Echelon Corporation Reports Fourth Quarter, Full Year Results

Echelon Corporation Reports Fourth Quarter, Full Year Results

    Business Editors/High-Tech Writers

    SAN JOSE, Calif.--(BUSINESS WIRE)--Feb. 3, 2005--Echelon Corporation (Nasdaq:ELON) today announced financial results for the fourth quarter and year ended December 31, 2004, in line with previously stated guidance.
    "2004 was the beginning of a transition process for Echelon as the Enel project -- which has been extraordinarily successful -- began to wind down to its conclusion in 2005," said Ken Oshman Echelon's chairman and CEO. "This quarter, we once again saw very robust performance in our European LonWorks(R) infrastructure business. In North America, our infrastructure results were slightly below our expectation, due primarily, we believe, to our customers carefully managing their year-end inventory levels. Asia, and particularly Japan, did not perform to our expectations, which has been the case throughout the year. While 2004 was a challenge for us in Asia, based on the energy and enthusiasm we saw at the Shanghai LonWorld(R) exhibition and conference this past quarter, I feel optimistic about a recovery in the Asian LonWorks infrastructure business in 2005. The 2004 LonWorld event was both the first ever held in Asia and, with over 2000 attendees, our biggest LonWorld event ever. Overall I am pleased with the 2004 performance of our LonWorks infrastructure business and believe we are on the path to accomplish the goals we have set for continued growth in 2005."
    "Our networked energy services (NES) business did not achieve the volumes that we had originally planned in 2004. Although we did not ship in the volumes we had hoped, our value-added reseller partners and Echelon made great strides in the market, with over a half dozen trials spread across Europe and Asia now in various stages of planning or deployment. While the decision making process of utilities remains one that is very hard to predict and certainly harder still to control, we do believe that the pilot and tender activities that we are engaged in now will begin to bear fruit in 2005."
    Revenues for the quarter ended December 31, 2004 were $31.9 million compared to revenues of $23.5 million for the same period in 2003. Revenues for the quarter ended December 31, 2004 were comprised of $20.3 million related to the Enel project, $11.5 million from the LonWorks infrastructure business, and $54,000 from products and services sold to our NES customers. Included in the Enel revenue for the quarter ended December 31, 2004 was virtually all of the approximately $4.7 million of revenue associated with data concentrator products shipped to Enel during the third quarter of 2004. As previously announced, Echelon determined that revenue on these units should not be recognized until the rework associated with an Engineering Change Order agreed to between Echelon and Enel was completed and the units were returned to Enel. GAAP net income for the quarter ended December 31, 2004 was $3.0 million, or $0.07 cents per share, based on a weighted average of 41,198,000 fully diluted common shares outstanding, compared to net loss of $520,000, or $.01 cent per share, based on a weighted average of 40,337,000 common shares outstanding for the fourth quarter of 2003.
    Revenues for the year ended December 31, 2004 were $109.9 million compared to revenues of $118.2 million for the year ended December 31, 2003. Full year 2004 revenues were comprised of $64.1 million related to the Enel project, $45.7 million from the LonWorks infrastructure business, and $85,000 from products and services sold to our NES customers. GAAP net income for the year ended December 31, 2004 was $5.3 million, or $0.13 cents per share on a fully diluted basis, based on a weighted average of 41,007,000 common shares outstanding, compared to net income of $1.9 million, or $0.05 cents per share, based on a fully diluted weighted average of 40,792,000 common shares outstanding for the year ended December 31, 2003. Non-GAAP net income for the year was $5.8 million, or $0.14 cents per fully diluted share, compared to non-GAAP net income of $12.7 million or $0.31 cents per fully diluted share for the same period in 2003. All non-GAAP information in this release is reconciled in the "Non-GAAP Consolidated Condensed Statements of Operations" table below.
    Gross margin for the quarter ended December 31, 2004 was 56.4% compared to 55.4% for the same period in 2003. Gross margin for the year ended December 31, 2004 was 56.2% compared to 55.9% for the year ended December 31, 2003. Total operating expenses for the quarter ended December 31, 2004 were $15.0 million compared to total operating expenses of $14.7 million for the same period in 2003. Total operating expenses for the year ended December 31, 2004 were $58.1 million, compared to $65.8 million for the year ended December 31, 2003.
    Highlights from the fourth quarter may be found at http://www.echelon.com/about/press/. These include:

--	Innovative and valuable applications of the LonWorks device networking platform by Helsinki City Transport (train control); the US Army, Navy and Air Force (building automation); and China's Shanxi provincial government (mine safety);
--	Announcing market moving products that enhance the entire LonWorks device networking platform including the new LNS(R) Turbo Edition network management software; i.LON(R) 100 e2 Internet Server, and LonScanner(TM) Protocol Analyzer; and
--	Establishing the NES smart metering system in the Asia/Pacific region with the announcement that NGC Holdings Ltd. (New Zealand) intends to deploy a pilot project to analyze their new business model by utilizing both the system's core smart metering functionality as well as its ability to deliver value-added services.

    Given that Echelon held an analyst call on January 17th, 2005 in conjunction with a press announcement of the company's Full Year 2005 Business Outlook and that the company's guidance is unchanged from that call, Echelon will not be holding an analyst call in conjunction with this release of the company's Q4 2004 results. Investors wishing to hear more from Echelon executives may attend the audio webcast of Echelon's presentation at the upcoming 17th Annual Roth Capital Partners Growth Stock Conference. Echelon's presentation will be webcast at approximately 1:00 pm Pacific Time on Tuesday, February 22nd, 2005.

    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 the 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.
    On January 17, 2005, Echelon issued a press release providing guidance for full year 2005. Echelon management offers the following supplemental guidance for the quarter ending March 31, 2005 and the full year ending December 31, 2005:

    -- For the quarter, revenue is expected to be approximately $21.5
    million, plus or minus $1 million, with Enel representing
    approximately $10.4 million of this amount.

    -- For the full year, we continue to expect revenue will be
    approximately $80 million, plus or minus $4 million, with Enel
    representing approximately $20.5 million of this amount.

    -- For the quarter, gross margin is expected to be between 57.5%
    and 58.0%.

    -- For the quarter, operating expenses are expected to be
    approximately $15 million, plus or minus $500,000.

    -- For the quarter, interest income is expected to be
    approximately $500,000.

    -- For the quarter, we expect our provision for income taxes will
    be approximately $150,000.

    -- For the quarter, GAAP loss per share is expected to be
    approximately $0.06, plus or minus $0.01, based on a weighted
    average of common and common equivalent shares outstanding of
    41,200,000.

    -- For the full year, we continue to expect the GAAP loss per
    share, excluding the impact of non-cash share-based
    compensation expenses required under SFAS 123, Share-Based
    Payment, will be approximately $0.30 per share, plus or minus
    $0.02, based on a weighted average of common and common
    equivalent shares outstanding of 41,250,000.

    Use of Non-GAAP Financial Information

    Echelon provides non-GAAP net income and non-GAAP net income per share data as additional information for its operating results. These measures are not in accordance with, or an alternative for, generally accepted accounting principles and may be different from non-GAAP measures used by other companies. Echelon believes that this presentation of non-GAAP net income and non-GAAP net income per share provides useful information relating to its financial condition and results of operations, which provides management and investors with a more complete understanding of Echelon's past performance and certain additional financial and business trends. 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 generally accepted accounting principles.

    About Echelon Corporation

    Echelon Corporation is the creator of the LonWorks platform, the world's most widely used standard for connecting everyday devices such as appliances, thermostats, air conditioners, electric meters, and lighting systems to each other and to the Internet. Echelon's hardware and software products enable manufacturers and integrators to create smart devices and systems that lower cost, increase convenience, improve service, and enhance productivity, quality, and safety. Thousands of companies have developed and installed LonWorks products and over 40 million LonWorks devices have been installed in homes, buildings, factories, trains, and other systems worldwide.
    Further information regarding Echelon can be found at http://www.echelon.com.

    Echelon, LonWorks, LonWorld, i.LON, LNS, and the Echelon logo are trademarks of Echelon Corporation registered in the United States and other countries. LonScanner is a trademark of Echelon Corporation in the United States and other countries. Other marks belong to their respective holders.

    This press release may contain statements relating to future plans, events or performance including statements regarding the receipt of Enel revenues; the outlook for our LonWorks infrastructure business in Europe, Asia and elsewhere; the outlook for our NES business, through tenders, trial installations and otherwise; and Echelon's financial outlook for the quarter ending March 31, 2005 and the year ending December 31, 2005. Such statements may involve risks and uncertainties, including risks relating to the development and growth of markets for Echelon's products and services, particularly the NES system and new infrastructure products and the ability of those products and services to meet customer and consumer expectations, risks associated with uncertainties pertaining to the timing and level of customer orders, demand for products and services, risks that the product deployment activities with Enel do not meet their target dates, or are terminated, risks that our development projects with other parties are not successful, risks that the arbitration with Enel may be decided adversely to Echelon's interests, risks related to changing business conditions which may result in additional operating expenses in 2005 including, but not limited to, impairment of intangible or other long-lived assets, addition of reserves for excess inventory and purchase commitments or other accounting charges, 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-K when filed with the Securities and Exchange Commission.

ECHELON CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) (Unaudited)

December 31, December 31, 2004 2003 ------------ ------------ ASSETS

Current Assets: Cash and cash equivalents $47,617 $18,667 Short-term investments 112,747 126,256 Accounts receivable, net 17,261 20,110 Inventories 5,584 5,906 Other current assets 2,213 2,519 ------------ ------------

Total current assets 185,422 173,458

Property and equipment, net 16,983 19,098 Other long-term assets 21,511 21,572 ------------ ------------

$223,916 $214,128 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities: Accounts payable $5,157 $6,922 Accrued liabilities 5,452 4,793 Deferred revenues 1,422 998 ------------ ------------

Total current liabilities 12,031 12,713 ------------ ------------

Long-term liabilities 823 491

Total stockholders' equity 211,062 200,924 ------------ ------------

$223,916 $214,128 ============ ============

ECHELON CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited)

Three Months Ended Twelve Months Ended December 31, December 31, ------------------- ------------------- 2004 2003 2004 2003 --------- --------- --------- --------- Revenues: Product $31,480 $23,334 $108,947 $117,153 Service 376 193 974 1,000 --------- --------- --------- ---------

Total revenues 31,856 23,527 109,921 118,153 --------- --------- --------- ---------

Cost of revenues: Cost of product 13,366 9,786 46,110 49,407 Cost of service 525 711 2,003 2,650 --------- --------- --------- ---------

Total cost of revenues 13,891 10,497 48,113 52,057 --------- --------- --------- ---------

Gross profit 17,965 13,030 61,808 66,096 --------- --------- --------- ---------

Operating expenses: Product development 6,639 7,079 25,262 35,113 Sales and marketing 4,780 4,632 19,440 18,597 General and administrative 3,533 2,954 13,388 12,108 --------- --------- --------- ---------

Total operating expenses 14,952 14,665 58,090 65,818 --------- --------- --------- ---------

Income (loss) from operations 3,013 (1,635) 3,718 278 --------- --------- --------- ---------

Interest and other income, net 385 399 2,140 2,219 --------- --------- --------- ---------

Income (loss) before provision for income taxes 3,398 (1,236) 5,858 2,497 Income tax expense (benefit) 389 (716) 586 600 --------- --------- --------- ---------

Net income (loss) $3,009 $(520) $5,272 $1,897 ========= ========= ========= =========

Net income (loss) per share: Basic $0.07 $(0.01) $0.13 $0.05 Diluted $0.07 $(0.01) $0.13 $0.05

Shares used in computing net income (loss) per share: Basic 41,194 40,337 40,918 40,070 Diluted 41,198 40,337 41,007 40,792

ECHELON CORPORATION NON-GAAP CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS Excluding adjustments itemized below (In thousands, except per share amounts) (Unaudited)

Three Months Ended Twelve Months Ended December 31, December 31, ------------------- ------------------- 2004 2003 2004 2003 --------- --------- --------- ---------

Revenues $31,856 $23,527 $109,921 $118,153 Cost of revenues 13,891 10,497 48,113 52,057 --------- --------- --------- ---------

Gross profit 17,965 13,030 61,808 66,096 --------- --------- --------- ---------

Operating Expenses: Product development 6,553 6,735 24,682 24,185 Sales and marketing 4,780 4,632 19,440 18,597 General and administrative 3,533 2,954 13,388 11,778 --------- --------- --------- ---------

Total operating expenses 14,866 14,321 57,510 54,560 --------- --------- --------- ---------

Non-GAAP income (loss) from operations 3,099 (1,291) 4,298 11,536 Interest and other income, net 385 399 2,140 2,219 --------- --------- --------- ---------

Non-GAAP income (loss) before taxes 3,484 (892) 6,438 13,755 Income tax expense (benefit) 407 (72) 644 1,100 --------- --------- --------- ---------

Non-GAAP net income (loss) $3,077 $(820) $5,794 $12,655 ========= ========= ========= =========

Non-GAAP net income (loss) per share: Diluted $0.07 $(0.02) $0.14 $0.31

Shares used in computing net income (loss) per share: Diluted 41,198 40,337 41,007 40,792

An itemized reconciliation between net earnings on a GAAP basis and non-GAAP basis is as follows:

GAAP net income (loss) $3,009 $(520) $5,272 $1,897

In-process research and development -- -- -- 9,808 Amortization of purchased intangible assets 86 344 580 1,120 Third party acquisition related costs -- -- -- 330 --------- --------- --------- ---------

Total non-GAAP adjustments to earnings from operations 86 344 580 11,258

Income tax effect of reconciling items (18) (644) (58) (500) --------- --------- --------- ---------

Non-GAAP net income (loss) $3,077 $(820) $5,794 $12,655 ========= ========= ========= =========

ECHELON CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)

Twelve Months Ended December 31, ------------------- 2004 2003 --------- --------- Cash flows provided by operating activities: Net income $5,272 $1,897 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,925 5,644 In-process research and development -- 9,808 Provision for doubtful accounts (75) 10 Loss on disposal of fixed assets 54 8 Change in operating assets and liabilities: Accounts receivable 2,924 2,810 Inventories 322 2,085 Other current assets 306 698 Accounts payable (1,765) 929 Accrued liabilities 659 1,020 Deferred revenues 424 (1,543) Deferred rent 332 324 --------- ---------

Net cash provided by operating activities 13,378 23,690 --------- ---------

Cash flows provided by (used in) investing activities: Net change in available-for-sale short-term investments 12,947 (27,105) Purchase of assets of Metering Technology Corporation -- (11,000) Purchase of restricted investments (239) (341) Change in other long-term assets (310) 576 Capital expenditures (2,254) (6,500) --------- ---------

Net cash provided by (used in) investing activities 10,144 (44,370) --------- ---------

Cash flows provided by financing activities: Proceeds from issuance of common stock 5,127 3,447 Repurchase of common stock. (176) -- --------- ---------

Net cash provided by financing activities 4,951 3,447 --------- ---------

Effect of exchange rates on cash: 477 959 --------- ---------

Net increase (decrease) in cash and cash equivalents 28,950 (16,274) Cash and cash equivalents: Beginning of period 18,667 34,941 --------- ---------

End of period $47,617 $18,667 ========= =========

--30--ALX/sf*

CONTACT: Echelon Corporation Steve Nguyen, 408-938-5272 (Press) qnguyen@echelon.com Chris Stanfield, 408-938-5243 (Investor Relations) cstanfield@echelon.com or Roeder-Johnson Corporation Abigail Johnson/Paul Michelson, 650-802-1850 http://email.roeder-johnson.com

KEYWORD: CALIFORNIA INDUSTRY KEYWORD: HARDWARE COMPUTERS/ELECTRONICS MANUFACTURING SOFTWARE EARNINGS CONFERENCE CALLS SOURCE: Echelon Corporation

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