Echelon Reports 2008 Fourth Quarter and Full Year Results

Echelon Corporation (NASDAQ:ELON) today announced financial results for the fourth quarter ended December 31 and full year 2008.

Revenues for the quarter ended December 31, 2008 were $36.8 million compared to revenues of $46.9 million for the same period in 2007. Revenues were comprised of $11.7 million from LonWorks® infrastructure products, $20.6 million from our Networked Energy Services (NES) products, and $4.5 million from the Enel project. Revenues for the quarter ended December 31, 2007 were comprised of $13.1 million from LonWorks infrastructure products, $27.7 million from NES products, and $6.1 million from the Enel project.

For the year ended December 31, 2008, revenues were $134.0 million compared to revenues of $137.6 million for the same period one year ago. Revenues were made up of $54.0 million from LonWorks infrastructure products, $67.1 million from NES products and $12.9 million from the Enel project.

Gross margin for the fourth quarter of 2008 was 35.9%, compared with 40.9% for the same period in 2007. Gross margin for the year 2008 was 38.4%, compared to 36.5% for the same period in 2007. Total operating expenses for the quarter were $19.6 million compared to $19.2 million for the same period in 2007. Total operating expenses for the year 2008 were $78.5 million compared to $69.9 million for 2007.

The GAAP net loss for the fourth quarter was $6.3 million, or $0.15 cents per share compared to net income of $912,000, or $0.02 cents per share, for the same period in 2007. The non-GAAP net loss for the quarter, which excludes stock-based compensation expenses, was $2.5 million, or $0.06 cents per share, compared to non-GAAP net income of $4.0 million, or $0.09 cents per share, for the same period in 2007. All non-GAAP information in this release is reconciled in the "Reconciliation of Non-GAAP to GAAP Results" table below.

GAAP net loss for the year was $25.8 million, or $0.64 per share, compared to GAAP net loss of $15.7 million, or $0.39 per share for the same period in 2007. Non-GAAP net loss for the year was $11.4 million, or $0.28 per share, compared to non-GAAP net loss of $7.9 million, or $0.20 per share for the same period in 2007.

"Given the challenging economic environment at year-end, we were pleased with our performance in the fourth quarter,” said Ken Oshman, chairman and CEO of Echelon. "In the near-term, we expect the current economic slowdown to impact our LonWorks product line, mitigated by the continuing drive to reduce costs by conserving energy and by worldwide government initiatives around energy management. For our NES product line, the economic slowdown has also impacted the pace at which some utilities move forward with their smart grid projects. However, we continue to see healthy NES activity from a number of utilities in Western Europe and North America and based on our current order pipeline, we expect modest growth for the year. Long-term, we remain very optimistic and believe our product lines are well positioned for the future,” concluded Oshman.

Business Outlook

The following statements are based on management's current expectations. These statements are forward-looking, and actual results may differ materially. Please see risk factors of forward looking statements at the end of this release for a description of certain important risk factors that could cause actual results to differ. Echelon management offers the following guidance for the first quarter of 2009. All non-GAAP estimates exclude the impact of any stock-based compensation charges. We expect:

• Total revenue to be approximately $17.0 million to $19.0 million, with NES revenue accounting for approximately 31%, LonWorks revenue 64%, and Enel project revenue 5%.

• Non-GAAP gross margin to be in the range of 38.0% to 41.0%.

• Non-GAAP operating expenses to be approximately $17.5 million to $18.0 million.

• Stock-based compensation expenses to be approximately $3.5 million.

• Our provision for income taxes is expected to be approximately $50,000.

• Non-GAAP loss per share to be $0.25 to $0.30, based on a fully diluted weighted average shares outstanding of 40,500,000.

• GAAP loss per share of between $0.34 and $0.38 for the quarter.

For those interested in further discussion regarding this release, Echelon's management will participate in a conference call today at 11:00 a.m. Pacific/2:00 p.m. Eastern Time. To access the call, dial 800-299-7098 and enter passcode: 55595591 (callers outside the US please use 617-801-9715); however, due to a limited number of available phone lines, the company asks that only those persons without web access use this number. An archived replay of the webcast will be available approximately two hours following the end of the call.

Use of Non-GAAP Financial Information

Echelon continues to provide all information required in accordance with GAAP, but believes that an investor’s evaluation of our ongoing operating results may not be as useful if an investor is limited to reviewing only GAAP financial measures. Accordingly, we provide non-GAAP net income and non-GAAP net income per share data as additional information relating to Echelon’s operating results. Echelon presents these non-GAAP financial measures to provide investors with an additional tool for evaluating Echelon’s operating results in a manner that focuses on what Echelon believes to be its ongoing business operations. The presentation of this additional information is not meant to be considered in isolation or as a substitute for net income or net income per share prepared in accordance with GAAP.

Echelon’s management uses certain non-GAAP financial information, namely operating results excluding the impact of stock-based compensation charges made in accordance with SFAS 123R, to evaluate its ongoing operations and for internal planning and forecasting purposes. Accordingly, we believe it is useful for Echelon’s investors to review, as applicable, information that both includes and excludes stock-based compensation (and the related tax impact) in order to assess the performance of Echelon’s business and for planning and forecasting in future periods. Whenever Echelon reports such non-GAAP financial measures, a complete reconciliation of the non-GAAP financial measure to the most closely applicable GAAP financial measure is provided. Investors are encouraged to review these reconciliations to ensure they have a thorough understanding of the reported non-GAAP financial measures and their most directly comparable GAAP financial measures.

About Echelon Corporation

Echelon Corporation (NASDAQ:ELON) is leading the worldwide transformation of the electricity grid into a smart, communicating energy network, connecting utilities to their customers, and providing customers with energy aware homes and businesses that react to conditions on the grid.

Echelon's NES System – the backbone for the smart grid – is used by utilities to replace existing stand-alone electricity meters with a network infrastructure that is open, inexpensive, reliable, and proven. The NES System helps utilities compete more effectively, reduce operating costs, provide expanded services and help energy users manage and reduce overall energy use. Echelon's LonWorks® Infrastructure products extend the smart grid, powering tens of millions of energy aware, everyday devices made by thousands of companies – connecting them to each other and the grid. LonWorks based products work together to monitor and save energy; lower costs; improve productivity; and enhance service, quality, safety, and convenience in utility, municipal, building, industrial, transportation, and home area networks.

More information about Echelon can be found at http://www.echelon.com.

Echelon, LonWorks and the Echelon logo are registered trademarks of Echelon Corporation registered in the United States and other countries. Other product or service names mentioned herein are the trademarks of their respective owners.

Risk Factors Regarding Forward Looking Statements

This press release may contain statements relating to future plans, events or performance, including statements regarding Echelon’s anticipated performance for the first quarter of 2009 and thereafter; the effect of global economic conditions on business in Echelon’s NES and LWI product lines; and the effect of market imperatives to manage and conserve energy. Such statements may involve risks and uncertainties, including risks associated with uncertainties pertaining to the continued development and growth of markets for Echelon's products and services, particularly the risk that the Company may fail to receive expected orders for our NES products; the risk that global economic conditions will affect our customers’ ability to receive approval for or finance NES or LonWorks-based deployments; risks relating to the ability of Echelon's products and services to perform as designed and meet customer expectations; the risk that a utility that awards a tender to Echelon or one of its resellers will not proceed with a deployment, will order fewer than the number of meters anticipated by Echelon or will cancel the project, or the risk that the project will not pass certain tests imposed by the utility; the risk that Echelon does not meet expected or required shipment, delivery or acceptance schedules for NES hardware or software products and that Echelon may incur penalties or additional expenses or delay revenue recognition as a result; risks that the application of U.S. generally accepted accounting principles could significantly affect the method of calculating and the timing of NES revenues; 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.