Echelon Reports Third Quarter 2013 Results

Company Marks First Milestones in the emerging Industrial Internet of Things Market

Category:

Thursday, November 7, 2013 5:08 am PST

Dateline:

SAN JOSE, Calif.
"We recently achieved the first milestones in our strategic plan to participate in the emerging Industrial Internet of Things market"

Echelon Corporation (NASDAQ: ELON) today announced financial results for the third quarter ended September 30, 2013.

  • Q3 Revenues: $18.0 million
  • Q3 GAAP Net Loss: $3.5 million; GAAP Net Loss per Share: $0.08
  • Q3 Non-GAAP Net Loss: $2.6 million; Non-GAAP Net Loss per Share: $0.06

"We recently achieved the first milestones in our strategic plan to participate in the emerging Industrial Internet of Things market," said Ron Sege, Chairman and CEO of Echelon. "The introduction of our IzoT™ platform offers a smooth migration path to IP for the millions of users of legacy control protocols, and our partnership with Marvell should enable best-in-class wireless connectivity options along with our award-winning wired offerings. Our participation in the IIoT market and our large pipeline of opportunities in the Grid modernization market should combine to broaden our prospects for future growth."

Total revenues for the third quarter were $18.0 million, down from $29.1 million in the same period last year. Revenues from Echelon's systems sales, reflecting sales to utility customers, were $7.8 million for the third quarter, down from $17.8 million in the same period last year. Included in systems sales were $2.0 million of data concentrator sales to Enel. Revenues from Echelon's sub-systems, largely from commercial customers, were $10.3 million in the third quarter, down from $11.3 million a year ago. Included in sub-systems revenues were $499,000 of sales to Enel in the third quarter compared with $1.8 million in the same period last year.

Gross margin in the third quarter of 2013 was 58.0% compared with 40.9% in the third quarter of 2012. Higher gross margins were driven by the one-time software deal with Ericsson related to the Sweden Grid Modernization Program. Total operating expenses for the quarter declined to $13.2 million from $15.7 million in the same period last year reflecting the Company's strategy to prudently manage costs.

GAAP net loss for the third quarter was $3.5 million, or $0.08 per share, compared with a net loss of $4.3 million, or $0.10 per share, in the same period last year. Non-GAAP net loss for the third quarter was $2.6 million, or $0.06 per share, compared with a non-GAAP net loss of $2.5 million, or $0.06 per share for the third quarter of 2012.

Business Outlook

Echelon offers the following guidance for the fourth quarter of 2013:

  • Total revenues are expected to be between $16.5 million to $18.5 million, with systems revenues accounting for 30% and sub-systems revenues accounting for 70%.
  • Non-GAAP gross margin is expected to be in a range of 47% to 49%
  • Stock-based compensation expense is expected to be approximately $1.0 million.
  • Non-GAAP loss per share amounts are expected to range from $0.07 to $0.12, based on 43.3 million fully diluted weighted average shares outstanding.
  • GAAP loss per share is expected to be between $0.09 to $0.14.

For those interested in further discussion regarding this release, Echelon's management will participate in a conference call today at 5:00 p.m. Eastern Time. To access the call, dial (888) 771-4371 or (847) 585-4405 outside the U.S and provide the confirmation number 35883487. An archived replay of the webcast will be available approximately two hours following the end of the call.

Use of Non-GAAP Financial Information

Echelon continues to provide all information required in accordance with GAAP, but believes that an investor's evaluation of our ongoing operating results may not be as useful if an investor is limited to reviewing only GAAP financial measures. Accordingly, we provide non-GAAP net income and non-GAAP net income per share data as additional information relating to Echelon's operating results. Echelon presents these non-GAAP financial measures to provide investors with an additional tool for evaluating Echelon's operating results in a manner that focuses on what Echelon believes to be its ongoing business operations. The presentation of this additional information is not meant to be considered in isolation or as a substitute for net income or net income per share prepared in accordance with GAAP.

Echelon's management uses certain non-GAAP financial information, namely operating results excluding restructuring charges, the impact of stock-based compensation charges made in accordance with ASC 718 (formerly SFAS 123R), as well as certain other non-routine charges, to evaluate its ongoing operations and for internal planning and forecasting purposes. Accordingly, we believe it is useful for Echelon's investors to review, as applicable, information that both includes and excludes these charges (and the related tax impact) in order to assess the performance of Echelon's business and for planning and forecasting in future periods. Whenever Echelon reports such non-GAAP financial measures, a complete reconciliation of the non-GAAP financial measure to the most closely applicable GAAP financial measure is provided. Investors are encouraged to review these reconciliations to ensure they have a thorough understanding of the reported non-GAAP financial measures and their most directly comparable GAAP financial measures.

About Echelon Corporation

Echelon Corporation (NASDAQ: ELON), a foundational leader in the Industrial Internet of Things, delivers all the elements necessary to design, install, monitor and control industrial-strength 'communities of devices' within the lighting, building automation, grid, Internet of Things, 'maker' and other markets worldwide. Echelon develops and sells complete systems and subsystems for target applications, plus system-on-chips (SoCs), embedded software, and commissioning and management tools for OEMs. With more than 100 million Echelon-powered devices installed worldwide, the company helps its customers easily and safely migrate existing control systems to the most modern platforms, while bringing new devices and applications into an ever-growing global Industrial Internet. Echelon helps its customers reduce operational costs, enhance satisfaction and safety, grow revenues and perform better in both established and emerging markets. More information about Echelon can be found at http://www.echelon.com and at the company's blog at http://blog.echelon.com/.

Echelon, the Echelon logo, and IzoT are trademarks of Echelon Corporation registered in the United States and other countries. Other product or service names mentioned herein are the trademarks of their respective owners.

Risk Factors Regarding Forward-Looking Statements

This press release contains "forward-looking" statements within the meaning of Section 21A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and is subject to the safe harbor created thereby. Echelon advises caution in reliance on forward-looking statements. Forward looking statements include, without limitation, those relating to the recovery of the smart grid markets, the potential success of the IZOT platform, the company's opportunities for future growth and the Company's guidance for the fourth quarter of 2013. Actual results could differ materially from those projected in forward-looking statements as a result of a number of risks and uncertainties. Such risks and uncertainties, include, but are not limited to, risks associated with the continued development and growth of markets for Echelon's products and services; the completion of anticipated legal settlements; failure to achieve revenue growth, maintain expense controls or achieve gross margins targets; circumstances that may delay the time frame for achieving our business outlook; the risk that global economic conditions will affect our customers' ability to receive regulatory or other approval or financing for system or sub-system-based deployments; the timely development of Echelon's products and services and the ability of those products and services to perform as designed and meet customer expectations; the risk that Echelon does not meet expected or required shipment, delivery or acceptance schedules for its products and that Echelon may incur penalties or additional expenses or delay revenue recognition as a result; and other risks identified in Echelon's SEC filings. The discussion of risk factors are detailed in the Company's filings with the Securities and Exchange Commission, including reports on its most recently filed Form 10-K and Form 10-Q. The financial information presented in this release reflects estimates based on information that is available to us at this time. Actual results, events and performance may differ materially. Echelon undertakes no obligation to update or revise these forward-looking statements, whether as a result of new information, future events or otherwise.

The financial statements that follow should be read in conjunction with the notes set forth in Echelon's Quarterly Report on Form 10-Q when filed with the Securities and Exchange Commission.

ECHELON CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

 
  September 30,
2013
  December 31,
2012
ASSETS
 
Current Assets:
Cash and cash equivalents $ 13,670 $ 18,876
Short-term investments 42,988 42,979
Accounts receivable, net 15,185 15,725
Inventories 8,042 11,729
Deferred cost of goods sold 1,730 846
Other current assets   2,101   2,662
 
Total current assets 83,716 92,817
 
Property and equipment, net 19,415 21,777
Other long-term assets   9,125   8,989
 
$ 112,256 $ 123,583
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current Liabilities:
Accounts payable $ 6,153 $ 8,551
Accrued liabilities 6,574 4,637
Current portion of lease financing obligations 2,202 2,056
Deferred revenues   6,286   4,912
 
Total current liabilities   21,215   20,156
 
Long-term liabilities 19,399 19,632
 
Total stockholders' equity   71,642   83,795
 
$ 112,256 $ 123,583
 
ECHELON CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

 
  Three Months Ended

September 30,

  Nine Months Ended

September 30,

  2013       2012     2013       2012  
Revenues:
Product $ 17,175 $ 28,056 $ 65,633 $ 107,387
Service   839     1,008     2,399     2,832  
 
Total revenues   18,014     29,064     68,032     110,219  
 
Cost of revenues:
Cost of product (1) 7,348 16,672 32,984 63,352
Cost of service (1)   211     493     862     1,601  
 
Total cost of revenues   7,559     17,165     33,846     64,953  
 
Gross profit   10,455     11,899     34,186     45,266  
 
Operating expenses:
Product development (1) 5,294 7,256 17,160 23,450
Sales and marketing (1) 3,991 4,807 12,504 16,512
General and administrative (1) 3,925 3,679 11,045 11,624
Litigation charges -- -- 3,452 --
Restructuring charges   --     --     2,522     1,176  
 
Total operating expenses   13,210     15,742     46,683     52,762  
 
Loss from operations (2,755 ) (3,843 ) (12,497 ) (7,496 )
Interest and other income (expense), net (606 ) (184 ) (486 ) (194 )
Interest expense on lease financing obligations   (305 )   (336 )   (938 )   (1,031 )
 
Loss before provision for income taxes (3,666 ) (4,363 ) (13,921 ) (8,721 )
Income tax expense   113     57     256     148  
 
Net loss   (3,779 )   (4,420 )   (14,177 )   (8,869 )
Net loss attributable to non-controlling interest   (266 )   (156 )   (590 )   (156 )
Net loss attributable to Echelon Corporation stockholders $ (3,513 ) $ (4,264 ) $ (13,587 ) $ (8,713 )
 
Net loss per share attributable to Echelon Corporation stockholders:
Basic $ (0.08 ) $ (0.10 ) $ (0.32 ) $ (0.20 )
Diluted $ (0.08 ) $ (0.10 ) $ (0.32 ) $ (0.20 )
 
Shares used in computing net loss per share:
Basic 43,184 42,806 43,039 42,564
Diluted 43,184 42,806 43,039 42,564
 
 
(1) Amounts include stock-based compensation costs as follows:
 
Cost of product $ 81 $ 166 $ 138 $ 462
Cost of service 10 31 35 82
Product development 276 619 533 1,874
Sales and marketing 194 455 665 1,460
General and administrative   394     535     806     1,687  
 
Total stock-based compensation expenses $ 955   $ 1,806   $ 2,177   $ 5,565  
 
ECHELON CORPORATION

RECONCILIATION OF NON-GAAP TO GAAP RESULTS

Excluding adjustments itemized below

(In thousands, except per share amounts)

(Unaudited)

 
An itemized reconciliation between net earnings on a GAAP basis and non-GAAP basis is as follows:
 
  Three Months Ended
September 30,
      Nine Months Ended
September 30,
2013   2012 2013   2012
 
GAAP net loss $ (3,513 ) $ (4,264 ) $ (13,587 ) $ (8,713 )
 
Stock-based compensation 955 1,806 2,177 5,565
Litigation charges -- -- 3,452 --
Restructuring charges   --     --     2,522     1,176  
 
Total non-GAAP adjustments to earnings from operations 955 1,806 8,151 6,741
 
Income tax effect of reconciling items   --     --     --     --  
 
Non-GAAP net loss $ (2,558 ) $ (2,458 ) $ (5,436 ) $ (1,972 )
 
Non-GAAP net loss per share:
Diluted $ (0.06 ) $ (0.06 ) $ (0.13 ) $ (0.05 )
Shares used in computing net loss per share:
Diluted 43,184 42,806 43,039 42,564
 
ECHELON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

   
Nine Months Ended

September 30,

2013   2012
Cash flows provided by (used in) operating activities:
Net loss not including non-controlling interest $ (14,177 ) $ (8,869 )
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization 3,083 5,308
Increase in allowance for doubtful accounts 41 17
Loss on disposal of fixed assets 24 --
Increase in accrued investment income (2 ) (3 )
Stock-based compensation 2,177 5,565
Change in operating assets and liabilities:
Accounts receivable 490 18,244
Inventories 3,686 587
Deferred cost of goods sold (885 ) 5,611
Other current assets 565 981
Accounts payable (2,332 ) (9,279 )
Accrued liabilities 3,617 (3,597 )
Deferred revenues 1,181 (7,290 )
Deferred rent   (28 )   (33 )
 
Net cash (used in) provided by operating activities   (2,560 )   7,242  
 
Cash flows provided by (used in) investing activities:
Purchase of available-for-sale short-term investments (38,953 ) (66,947 )
Proceeds from maturities and sales of available-for-sale short-term investments 38,955 63,970
Change in other long-term assets (62 ) (20 )
Capital expenditures   (811 )   (814 )
 
Net cash used in investing activities   (871 )   (3,811 )
 
Cash flows provided by (used in) financing activities:
Principal payments of lease financing obligations (1,530 ) (1,461 )
Proceeds from non controlling interests -- 294
Repurchase of common stock   (423 )   (1,249 )
 
Net cash used in financing activities   (1,953 )   (2,416 )
 
Effect of exchange rates on cash:   178     13  
 
Net change in cash and cash equivalents (5,206 ) 1,028
Cash and cash equivalents:
Beginning of period   18,876     17,658  
 
End of period $ 13,670   $ 18,686  
 

Contact:

Investor Relations Contacts:
StreetSmart Investor Relations
Annie Leschin/Vanessa Lehr, +1-415-775-1788
annie@streetsmartir.com

Contacts

Press Information

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pr@echelon.com

Investor Relations

Annie Leschin

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info@echelon.com