Echelon Reports Full First Quarter 2008 Results

Echelon Corporation (NASDAQ:ELON) today reported its financial results for the quarter ended March 31, 2008, adding to the revenue, cash and cash equivalent, and short-term investment balance results reported on April 30, 2008. In addition, the company reported that it has completed the work necessary to restate its financial reports for previous periods related to various non-cash items. On Friday, May 16th, 2008, the company filed with the Securities and Exchange Commission its amended Form 10-K for the period ending December 31, 2007, as well as amended Form 10-Qs for each of the interim quarters of 2007. The company is now current with its SEC filings. As previously reported, revenues for the quarter ended March 31, 2008 were $35.6 million compared to $39.3 million for the same period in 2007. Revenues for the first quarter of 2008 were composed of $20.5 million from products and services sold to our Networked Energy Services ("NES”) customers, $13.8 million from our LonWorks® infrastructure ("LWI”) product line, and $1.3 million related to the Enel project. Revenues for the quarter ended March 31, 2007 were composed of $24.9 million from our NES product line (of which approximately $14.4 million was related to the recognition of revenue deferred from earlier periods), $13.3 million from our LWI product line, and $1.2 million from the Enel project. The GAAP net loss for the quarter ended March 31, 2008 was $6.8 million, or $0.17 cents per share, based on a weighted average of 40,788,000 common shares outstanding, compared to a GAAP net loss of $5.6 million, or $0.14 cents per share, based on a weighted average of 39,227,000 common shares outstanding for the first quarter of 2007. Excluding stock-based compensation expenses, the non-GAAP net loss for the quarter was $3.5 million, or $0.09 cents per share, compared to a non-GAAP net loss of $4.2 million, or $0.11 cents per share for the same period in 2007. All non-GAAP information in this release is reconciled in the "Reconciliation of Non-GAAP to GAAP Results” table below. GAAP gross margin for the quarter was 34.7% compared to 25.9% for the same period in 2007. Total operating expenses were $19.6 million compared to $16.8 million for the same period in 2007. "While I am not pleased that we had to go through this restatement process, I am pleased that we have completed it so quickly and that we can again devote all of our attention to running our business,” said Ken Oshman, Echelon’s chairman and CEO. Business Outlook The following statements are based on the company’s current expectations. These statements are forward-looking, and actual results may differ materially. Please see "Risk Factors of Forward Looking Statements” at the end of this release for a description of certain important risk factors that could cause actual results to differ. Echelon management offers the following guidance for the quarter ending June 30, 2008 and the full year ending December 31, 2008. All non-GAAP estimates exclude the impact of any non-cash stock-based compensation charges. For the quarter, revenue is expected to be approximately $32.4 million. We expect NES system revenues to be approximately $17.0 million, LonWorks infrastructure revenues to be approximately $14.0 million, and Enel project revenues to be approximately $1.4 million. Of the $17.0 million of forecasted NES revenue, the timing of approximately $5.0 million is such that customer acceptance may or may not occur before the end of the quarter. To the extent customer acceptance for some or all of those units does not occur until after the quarter close, the corresponding revenue would be recognized in a later period. For the full year, we continue to expect revenue of approximately $178.0 million. Of the $178.0 million, we expect NES revenues to be approximately $110.0 million, LonWorks infrastructure revenues to be approximately $58.0 million, and Enel project revenues to be approximately $10.0 million. For the quarter, non-GAAP gross margin, which excludes any stock-based compensation expense, is expected to be approximately 40.7%. For the full year, we now expect our non-GAAP gross margin will be approximately 38.9% as compared to our previous guidance of 40.7%. For the quarter, non-GAAP operating expenses, which exclude any stock-based compensation charges, are expected to be approximately $17.9 million. For the full year, we now expect our non-GAAP operating expenses will be approximately $69.5 million as compared to our previous guidance of $69.0 million. For the quarter, we expect stock-based compensation expenses associated with stock options and other equity compensation awards to be approximately $4.0 million. For the full year, we now expect our stock-based compensation expenses will be approximately $15.0 million as compared to our previous guidance of $13.0 million. This estimate could change based on the size and timing of options actually granted by the Compensation Committee, as well as other factors we will use in valuing future option grants, such as the market price and historical volatility of Echelon’s stock price when those grants are made. For the quarter, net interest and other income is expected to be approximately $350,000. For the full year, we now expect net interest and other income to be approximately $1.5 million. These estimates reflect the interest expense we expect to record associated with our leased corporate headquarters facilities of $262,000 for the second quarter and $1.0 million for the year. Our previous guidance for full year interest and other income was $5.0 million. For the quarter, we expect our provision for income taxes will be approximately $200,000. For the full year, we now expect our provision for income taxes will be approximately $800,000 as compared to our previous guidance of $1.0 million. For the quarter, we expect to generate a non-GAAP loss per share of approximately $0.11 and a GAAP loss per share of $0.21, based on a weighted average of 41,000,000 shares outstanding. The non-GAAP estimate excludes the impact of any stock-based compensation charges. For the full year, we expect to generate non-GAAP earnings per share of $0.01, and a GAAP loss per share of $0.35. This compares to our previous non-GAAP earnings guidance of $0.16 per share, and a GAAP loss of $0.14 per share. The non-GAAP earnings per share is based on a fully-diluted weighted average of 45,000,000 shares outstanding. The GAAP loss per share is based on a weighted average of 41,500,000 shares outstanding. The non-GAAP estimate excludes the impact of any stock-based compensation charges. For those interested in further discussion regarding this release, Echelon's management will participate in a conference call today at 11:00 am PT (1:00 pm Central/2:00 pm Eastern). To access the conference call, dial +1-877-718-5108 (callers outside the US please use +1-719-325-4752); however, due to a limited number of available phone lines, the company asks that only those persons without Web access call this number. The call will be available live today, and for playback on the Investor Relations section of Echelon's web site (www.echelon.com) through June 30th, 2008. 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 the impact of stock-based compensation charges made in accordance with SFAS 123R, 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 stock-based compensation (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) is a networking company that provides products and systems that can monitor and save energy; lower costs; improve productivity; and enhance service, quality, safety, and convenience by connecting everyday devices in utility, buildings, industrial, transportation, and home control systems. Tens of millions of smart devices based on Echelon’s LonWorks® products and Networked Energy Services (NES) systems are used around the world today, bringing benefits to consumers and industry. More information about Echelon can be found at http://www.echelon.com . Echelon, LonWorks and the Echelon logo are trademarks of Echelon Corporation registered in the United States and other countries. Other marks belong to their respective holders. This press release may contain statements relating to business outlook, future financial and operating results, and overall future prospects, including projected revenue and other financial results for the second quarter and full year 2008. Such statements may involve risks and uncertainties, including risks associated with uncertainties pertaining to the development and growth of markets for Echelon's products and services, particularly our NES products; risks relating to the ability of Echelon’s products and services to perform as designed and meet customer and consumer expectations; risks that our products or technology might not be accepted in standards specifications, or even if accepted, that our products might not be used in applicable implementations; the risk that a utility that awards a tender to Echelon or one of its resellers will not proceed with a deployment, will order fewer than the number of meters anticipated by Echelon or will cancel the project, or the risk that the project will not pass certain tests imposed by the utility; the risk that Echelon does not meet expected shipment schedules for the NES system; risks associated with uncertainties pertaining to the timing and level of customer orders and demand for products and services; risks that the application of U.S. generally accepted accounting principles could significantly affect the method of calculating and the timing of NES revenues that Echelon expects to recognize from time to time; and other risks identified in Echelon's SEC filings. Actual results, events and performance may differ materially. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Echelon undertakes no obligation to release publicly the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. The financial statements that follow should be read in conjunction with the notes set forth in Echelon's Form 10-Q for the quarter ended March 31, 2008, which was filed with the Securities and Exchange Commission May 16, 2008; and with our 2007 annual report on Form 10-K/A, which was also filed with the Securities and Exchange Commission on May 16, 2008. ECHELON CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) (Unaudited)   March 31,2008   December 31,2007 ASSETS   Current Assets: Cash and cash equivalents $ 86,958 $ 76,062 Short-term investments 18,066 31,128 Accounts receivable, net 23,160 33,469 Inventories 16,022 14,012 Deferred cost of goods sold 3,994 6,656 Other current assets   2,831   2,092   Total current assets 151,031 163,419   Property and equipment, net 29,546 30,776 Other long-term assets   10,772   10,512   $ 191,349 $ 204,707 LIABILITIES AND STOCKHOLDERS’ EQUITY       Current Liabilities: Accounts payable $ 8,834 $ 12,945 Accrued liabilities 5,230 4,551 Current portion of lease financing obligations 2,985 2,900 Deferred revenues   10,476   16,312   Total current liabilities   27,525   36,708   Long-term liabilities 13,932 14,788   Total stockholders' equity   149,892   153,211   $ 191,349 $ 204,707 ECHELON CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  (In thousands, except per share amounts) (Unaudited)   Three Months EndedMarch 31,   2008     2007   Revenues: Product $ 34,667 $ 39,077 Service   928     192     Total revenues   35,595     39,269     Cost of revenues: Cost of product (1) 22,532 28,634 Cost of service (1)   713     483     Total cost of revenues   23,245     29,117     Gross profit   12,350     10,152     Operating expenses: Product development (1) 9,036 7,778 Sales and marketing (1) 6,005 5,427 General and administrative (1)   4,515     3,568     Total operating expenses   19,556     16,773     Loss from operations (7,206 ) (6,621 ) Interest and other income, net 659 1,497 Interest expense on lease financing obligations   (274 )   (319 )   Loss before provision for income taxes (6,821 ) (5,443 ) Income tax expense   20     108     Net loss $ (6,841 ) $ (5,551 )   Net loss per share: Basic $ (0.17 ) $ (0.14 ) Diluted $ (0.17 ) $ (0.14 )   Shares used in computing net loss per share: Basic 40,788 39,227 Diluted 40,788 39,227                 (1) Amounts include stock-based compensation costs as follows: Cost of product $ 363 $ 147 Cost of service 47 16 Product development 1,169 482 Sales and marketing 697 316 General and administrative 1,016 372 Total stock-based compensation expenses $ 3,292 $ 1,333 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 EndedMarch 31,   2008       2007     GAAP net loss $ (6,841 ) $ (5,551 )   Stock-based compensation   3,292     1,333     Total non-GAAP adjustments to earnings from operations 3,292 1,333   Income tax effect of reconciling items   --     --     Non-GAAP net loss $ (3,549 ) $ (4,218 ) Non-GAAP net loss per share:    Diluted   $ (0.09 ) $ (0.11 ) Shares used in computing net loss per share:    Diluted 40,788 39,227 ECHELON CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)   Three Months EndedMarch 31,   2008       2007   Cash flows provided by (used in) operating activities: Net loss $ (6,841 ) $ (5,551 ) Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 2,117 1,778 Loss on disposal of fixed assets -- 2 Increase in (reduction of) allowance for doubtful accounts (15 ) 7 Reduction of accrued investment income 542 114 Stock-based compensation 3,292 1,333 Change in operating assets and liabilities: Accounts receivable 10,352 (3,607 ) Inventories (1,945 ) 290 Deferred cost of goods sold 2,662 12,627 Other current assets (611 ) 136 Accounts payable (4,184 ) (479 ) Accrued liabilities 504 3,681 Deferred revenues   (5,826 )   (11,779 )   Net cash provided by (used in) operating activities   47     (1,448 )   Cash flows provided by (used in) investing activities: Purchase of available-for-sale short-term investments (10,629 ) (31,783 ) Proceeds from maturities and sales of available-for-sale short-term investments 23,082 32,768 Change in other long-term assets 15 6 Capital expenditures   (824 )   (983 )   Net cash provided by investing activities   11,644     8     Cash flows provided by (used in) financing activities: Principal payments of lease financing obligations. (688 ) (613 ) Proceeds from exercise of stock options. 102 845 Repurchase of common stock.   (521 )   (377 )   Net cash used in financing activities   (1,107 )   (145 )   Effect of exchange rates on cash:   312     43     Net increase (decrease) in cash and cash equivalents 10,896 (1,542 ) Cash and cash equivalents: Beginning of period   76,062     37,412     End of period $ 86,958   $ 35,870