Echelon Triples on Investor Enthusiasm

CNBC CNBC 2000

6th June 2000

Echelon Triples on Investor Enthusiasm

By Hal Plotkin
Silicon Valley Correspondent

You might think that communicating with appliances or industrial machinery from afar sounds like a far-fetched concept, but Palo Alto, Calif.-based Echelon Corp. {ELON} has positioned itself to provide the technology that could do everything from monitoring jet engines while in flight to preventing the failure of high-performance medical equipment.

Investors, excited about Echelon’s future, have bid up the company’s stock more than 300 percent this year.

Several analysts say Echelon is poised to become a technology sector leader more than a decade after the company’s seasoned founders first began laying the foundation to capture an integral part of the electronic future.

“Echelon has an outstanding story,” says analyst John Todd, who recently left C.E. Unterberg Towbin to join Thomas Weisel Partners in San Francisco. “Echelon has been plugging away for some time now, and it’s starting to pay off.”

Todd initiated coverage of Echelon’s stock last week with a “strong buy” rating and an $80 12-month price target. During the past six months, Echelon’s stock has more than tripled in value, climbing from 19 9/16 in early January to 61 1/4 last Friday.

Echelon 52-Week Stock Chart

Echelon was founded in the late 1980s and is emerging as the leader in control network systems.

The firm pioneered an open-standards Internet-ready technology called LONWORKS that networks electric devices such as appliances, security and sprinkler systems without need of any new cables or wiring.

Echelon’s Neuron chip, which makes devices network-ready, is manufactured by the firm’s partners, Cypress Semiconductor Corp. {CY} and Japan’s Toshiba Corp. {TOSBF}. The firm’s target markets include commercial buildings, industrial applications and transportation systems, as well as the still-nascent home-automation market.

“The beauty of what Echelon is doing is that you just bring the appliance home and plug it in and bam, it works,” Todd says. “It’s that simple.”

A homeowner with a LONWORKS-enabled air conditioner, for example, could turn it on before heading home using either their desktop computer or their web-connected cell phone or personal digital assistant.

“There was a holy war over standards in this area back in the early 1990’s” recalls Kurt Scherf, home networking analyst at Parks Associates, based in Dallas, Texas. “But now both of the competing specs have been standardized. Echelon, however, is really the only network control company tying itself directly to the Internet. They’re going gangbusters.”

Analysts say the competing approach, based on a consumer electronics standard called CEBus, is not gaining much traction in key markets.

In comparison, there are now more than 200 members of the LONMARK Interoperability Association working together to develop and promote Echelon’s approach to control network technology.

Members include General Electric Co. {GE} (parent of CNBC), AT&T {T}, Bombardier Inc. {Toronto:T.BBD.A}, American Standard Company Inc.’s {ASD} Trane Company, and Matsushita Electric Works, Ltd. {MEWK}, among many others.

See the full list of LONMARK Interoperability Association members.

“LONWORKS is playing with pretty much everyone who wants to get into this space,” says Schelley Olhava, research analyst at International Data Corporation, based in Mountain View, California. “They’ve developed a strategy that works with all of the different protocols, which gives them a lot of leverage.”

Echelon’s senior management team includes two of Silicon Valley’s most accomplished and respected entrepreneurs, M. Kenneth Oshman, who co-founded ROLM Corporation, which was eventually acquired by the German conglomerate Siemens AG {SMAWY}, and A.C. “Mike” Markkula, the savvy venture capitalist who put Apple Computer on the map and served as its chairman for more than a decade.

“Some of the smartest people in Silicon Valley have been working on this for years,” says Todd.

Earlier this month, Echelon announced that Europe-based Enel SpA {NYSE: EN; Milan: ENEL}, the world’s largest publicly traded electric utility, had signed a nonbinding memorandum of understanding to integrate Echelon’s technology into its digital meter modernization project.

Enel will provide digital electricity meters and a complete home networking infrastructure to over 27 million Italian households over a three-year period and will also purchase 3 million shares of newly issued Echelon common stock.

“The prospects for Echelon are very bright due their alliances with the giants,” says Hongjun Li, director of research at Parks Associates. “In my view, Echelon has combined an excellent job of marketing with very innovative, long range thinking.”

One concern expressed by some analysts, however, is that emerging wireless home and business networks now coming online that tie computers, modems, and printers together might eventually expand to control the other devices targeted by Echelon.

“I am not convinced that ‘smart’ homes with ‘smart’ cabling is necessarily going to be successful because the real trend long-term appears to be toward wireless networks,” says Stan Schatt, an analyst at the Giga Information Group, based in Santa Clara, Calif. Schatt adds that he has not, however, studied Echelon’s particular technology.

Other analysts more familiar with the firm, however, say emerging wireless networks will whet consumer appetites for Echelon’s LONWORKS-enabled products.

“You’re not going to be pushing streaming media through your washing machine,” says Todd. “Echelon has been developing this control networking technology for about a dozen years. It’s not a trivial thing. There’s a tremendous amount of knowledge in the company.”

“Our conclusion is that no one type of network is going to prevail and handle everything,” agrees Olhava, of International Data Corp. “We see wireless networks co-existing with something like LONWORKS.”

If that happens the company will be in position to capture the lucrative opportunity its visionary founders targeted more than a decade ago.

Put simply, if Echelon owns the technology used to link and control commercial, business, and household appliances and systems, the company should be able to develop additional business opportunities in each of those large markets.

“The various ways this kind of networking can take off is endless,” says Olhava.

For starters, information about appliances that are nearing failure, for example, could be used to market repairs or replacements. Monitoring and reducing energy use, a critical concern for many types of businesses, is another early application of the Echelon technology.

“We’re beginning to see a big push from the big giants on this,” says Li, of Parks Associates. “The market has been slow to develop. But I think a lot of people are going to soon be getting a better idea of what home networks and control networks can do. That’s going to be very good for Echelon.”

On April 20, Echelon Corp. reported a net loss of $651,000 for the quarter ended March 31, 2000 on revenues of $11.4 million, as compared with a net loss of $1.6 million on revenues of $8.8 million for the same period one year earlier.

Todd says he expects the company will break even on about $12.7 million in revenues when it reports its next fiscal quarter ending June 30.

KEY NUMBERS

KEY PEOPLE

Nasdaq: ELON
Fiscal Year End: December1999 Sales (mil.): $39.8

1-Yr. Sales Growth: 23.60%

1999 Net Inc. (mil.): ($3.9)

1-Yr. Net Inc. Growth: —

1999 Employees: 173

1-Yr. Employee Growth: 4.20%

Chairman,President, and CEO:

M. Kenneth OshmanVC:

Armas Clifford Markkula