ESCO Technologies Inc.
Q3 2008 Earnings Call Transcript

Published: 8 Aug 2008

[Operator:]

Good day and welcome to the ESCO Third Quarter Conference Call. Today's call is being recorded. With us today are Vic Richey, Chairman and CEO and Gary Muenster, Executive Vice President and CFO and now to present the forward-looking statements and for introductions, I would like to turn the conference over to Ms. Pat Moore, Director of Investor Relations. Please go ahead.

[Pat Moore:]

Good afternoon everyone. Statements made during this call regarding the timing and amounts of fiscal 2008, 2009 expected results, cash flow and net debt, the timing and success of PG&E contract negotiations, future contract awards, the timing and amounts of expected Aclara RF gas products, the success of AMI pilots, the success in international markets and other statements, which are not strictly historical, are forward-looking statements within the meaning of the Safe Harbor provisions of the Federal Securities Laws. These statements are based on current expectations and assumptions and actual results may differ materially from those projected in the forward-looking statements due to risks and uncertainties that exist in the company's operations and business environment, including but not limited to the risk factors referenced in the company's press release issued today, which is an exhibit to the company's Form 8-K, filed today. We undertake no duty to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. In addition, during this call, the company may discuss some non-GAAP financial measures in describing the company's operating results. A reconciliation of these measures to their most comparable GAAP measures can be found in the third quarter results press release, issued earlier today and found on the company's website at escotechnologies.com under the links Investor Relations, Financial Reports and SEC filings. I'll now turn the call over to Vic.

[Victor Richey:]

Thanks, Pat. Given where we are in the fiscal year and considering the recent volatility in our stock price, I thought it would be helpful to take a slightly different approach with my commentary on this quarter's call. I'll provide a few comments related to PG&E and on the balance of the business followed by Gary who will discuss the financial highlights for the quarter and the year, and then we'll open up for question and answers. First of all, I'd like to address the recent churn regarding PG&E and the status of their AMI deployment as there has been a lot of discussion recently about what decisions have been made and what impact these decisions have or will have on ESCO. My current perspective remains consistent with the message that I've communicated previously and is based on the following information. I've had several recent conversations with senior management responsible for the AMI project. This information has been substantiated by internal formal communications within the customer organization. And this perspective has been validated by the customer's ongoing testimony to the California Public Utility Commission. The bottom line is this

[Gary Muenster:]

Thanks, Vic. As noted in the release, adjusted EPS from continuing operations was $0.60 a share, excluding the $0.10 of non-cash amortization related to TWACS NG software and purchase accounting related assets. GAAP EPS was $0.50 a share, which represents a 67% increase over the prior year third quarter, in spite of a more challenging economic environment. When looking at the third quarter from an operational perspective, I'm very pleased with our year-over-year results, which I detailed in the release. A few highlights include

[Victor Richey:]

Okay those are our prepared remarks no longer than normal but I will make sure everybody had a clear perspective of what was going on and how we saw the future position of the business. We'll be glad to answer any questions.

[Operator:]

[Operator Instructions.] We will take your first question from Steve Sander with Stephens Incorporated.

[Steve Sander:]

Good afternoon.

[Vic Richey:]

Hi, Steve.

[Steve Sander:]

A couple of questions, first on PG&E. Just roughly what were the sales in the quarter and have you started shipping the Aclara RF for the electric?

[Vic Richey:]

On the sales side we shipped about 350,000 units worth about $23 million.

[Gary Muenster:]

And to answer the second piece that we are just starting to ship that product to PG&E.

[Vic Richey:]

In the fourth quarter?

[Gary Muenster:]

Right.

[Steve Sander:]

Okay and then Vic I think you indicated that you expect to see a pretty significant increase on the gas side there in 2009 just as a starting point, what are you expecting for 2008 in terms of gas shipments, just rough dollars?

[Vic Richey:]

You have that Gary? I think Gary has got it. You are talking about the dollar amount on the gas side?

[Steve Sander:]

Yes. Just by yearend, what's our starting point to think about…

[Gary Muenster:]

Yes, what we've shipped

[Steve Sander:]

In '09.

[Gary Muenster:]

What we've shipped so far Steve through the quarter end was about 700,000 units and another 100,000 in July, and so looking at July and let's just assume that's the trend, and call it a 100,000 to 125,000 a month.

[Gary Muenster:]

Okay.

[Gary Muenster:]

And so that equates to about 6 million or 7 million a month, so we should do somewhat consistent with what we did in Q3, which is like I said the $22 million to $23 million.

[Steve Sander:]

Okay. And then Gary, on the numbers it looks like you guys had a pretty sizeable Q-to-Q sales increase. The gross margin was down 100 bips, maybe a little bit more than that. Is that mix, or is there something else going on there?

[Gary Muenster:]

No, it's mostly mix. I would say looking at across the business segments within filtration WACO had an outstanding quarter, and the shipments of their defense spares Q3 of last year versus this, and in some cases there is 10 or 15 points of margin. And then as you look at the mix in the Test business, we ended up selling more large chambers and less components and there is probably a 15% to 20% margin differential there. So there is nothing unusual that warranted our concern other than the volatility of the mix that we see on a quarter-to-quarter basis.

[Steve Sander:]

Okay. And then a couple of others. On the other expense line $0.50 million bucks, anything unusual there?

[Gary Muenster:]

No, nothing out of the ordinary.

[Steve Sander:]

Okay. And then it looks like based on your revised tax rate guidance that you picked up maybe $0.10 or so which would imply that something slipped relative to what you were expecting a quarter ago?

[Vic Richey:]

Yes. Let me address that. Some of the, goes back to the Test business a bit. Some of the chambers that we had thought were going to be able recognize revenue on/or they were going to shift in the third quarter, shifted out of the quarter. I'd say that was the majority of it. And most of that comes back in the fourth quarter.

[Steve Sander:]

Okay, all right. And then just two final questions, then I'll get out of the way. Vic you referenced your '09 outlook. I guess are you talking about the $3 cash number that you guys put out there several years ago, which would tie to something in the $2.50 or $2.60 range now, since you haven't really issued anything formal. Is that what you're referencing when you mentioned nothing in PG&E electric as it relates to your '09 outlook?

[Vic Richey:]

Well, the point I was trying to make with the PG&E is I think there has been a lot more activity and a lot more concern about whatever's going to happen at PG&E and I told you what I know today and I don't know what's going to happen tomorrow or next week or next year. So I have to make that clear, but I want to make sure everybody understood what we knew first of all. And second of all, I want to make sure that people knew that we had already made that assumption, that while certainly our thought is that we're going to get more of that product, we want to make sure everybody understands there's not an assumption of that in our forecast all through the remainder of the year beyond what we already have or going forward. As far as '09, as you know the $3 that we have out there was the target and I think as we've talked about to a lot of folks over the past six months or so, that's more of a cash EPS now and we don't know that we are going to get exactly that number is the target we are shooting for. So we are not prepared to today to give guidance for '09 other than to say for currently based on everything we see and as Gary shared with you that we do anticipate certainly our earnings being better next year than they are at this year.

[Steve Sander:]

Okay and on the international side did you add a couple of pilots since the last call? Can you just essentially repeat your comments there what's new what's incremental to what you talked about in the past?

[Vic Richey:]

We started another pilot in South America and as I mentioned we did win a first pilot in Europe.

[Steve Sander:]

Okay alright thanks a lot.

[Vic Richey:]

Okay.

[Operator:]

We will take your next question from Kevin Maczka with BB&T Capital Markets.

[Kevin Maczka:]

Hi Vic, Gary.

[Vic Richey:]

Hi Maczka.

[Kevin Maczka:]

Gary, just a question about, going back to some of your commentary from the call last quarter. I think you used the term “confidence factor” a number of times and I am just wondering as you sit here today three months forward you are maintaining your revenue guidance for the year, you are trimming the high end of your EPS guidance by a nickel and in your outlook you are still very positive for next year. But I guess as it relates to Q4 end of next year, just give some more color around that confidence factor that you've have got now.

[Gary Muenster:]

Yeah I would say Vic touched on it. Looking at utility solutions and filtration, we understand the delivery schedules there and the majority of its in our control, its manufacture and deliver. But within Test there are so many projects currently in the works and they are spread all over the world, and there is a quite a few situations that honestly just get outside of your control. For instance if you are putting a Test lab at Sony over in the Far East and if the parent building isn't fully constructed in time for the application of our product to be installed then that can slip at a month or two And so I would say everything we need to hit our numbers is in backlog today. We are not sitting here today hoping that something gets booked and shipped. I would say the only thing that waivers the confidence from a 100% is the fact that within the Test segment there are certain aspects of those large chambers that are outside of our control. And so if there is any risk in Q4, it's going to be something that doesn't happen in September, but ships to October and again it's very important to understand that the things we need to do are in backlog. Okay. So, sitting here today I remain very confident, but the caveat is let's say if two or three of these chambers move to the right, you are talking a couple penny, you are not talking $0.20 and $0.30, and again whatever moves to the right doesn't impact cash flow because of the way we get deposits, down payments and milestone payments along the way it's purely a revenue recognition issue that could possibly move to the first quarter. And that's why we narrowed the top end of our range.

[Kevin Maczka:]

Okay, got it. And then shifting gears over to margins, as I look at the three major business units you report and some of the prior guidance that you've given for full year margins, it would kind of suggest that you we're not really on pace to still make those milestones, particularly on the utility side and the Test side, and I guess the Test is more understandable with some projects being delayed. Can you just give us some more color around your margin expectations for Q4 and as it relates to '09?

[Vic Richey:]

Let me just make a general comment and Gary would follow up. Again you have to remember that the fourth quarter is going to be our biggest quarter by far. So inherently that's going to result in higher margins really across the board. Of course our plan is to have a very solid, up fourth quarter.

[Gary Muenster:]

Yes. And taking that forward and again I'll just lightly touch on the three segments, but within filtration where we've added about 17% EBIT and roughly $31 million in sales. Again relative to the individual components we have there. Looking at what we have in backlog and yet to be shipped, we can see just sequentially more than a 10% increase in sales in Q4 in filtration. And so in round numbers that's $3 million or $4 million additional sales that we expect in the fourth quarter, and with that we tend to run $0.50 to $0.55 or percent incremental margins on that. So as you get up to the volume levels we're talking about for Q4 you have a substantial amount of the margin that falls right through the bottom line. So the expectations in filtration for Q4 are north of 20%. Okay. So when you blend that all together, we're very confident on what our original expectations were there. Again on Test, the sales increase from Q4 versus Q3 is about 40% higher, because again the majority of these chambers are well into the construction phase, they're all in backlog, and it really is just a matter of between the customer, situations onsite and other things, can we deliver somewhere in the mid to upper 40s in revenue. And we were just down there a week or two weeks ago with the Test folks in our July ops review, and again there is some risk and things moving a little bit, but the risk is not substantial. So when you put incremental revenues through that Test business and somewhere in the neighborhood of $45 million to $48 million relative to $33 million, you're covering your fixed costs so substantially that you're going to have an unusually high margin pull through in that situation, where it would not be unrealistic to think of this as 14% to 15% EBIT coming through Q4 on that high margin. Looking at utility solutions, again we expect not just as I mentioned earlier what's going to be going on with PG&E gas, there is also some positive momentum at Doble. There is positive momentum through the other aspects of this and so we expect sales there to be potentially $15 million to $20 million more over the $93 million that we have booked there. So again when you pull that type of volume through and again it's all in backlog. It's being manufactured as we speak and as long as we get it out which we don't feel a lot of risk, you are going to pull through a pretty substantial margin on that incremental sales there. So, and it's a longer answer than you might have been looking for, but you have to look at the three pieces and you look at the volume and the incremental margins that pull through at these volume levels. We are not sitting here with our fingers crossed hoping that every star line is up to hit these numbers.

[Kevin Maczka:]

All right. No, that's fine Gary long is good, I appreciate the color. But just one final one if I could. If you can just describe a little bit to us in more detail of the utility orders that you received nearly $100 million in the quarter and I guess $31 million of that was PG&E related. But I thought Vic I heard you say that you had signed up some 50 odd AMI customers year-to-date, just describe the size of may be some of the orders that might be coming from them or the Doble portion of that order book?

[Vic Richey:]

Yeah, the thing I was talking about with the 50 new AMI customers those are strictly in Aclara group. So, as I remember it, I think there were about 22 of those were on the electric side. The majority of them being COOPs but also Idaho, then we had the Aclara RFPs, where we had a number of smaller water jobs, we also had New York, we also had Toronto we also had the pilot of PG&E, and then I think there were about seven new software customers year-to-date. I think maybe the other number you were talking about is really kind of subsequent to the end of the quarter, we've entered about $150 million total of orders and that's, New York, Toronto, Idaho, and then this large automotive chamber in India that we entered. And then the Doble business I think has been very consistent at something over $20 million a quarter as far as orders there. And most of that shifts, I won't say we're always within the quarter, because they have these long-term contracts. But that's pretty consistent business thus far.

[Kevin Maczka:]

Okay, and how big was the Toronto business again Vic?

[Vic Richey:]

That's going to be somewhere around $30 million maybe a bit larger.

[Kevin Maczka:]

30 million, okay. Okay, guys thank you.

[Vic Richey:]

Thank you.

[Operator:]

We'll hear next from Carter Shoop with Deutsche Bank.

[Carter Shoop:]

Good afternoon. Few quick questions here, for PG&E when we talked about that business accelerating in '09 versus '08, will we see an acceleration versus the current run rates or are we just going to see the year-over-year increase as a result of staying at existing shipping rates?

[Gary Muenster:]

I think it's a little of both. And keep in mind that the ramp up on the gas side really didn't begin in earnest until about halfway through the second quarter, and just to kind of put some numbers around it. In the first quarter we did in round terms about $10 million, in the second quarter we did about $10 million and we ramped up to as I said the 22 or so and we are on track for that. So if you just assume it's flat with Q3 and Q4 at 20 to 22, you are looking an 80, four quarters at 20 versus something in the neighborhood of 60 this year. So that's assuming a normalization of today's run rate, which is consistent Q3, Q4. So if there is some additional acceleration, which is what our belief is, you should be able to see something incrementally better than that. So you're comparing 12 months or four quarters at a 20 versus two at 10 and two at 20, so you get that benefit working in your favor plus the opportunity to accelerate on top of the 20 if that's in fact what PG&E's intent is.

[Vic Richey:]

The thing we don't know today, and I don't disagree with anything Gary said, but the thing we don't know today is how quickly we're going to be able to deploy those. So, they're in a ramp up phase just like we're in a ramp up phase in deploying those products and so they need to be able to prove to themselves that they're going to be able to deploy at the same level they're being delivered.

[Carter Shoop:]

That leads to my next question. Do you have visibility in regards to how many gas and electric meters they shipped of yours versus how many you've shipped them?

[Vic Richey:]

I think assuming as far as installed, I think the number of installations that they have is something over 750,000. And that's gas and electric.

[Carter Shoop:]

Do you have a breakout by any chance between the gas and electric?

[Vic Richey:]

I think they've deployed around 200,000 electric and the rest will be gas.

[Carter Shoop:]

In regards to Doble, it appears that businesses maybe tracking a little bit behind original expectations. Is that the case or do you usually see a pretty large seasonal uptick in the September quarter in that business?

[Vic Richey:]

I would say it's tracking really right on what we thought. It's the only issue I think we had to explain, as here we had markup something's, but they're really right on or maybe even just a tad ahead of where they were anticipated to be at this time, and typically they're big month is in December. So we don't see any big tick in the fourth quarter but they're right on track with what we've projected.

[Gary Muenster:]

Yeah. Carter, in Q2 which obviously was the first full quarter, they did a little over 21, in this quarter they did right at 21. So I wouldn't think of that as missing expectations by any strategy.

[Vic Richey:]

I think what we had said when we made the acquisition they were going to be doing about $80 million in sales on an annualized lost basis.

[Carter Shoop:]

Okay may be my notes are incorrect. I had $80 million to $90 million for 10 months. I'll go over and double check that.

[Vic Richey:]

That would be it.

[Carter Shoop:]

That's all I have. Thank you.

[Vic Richey:]

Okay.

[Operator:]

We'll here next from Patrick Forkin with Tejas Securities.

[Patrick Forkin:]

Good afternoon guys.

[Vic Richey:]

Hi, Pat.

[Patrick Forkin:]

Was wondering if we could drill into these water projects a little bit first on New York City win, what does the ramp up look like there, when are you guys going to start shipping in meaningful quantities and what's the project period there?

[Gary Muenster:]

Yes, our understanding is that we will be shipping some product in the first quarter of '09, maybe a little bit in the fourth quarter of '08, but what we will be doing there really fairly small amount, some of the data collection units to start getting the infrastructure in place. What they say now is that and I think what they have said probably is they plan a three year deployment.

[Patrick Forkin:]

Okay you are talking about your fiscal quarters.

[Gary Muenster:]

Yes.

[Patrick Forkin:]

Okay and then on Toronto.

[Gary Muenster:]

I think that was probably going to be, more probably our second quarter of '09 and their deployment schedule currently is a five year deployment.

[Patrick Forkin:]

Okay and then on Idaho. Is that a shorter deployment period there?

[Gary Muenster:]

I think its going to be three years as well.

[Patrick Forkin:]

Okay.

[Gary Muenster:]

We are starting to ship some sub-station equipment out there in the fourth quarter as well.

[Patrick Forkin:]

Okay and then in some of the proceedings or the press on New York, there was some discussion about exploring using the Hexagram or Aclara network to look at metering, picking up the electric meters. Have you guys been involved in those discussions, or do you have any input there?

[Gary Muenster:]

I don't think there is anything we're really in position to talk about right now, obviously once we get the infrastructure around any meters that are resident underneath that would be in Canada, so for us to pick up.

[Patrick Forkin:]

Okay. And then Vic, in your prepared comments did you mention that there were maybe some other significant water engagements that you were involved in?

[Vic Richey:]

There is a couple of others, yes, that we're looking at.

[Patrick Forkin:]

Okay. Would they be on the same scale as New York and…

[Vic Richey:]

Probably not as big as New York, but they would be more in the Toronto type size.

[Patrick Forkin:]

Okay, very good, thank you.

[Vic Richey:]

You bet.

[Operator:]

We'll hear next from Ian Fleischer with FBR Capital Markets.

[Ian Fleischer:]

Hi, good afternoon.

[Vic Richey:]

Good afternoon.

[Ian Fleischer:]

Could you touch on the recent acquisition announcement and how that kind of folds into Doble and kind of the benefits with respect to that offering?

[Vic Richey:]

Sure. There is a couple of things in this. Quite nicely this was an acquisition in candidate that Doble had identified really and talked to us about during the acquisition process with Doble. But LDIC is a company that does very much what the same types of products that Doble does. They do really primarily partial discharge though and that's a test process, that's much more common in Europe, although we have started to see it more in US as well. So, what it does for us is it really expands the product offering we have, it gives us some Euro centric product if you will as well. It also gives us a base in Europe and obviously what we want to do is accelerate our international growth that's where we see the best growth. So having a well established company, this is a company that has been around for quite some time in Germany and in Switzerland. That it has a good distribution network throughout Germany I think is going to help us. Also they have an excellent product development group there as well and access to good engineers and so we'll do a lot of the European product development in that facility with that group. So what it does it really expands our products, expands the opportunity in Europe and allows us I think to accelerate that opportunity. This company is pretty well known in Doble, they've been working with them for a number of years.

[Ian Fleischer:]

Okay, great. And so when you think about your Utility Solutions segment, overall right now. Do you think there is other opportunities, acquisition opportunities, to continue to build out that segment or do you feel that you're pretty much at where you think you'll be?

[Vic Richey:]

I think we'll continue to look for things. I would say that particularly on the Doble side or that side of the business they continue to look for opportunities and it's really how we're going to expand internationally in some ways we already have as I've mentioned before a number of international occasions if we get a little more critical mass there, in some of these fast developing countries that we would really take a hard look at that. We're doing it a little bit the old-fashioned way with a smaller group and growing around, but if other opportunities like LDIC present themselves we'd certainly take a hard look.

[Ian Fleischer:]

Okay. Just finally, if you could maybe just rank kind of your near-term opportunities on the AMR/AMI side internationally with respect to Central, South America, Europe and Asia?

[Vic Richey:]

Yes. I'd say certainly that the best near-term opportunities are Central and South America without a doubt. It’s a small foray into Europe, but I would say probably the next one would probably be in Asia, because I think we've got some good opportunities there, having some good discussions with customers there but certainly Central and South America remains at the top of the list.

[Ian Fleischer:]

Great thank you very much.

[Operator:]

(Operator Instructions) We will hear next from Chip Moore with Canaccord Adams.

[John Quealy:]

Hi it's actually John Quealy, just a quick follow up on PG&E and the outlook in the next couple of quarters in terms of the booked orders. Does the revenue mix or recognition change given what I think PG&E had in their deployment plan about having the network infrastructure fully deployed in '09 and the meters continuing on past that time. Does that impact the price per end point for you folks in the next couple of quarters as you help to fulfill that goal?

[Gary Muenster:]

Hey John this Gary. I don't think you are going to see any really differential if the mix between the data collection units and the end points tilts one way or the other obviously the relationship of the unit price is obviously a big difference between a meter and a collector unit, but there is a lot less collector unit. So you can still continue to think of this in the neighborhood of $55 to $60 of a blended end point process. So I don't see anything as the quantity differentials come through that's going to impact anything there.

[John Quealy:]

Okay great and then lastly on Doble. Can you comment a little bit, about any cost optimization efforts where you folks are in that way and also as you look to '09, fiscal that is. What's your outlook for Doble organically ex-acquisition, do you think it's an up year or product cycle is coming or what's your thoughts there?

[Vic Richey:]

Let me answer the second part of it first. We didn't think that we'll have an up year at Doble next year over this year, ex the acquisition or obviously that's going to help, but we anticipate some growth there organically as well. As far as the cost optimization, we have made a decision to stay in a facility that we are in, we are doing some relay out of that. They had already started some outsourcing of some of the product and we are going to continue to do what they had set out to do, but we are going to relay out the plant that we have in place to make sure that we are optimizing that as much as possible. It is running as a standalone business, we don't intend to change that, so you are not going to see a consolidation that you would if we were, consolidating plants or something of that nature.

[John Quealy:]

Great, and just one other. Again, I don't know if anyone asked this, but in terms of the momentum it seems like there is a lot of chatter about STAR networks and AMI versus MESH. Can you comment about what you are seeing in terms of RFPs in characterizations of MESH versus point?

[Gary Muenster:]

I think that everybody, we are responding to a large numbers of RFPs. I think the MESH folks are doing the same thing and I think it's just going to be a matter of say on each how each of these systems really work at the end of the day, I think there is some inherent advantages to having a point-to-point system. I think there is some misconception that, you know, at some point-to-point, you've only got one opportunity to make that connection. The reality is the way our systems are setup that we typically will pick up a signal from a meter about two or three, sometimes even more data collection units. So it is a very robust system and that you're not counting on just one line of contact between the meter and the DCU. The other thing I know people probably get tired of hearing me say this but I'll continue to say it, this point-to-point system has proven its scale and it's proving to be able to handle the data loads that are required, and it's proving to be able to scale up, so I would say that's again the biggest advantage that we have today.

[John Quealy:]

Great. Thanks, guys.

[Operator:]

We'll hear the next question from Ric Eastman with Robert Baird.

[Richard Eastman:]

Hi. Vic, is the pilot that you are deploying in Europe is that on the electric side?

[Vic Richey:]

Yes.

[Richard Eastman:]

And is that, presumably that's RF?

[Vic Richey:]

That is not.

[Richard Eastman:]

So it's power line?

[Vic Richey:]

Yes.

[Richard Eastman:]

Okay. I thought there were some issues with the technology being deployed in Europe just from the number of transformers and some physical issues?

[Vic Richey:]

It varies from place-to-place. I thought were you going to ask about the 50 hertz and we have been working with a partner on that. But this is an opportunity where the technology should work very well. So that's yet to be seen, but there were several other companies who were not selected, but we were selected to do a pilot there.

[Richard Eastman:]

Okay. And then any update on [Oncor] in terms of that remaining territory? I know they choose another vendor to take a quick look, but is there any additional business there that either came in through a booking or do you expect soon?

[Vic Richey:]

We've not got any additional bookings there. We remain in discussions with Oncor and I am not really sure how that's going to play out. As you probably know, people will follow the Texas situation. I would say the PUCs got very active there and there has been a lot of discussions about what the final requirements are going to be. And I think until some of that gets shaken out we are not going to have a clear vision on what are full opportunity is there, but we are engaged with them and I would say we have had folks down there probably three times in the past two months.

[Richard Eastman:]

I see, okay. And then just one last question on the New York City water project, is that $68 million. How does that come through the P&L and what profit margin, does that include any install, are you the project manager on that, or does that come in with a typical kind of hardware/software margin?

[Vic Richey:]

It's a straight hardware sale and obviously the software that's engaged in that project is not one like we had historically with the new developments at TNG. So it's a units of delivery system, we deliver the product, can't recall who the installation company is offhand, but that's not our situation. It's going to be a straight standard commercial delivery product. I am not allowed to comment specifically on the margins other than to say that they are consistent with the run rate that we have there so some of the noise that might have been tossed around that. We bought into that system I would say is absolutely untrue.

[Richard Eastman:]

Okay. And can you just give us how many end points is that?

[Vic Richey:]

About 875.

[Gary Muenster:]

Yeah, I think that 875 is what New York called it.

[Richard Eastman:]

Okay, great thank you.

[Vic Richey:]

Thanks Ric.

[Operator:]

We will hear a follow up from Patrick Forkin with Tejas Securities.

[Patrick Forkin:]

Hi, just a follow up to Rick's question on the European pilot. Victor did you say you are working with a partner on that project?

[Vic Richey:]

Yes.

[Patrick Forkin:]

Can you give us any…

[Vic Richey:]

I am not sure we have ever disclosed that and I am not sure as to the benefit of doing that. I would just tell you it's a meter manufacture outside of the US that we have been doing some other deployments with and they kind of took the lead on that. But it's a company we have been working with for several years, and have been a great product with probably two years ago.

[Patrick Forkin:]

I wasn't going to ask the name, because I knew you won't give, I mean you wouldn't give it, but I was just kind of curious as to the size and timing on that, the number of end points in the pilot?

[Vic Richey:]

It’s a pretty small pilot, I would say it's like 3,000 end points or something like that. It's not going to be deployed probably in the next four months or so. They really haven't given a strong indication on whether they'll go for it, but I think a decision would be made sometime in '09.

[Patrick Forkin:]

Okay. Very good, appreciate it.

[Vic Richey:]

You bet.

[Operator:]

That concludes today's questions. Now I would like to turn the call back over to Mr. Mike Richey.

[Vic Richey:]

All right, well this is Vic Richey. I appreciate everybody's attention and interest today. I think we have a lot of good things going on, I think we made a lot of progress over the past 12 months and I look forward to finishing up this year and having a strong '09. So, thank you very much.

[Operator:]

That concludes today's conference and thank you for attending.