Itron, Inc.
Q4 2010 Earnings Call Transcript

Published: 17 Feb 2011

[Operator:]

Good day, everyone and welcome to the Itron Inc. Q4 and Year End 2010 Earnings Conference Call. [Operator Instructions] For opening remarks, I would like to turn the call over to Ranny Dwiggins. Please go ahead, sir.

[Ranny Dwiggins:]

Good afternoon, everyone and thank you for joining us today. On the call today, we have Malcolm Unsworth, our President and CEO; and Steve Helmbrecht, our Chief Financial Officer. We issued a press release earlier today announcing our results. The press release includes replay information about today's call. We have prepared slides to accompany our remarks today. These slides are available through the webcast and through our corporate website in the Presentation folder under the Investor Relations tab. Now, please turn to Slide 2 while I review today's agenda. After I complete the introduction, Malcolm will provide a business update. Next, Steve will review the financial results for the quarter, and then Malcolm will close our prepared remarks with a summary of our 2011 outlook. After that, we'll take your questions. Our earnings release and financial presentation include non-GAAP financial information that we believe enhances your overall understanding of our current and future performance. We have included reconciliations of differences between GAAP and non-GAAP financial measures in our earnings release and financial presentation. Now, please turn to Slide 3 regarding our safe harbor statement. 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 and the comments made during this conference call and in the Risk Factors section of our Form 10-K, Form 10-Q and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statements. And with that, I will turn the call over to Malcolm Unsworth, Itron's President and CEO.

[Malcolm Unsworth:]

Thank you, Ranny and good afternoon, everyone. It's a pleasure to have a chance to discuss with you the year just completed and the year ahead. Now, please turn to Slide 4 of the presentation where we can see the areas I'm going to cover this afternoon. As you know, Itron is a global driver of technology and innovation for electric, gas and water utilities. Around the world, the opportunity for energy and water resource management continues to expand. Consider in less than 20 years, electricity demand will grow by more than 40%. The aging gas infrastructure is making safety a top of mind issue for gas utilities, triggering new opportunities for Itron. And in less than a generation, global water demand is projected to increase by 53% and we are well-positioned in each of our businesses to capitalize on these opportunities. In the beginning of 2010, I set a few objectives as noted on the slide

[Steven Helmbrecht:]

Thank you, Malcolm, and good afternoon. Please turn to Slide 7 for my financial review. We had a strong quarter on the revenue line, with revenue growth of 30.2% over Q4 '09 to a record $621 million. And bookings were $581 million, evenly balanced between North America and international. With a record quarter of revenue, we had a book-to-bill ratio of 0.94

[Malcolm Unsworth:]

Thank you, Steve. Now, let's move on to Slide 20. Let me reiterate what I spoke about earlier. This graph shows our evolution from 2007 through to 2010, with our total backlog in yellow and our 12-month backlog in red. As you can see from the slide, we have a great start to 2011. Let's move to Slide 21 to review Itron's 2011 objectives. Our first objective is to translate INA's Smart Grid success into global wins; secondly, we will grow our Gas and Water businesses; third, we will continue to expand in emerging markets; and finally, we will focus on increasing profitability. Now, let's talk about our outlook for 2011. Will you please turn to Slide 22? Here is our guidance

[Operator:]

[Operator Instructions] We will take our first question from Colin Rusch with ThinkEquity.

[Colin Rusch:]

Can you talk about where the growth is coming from, specifically for the Water business? It looks like the tremendous opportunity to me, still I'd love to get a little bit of more granularity on that.

[Malcolm Unsworth:]

Yes, Colin, the growth obviously that we had in 2010 from 2009, as I said was in electricity, which was 50%; gas, which was 20%; and the water, which was 7%. In particular, the water industry, we have significant water changes that are taking place in North America with our AMI solutions, which is why I talked about our 100 W and also in our international business, where we've launched our EverBlu solution, which is having great inroads in Europe and in India, where we have started deployment of the Mumbai project.

[Colin Rusch:]

The slide where you've got your revenue broken down between the basic meters, advanced meters, smart meters and communication modules, can you give us a similar breakdown of the backlog that you've got entering the year?

[Malcolm Unsworth:]

No, we don't go into that level of detail but as you can see, the amount of shipments that we made in advanced meters is significantly increasing in 2010 over 2009, whereas basic meters are down about 6%, which would probably be the trend as we move forward.

[Operator:]

We will take our next question from Jesse Pichel with Jefferies.

[Jesse Pichel:]

The first is in the press release you mentioned services might have been partially responsible or the mix of services. I'm wondering, were services margins down in the quarter? And what do you expect in terms of charges for Q1 or will there be no charges, thus will gross margin go up? The second question I had is following some headline issues there with gas pipeline explosions at PG&E and in Pennsylvania, have you gotten any uptick in the interest for your advanced gas monitoring solutions at the distribution level? And what kind of technology solutions can you provide into that market?

[Steven Helmbrecht:]

This is Steve. I'm going to take the first one, the question about services. There were some impact as well. I did call out specifically some key charges in the quarter, but in addition, we did see some pressure on margin in the fourth quarter coming from services, and some of that was timing based, related to some projects, particularly some of our larger projects. So your question is leading into Q1 and into 2011. There can be movement like that in terms of services, but we don't see what happened in Q4 as the start of a trend overall. You've mentioned charges overall. Again, we called out these particular items but we also do have and we've talked about in the past periodically severance or termination-related charges. We did have a little bit of that as well in the quarter in addition to, you can also include what we saw certainly in this year, higher compensation expense for 2010. So as we look ahead in what helped shape the guidance we gave, is certainly a thought about the margins and some improvement there overall, certainly relative to Q4.

[Malcolm Unsworth:]

Jesse, let me just answer the question regarding the impact of the gas pipeline explosion monitoring. There's about 2 million miles of gas pipes in North America and about 60% of those gas pipes are over 40 years old. So we've designed a solution, which is a fixed-network system that can be put over a territory and actually monitor things like the corrosion levels of these underground pipelines and also, we've got a complete solution that gives utilities the ability to look at 40 days of data. So it's going to have a significant or it's going to have an impact on our business in North America moving forward. I see, because definitely that would have an impact.

[Operator:]

We'll take our next question from Steve Sanders with Stephens.

[Stephen Sanders:]

First, a question on the international side. I think you mentioned on Slide 26 that over the course of 2010, you saw some delays as customers in Europe kind of looked at next-generation solutions. How should we think about that in 2011?

[Malcolm Unsworth:]

Well as I mentioned earlier, Steve, I did visit with the CEO of ERDF recently, and also with some folks, some senior executives in the U.K. And as you see, what I said about Italgas, there are projects that are absolutely moving forward in '11 and '12. Now as we know, there's 27 countries in Europe, and the top five have over a few hundred million to deploy over the next few years. The question really isn't if, it's when. So they've all reiterated that they will be moving forward. And again, it's a question of if versus when so, okay?

[Stephen Sanders:]

Okay. And then a follow up is in North America. Where are you in terms of the next-generation lower cost OpenWay product? Is that going to fully-flow through in the first or second quarter of '11? Or is that still kind of mixed?

[Malcolm Unsworth:]

We have launched the product. It is our hardware 3.0 solution and it's in the hands, as I said before, of our customers looking for approvals. But that will be deployed in 2011 and will start ramping up over time.

[Operator:]

We'll take our next question from Stuart Bush with RBC Capital Markets.

[Stuart Bush:]

I know that your 12 months backlog is higher than a year ago, but your 2011 revenue guidance is essentially down sequentially. Can you help me understand the dynamics that would get you from the low end to the high end of your revenue guidance range?

[Malcolm Unsworth:]

Absolutely. Obviously, we do a complete bottoms-up approach and at the same time, we look at the competitive wins we've had and some of the competitive losses. We look at the assessment of all of the outstanding project opportunities that we have and look at what's been mandated through the North America, with Texas and California. But at the same time, when you start looking at the total backlog that we have and the book-and-ship business that we have, if you look between -- we range between $1.2 billion and $1.4 billion of book-and-ship business. Added to the backlog, which is never stable, and neither is the book-and-ship business, it ranges between $2.1 billion and $2.3 billion. So that's primarily with all of the other bottoms up approach, how we have managed to put that guidance in there.

[Stuart Bush:]

And then maybe you can help us understand the dynamics for the margins for next year? What exactly are you putting into place for some margin improvement? Is that mainly in materials in Europe or in international or is there something structural or factory absorption here in the U.S. that we can look to?

[Malcolm Unsworth:]

Obviously, one of the areas of focus that I talked about as an objective is to improve operating margins. And if you take a look at what we experienced in 2010, we had some significant growth rates in particular areas around the world, and that caused some stock buying of components. We see the commodity prices, especially in copper, have definitely risen over last year. But with electronics and a few other things and plastics and steel, it's not too bad. So we now have the ability because we forecast and look at what we're doing, especially in certain parts of the world, where we can do long-term contracts with some of these commodity prices. But remember, that's why I talked about the water product that I had, which was a new composite material in the water side internationally, that we can transition over to that, which eliminates the spot issues that we have with copper. So overall, yes, it's certainly a concern, but with new products in there and the visibility that we have, I think we'll be okay.

[Operator:]

We'll take our next question from Dale Pfau with Cantor Fitzgerald.

[Dale Pfau:]

Could you give us an idea please what your expectations are of your revenues for next year for your OpenWay meters? And then as a follow-up, it looks like based on your guidance, you're not expecting any significant OpenWay wins that would contribute to revenues over the next four quarters.

[Malcolm Unsworth:]

One thing that's important to understand is that we have seen significant activity levels in our RFQs, both in North America and overseas. And we are looking at winning our fair share of business. We expect we will have specific wins in 2011. Of course, we would because we've invested heavily in our OpenWay R&D solution. But we're not going to share that because it's confidential. So yes, we expect we will be booking more OpenWay solutions in 2011.

[Steven Helmbrecht:]

And just a follow up, there's a question about the mix. I mentioned about the 50%, greater than 50% is a percentage of revenue. Clearly, as we go forward North America, OpenWay will continue to play a large role, but as Malcolm also mentioned, we've seen very good growth in water and gas.

[Operator:]

[Operator Instructions] We will take our next question from Vishal Shah with Barclays Capital.

[Vishal Shah:]

Just to clarify your guidance of 2011 assumes sequential decline in both North America and International business or is it just one or the other? And if you take the Q4 OpenWay run rate of say $300 million plus, it will imply a steep decline in European business. I just wanted to clarify that portion.

[Malcolm Unsworth:]

Overall, we see revenues between as I said $2.15 billion and $2.3 billion, which is relatively flat. Today, we do not sell our OpenWay solution overseas. It is only a North American product. But as I said, we're starting to see some growth opportunities in our gas and our balanced business, with gas, water and electric overseas, as well as in North America.

[Operator:]

We will take our next question from Carter Shoop with Deutsche Bank.

[Carter Shoop:]

Can we talk about what the exact number was for AMI as a percentage of Itron North American revenue? And then the follow-up question would be, does your guidance incorporate any large, as in 1 million plus-point wins in North America for OpenWay?

[Ranny Dwiggins:]

Carter, this is Ranny. I believe OpenWay revenue is about 52% of Itron North America revenue in Q4. And with regard to the guidance, as Malcolm had said earlier, we looked at a number of contracts and you're aware that there are contracts out there of that size. We looked at all of those in our guidance. And we're not specifically saying what's in or what's out, it's just as we look at all of those opportunities, we factor those in, along with the book-and-ship business to come up with what we think is a reasonable number for the year.

[Operator:]

We will take our next question from Sean Hannan with Needham & Company.

[Sean Hannan:]

Maybe if I can jump on a different topic. So San Diego Gas & Electric has pretty much indicated it, it is well as the industry is going to have to acknowledge concerns around the use of RF meters and design an alternative solutions in their deployments, whether the health of residential customers is truly impacted by the use of RF or not. So when you look at your in-house communications technologies, as well as your partnerships as what you have with Canon for PLC, et cetera, do you see at this point a logical need to step up your position or even consider an acquisition? Or are you comfortable with where you stand today for your offerings?

[Malcolm Unsworth:]

Well first of all, Sean, let me just say that our products have gone through rigorous testing and are safe. We make sure they comply with all the FCC Regulations, and I see no reason why we need to worry about our RF communication technology, both here and around the globe.

[Steven Helmbrecht:]

Question with also PLC.

[Sean Hannan:]

Yes...

[Malcolm Unsworth:]

We have a PLC solution already in Europe and I recently promoted a Chief Technology Officer. His name is Simon Pontin. His responsibility is to make sure we share all the technologies across the globe, which we have been doing in the past. But I now want to start focusing a lot on that even more. And so we do have PLC solutions in Europe, and that is an opportunity that we have into North America. So will that mean doing something with acquisitions for PLC technology in North America? No.

[Operator:]

We will take our next question from Paul Coster with JPMorgan.

[Paul Coster:]

Malcolm, the book-and-ship business is obviously -- in part a function of the health of the end market utilities. Can you give us some sense of how you think they are trending in terms of their appetite for investing up, down or sideways. And I have one minor distant question, which is you said in your prepared remarks, you intend to translate INA Smart Grid success into global wins. Can you explain what it is that can be ported to the international market and why?

[Malcolm Unsworth:]

Sure, first of all, the health of the market for our book-and-ship business. If you look at 2009, at a time when we had some significant issues regarding utility cash flows and stuff, or should I say the balance sheet, it really was a problem. 2010 saw the fairly good clip of our book-and-ship business. It came back to over, I should say $1.4 billion compared to 2009, and that was good. So the health of the market I think is fine. As far as I say what's up, European utilities, still have a very healthy balance sheet, there's no question about that. So I don't see any major issues with the book-and-ship business. Now, how does that translate, you said how does the sharing of technology translate with the success of what we had in North America? One of the things that I talked about was the execution at the beginning of 2010 of our AMI solution, OpenWay. We have done that and very successfully, and it's working extremely well. So we wanted to wait until we had a lot of good usage and a lot of good installations completed in deployments. And one perfect example of that is our ZigBee communication technology and our meshed technology and in particular, our software solutions. So we have a global software platform across the whole world. So with this balanced portfolio, Simon Pontin's responsibility is to make sure we have commonality of processes, we utilize all technology across the company and we should start seeing some of that start to take effect probably in '12.

[Operator:]

[Operator Instructions] We will go next to John Quealy of Canaccord Genuity.

[John Quealy:]

First, for Steve, can you comment on free cash flow expectations? Should we expect the same relative contribution on that revenue in '11? And I'm sorry if you mentioned that. And then also, Steve as a very quick follow-up if I could, in terms of the convert, how should we look at a cash versus revolver mix there as you look to extinguish that in June? And then just a quick follow-up.

[Steven Helmbrecht:]

The first was on cash flow and again, we had mentioned very strong cash flow this year. We think about a couple of factors, CapEx for next year for '11, pretty similar to what we've seen this year. Overall, working capital metrics staying about the same, a pretty strong improvement here this year and we want to continue that. And then really, the key drivers there then would be the overall earnings results. We'll see a little movement on the cash tax side and interest expense, pro and con, let's say plus or minus, but really not a big change overall as we're thinking ahead in the cash profile. That's also the question about the convert and that has a put and call option feature in August of this year. We're considering a number of alternatives as we look at that instrument between now and then and feel we have a number of options we could pursue we're still looking at. But the point I want to make there is the recent successful expansion of the revolver by $75 million. If you take the total of $315 million and back out some LCs, leaves about $270 million in capacity on that revolver, which coupled with cash, we believe gives us ample liquidity and a lot of flexibility as we look into later this year.

[John Quealy:]

And then if I could, just for Malcolm, qualitatively, are you happy with the competitiveness in Itron now? We've got a new relationship with Cisco. You just talked about moving Smart Grid success internationally. Can you give us a report card about how you think Itron is doing competitively and what we should expect from you folks next year?

[Malcolm Unsworth:]

We spent $140 million in R&D. I talked about all the new products that we're developing. We specifically mentioned on the water side, where we introduced 10 new products. We've been equally the same across all of the product lines. If you look globally, we spent significant amounts of money in each particular segment, and it's enhancing the products that we have and developing new products to compete across the globe. So I am very happy with what we've developed. In particular, I did talk about protecting the installed base in North America, with our new solution, which includes OpenWay and something that's got what we call an SCM message involved, which protects all of the large installed base we have where a customer can actually convert over from an AMR system to flow as we move it over to an AMI system. This a big improvement that we've got. All of these things should help us competitively. And especially on the Cisco side, we have been working diligently, with phone calls and meetings twice a week with Cisco. We demonstrated a solution that we had at DistribuTECH. We have 10 customers in the booth and in private sessions who signed NDAs. So I can't disclose who they all are. But they're very, very interested in our relationship and our future moving forward with Cisco.

[Operator:]

We will take our next question from Andrew Weisel with Macquarie.

[Andrew Weisel:]

Have you given the break out of orders between North America and international?

[Steven Helmbrecht:]

We didn't give it specific. This is Steve, Andrew, but I did talk about a fairly-even balance of bookings in the fourth quarter overall as part of my initial remarks.

[Malcolm Unsworth:]

One of the interesting things we mentioned was that we booked $581 million of orders in Q4. I just wanted to make sure that was understood.

[Andrew Weisel:]

I'm assuming it's a lot of small ones, right, because there weren't too many press releases about big contract announcements during the quarter?

[Malcolm Unsworth:]

Andrew, we do have a balanced business. So we don't rely on one particular section. If one's up, then one maybe down. But overall, we're extremely happy with the balanced portfolio that we've got across the globe, including North America and Canada. As I mentioned earlier, we've got the ATCO Gas booking that we had. So I'm very pleased with the $581 million in bookings we had.

[Operator:]

We will take a follow-up question from Jesse Pichel with Jefferies.

[Jesse Pichel:]

We're trying to ascertain the kind of growth rates we can look at next year, so we'd like to ask do you have an update on the Cisco partnership? And in terms of the Itron servicing partnership, how is the development on both of these fronts?

[Malcolm Unsworth:]

I just mentioned about the Cisco partnership, first of all. As I said earlier, on the last call, we have had tremendous interest in our relationship with Cisco. What we did was in DistribuTECH, we launched the products and showed behind closed doors to utilities to utility executives where our plans were and our roadmaps were. Obviously, we can't share that on the phone, and we can't share that because of competitive reasons, but they were very delighted with what they saw moving forward and what we're offering. When it comes to the Silver Springs relationship, one of the things that we do believe in is that first of all, it will not affect our Cisco relationship, but the idea is winning business. We cannot win everything. But if Silver Springs do win over us, then the idea is to have a balance between utilizing our technology under the Silver Springs banner. So it's an opportunity to be at the table rather than on the menu, to put it that way.

[Operator:]

We will take a follow-up question from Stuart Bush with RBC Capital Markets.

[Stuart Bush:]

Can you give us some sense of the seasonality of the guidance across 2011? Should we be expecting more in the back half or will it be more evenly weighted, given the shipments on the OpenWay products to your main customers?

[Steven Helmbrecht:]

Stuart, this is Steve. We haven't given specific quarterly guidance. We're not going to do that but as we think of the business, as Malcolm talked about the book-and-ship business and relatively level, good, strong performance in the fourth quarter and the trend he talked about, the impact of that can be some timing on projects and so forth, we've generally talked about seasonality as some fourth quarter spending in the past, and utility capital spending where we didn't mention that. But generally speaking, we don't see a lot of seasonality, any kind of big trends that are happening right now that would affect seasonality from an overall business perspective.

[Stuart Bush:]

One follow up, I mean excluding 2009, we've typically seen utility use it or lose it on the budget in the fourth quarter? Is there any reason to expect that we wouldn't be able to see that again this year given the state of the health of utilities?

[Malcolm Unsworth:]

Sure, we obviously had some end-of-the-year spending included in the $581 million. We specifically don't call that out. We didn't get a lot of that in 2009 because of the way the utility was holding onto their cash on the balance sheet, but we did see some of it this year. And with the health of the industry, could we see it next year? Well, sometimes we do see it in December. So, yes there's a possibility we could see some end-of-the-year spending. But it just depends.

[Ranny Dwiggins:]

This is Ranny. That was one of the many things that we factor into our guidance. We look at the potential awards out there, the book-and-ship business and year-end spending and all of that becomes part of how we estimate our number for the year.

[Operator:]

We will take a question from Ben Schuman with Pacific Crest Securities.

[Benjamin Schuman:]

Can you give us an update on San Diego Gas & Electric specifically, if the volume deployments there are going to finish up this quarter? And tell us whether or not any large AMI contracts are baked into the 2011 guidance, unannounced AMI contracts?

[Malcolm Unsworth:]

The San Diego Gas & Electric contract is considered to be completed by the end of this year. So yes, we factor that into our numbers for 2011. And with regards to long-term contracts and new contracts, as I said earlier, we don't comment specifically on individual contracts because we signed NDAs with all of our utilities when we put a response to our RFQ. But as I say, what was said many times on the call is our activity is high.

[Operator:]

We will take our next question from Patrick Jobin with Crédit Suisse.

[Patrick Jobin:]

First question is for Steve. I guess could you walk us through maybe the roadmap to get AMI margins back up both on the gross margin side and then just looking at kind of a leveraging component of business longer-term?

[Steven Helmbrecht:]

Sure, and Malcolm talked about some of this as well. You mentioned hardware 3.0, the development efforts underway to take cost out of that product and its approval and now planned rollout overtime, over the course of the year. That's not the only product we're focusing on taking cost out. Malcolm mentioned composite meters on the water side and other areas. In fact, that's a very large focus of our R&D spending. It's both innovation and cost reduction. On the manufacturing side, when I talk about CapEx, it's looking at manufacturing efficiency and improving automation. You see some large percentage of our capital expenditures and adding new properties but it's actually inside the factory and automation. And then the other key area is on OpEx, and its scalability. It's the ability to scale the top line. We feel we have generally the sales distribution in place today with our multi-local strategy. We don't need to significantly increase that. We're investing in new systems for automation, particularly in the G&A front to help to manage that rate of growth down. And that really leaves the R&D line and we've continuously talked about the R&D spending. We'll continue to focus on that. But as well, Malcolm mentioned with the new CTO, a focus on not duplicating and rationalizing and sharing our technology around the world, a major area of focus for us going forward.

[Patrick Jobin:]

And then a question for Malcolm, it's not if but when, and you seem to make a comment that 2012 could be a good year for Europe. Did I understand that correctly? I think we're all believers that it's not if but when. But when do you think you'll see meaningful revenue in Europe for smart meter deployments?

[Malcolm Unsworth:]

If you turn to Page, I'm not certainly exactly what the page is on, but we did $700 million -- in 2010 on Page 26. We did $756 million in Europe versus $807 million in 2009. Europe is still a big piece of our business. Obviously, the idea is when is that smart solutions going to start. If you look at the five countries that represent a significant portion of it, France, Germany, Italy, Spain and the U.K., each one of them have plans in place today to start the deployment either in 2011 or in 2012. And again, I'll reiterate, it's not a matter of if, it's a matter of when. So we always are looking at these and we're very enthusiastic about moving forward. A, because it's mandated in many parts of the world and in other areas, we've already started already. As I said earlier, Italgas they have started -- we started there with the deployment of their C&I smart meters. And we have a very nice factory in Naples where that could be something we could ship when they start the residential change outs.

[Operator:]

We will take our next question from Chris Kovacs with Robert Baird.

[Benjamin Kallo:]

This is actually Ben Kallo from Robert W. Baird. If I remember it correctly, once you and Cisco get your solution worked out, you're going to go ahead and deploy that on your AMI projects that you've already deployed on. If that's correct, is there a cost associated with that? Is it substantial and then who bears it? And will you have to go back to the PUC for it?

[Malcolm Unsworth:]

One of the important parts that we've designed at OpenWay solution is that everything that we have, whether it's hardware 2.0 or hardware 3.0, you do not have to visit the meter to go and download the Cisco solution. So the answer is no, you do not have to go and you can do it all over the air without any costs associated with it for the utility.

[Benjamin Kallo:]

And then on your traditional metering side, could you talk about any pricing pressure you're seeing there?

[Malcolm Unsworth:]

Yes, there's always pricing pressure. We've had pricing pressures for 25 years and I've been in this industry a long time. So it's always pricing pressure. That's why we spend R&D money to increase the functionality, get the costs down. We're always looking at different ways to reduce expenses, and reduce costs, but there's always been pricing pressure.

[Steven Helmbrecht:]

Just to add to that though, there is the benefit of mix as we move towards higher forms of technology and automation. There's the benefit of selling units at a higher price point over time reflective of that, certainly a key theme in North America.

[Operator:]

We will take our next question from Mark Rogers with Gagnon Securities.

[Mark Rogers:]

I was wondering on the inventory obsolescence charge, what was it that had you determine that inventory was indeed obsolete? And I know you've talked about the over the air upgrade to the Cisco OpenWay version of your product. Is there any chance that you will have inventory become obsolete as you roll out this upgrade?

[Steven Helmbrecht:]

This is Steve. We did have obsolescence as I mentioned during the quarter and the cost associated. It was both in Itron North America and Itron International. So really different, different reasons going on there. In Itron North America, as we're shifting towards different generations of product. We did have some inventory obsolescence related to that but in the context of the size of the rollout and the management of that rollout over time and the lack of those charges really historically over the last year overall, as we transitioned to OpenWay. We believe and really focused on trying to minimize that as much as possible but we did have that, and identified that in the quarter. In international, it related to some excess in obsolete inventory in a couple of foreign subsidiaries as we viewed those businesses and the products overall. Could we see that going forward with the over the air upgrade? I'll let Malcolm speak to that. But again, we focused closely on maintaining inventory levels at the right level and really working closely with manufacturing R&D to minimize that as to the extent possible.

[Malcolm Unsworth:]

Just to expand a little bit on what Steve said. When you transition to any new products when you have a big mass deployment, you have to work extremely closely with your customers and to make sure you do not have significant amounts of excess inventory. So there's really, we've got the hardware 2.0 and the hardware 3.0. There's a change there in technology and this has always been locked up with regards to any excess in obsolete. So it's something that you manage very carefully moving forward with any of our products globally.

[Operator:]

We will take our next question from Cleo Zagrean with Macquarie.

[Andrew Weisel:]

It's actually Andrew Weisel. I just had one quick follow-up similar to my last question on the outlook for 2011 between North America and international?

[Steven Helmbrecht:]

We haven't provided specifics for each of the businesses overall and provided an aggregate and outlook for that. So we're not going to give specifics.

[Andrew Weisel:]

Just directionally, qualitatively?

[Steven Helmbrecht:]

We'd see fairly flat. We talked about that but the business is generally overall, as we talked about the bookings and backlog of both businesses reflects the aggregate guidance.

[Operator:]

We will take a follow-up question from John Quealy with Canaccord Genuity.

[John Quealy:]

Malcolm, can you talk about the likelihood of a transformative acquisition in the next 24 months? What's the appetite of the board? Is it still execution and organic growth? Can you lay some expectations for us for the next couple of quarters?

[Malcolm Unsworth:]

John, we're always looking at organic growth. There's no question about that. And you know we don't comment publicly on any acquisition plans. However, we do acknowledge all those opportunities on an ongoing basis.

[Operator:]

We will take a follow-up question from Carter Shoop with Deutsche Bank.

[Carter Shoop:]

Just to clarify some of these charges here, the contingency reserves, inventory charges and discontinuation charges for Iran, did those all fall into the COGS line or was there anything in the OpEx line there?

[Steven Helmbrecht:]

There's a mix, there's primarily in the COGS line in that we did have some charges that went through, but primarily, some through the OpEx line, but primarily, those were going through the COGS line overall. I did mention that the release of the reserve went through the OpEx line.

[Operator:]

And gentlemen, at this time, there are no further questions. Mr. Dwiggins, I will turn the conference back over to you for any closing comments.

[Ranny Dwiggins:]

Cynthia, thank you very much and thank, everyone for joining us today. And as always, if you have any follow-up questions, please feel free to give me a call. Thank you.

[Operator:]

There will be an audio replay of today's conference available this afternoon. You can access the audio replay by dialing 1-888-203-1112 or 1-719-457-0820, with a pass code of 4354205 or you may go to the company's website at www.itron.com. This will conclude today's conference call. We thank you for your participation.