to Ajit Pai with Thomas Weisel Partners.

Yes, good afternoon.

Hi, Ajit.

Good afternoon.

A quick question about emerging markets. I think I heard you mention Eastern Europe. You also mentioned India and some growth there. Could you give us some color as to the combined business now, Actaris and Itron. What percentage of the overall business is in these emerging markets? And also sort of very broadly the growth rates in those markets and the margins, whether the ASPs are lower and whether the margins structure is lower or higher?

Ajit, we don't disclose revenue by those kind of countries, so we really can't give you any color around that right now. I guess what we could say is the majority of Actaris' revenue still continues to come from Europe, although we are starting to see revenue from these markets.

And on the margin structure side, whether the ASPs and margins are comparable with the (inaudible) business and these new markets and what the relative growth rates are?

Yes, I mean, Ajit, the point I'd make there is you have to be careful that you talk about apples and apples and not very complicated meters with electronics on them versus very uncomplicated mechanical meters. So for instance, Indonesia we make bread-and-butter mechanical electric meters. Those don't have the kind of margin that a meter you make in Europe that's got either a prepaid device on it or an AMR device. I mean, the differential there in margin is quite substantial. So in general where you have less complexity, no electronics as Malcolm talked about a little while ago, you have lower margins. And so one of the things we think the world does is to move to greater complexity of technology on top of basic meter platforms, and that allows us to bring margins up beginning as it did in the US, extending to Europe. This is going on now. And then in developing countries across time.

One of the great examples of that is if you look at China today. We make gas meters in China, but we really don't sell a lot of meter product except very complicated meter product in China because the margins on that stuff are just miserable. And so we look at geographies quite carefully to decide whether we want to expend any kind of effort to get there or not. Malcolm mentioned one which is India, which we have some hopefulness for, particularly around water because water is a very precious commodity there as it is elsewhere. And we look for that business to be very nice in the future.

Got it. Thank you.

Thanks, Ajit.

And now we have Patrick Forkin with Tejas Securities.

Good afternoon.

Hi, Pat.

Hi, Pat.

A couple questions on the competitive front in North America. With respect to your solid-state meters, it sounds like you guys have totally integrated the remote connect-disconnect switch under the glass. How many of your meter competitors have done the same thing?

I mean, Pat--it's Philip--we've seen--I've seen a number of samples deployed of competitors actually at AMRA that claim to have the disconnect. I think that's a game of maturity and volume, but I fully expect based upon the interest in the disconnect switch that that is a temporary competitive differentiator for us and that all of the major players are going to be working hard on that problem. We have a terrific solution.

Okay. So would you say that's a broad interest among utilities now, Philip?

In the AMI space, yes, I believe it is.

Okay. And then with respect to competition on the AMI side, if you could just review the top two or three companies that you're seeing out there in some of the competitive proposals you're working on?

Sure. I think they fall into two broad categories. The larger, established players, by that meaning Cellnet and Elster. And then a number of either new-market entrants or smaller players that are experimenting with newer technology. And so we've seen [Census], Silver Spring and a couple of others, Trilliant, that have either announced pilots or we know to be working on various pilot projects.

Okay. And the last question, on the regulatory front there's some proposed cases out there that would actually provide awards to the utilities for selling less electricity under the various demand response programs. And then earlier this week Duke was out talking about the same type of thing in some of their Midwest territories. LeRoy, any thoughts on whether that is going to really take hold in California? What the opportunities are for that to spread across the country and then what it might mean for your AMI business?

Well, I don't know about California in specific but the fact that the California PUC is allowing all of those utilities to put those huge purchases in a rate base sort of underpins that. I have heard Jim Rogers in Duke speak on his concept about being paid to deliver megawatts or--he's got a different--

Save-A-Watt.

Save-A-Watt. It's not an unreasonable concept, and I spent sometime recently with a couple Commissioners that would say conceptually it is not an idea that we would immediately turn from. The devil's in the details on that one, Pat. But if you think about the fact that utility gets paid fundamentally for serving load, if they can do that be effecting conservation, it's pretty hard for a Commission to stand up and say, "We're not going to let you do that." I think the fight really is in the detail and exactly how they're going to get to do it.

Okay. Very good. Thank you.

Thanks.

And now we'll move to Chris Sommers with Greenlight Capital.

Hey, guys. I guess a couple questions. One, a majority of your EBIT now comes from overseas. I was wondering what your benefit was from currency translation in the third quarter?

We haven't really quantified that to be perfectly honest with you, Chris. Obviously the Euro is moving in the right direction for our Actaris business and we are translating it at a higher rate. But in all fairness I don't have it quantified.

Yes, we didn't quantify that but we clearly came in at a higher rate than we had originally expected. And with as we look forward with right now the Euro and dollar at about a 144 rate, we are looking about clearly that as a contributor to the increased relative revenue from Actaris in the third quarter was the actual rate coming in higher. But I don't have a number right here to quantify that.

Got it. And then secondly your guidance for the rest of the year implies that the fourth quarter revenue is going to be higher than the third quarter. I was wondering if you could comment on kind of what you're seeing so far given that Actaris seemed to slow down a bit in the third quarter because it ended the quarter with about .9 book to bill. So with the majority of your revenue slowing down leaving the third quarter, what are you seeing that gives you the comfort to raise the fourth quarter revenue versus the third quarter?

Chris, a couple of points there. Don't get fixated on the book-to-bill for Actaris. That flips right around potentially in Q4 and is overwon. And a good deal of it if not most of it gets shipped in Q4. So there isn't the lag if you will on the Actaris shipping that you see in a whole lot of the business in North America because far, far less of their business is project-based business. And so don't--I'm not saying you shouldn't look at it, but understand that it's a very different book-to-bill than US is. We were very careful as we looked at the fourth quarter knowing how we were going to come into the end of Q3 to do a very careful bottoms-up sales forecast with Malcolm's guys and Philip's guys. We are feeling very good about the numbers we've given you for Q4.

Okay. Great. Thanks a lot of guys.

Sure.

Thanks.

And now we have Michael Horwitz with Pacific Growth Equities.

Hi. I feel it necessarily to do maybe a bit of a follow-up on all these timing questions and the way that these contracts can roll out for AMI because I do think that it has now gotten a bit confusing with the multiple answers and questions. Given what your stock's doing right now in the after-market it might be helpful if we walk through. CenterPoint, you're able to make this announcement today. Now we have a bit of a process to go through over the next few months. But it still implies the middle of next year, given your earlier comments, that then that will start to become a volume situation. And if that is the case, can you also explain some of the other opportunities that are out there and if those are in similar timelines and exactly how that might map out? Because I do think some of your prepared comments may have been a bit different than when you answered some questions.

Michael, I will answer that question to the degree we can. So first of all let's start about CenterPoint. Your assumption on CenterPoint is not incorrect. If they move through their own internal process and they move through the process with their Public Utility Commissions, there is a reasonable chance and I would agree with your statement that in the middle of '08 they are shipping volume product. But understand that CenterPoint is different than almost if not every other major AMI prospect out there on the street, whether it's Southern California Edison or San Diego Gas and Electric or Detroit, which are three of them that everybody talks about, or PG&E. Those guys haven't come through a 10,000 point trial period. And all of those guys some time between now and we think at this point early in the first quarter will be making vendor selections, at which point they will start something like a 10,000 point trial. That trial will go on for the better part but probably not all of 2008. The technology will either be valued as worth going forward with or not. And then the larger deployment will commence. To the point Stuart finally got me to understand, there's probably a quarter's worth of time between actually saying, "Okay, let's go ahead and do the full deployment," and when people start ramping up.

And so as I said in my prepared remarks, I think we need to be very careful to understand that while the prospects are huge and in fact if you add them all up they're well over $2 to $3 billion, all that stuff's not going to start shipping in volume in 2008. So I'm trying to be very careful to forewarn all of you to model carefully because this stuff just takes time to progress through a pilot--which by the way CenterPoint is a good example of--stuff installed, beginning at the very front end of this year, and then finally they're coming out of it. You saw our announcement this morning. So that gives you a model at least of the timing of the pilot. And then you go to full award, and then you go on. So hopefully that helped a little bit.

I think that was great, and thank you for doing that. And then so the timing which seems to be in line with my expectations that this is really a 2009, 2010 and beyond volume deployment, given your commentary about guidance on '08, I would have suspected if you thought there was volume in '08 and if the street thought there was volume in '08, that number would have been a lot of bigger. So I just wanted to be clear that I feel like it's pretty well understood how volume works in '09 and 2010. So thank you for explaining that.

Thank you.

No problem at all, and thank you for asking for the clarification. And to a point Philip made, and I know some of you guys want us to say more about individual prospects out there. I mean, utility companies in general are in very sensitive places right now with their Boards and with their Commissions. And so virtually every one of us has been asked, whether it's Itron or one of our competitors, "Would you guys just shut up about what we doing? We do not want you talking. It's too sensitive right now." And you know what? When somebody who might give me a $400 million order says shut up, generally I listen.

Thank you.

Thank you, Michael. Shauna, can you tell us if we have very many other questions on the phone? We're a little over.

There are two left in the queue.

Okay. We'll take the last two.

Okay. Our next question comes from Steve [Wheepel] with Standard Life Investment.

Hi, guys.

Hey, Steve.

Hi, Steve.

This relates to the last point you made, and I realize (inaudible) and that you're not in control of the timeline of the data releases, but can you give us some idea of who you think is furthest ahead in the process and maybe the order in which the utilities might come to the market with some announcements.

Well, I think in an obvious way clearly CenterPoint is maybe as far down the road on process as anybody is, but you would have got that one yourself. I think the four that are out there right now that everybody knows about that are probably as far in the process as you can be without actually giving people orders are Southern California Edison, San Diego, CenterPoint--or not CenterPoint, but PG&E and then Detroit. And in some respects those guys are bowed in the same place and depending on issues they have individually with their Commissions or they might have with their Boards, and I'm going to explain why that occurs here in a moment, I think toward the end of this year, very front of next year, you're going to see them all sort of coming out of what is a little bit of quiet.

One of the things that a utility has to do on these things, say it's $300 to $600 million, is they sort of get into a negotiating round robin with Commissions, Commission staffs and their own Boards as to how they're going to deal with capital requirements, how they're going to deal with embedding this either in a rate base or taking other kind of regulatory consideration for that stuff. It is just not determinant how long that kind of a process takes. There's a little trial [ballooning] that goes on. There's a little negotiation that goes on. And so to try to be more definitive is just silly on one hand because nobody knows. They don't even know.

And so one of the things you can do, though, is to watch filings at those utilities. They'll make filings that are public with their Public Utility Commissions, and you guys read those just like we do. In fact, I think you get them before we do. I just haven't figured out how.

Do you think the vendor selection has been made and its now just the process that has to be followed?

No, I think in the ones I mentioned vendor selection has not. I do think you've seen some narrowing down, which we've all talked about on previous calls. A couple players at Southern Cal, a couple of players in the mix at San Diego. I really don't know at PG&E. I'll be fair on that one. And a couple of players in the mix at Detroit.

Okay. Thank you.

Thank you.

You bet.

And our final question comes from Jay Hingorani with Standard & Poor's Financial.

Yes, thanks for taking my call. Just real quick, you provided EBITDA guidance, about 220 with some upside. And in the past you've mentioned how EBITDA is probably the appropriate way to look at companies in your space being valued. I just wanted to ask you real quick, that upside, can you just kind of give us a little color on what you see happening or how that can happen? And then just talk about where does year-to-date and kind of round out that picture if you will?

Well, sure, Jay. I mean, we put in our earnings release what our EBITDA has been for the quarter so far or for the year-to-date period, and I believe it was $158 million. So what we said in our earnings release today is we expected that that would be greater than $220 million for the year, so obviously there's some upside implied in that. Our cash has come in a little bit from what we projected in all fairness because our earnings aren't what we projected a quarter or so ago. Does that answer your question?

Sort of. And then you're still looking at industry range of between 12 and 15 times?

Are you talking about our get to EBITDA for our covenants?

I think valuation.

Yes, I'm talking about--

We don't comment on our valuation multiple.

We don't comment on our valuation.

The other comment I'd want to just clarify again is that we do have debt investors who look at covenant (inaudible) ratios on a last-12-month basis, and the point we were trying to make is of course what we report financially only includes Actaris from the day we acquired the company. And that clarifies--we want to be clear in terms of what we are disclosing in reported EBITDA and our forecast for the year. And then in addition we do have stock comp expense which we do not add back in that number but it is a relevant measure for our debt investors and we like to provide that information as well.

Okay. Good enough. I'll follow up offline as well. Thank you.

Thanks, Jay.

And that does conclude today's question-and-answer session. Ms. Duquette, I'll turn the conference back over to you for any closing remarks.

Okay. Thank you, everyone, for joining us today, and as always if you have any follow-up questions please feel free to call.

There will be an audio replay of today's conference available this afternoon. You can access the audio replay by dialing 1-888-203-1112 or 1-719-457-0820 with a passcode of 4780106. Or go to the company's website, www.itron.com. That does conclude today's conference call. Once again we thank you for your participation.