This is your forum to ask questions and, where appropriate, receive answers from Ron. You can read through our most popular questions and answers below.
1: Just 1 large lighting contract of 5-10M would send Echelon up sharply. What are your chances of winning a contract this large over the next few years?
A: Growth of our lighting business is a priority for us. Outdoor lighting is an important part of the strategic asset base for cities, municipalities, and large enterprises and interest is accelerating as the market strengthens. Inquiries for various sizes of connected lighting solutions continues to grow as more customers become interested in the benefits of Echelon’s differentiated solutions. Echelon offers a sophisticated, comprehensive, open standards-based approach to outdoor lighting control that makes it easy and affordable for lighting owners to increase the efficiency, safety, and versatility of their municipal and commercial lighting systems. With a focus on mid-tier cities, individual opportunities typically don't reach the $5-10 million range you suggest, but they clearly add up quickly. Regardless, It's important to remember that sales cycles can be unpredictable and implementations of these complex systems can take many months.
2: I have been an Echelon investor since '00. As a pioneer in control networking, has Echelon retained any initial advantage?
A: Thank you for writing in with your question. We have the following advantages:
1. Our installed base. We have an estimated 140M devices embedded in long-lived Industrial IoT assets such as buildings, manufacturing floors, train cars, and security systems. It is very difficult to "rip and replace" these systems to install more modern ones, even if such options were to exist in mature and reliable form. With the advent of new cloud-based analytic tools, we are starting to hear our customers ask how they can extract data from our installed systems and feed them up to these tools. In addition, we are hearing our customers starting to ask how they can extend their systems to collect more data, using either LonWorks or in some cases emerging IoT technologies. To take advantage of this emerging trend, we have developed what we call an "embrace, extend and enhance" strategy -- embrace existing installations, extend with LonWorks or other standards-based connectivity technologies, and enhance the systems with cloud-based analytics. The results can be better system optimization and therefore business outcomes. Our recently announced SmartServer IoT edge server is at the heart of this strategy and we are very excited about it.
2. Our know-how. Almost 1/2 of our technical staff has more than 10 years of experience with Echelon and therefore with Industrial IoT. With billions of legacy control systems installed and not going away, our understanding of how to connect the old with the cloud gives us strong insights and competitive advantage
3. Our gross margins. Our above-industry-average gross margin is a testimony to the value our customers see in our solutions and our know-how. They also allow us to fund value-added R&D projects like the SmartServer IoT.
4. Our understanding of what it takes to deploy large-scale IoT systems. It is relatively easy to stand up small IIoT pilots, as many new entrants are doing now in the market. It is hard to deploy high-value large scale systems with the proper level of reliability, such as the 29 million smart meter deployment in Italy that relies on our technology, and the growing number of smart outdoor lighting systems that do the same. For example, we are just installing a 6,000 streetlight system in a Northeast US city. Deploying this is the equivalent of putting a network up in a 6,000 employee company, except employees are spread over a 69 square mile area instead of in a 3- or 4-building campus.
Our strategy is to leverage each of these advantages as the IIoT market continues to emerge.
3: I was wondering if Blockchain was something we're looking into for implementation into our IIoT solutions?
A: We do not comment on future product plans as you can imagine, however we do have an active program to evaluate new technologies that might benefit our customers in unique ways. For example, last year we introduced Artificial Intelligence capabilities within a camera that we use for counting traffic to intelligently control streetlighting levels. This recently won an innovation award in the lighting industry which you may have seen:
In general, we continue to study various new approaches and technologies, including the potential applicability of blockchain, and, if appropriate, would make announcements about plans at a future time.
4: Has the company considered strategic alternatives?
A: Yes we have. As reported last year, Echelon’s Board had formed a Strategic Committee, supported by Goldman Sachs, to look at various strategic alternatives. As part of this process, we spoke to a number of potential strategic and financial acquirers and investors, conducted due diligence and engaged in discussions regarding potential transactions. After weighing all the opportunities, the Board decided that the most attractive option would be for the company to focus on executing on our stated objectives and strategy as a stand-alone entity by bringing to market our comprehensive networked lighting control solution and refreshing our embedded systems product line, both of which we have made significant progress on to date.
5: At what point will leadership take appropriate cuts in compensation to preserve what little is left?
A: We have taken significant steps to preserve our cash by reducing costs and selectively investing for the future. Additionally, our executives voluntarily agreed to commute their cash bonuses entirely to performance based stock awards this year, further reducing cash compensation. We continue to focus on innovation and growth while effectively manage our cost structure.
6: What is the long-term vision for the non-lighting related business? Is it your intention to invest some resources to grow that business as well?
A: Our strategy for our embedded business is to 'embrace and extend' existing solutions, like Echelon’s LonWorks. By injecting elements of new technologies that make sense for our customers, we are making selected investments in this strategy. For example, a couple of years ago we added Internet Protocol (IP) to our system on a chip (SOC), which in turn enables the use of a wider range of communications technologies while retaining compatibility with all the LonWorks devices that are in the installed base (~100 million). This has allowed third parties to easily add LonWorks to existing solutions like who, Inc. did using Wirepas mesh communications technologies (see press release July 20, 2017).
The primary benefit of the Industrial Internet of Things (IIoT) phenomenon is the ability to harvest vast amounts of data from commercial and industrial "things," and use cloud-based big data analytics to extract information to make informed decisions that improve business outcomes. (e.g., data from manufacturing lines can avoid down time and increase productivity.)
There are a variety of initiatives to "invent" connectivity and services layers to collect this data and effect the results of the analytics, starting with new communications technologies. While most are being built from scratch or adapted from other applications, existing and widely deployed control technologies such as LonWorks, BacNet and SCADA are proven at collecting data and effecting actions from the analysis of that data.
In our last earnings announcement, we noted surprising strength in our embedded business, which may indicate that the market’s endorsement of our strategy to use existing technologies to harvest data to make better decisions and effect better outcomes. But it is too soon to tell. As a result, we are investing carefully in this strategy given the long design and revenue cycles, while continuing to build-out our smart controls for the outdoor lighting market.
7: ELON stock is currently trading below cash value, giving virtually nothing for the innovative lighting business. What, in your opinion, will it take to change perceptions, and if they can be changed, When?
A: We have focused heavily on demonstrating innovation in the smart lighting business, primarily in outdoor lighting and smart city applications. I believe this has given us good visibility from a marketing perspective which has in turn helped contribute to a growing pipeline of sales opportunities. We continue to believe that we will create investor attention and potentially stock appreciation as and when those sales opportunities convert to revenue, which, at the end of the day, is what validates end customer value.
From what we can see and hear, the smart lighting market has yet to hit the inflection point of growth that should be a key driver of pipeline conversion to sales. Things to watch for include increased smart city project deployments and advanced applications that demonstrate the clear value of smart cities. As we see more successful use cases emerge across the market, this should drive overall industry growth benefiting Echelon.
8: Where are most of your lighting revenues coming from - businesses or municipalities, etc.? Is there a difference in margin for say an automotive dealership and a municipality?
A: Mostly from municipalities. We would also like to grow our enterprise sales, as the cycles may be shorter, but these opportunities are tougher to find.
9: With your current lighting-centric salesforce, what kind of progress are you seeing? Are revenues increasing as a result? What is the average sales person's quota and how long do you expect them to take to ramp up?
A: Revenues from lighting have been increasing for 4 consecutive quarters now. We are seeing many more opportunities due to growth in market interest and a more on-target sales force. Our most innovative offerings are just now hitting the market.
10: How long will the turnaround take? Seems like it's been going on for nearly 2 years with little incremental growth.
A: 2015-16 were years of building out the solution set, rebuilding the salesforce and starting the sales cycles. Municipal project sales cycles can be 18 months or more. Smart cities are a growing market, but still nascent. We believe that our new innovative solutions such as white tunable outdoor lights address real, burning customer issues today and as such can accelerate interest in and adoption of our platform.
In addition to the headwinds presented by our embedded business decline, our year-year comparison reflects the termination of embedded systems sales to Enel, as previously disclosed.
On this webpage, we may make statements related to our overall business outlook, future financial operating results, accounting matters and future prospects. These are forward-looking statements based on certain assumptions and are subject to a number of risks and uncertainties. We encourage you to read the risks described in our press releases, as well as those in our SEC reports, including our report on Form 10-K and subsequent reports on Form 10-Q for a more complete disclosure of the risks and uncertainties related to our business.