Itron Inc (ITRI) 2010 Q3 法說會逐字稿

Good day, everyone and welcome to the Itron, Inc. Q3 2010 Earnings Conference Call. As a reminder, today's call is being recorded. For opening remarks, I would like to turn the call over to Mr. Ranny Dwiggins. Please go ahead, sir.

Thank you. Good afternoon, everyone and thank you for joining us. On the call today, we have Malcolm Unsworth, our President and CEO and Steve Helmbrecht, our Chief Financial Officer. Steve will begin the call by giving us a financial overview of the quarter and then Malcolm will provide a business update. After that, we'll take your questions. Our earnings release includes non-GAAP financial information that we believe enhances your overall understanding of our current and future performance. We also have a supplemental slide deck that is intended to augment our prepared remarks, as well as provide a reconciliation of differences between GAAP and non-GAAP financial measures. You can find this supplemental information on our corporate website under the investor relations tab.

We will be making statements during this call that are forward-looking. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially from these expectations because of factors discussed in today's earnings release, in the comments made during this conference call and in the risk factors section of our Form 10-K, Form 10-Q and other filings and reports with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statements. With that, I will turn the call over to Steve Helmbrecht, Itron's CFO.

Thank you, Ranny and good afternoon. Itron had a very strong quarter building on our balanced portfolio of electric, water, and gas solutions with record results. Here they are. Quarterly revenue growth of 41% to a record $576 million. Nine-month revenue growth of 36% to a record $1.6 billion. Quarterly adjusted EBITDA growth of 115% to a record $89 million. Nine-month adjusted EBITDA growth of 82% to a record $239 million.

Record quarterly and nine-month, non-GAAP diluted earnings per share of $1.06 and $3.06. In our last earnings call, we talked about full year revenue growth in the mid-20% range. We've done better than that. We came into 2010 with concerns about the economy, project ramp rates and supply-chain risk that influenced our outlook. Over the course of the year, our focus on manufacturing, quality and delivery has helped mitigate those risks and drive growth. I will start with Itron North America where quarterly revenue grew 130% to a record $315 million. OpenWay continues to drive Itron North America revenue growth. We shipped 1.3 million OpenWay units during the quarter with OpenWay revenue contributing about 50% of total Itron North America revenue.

Our gas and water businesses in Itron North America are also very healthy with about 70% revenue growth over the third quarter of 2009; evidence of a balanced portfolio. Itron International revenue was down about 4% to $261 million. The revenue decline was due primarily to a strengthening US dollar compared to last year. On a constant dollar basis, revenue grew about 1% on higher meter volumes. Next, our gross margin for the quarter was 32% comparable to 31.7% in 2009. We are pleased with the improvement in Itron North America gross margin; a result of manufacturing efficiency due to higher volumes, as well as cost reduction efforts. Thus I'm happy to report Itron North America gross margin for the quarter was 35.5%, up 450 basis points from 2009.

On the other hand, there was a decrease in the International gross margin due to a number of factors including increased warranty expense, costs related to factory movement and consolidation and increased raw material and component costs. Itron International gross margin was 27.8% for the quarter, down 430 basis points from 2009. In particular, a special warranty charge of about $4.2 million impacted Itron International gross margin by about 160 basis points and it impacted overall gross margin by about 70 basis points. The warranty charges relate to the final settlement during the quarter of the remaining arbitration in Sweden. I discussed this matter in the last earnings call, and we are pleased this has been settled. Now let's look at operating expenses for the quarter, excluding amortization of intangibles. On 41% of revenue growth, operating expenses grew only 11% to $106 million, due mostly to increased compensation expense resulting from the reinstatement of bonus and profit sharing plans.

Operating expenses as a percentage of revenue, excluding amortization of intangibles, were 18.4% in the quarter, compared to 23.4% in 2009. We are seeing improved operating margins as a result of our focus on driving higher revenue while managing lower growth in sales, marketing, development and G&A expenses. As I mentioned, adjusted EBITDA increased 115% to a record $89 million. Adjusted EBITDA margin for the quarter was 15.5%, compared with 10.1% in 2009. Cash flow from operations for the quarter increased 154%(Sic-see presentation slides) to $50 million. Capital expenditures were about $18 million, resulting in free cash flow of about $32 million. Our non-GAAP effective tax rate was 33% for the quarter and 23% for the first nine months.

The increase over the course of the year reflects continued improvement in profitability in high tax jurisdictions, primarily the US. For the full year, we expect our non-GAAP effective tax rate to be in the mid-20s excluding any additional discrete items or the potential extension of R&D credit legislation. New order bookings in the quarter were $528 million for a book-to-bill ratio of 0.92 to 1. Total backlog was $1.7 billion at September 30, compared with $1.6 billion a year ago. Our 12 month backlog remained healthy at $958 million. Our debt balance continues to decline as well. At September 30, we had $671 million in non-GAAP total debt at a blended interest rate of 5.05%. During the quarter, we made $33 million in debt payments, about equal to our free cash flow and our cash balance as of September 30 was $148 million.

In the first nine months, we have made a total of $107 million in debt payments. Our debt to total capitalization ratio at September 30 was 33%, and our debt to EBITDA covenant ratio was 2.2 times, compared with a maximum covenant of 3.75 times. I want to highlight on the balance sheet, the current portion of debt, which increased from $11 million at December 31 to $226 million at September 30. This change relates to the classification of our outstanding convertible subordinated notes issued in 2006. The notes have put, call and conversion features starting in July 2011. As these features now fall within a one-year window, the notes are classified as current, rather than long term. In Q2, we expanded our revolving line of credit from $115 million to $240 million. At September 30, there were no borrowings outstanding and about $47 million was utilized by outstanding letters of credit leaving substantial liquidity. In closing, we are pleased with how the businesses are executing and I look forward to providing a full-year report in our next earnings call. I will now turn the call over to Malcolm.

Thank you, Steve and good afternoon, everyone. Itron's quarter of record growth and financial performance is a direct result of successful innovation in our balanced portfolio of a electric, gas, and water solutions. We are a technology company. Our ability to deliver innovative products and services that meet our customers' needs give us confidence in our competitive positioning. I'll start with a few comments about innovation. In North America, we released our OpenWay solution in 2008. And after a year of testing, began ramping up shipments in Q4 of 2009.

To date, we have cumulatively shipped approximately 4.5 million OpenWay meters and gas endpoints. Installation of smart meters in North America continues at a very rapid pace. By every measure, accuracy, reperformance, customer satisfaction and on-time delivery, these are successful projects. On the day of its release, demand for our smart gas distribution solution has been excellent. It's the most advanced residential gas solutions in the world. Specifically, this quarter's results include an order of 1.2 million smart gas modules and the associated systems for CenterPoint Energy in their gas service territory in Houston. I'd like to emphasize that this gas order is in addition to our previously announced contract to OpenWay.

Earlier this year, we also announced a new gas meter with an integrated safety shutoff valve, the first in North America. So with our new gas smart network, new gas endpoints and our new gas meter, we have brought the smart grid to the gas industry. I heard a recent story from one our gas customers in the US that is a great example of the benefits of this new offering. This utility had a gas explosion at a home within their service territory. Fortunately, our customer had recently installed our new gas endpoints. This allowed them to capture 40 days of hourly gas consumption data at each residence, information critical to determining the cause of the accident. This example demonstrates the value our new smart gas distribution systems are providing utilities, regulators and insurance companies. And for the first time, they have the information needed to help them solve complex investigations and save millions of dollars. Itron's innovation also extends water utilities, where water losses are a huge issue in both conservation and non-revenue water.

Our new smart water distribution system and the new leak detection solution we define the smart grid for water. And we have the best-selling meter data management software in the world. In fact, this enterprise system just won the Teradata 2010 Innovation Award, its top award to a partner across all verticals globally. Teradata, a strategic partner, is the world's leading enterprise data warehousing provider. And our groundbreaking alliance with Cisco, announced earlier, is another example of our commitment to lead the industry. I'll give you an update on that in a few minutes. So the point is, innovations like these have led to record revenue, margin expansion, and improved cash flow. Moving on to bookings, I was very pleased with Q3 bookings. Their reflection of the tremendous opportunity for new business provided by our balanced portfolio of electric, gas, and water solutions.

Over the past 12 to 18 months, we have good opportunities to win large electric contract awards in North America. The first wave of electric contracts was driven by a regulation in California and Texas. The second wave was stimulus driven which has mostly played out. So what happens after that? We're seeing momentum in the marketplace from utilities' growing acceptance of a broader operational business case for the smart grid. There is business to be won. Not only does Itron have great solutions, but we've made an organizational change to strengthen our focus and support broader smart grid electric opportunities.

In water and gas, we continue to win with strong bookings. During the quarter, North American bookings included 1.9 million smart gas endpoints. As mentioned previously, this includes our CenterPoint gas contracts. They also had a significant win with Cleveland Water, which chose our newest smart water distribution solution. And we've also seen very good demand for gas meters with a 62% increase year-over-year, year-to-date. And as a reminder, we acquired the US gas meter business as part of our acquisition of Actaris in 2007. This increase in demand is clearly one of the best examples of revenue synergies we've seen from this acquisition. Now the opportunities outside of North America will take a little longer to play out. Yet, in the third quarter, we saw at continued momentum in many parts of the world towards the adoption of smart technologies, providing ongoing growth opportunities.

During the quarter, we announced a new water project in the UK with Severn Trent. And today, we announced three contracts for smart electric payment meters in Indonesia. In total, the contracts include 800,000 meters. This smart payment technology will help people self-manage their energy bills and protect utilities revenue, a significant issue in many parts of the world. But the question is more about future bookings.

In that regard, here are some things to keep in mind. I attended the European Metering and Billing conference held in Vienna in September. Many utilities presented and demonstrated and they are continuing to move forward with their plans to meet 20-20-20 European mandate. During the quarter, we announced a smart grid pilot with GrDF, the a main gas utility in France, with 11 million residential customers. We were one of four vendors selected to participate in their smart meter pilot. We also announced a smart metering partnership with Hager that strengthens our market position in Germany. And the Brazilian government issued a draft measure for the adoption of smart meters, a continued sign of government support for smart metering.

There are growth drivers in different regions of the world encompassing all of these three markets; electric, gas, and water. And this highlights one of our key competitive advantages. We are strong in all three areas with presence around the world. nd let's also remember the growth opportunity for new electric, gas, and water infrastructure. In some countries, electrification is still being established, water being measured for the first time and new natural gas resources are being found and extracted. Finally, I have some thoughts to share with you about the movement to open standards and interoperability. Some see this as a negative for metering companies, but that's not the way I see it. Itron supports this movement and I believe this will be positive for us and for the industry. The issue is about accelerating the market, lowering the overall implementation and integration costs for utilities in order to enhance business cases by opening up the market for widespread adoption and consumer benefit.

No one company can claim to supply the network for the smart grid. Rather, the smart grid is the network of networks. We're excited and very excited to be working with Cisco, the world's leading network company, to develop the first truly scalable open standards-based smart grid architecture based on IPv6. And since we announced our alliance, our collective teams have made significant progress. We've confirmed that our OpenWay 3.0 platform is forward migratable to a full implementation of IPv6. In fact, we provided live demonstrations of OpenWay on IPv6 supporting distribution automation devices at our Itron users conference last week in Orlando. And as we previously committed, we do in Q4. We are ready working together on customer meetings, joint sales proposals, and engineering reviews to ensure we meet customer needs. We couldn't be more pleased with the synergies this alliance is bringing. In summary, with our innovative capability, global footprint, and broad portfolio of electric, gas, and water end to end solutions, Itron is very well-positioned to compete for the growth opportunities ahead of us. Operator, we're ready for questions.

(Operator Instructions) We do ask that you limit yourself to one question and one follow-up. If you have any additional follow-ups, please re-signal. (Operator Instructions) We'll go first to Vishal Shah with Barclays Capital.

Yes, hi. Thanks for taking my question. Congratulations on a strong quarter. I have a question on the margin outlook for the International business. I believe you said that the warranty charges are behind us now. So can you talk about how we should think about the margins in that segment going forward? And also, did I hear you correctly -- you say that the OpenWay revenue represented 50% of your North American revenue? And would that imply that your ASP's in some of the [AMI] contract are better than the others? Like CenterPoint is probably better than the others?

This is Steve. So, let me cover those. First of all, in International margins, as I mentioned, is down about 430 basis points. And more than half, or probably closer to two-thirds of that in the quarter was really due to, as I mentioned, a number of specific items. The warranty being the largest. We are seeing some increased material and component costs and are continuing to working on managing that our purchasing areas. We've seen some pressure there on the pricing. We continue to focus on manufacturing efficiencies to offset that to the extent possible. And so, as I said, the primary driver for that over the course of the quarter was those other items I mentioned. I did say that the OpenWay was about 50% in total. And so non-OpenWay was about the other half as well. And then, I missed the last part on the ASP.

Sorry. I thought that the implied ASP for some of the PMI contracts was better than the other, but I believe that they might not be the case given the new disclosure. Thank you

Okay. Thank you

Thank you.

We'll go next to Dale Pfau with Cantor Fitzgerald.

Yes. Congratulations. Excellent quarter, gentlemen.

Thank you.

Thank you.

As we look forward, in the past you'd asked us to focus on your 12-month backlog, and for the first time in several quarters, we've actually seen a slight dip. Could you talk about trends you're seeing out there and how we ought to expect seasonality over the next few quarters?

We had a -- yes, it was a slight dip in backlog. But we still have a very, very robust backlog of $1.7 billion. Considering our bookings were $528 million and our revenue was $576 million, the backlog did go down slightly, but not anything that we are worrying about. And it gives us an opportunity, as we move forward, to look at all the relationships that we have to grow that business with the relationships that we now have with Cisco. And so, we're looking forward to increasing that, as I say, over the next period of time, especially with these relationships.

And should we expect any seasonality in your bookings over the next couple of quarters?

Usually at the end of the year, it is one of those situations where sometimes, in the fourth quarter, utilities do spend -- do seem to spend either use it or lose it theory. So occasionally, we do have year-end orders to make sure they spend their money. So, it is a little seasonal sometimes.

Any comments on what -- how you think this year will play out?

We're just starting now in the fourth quarter, so it's a little too early to tell.

We'll go next to Stuart Bush with RBC Capital Markets.

Yes, hi guys. Great quarter. Was hoping you could give some more color on specific opportunities in Europe and internationally that you're focused on here for the first half of 2011? I mean, I know you mentioned you've got a great platform and a lot of opportunities. Are there - is there something that investors should be looking at for prime opportunities for next year?

Stuart, we did spend, as I said in my prepared remarks, I did spend some time at the European Metering Conference in Vienna, and we're working primarily with many of the large utilities based on their mandate of 20-20-20. In particular, I mentioned in my prepared remarks that we've got GrDF pilot up, we have an ERDF pilot, we're working with Iberdrola, and now we've announced this partnership that we have with Hager in Germany. So we really cover many of the areas and of course, we provide a lot of products into the UK, where we have our smart payment solutions and we're working on that as well. So, we try to cover -- we've got a significant broad portfolio where we cover all of the countries both in Europe and the rest of the world. So when it comes to Europe, we're very well-covered and other parts of the world, like I talked earlier. There are situations in Brazil and South America and so we don't rule out any of that. We're looking and working with all of the utilities throughout the globe.

Okay, can I follow-up with that real quick? Should we expect your International OpEx to go up as a result of increased sales and marketing efforts around the world?

This is Steve. We talked before, Stuart, in the area where we've seen we have a strong distribution network already in International and are comfortable with the structure we have in place. It can be a little bit of variable compensation growth. But the main area endpoint has been in R&D where we have talked about increasing that modestly in order to help focus on the opportunities around the world which require us to be able to be local and to work with the specific requirements in each of the industries. And on the G&A line, no, we don't see them lot of movement there as well.

Just to add some color, Stuart, we do have 60 locations where we have salespeople throughout the world. And in those sales locations, we're trying to strengthen the position where we can provide the services that utilities need on how to move towards smart grid. So will there be increases in our sales and marketing expenses? Marginally, yes.

We'll go next to Ben Schuman with Pacific Crest securities.

Hi, guys. Can you talk about the split between Q3 and Q4 for the bookings and delivery for the Indonesia contract? And then, maybe just talk in relative terms about the ASP of that prepayment solution versus something like an OpenWay in the US?

Just to give you an example, I believe about half of the booking was included in the bookings for -- oh, sorry, all of it was included in the bookings for Indonesia. With regard to selling prices and ASP, no, we don't do that, we don't say that. It's confidential, of course. But it's -- there's significant opportunity in that region of the world for prepayment and smart solutions, Ben. So.

Okay, great. And then, can you give us a rough dollar amount for the CenterPoint gas bookings?

Know we've got 1.2 million points that we have associated in our and our CenterPoint gas booking. And what's important about that, is that is the new solution that we have for our Choice Connect two-way smart grid solution for gas. And they've elected to do that so that they can also incorporate that with one holistic system for their non-electric territory, or should I say, gas only territory.

We'll go next to Sanjay Shrestha with Lazard Capital Markets.

Great. Thank you. Good afternoon, guys and congratulations on a great quarter. Two questions. First, on some of the European pilot programs that you guys are working on, GrDF and all those guys. When do they move from pilot to full stage installation?

That is a very important question, Sanjay. And obviously that's something that we monitor very closely. The mandates call for having the complete installations done, as we said, by 2020.

Yes.

These pilots, they start this year. We've done very well with the ERDF, providing that one to the electric side. But those projects have been traditionally known that they would start around about 2012. So not much changed from that, that's been made public to us today.

Okay.

But we're working with that and GrDF to do the same kind of thing.

Got it. Got it. One follow-up if I may then, along those lines, because you guys have done a great job this year. Next year is probably going to play out pretty well, driven by the OpenWay tractions, trends, existing backlog. One general concern that is there, and I'm asking you to take a look at the crystal ball here a little bit, is about potential slowdown in North America for 2012, especially on the electric side. But based on your comment about broad operational business case, Cisco relationship, are we looking at a situation here where even electric business does well in 2012 and you will do well with Itron North America as you continue to do well with the gas and the water meter side of the business and international complements to growth in 2012 is also a pretty smooth year versus any major decline?

You know, Sanjay, I also don't have a crystal ball, but what I can tell you is that are -- that the relationship that we have with Cisco, as I said in my prepared remarks, we're visiting customers. There are certain customers in North America that have to have these installed by 2012. We're working with a handful of these clients, working with Cisco making joint calls and trying to meet their customer requirement dates so that we can enjoy some of the opportunities as we move forward like we've done with the full five large contracts that we have today. So, we are obviously spending time with Cisco, and trying to change the way and do things slightly differently. Because, let's face it, this alliance agreement that we have with Cisco is going to reduce the total cost of their business case to push for more and quicker deployments.

We'll go next to John Quealy with Canaccord Genuity.

Hi. Good afternoon, good quarter. First, can you talk a little bit about Cisco? I know -- Malcolm, you mentioned that some of your utility customers, you've been out there jointly visiting them and potentially pitching them, but can you comment for North America, at least in the electric side, has every single open RFP or major potential AMI project, have they met with Cisco with you folks together at the utility? Can you give us a little background there?

John, we signed the agreement, official agreement on September 1. And we've had a significant number of meetings with them. In particular, I haven't seen Philip Mezey for a while because he's been talking to Cisco, probably too much. But it shows you that we've got this significant relationship with Cisco. And going together with all the RFPs with Cisco is something that we endeavor to do. Absolutely.

And as a follow-up, again, going back to this booking question if you would. There seems to be three deals of note this quarter, Cleveland, CenterPoint Gas and Indonesia. If they're all in the booking number this quarter, is it safe to say that collectively they're in the neighborhood of maybe 15% or 20% of the total bookings represent those three jobs? And if you can't comment on the number, can you talk about Q2 and were there any like-size deals in Q2's bookings?

You want to take that, Ranny?

John, this is Ranny. We haven't really given numbers on exactly what the bookings are by contractor and group. So, we really don't talk about that. Going back to Q2, we had a, you know we had the really big booking that we disclosed in Q2 for Detroit Edison and I think you're talking about things other than that one. And right off the top of my head, I can't recall what those were.

We'll go next to Patrick Jobin with Credit Suisse.

Congratulations on a great quarter and thanks for taking my question. I was hoping you could provide a little more color on International growth. You said on a constant currency basis, you saw 1% growth. Could you maybe provide a little more color on the geographies and product mix that are seeing the strength and recent trends?

Yes. We have a very balanced portfolio of electric, gas, and water. So, it's not specific just to say one particular area with regards to what bookings we have. But we've got -- we have seen very good opportunities with our gas business with regards to prepayment, as we talked about. That's one of the countries where we, in Azerbaijan, Azeri Gas, where we're deploying smart gas products. We've got these opportunities, as I said, worldwide with Indonesia, with PLN and that was an electric deal. And then, of course, we provided water solutions to India, like we talked about earlier. An this new opportunity that we've booked with regards to the water smart project, or the water project with Severn Trent. So, it's a bit of a blend all over and so there's not one particular section that's really moving. And the balance that we have, as we have said, it's about 40% for electric, 30% for gas and 30% for water. So, water' moving up a little bit, to be honest with you. We've booked more business with water in the last little while and we're seeing that as a trend.

Great. That's very helpful. And just as a follow-up or somewhat separate question. Your strong cash flow would suggest you have quite a few options. Is there maybe deleverage or maybe a smaller technology-specific acquisition? Can you maybe help us think through what your target leverage ratio is or what your plans are with your cash flow?

Let me let Steve take that for leverage and then I'll talk a little bit about possible choices we have.

Patrick, we've repaid a significant amount of debt and in the near term we're going to continue for to focus on that delever -- comfortable below two times EBITDA covenant over time. I also want to maintain some additional liquidity for the reasons I talked about. And at the same time, make sure that we are providing investment organically where needed for R&D and the growth opportunities we talked about. So we see the best use cash in the near-term as continued to be used to pay down our debt.

And when it comes to potential acquisitions, obviously we can't publicly talk about that. But we're always looking at possibilities. We do that. We look globally at the possibilities, it's not just in North America or in Europe it's across the globe. So, we're always looking at the possibilities for that, Patrick.

We'll go next to Carter Shoop with Deutsche Bank.

Thanks for taking my question. First off, congratulations. Six consecutive quarters of a positive book-to-bill region -- in the North America region here is pretty impressive. Excluding the OpenWay business, looks like the overall bookings up about 40% year-to-date excluding OpenWay is a pretty noticeable trend here. And want to get your sense here on if this trend is something that we can continue to see going into 2011? Is there any reason to think that the bookings momentum outside of OpenWay will slow?

Carter, it's obviously one thing that we're always looking at. Is the economy picking up as housing starts increasing or is it just that their inventories have gone down? It could be a blend of all three especially in North America. We've got some very good innovative products that we've put together. When we talk about the gas solutions, the two-way AMI gas or smart gas distribution solutions which I talked about in my prepared remarks. When we talk about the new booking that we've got in Cleveland, it's a bit of a game changer when it comes to areas that were traditionally our AMR customers. And now that we've got this two-way communication and smart technologies for water and for gas, its given us a bit of an edge when it comes to being competitive when you've got lots of features at a decent price. And, of course, the OpenWay situation everybody's aware of that with the smart group at Cisco. So we're working very closely with these customers to look at opportunities. So we do cover all of the water, gas, electric customers over the year. And we're looking at 2011, hopefully we'll continue with the trend.

In regards to gross margins in the international business, can you disclose what the impact was from restructuring in the quarter and what type of impact you expect from restructuring in 2011?

This is Steve, Carter. As I mentioned, of the total reduction at a high level, about two-thirds of that was related to the warranty. But there was some additional restructuring. And we are in the process of moving a couple locations and consolidation of a factory which is a good thing, to drive more efficiency going forward. As we look into 2011 and the bigger pictures, we're very comfortable with our footprint, multi-local. We're happy with what we have and we don't see the need to be expanding in terms of CapEx and building out facilities over time, nor even focusing, as well, on rationalization in any large way. We will look for smaller opportunities to continue to take costs and improve efficiency.

Just to expand on that We did do some, as we said, consolidations in South America. But at the same time, we've opened up the markets for water in India and also in China. So, we've added some of those capabilities. So as much as one's gone down, the consolidation, other areas are increasing.

We'll go next to [Elaine Clay] with Jefferies.

Hi, everyone. I'll add my congratulations for the quarter. Outside of the existing OpenWay deployments, could you talk a little about which segments of the market in North America are showing particular strength? Is it spending coming back faster at the larger IOUs or at smaller to midsize utilities? And then, on the product side is that primarily from the smart gas and water or MDM or other products? And finally, I think you had mentioned in prepared remarks, stronger gas meter demand and we're just wondering if there's something specific driving that?

When I talked about the prepared remarks for the stimulus money, that also related to the water side as well. Basically, that's run out now from the waterside, so what's growing the water business? As I said to Carter, it's really the new innovative products that we've developed. You get better business cases and gives them the ability to do the traditional things that AMR used to do but with now some significant different capabilities like, as I say, these safety issues that we've got. So that is helping the utility put a better business case together. And maybe they're looking at these opportunities going forward and it's sort of a blend of a number of things. The economy, the fact we've got better products and it's never just one thing. So, that may have answered your question, Elaine.

Yes. Thanks, Malcolm. And just as a follow-up, I was wondering if you could share any thoughts you might have in terms of pursuing more recurring services or software type of revenue? And what the potential opportunities might there be in, for example, network management, demand response, and the prepay systems? And especially in the context of the Cisco partnership, if that opens up any avenues there?

With regards to prepaid services, obviously one of the areas we've got strength on is managing that in South Africa and also in the UK. We will not be doing that yet, for the time being, in Indonesia but that's always a possibility. We always look at these recurring services. When it comes to demand response, as we've said many times, there's a couple of large players in this business, and they're doing quite well, they're going quite well. But we also offer a product that helps the utility do that function for themselves. But the Cisco relationship -- that could help. There's no question. They've got some services that they could provide and we could use their services and push that going forward. So there's always that possibility, Elaine.

We'll go next to Steve Sanders with Stephens, Inc.

Good afternoon, everyone. Great quarter. I just wanted to come back to the project in Indonesia and see if you could talk a little bit more about how competitive it was, how the margins on that project would compare to the international corporate average, and whether there are significant incremental opportunities in that area or with that customer?

Steve, you know that I won't cover pricing or anything like that. But we live, eat, and breathe every day with competitive racing. These are not just awards that you get without being competitive. So, we do this all the time. We have a factory in Indonesia, it has about 1,000 people and we have local content. Does that make a difference? It could.

And so, these are the kinds of things that we offer -- a very large portfolio of local content, because we're a global company and we operate locally. That's the advantage that we have. Could we ship this product other the US or out of the UK? Probably not. We manufacture that product for the Indonesian market. So, I just want to make that clear. And, of course, I won't talk about pricing.

Steve, you also asked about -- this is Steve, about the potential for growth over time.

Right.

Obviously, in Indonesia, it's a populus, growing company with growing GDP and clearly, our strategy with all our customers is to execute, deliver well on projects and hope that, that leads to winning additional business over time on the merits.

Now, 200 and, I think the number, Steve, is 214 million people in Indonesia. 800,000 points is a not a large percentage, so their opportunities continue because they have what's referred to as some non-technical losses. So this helps the utility with that.

Right. And the question really wasn't on pricing, it was more around just kind of the general idea that this is a product that arguably has more technology content than a base meter and so shouldn't it be a positive incremental contributor to your margin? So, whether you want to go down that road or not I understand. And then, my next question was just as you came away from the European meter show, what are you thinking about in terms of the most significant obstacle to seeing some meaningful vendor selections in the back half of 2011 and some sizable rollout starting in 2012?

Vendor selections, well, if you take a look at the market shares that we have with electric, gas and -- mostly electric and gas in Europe, I came away from there feeling quite confident that we have a very good opportunity in all of the markets in Europe. We've got to, as we said before, market shares are something we look at all the time. And being selected in certain markets or certain customers they've made the selections in two or three locations our customers today and so long as those solutions work, you're pretty much going to get selected going forward. But that doesn't guarantee it. But we've got very close relationships and close ties with all of the major players in Europe for gas, electric, and water products and we've been progressively going over to AMI solutions and they like it.

Steve, this is Steve. Just to answer -- add to your prior question, certainly we see that and consider a prepayment meter to be a smart meter. And as such, relative to a traditional consumption watt-hour meter has a lot more capability and functionality and that certainly factors in, in terms of pricing the value proposition to the customer. Absolutely.

We'll go next to Michael Horwitz with Robert W. Baird.

Great. Thank you for taking my question and pardon if I'm going to maybe repeat a little bit of something because we had a fire alarm going off here. With the CenterPoint bookings in the quarter, you said 1.2 million units? For gas? Is that correct?

Yes that's correct.

And is it fair to say if I look at smart gas meter prices that -- and I make my assumptions around price, I know you're not going to comment, but it's pretty well documented that, that is better than half of your North American bookings this quarter?

Yes we really haven't commented on the specific dollar amount of the CenterPoint booking.

It's a very large contract I guess is my point.

We're very pleased with it. Yes, it's a great contract.

Okay. And so I would normally not bring this up, but any issues we should see around the lawsuit that CenterPoint and Encore in Texas, New Mexico Power have on their hands now as of the 21st from TransData? Does that affect any of your technology offerings at CenterPoint?

I'm not as familiar as I should be, but no we really can't comment on any particular legal issues that are going on with our clients.

So -- the only reason why I ask is because it seems to be fairly specific about technology and it was just filed.

Okay.

One other quick question, on Cisco, are you implying that you're going and seeing utilities right now that may have already awarded their contracts to other vendors? And so they may need to get things done by the end of 2012? And perhaps things aren't going well with their other vendors so you're going in and offering a different solution with Cisco in hand? Or are you talking about other business?

Michael, that's a great question. It really is. We do the same as all the rest of our competitors. We have the opportunity because we've got a very large portfolio of solutions that they use today. While they're deploying some of our other customers our competitors products, they have to go and read meters. We have a significant broad portfolio of handheld devices using our reading solutions. They have to use those. So we have the reasons to go see them anyway. And while we're there, yes, there's a perfect opportunity to revisit some of those clients that already have been awarded.

We'll go next to Paul Coster with JPMorgan.

Thanks, Malcolm. In your prepared remarks, you stressed that this is a technology company, you didn't say it was a meter company. And I'm just curious also in the concept of acquisitions and looking out several years from now whether you're looking at the application layer that will hinge off the deployment of meters. Whether it's building management, home area management systems and as you mentioned systems directly load control grid management, which I think people believe might have higher margins attached to it. Is that, do you think, going to be part of Itron's strategy long-term?

Obviously, Paul, I don't comment about specific opportunities. But, yes, you bring up a good point. We're always looking at opportunities to grow. One thing that we will always remember is we will always be in the utilities space. We will not go outside of that space. And I've said many times that if you take a look at some of the smart thermostats, for example, that on your wall, I don't think we can compete with companies like Honeywell. So there are certain areas that, yes, we will look at, but not the obvious ones like the home area network devices and looking at companies like, if you take a look at the iPhone application on Google, we really can't compete with those companies. But yes, we do always look at other opportunities. So yes, we do, we do, Paul.

Okay. The other question I wanted to ask is following up on Sanjay's line of query. So electric has already yielded some 40 million contracted endpoints, another 30 million if pilots are seen through. That leaves another 70 million homes that could go smart now that you've had some time talking to more utilities. Is your sense that eventually every US home will have an electric smart meter?

Yes. The opportunities are there to do that. Obviously if the business case is there for each particular utility with all the business capabilities, that would be something that we could -- that we would look at. But there's public documents that are around today that do look at the total numbers of about 65 million points. You could take that -- take a look at it and I'm sure you're pretty familiar, Paul, with some of these (inaudible) informations that you can look at that show you there's a significant number left to deploy. And it will take quite a long term -- quite a length of time to deploy all those. But as the price point comes down, as it is doing now, and the business cases improve, there's opportunities to do that, yes.

We'll go next to Jason Feldman with UBS.

Good afternoon. So some companies this earnings season selling other types of products into the utilities space, like transformers, have noted a pickup in utility activity and in purchasing. Have you seen a change of sentiment more broadly among the customers, not just in their activity, but how they're viewing the world? And also, do you think there's any kind of uncertainty overhang right now related to the upcoming election?

When it comes to if utilities are starting to increase their bank patents, one thing that we've done with our solutions is that we've managed -- this was a couple of years ago obviously, with the large ones, is we've done that with our stimulus money. Stimulus money now has sort of moved away and it's coming back to replacements. They didn't spend much money in 2009 because of the recession, so, yes, I do see that their starting to spend a little bit more money it's because their inventories went low in 2009. So, they will eventually have to spend money on things like transformers to replace the old ones. And will the elections make a difference? I don't have a crystal ball.

I understand. And then, last question, I understand you're not updating guidance, but when we think about fourth quarter from a revenue perspective in North America, what are the factors that we should take into account? Is there typically seasonality we should be aware or something else or is the third quarter run rate reasonable given that your backlog was roughly flat?

This is Steve, Jason. To that point, we talked about -- we've already talked about the backlog and Malcolm did mention year end spending and seasonality -- that's a bit too soon to talk about that in terms of what utilities do. But historically we had seen some year end spending over time, that just depends really on terms of individual circumstances. But we tend to see, as Malcolm mentioned, that there can be year end spending as well in utilities. It just depends.

We'll go next to Stephen Milunovich with Bank of America Merrill Lynch.

Great. Thank you very much. Two questions, first of all, the OpenWay bookings in the third quarter, have you given out that number or could you?

We haven't given out the number. We had a couple of pilots that we booked that were relatively small. So nothing significant compared to the overall booking numbers.

Okay, thank you . And then, Malcolm, you've obviously talked quite a bit about the Cisco relationship. You make it sound like it's potentially accelerating your business looking forward. Is that true? Are you seeing any customers who might be concerned about committing to Itron today given that I don't think you're going to be integrating their technology into the communications product until next year. You did mention that, I think, the current communication software is forward compatible, which I assume is very important to people were going to be buying any time near-term. But I guess I'm asking is there any risk that it actually slows things or is it truly accelerating

The feedback that we've had from customers about the relationship we have with Cisco has actually been excellent. And one thing that I really want to stress, which I did say on my prepared remarks, was that our hardware 3.0 solution is completely what we call backward compatible. So, it could be -- it can be downloaded over the air. So whatever solution that we are proposing, using full interoperability with missed standards, is all backward compatible. So it's adding a lot of flexibility to our customers. And they're liking the fact that we're working together making joint calls, and trying to align their timetables with our timetables.

We'll go next to Craig Irwin with Wedbush Securities.

Evening, gentlemen. Congratulations on the strong quarter and thank you for taking my question. So, in your prepared remarks, you mentioned CenterPoint and the 1.2 million smart gas meters that you booked in the quarter. I thought I heard you mention a total of 1.9 million smart gas meters booked in the quarter. Just wanted to know if you could confirm that? And then if you could comment on the breadth of customers that are contributing to the additional units? And if you have any comments on the overall level of trial activity and smart gas meters right now?

That is correct. We said 1.9 million gas endpoints. The acceptance, I was recently speaking at the American Gas Association and when I talked about the situation with the [100G] product that they use for 40 days of hourly data and the fact it saved the particular utility a significant amount of -- potentially a significant amount of money, gave them all the information that they needed, that they've long been waiting for, for safety reasons. We're seeing tremendous opportunity and tremendous interest in our new gas solution or gas AMI solution. So yes, everything we ship now. Most of everything we ship on the gas side is with our AMI two-way communicating smart grid gas solution. So tremendous interest in that.

Great. And it sort of looks like, on the gas side, we might be at a an interesting point, maybe similar to where we were five to seven years ago on the electric side. Can you comment on whether or not you see customers coming in from broader business cases and ramping activities significantly in the North American market? Or if this is something we should consider that will move alongside the electric AMR over the next couple of years?

I can absolutely say that for a fact. One thing that the utilities have always thought about and watched very carefully is safety. Safety is the number one concern that they have with gas utilities. We don't really say an awful lot about that, only when it's public. But this product allows the ability, both with a safety shutoff valve with what we call product protection with gas lines to stop them from rusting or at least indicating that. There's a significant amount of interest in our solution. Will that come forward like the electric side? It could. That's what we're hoping for.

Operator, so I think we are right at about an hour here, do we have more calls, more questions in the queue?

Yes, we do have a few more.

Let's take two more questions and then we'll end the call after that.

We'll go ahead and take our next question from Colin Rusch with Thinkequity.

Hi, this is actually [Brandon Millar] for Colin. Thank you for taking my call and congratulations. I was just -- I just have two questions and I guess the first one is, over the next two or three years, are there any opportunities that you are just -- that you're seeing for the distribution automation network in the electricity industry in the US? Not necessarily M&A, but if there's M&A, I know you said you weren't going to talk too much about that, but just in general? And then, the second question would be with -- if you've seen any new activity in water metering opportunities for municipalities in the US?

Let me just answer your question with regards to distribution optimization. When it comes to understanding what's going on in the grid, that's one of the benefits that we have with our Cisco relationship. We've also got distributed generation that we are looking into and also, electric vehicle charging stations that we're working with some of our customers on that. All of this all ties together over the next two to three years when it comes to looking at the activity levels that utilities are trying to determine for their smart grid applications. So yes, we are working with utilities on their DA solutions. When it comes to water acceleration, we're just doing the same thing. We end up, but we are always looking at solutions with our water distributors. But they're looking today at fixed network. Nearly all of the opportunities that we are seeing coming from the water side now, mobile used to be there and we're offering backward compatibility. But nearly everything we're seeing with guard to RFQs is fixed network, and that's what we're offering.

All right. Thank you very much.

We'll take our final question from Andrew Weisel with Macquarie.

Hi. Thanks a lot for squeezing me in at the very end, here. Most of my questions have been answered but just one that I want to get to, if you look at the shipments that you've had over the past say six quarters or so, say sever quarters, there's been a steady shift from the old electromechanical meters into the AMR and AMI. Obviously, a good mix shift. My question is, when you look at your current backlog and the trend of bookings that you've had more recently, do you expect that shift to continue, how high can that proportion get, or is it going to plateau at this 50/50 or so on a volumetric basis?

Yes. When you look at the global market, remember there are certain countries that still we still provide electromechanical products. But we've got water, gas, electric. So just on the electric side, the electromechanical business is definitely declining, there's no question. As we just talked about when we got the business in Indonesia with smart payment solutions, that's 100% electronic with a smart keypad. So the whole of the industry is moving towards solid-state smart metering solutions throughout the world, yes.

And that's reflected in your current backlog now?

Increasingly so.

We still sell a letter mechanical products to certain parts of Europe and certain parts of Asia and certain parts of South America . So yes, it is reflected in the

Okay. Great. And then, just lastly, you mentioned in the press release some of the benefits in the North American margins from the cost-cutting activities. Can you just elaborate? Maybe quantify the benefit and how much of that is sustainable?

We're always looking at opportunities to reduce cost. If it's redesign, if it's purchasing, higher volumes, absorption, a better absorption, we're always looking at that. And so, with regards to continued cost reductions it's something that's just in our nature, that's what we do everyday.

Okay, fair enough. Thank you very much.

You're welcome.

And that does conclude our question and answer session. I'd like to turn the call back over to our presenters for any additional or closing remarks.

Thank you, Kevin. Appreciate it. So thanks everyone for joining us today and as always, if you have any questions, please give me a call. Ranny Dwiggins and I'll be happy to talk to that you.

Thank you.

There will be an audio replay of today's conference available this afternoon. You can access that audio replay by dialing 1-888-203112 or 1-719-457-0820 with a passcode of 403-7712 or you can go to the company's website at www.Itron.com. Again, that does conclude today's call. We do appreciate everyone's participation.