ELON:
numbers still look increasingly better. revenues growing both YOY and sequentially. operating expenses up a little but margins are too. partnerships and alliances strong. lots of short interest's been on them recently though. their technology being adopted as an open ANSI standard is a major coup IMO. worth reviewing the project hunt on this one with the price looking good for an entry:
Echelon Corporation (ELON) Project Hunt Report 1. Company Overview
Echelon Corporation develops, markets and supports a family of hardware
and software products and services that enables original equipment
manufacturers ("OEMs") and systems integrators to design and implement
open, interoperable, distributed control networks. The company offers its
products and services to OEMs and systems integrators in the building,
industrial, transportation, home and other automation markets. The company
provides a variety of technical training courses related to its products and
underlying technology as well as customer support to its customers on a per
incident or annual contract basis. The Company derives its revenues primarily
from the sale and licensing of its products and, to a lesser extent, from fees
associated with training and technical support offered to its customers. Product
revenues consist of revenues from sales of transceivers, control modules,
routers, network interface devices and development tools and from licenses
for network services software products. Revenues from software licensing
arrangements have not been significant to date. Service revenues consist of
product support (including software post-contract support services) and
training. The Company recognizes revenue from product sales at the time of
shipment to the customer. 2. Revenues Total revenues grew to $9.8 million in
the third quarter of 1999 from $7.1 million in the third quarter of 1998. Total
revenues for the nine months ended September 30, 1999 grew to $28.4
million from $23.6 million in the same period in 1998. One customer, EBV,
the sole independent distributor of the Company's products in Europe since
December 1997, accounted for 29.0% and 23.7% of total revenues for the
quarters ended September 30, 1999 and 1998, respectively, and 27.5% and
22.5% of total revenues for the nine months ended September 30, 1999 and
1998, respectively.
Product. Product revenues grew to $9.3 million in the third quarter of 1999
from $6.4 million in the third quarter of 1998. Product revenues for the nine
months ended September 30, 1999 grew to $26.7 million from $21.3 million
in the same period of 1998. The 45.2% increase in product revenues between
the two quarters and the 25.4% increase in product revenues between the two
nine-month periods were primarily a result of an increase in sales of control
and connectivity products, and to a lesser extent, an increase in sales of
LonPoint products and network services products, partially offset by the
decrease in sales for development tools products. Service. Service revenues
decreased to $473,000 in the third quarter of 1999 from $717,000 in the third
quarter of 1998. Service revenues for the nine months ended September 30,
1999 decreased to $1.7 million from $2.4 million in the same period of 1998.
The 34.0% decrease in service revenues between the two quarters and the
28.0% decrease between the two nine-month periods were primarily due to
reduced customer support revenues partially offset by a slight increase in
training revenue. 12-month sales growth as of: Dec. ?98 13.8% Mar '99
14.8% June '99 13.0% Sept '99 18.7% Dec '99 23.5% Gross margins have
grown over the last 8 quarters and in Sept. '99 stood at 60.5%.
3. Neuron Chips & Dependence on Key Manufacturers
The Neuron Chip is an important component used by the Company's
customers in control network nodes. In addition, the Neuron Chip is an
important device used in many of the Company's products. Neuron Chips are
currently manufactured and distributed by both Motorola, Inc. ("Motorola")
and Toshiba Corporation ("Toshiba"). The Company has entered into licensing
agreements with each of Motorola, Toshiba and Cypress Semiconductor
Corporation ("Cypress"). The agreements, among other things, grant
Motorola, Toshiba and Cypress the worldwide right to manufacture and
distribute Neuron Chips using technology licensed from the Company and
require the Company to provide support and unspecified updates to the
licensed technology over the terms of the agreements. The Cypress agreement
expires in April 2009, unless renewed. The Toshiba agreement expires in
January 2001, unless renewed. The Motorola agreement expires in January
2001, and Motorola has announced that it will discontinue distribution of
Neuron Chips after January 31, 2001.
4. Market Acceptance of Interoperability The future operating success of the
Company will depend, in significant part, on the successful development of
interoperable products by the Company and OEMs, and the acceptance of
interoperable products by systems integrators and end-users. When products
or subsystems from multiple vendors can be integrated into a control system
without the need to develop custom hardware or software, they are
"interoperable." The Company has expended considerable resources to
develop, market and sell interoperable products, and has made such products
a cornerstone of its sales and marketing strategy. The Company has widely
promoted interoperable products as offering benefits such as lower life-cycle
costs and improved flexibility to owners and users of control networks.
5. G/K Characteristics
A. Is there a discontinuous innovation or a proprietary open architecture?
Yes. LonWorks is a discontinuous innovation whose technology is open and
proprietary. The most dramatic market successes are (or began as) open,
proprietary technologies. Their proprietary nature offers an economic rationale
for their existence, and their open availability makes them accessible to all,
with no advantage accruing to any particular user. Examples include DOS
Windows, Unix, Ethernet. LonWorks is an open technology. Its enabling
component (the Neuron chip) is manufactured and sold worldwide by two
competing semiconductor giants, Motorola (now Cypress) and Toshiba.
What does the technology encompass? This is perhaps the least understood
(and appreciated!) aspect of the LonWorks story. Many who are only
casually familiar with the technology tend to view it with a very narrow
perspective: perhaps that of a protocol definition or a power line
communication transceiver, or a specialized chip for control systems, or
whatever. Such constrained views miss the whole point of the technology, and
certainly the principal reason for its success in the marketplace. For it is all of
these things, and much, much more. Designing, constructing, installing, and
maintaining a control network requires attention to a great many issues,
including: an appropriate communication protocol, physical layer transceivers
for the selected medium (or media, in many cases), capable microprocessors
for both application and protocol execution, device controller hardware &
software for the required sensors and actuators, timing hardware, RAM and
ROM storage, non-volatile parameter storage (such as EEPROM), an
appropriate programming language model & a compiler/debugger for same,
run-time libraries, a real-time distributed operating system, an interoperability
solution, physical node identification (for installation, tracking, etc.), network
management software, on-line diagnostics, protocol analyzer, host application
program interfaces, installation and configuration tools, etc., etc. LonWorks
technology offers a ready-made, highly integrated solution to *all* of the
above concerns, much of it in the form of a single, low-cost silicon component
from two of the world's largest semiconductor companies. Available today.
On the chip. Off the shelf.
How extensive is the LonTalk protocol? Protocols today are generally
designed around--and described by--the ISO standard "Open Systems
Interconnection Reference Model", which encompasses a full set of protocol
features, and classifies them according to seven functional categories (referred
to as "layers"). Thus the "seven layer OSI model". The LonTalk protocol
implements the entire seven layers of the OSI model, and does so using a
mixture of hardware and firmware on a silicon chip, thus precluding any
possibility of accidental (or intentional!) modification. Included are not only
such expected features as media access, transaction acknowledgment, and
peer-to-peer communication, but also more advanced services such as sender
authentication, priority transmissions, duplicate message detection, collision
avoidance, automatic retries, mixed data rates, client-server support, foreign
frame transmission, data type standardization and identification,
unicast/multicast/broadcast addressing, mixed media support, and error
detection & recovery. For an overview of the LonTalk design, and the benefits
of fully functional protocols, refer to "LonTalk Protocol Rationale", available
from Echelon Corporation. The full LonTalk Protocol Specification is also
available; due to its size, a charge of $50 applies. How is LonTalk an Open
Protocol? The market for control networking has only recently evolved from
one of early adopters and experimenters to maturity. Everyday, developers are
finding more uses for the protocol, yet at the same time are inventing uses
never envisioned by the people that developed the dedicated silicon upon
which all current LonWorks networks are based, the Neuron Chip. Therefore,
Echelon has opened up the LonTalk protocol to allow any company to port it
to the processor of their choice. This means that applications requiring 16 or
32 bit processing power, can now host the protocol in native mode and
eliminate the need for a microprocessor interface program. The protocol is
also currently in committee review by the Electronics Industry Association for
possible recommendation as a standard for home automation. Additionally, the
protocol is part of the American Society of Heating, Refrigeration, and
Air-Conditioning Engineers' BACnet control standard for buildings. This is
now known as ANSI/ASHRAE 135-1995. Although it is possible to
implement the LonTalk protocol on a generic processor architecture, a silicon
realization (i.e., the Neuron chip) is the best approach for most control
applications. This is for several reasons: ? The Neuron is actually 3 8-bit inline
processors in one. Two are optimized for executing the protocol, leaving the
third for the node's application. This ensures that the complexity of the
application does not negatively impact network responsiveness and vice versa.
? Use of the Neuron chip guarantees an appropriate hardware execution
environment for the protocol. If there is a downside to a full-featured,
seven-layer control protocol, it is the need for ample computational power to
execute it. The protocol is thus implemented with a mixture of hardware and
firmware (the instructional set of the Neuron processors was designed
specifically to execute the LonTalk protocol, allowing the firmware portion to
occupy a mere 8K bytes of on-chip ROM). ? The creation of a custom silicon
device also allows the inclusion of additional functionality to facilitate control
node design. The Neuron chip, for example, incorporates watchdog timers,
on-board diagnostics, 35 device controller types, a distributed real-time
operating system, run-time libraries, three types of memory, and even a 48-bit
software-accessible serial number (which, guaranteed by the chip's
manufacturers to be unique, provides an always-available installation address
for any Neuron chip-based node).
intellicom.se In summary, LonWorks
technology is a commodity solution to the many problems of designing,
building, installing and maintaining control networks, of all sizes, in all
industries. The Neuron chip is the enabling technology for, and the core
component of, each and every LonWorks node. Jack Hicken, editorial
director of Instrumentation & Control Systems,wrote, "My gut feeling is that
LonWorks will do for control networks what the microprocessor did for
computers." (My emphasis) Like the microprocessor, LonWorks technology
exploits the very high volume production of a highly generic and massively
integrated solution. (FAQS) The principal suppliers of LonWorks technology
are Echelon Corporation, (creator of the technology, and provider of
transceivers, connectivity products, development tools, and training), Motorola
(until January 1, 2001), Toshiba and Cypress Semiconductor (Neuron chips)
(from FAQ) Over 2000 corporations use LonWorks technology today, and
their numbers are growing rapidly. Because many of them view their use of the
technology as strategic, they are averse to any public reference. B. Is there a
Discontinuous Innovation? Yes. In the building controls industry, two enabling
technologies have converged, the Internet and LonWorks. LonWorks
Network Services (LNS) seamlessly ties these technologies together. LNS is
an Internet ready, out of boxsolution, with no need for custom engineering
where it is possible to install, configure, monitor and control a system all on
LNS. LNS is a real, open, multi-vendor and multi-product solution that
enables a system to. 1. Speak peer to peer, a node from manufacturer A can
speak to a node from manufacturer B. 2. Possible to use a common tool to
configure. 3. Can substitute a node from manufacturer A to manufacturer B.
This integration allows a single user interface, lower failure, competitive prices,
easier and faster specification and design and very, very low technology risk.
C. Does it have the potential to grow into a mass-market phenomenon,
become a standard? Yes. There have been myriad examples of Echelon wins
cited on this thread, including the adoption of LonWorks as an ANSI
standard, and the production of the iLON server. I will concentrate on the
building controls industry and the comparative adoption of BACnet and
Echelon as standards, and how Echelon is winning market share in this space.
BACnet is a committee-created ASHRAE standard, and has been described
as a framework for an open system. Their stated purpose is "to define data
communications protocols for monitoring and control." There is a 501-page
book of BACnet specifications; however, since every engineer designs
systems differently interpretation becomes problematic. According to an
Echelon claim, "You don't see a lot of BACnet product," because of
conformance procedures. They contrast the number of control nodes installed
that are accessible through the two different protocols: Echelon LNS=Millions
BACnet=Thousands The real test then becomes the degree to which these
two protocols provide interoperability. LONMARK took a different path to
insure seamless interoperability. Members of the LonWorks Interoperability
Association decided on technology with the neuron chip embedded, and
where the Lonsoft protocol is an open, published device specification which
has become a de facto standard supported by shipping real products.
D. Are there high barriers to entry and high switching costs?
Yes to both. Echelon has created what seems like insuperable barriers toentry.
A company would first have to create a competing discontinuous innovation.
Then they'd need to work at getting the buy-in from the isparate group of
manufacturers who make up Echelon's value chain. Something Echelon has
been working on for the past ten years. Echelon has a robust trade group in
the LONMARK Interoperability Association.According to a pdf document on
Echelon's site entitled "The Open Control echnology Standard for Buildings,"
there are:
? Over 3,500 OEMS with Development Tools designing products with
onWorks ? Over 1,400+ products now available?commercial, residential,
industrial ? Millions of nodes installed ? Over 240 members in LONMARK
Interoperability Association ? Vendors representing 57% Share of the
Buildings Control Systems Market at ASHRAE '99 with shipping products
E. Have value chains developed?
Echelon's LONMARK sponsor members pay user fees to carry its logo, and
they are a veritable who's who in the controls industry. Some of these
LONMARK sponsor members are Carrier, Honeywell, Johnson Controls,
and SIEBE, thus enabling Echelon to leverage its standards. I would say a
gold-plated value chain has developed in the building control industry. As an
aside, the relationships they have developed across industry lines and with
competitors within various industries would seem to preclude a takeover.
Echelon is the arms merchant to all, but does not compete in the core
businesses of most of its LONMARKS sponsors and partners.
F. Have they crossed the chasm?
Yes, and the head pin is building automation. In addition to the 57% of
non-residential building controls companies shipping Echelon enabled
products, they also claim 240 LONMARK Interoperability Association
members from 17 Countries, or 82% of the building controls market.
G. Existence of Hypergrowth?
From December 5, 1990 to December 31, 1998, shipped 6.95 million nodes.
From December 1998 to June 1999 shipped 1.5 million nodes. In the words
of the gentlemen (who did not introduce himself by name) presenting on the
video, "That's the kind of growth you see in a platform that's beginning to catch
fire." Sounds to me he's talking about hypergrowth, however, if we use as our
measure Ken Oshman's goal of billions of neuron chips we're not there yet.
But the growth over the past year may be characterized as
micro-hypergrowth. They shipped those 6.95 million nodes over an eight-year
period, and were on track to ship 3 million in 1999. Allowing for a modest
ramp up in shipments they could achieve 100% year-over-year growth in
shipments. Also, their iLon server began shipping this quarter. How that will
impact revenue will be telling, since they state in their 10Q that "the company
recognizes revenue from product at the time of shipment to the customers."
100%+year-over-year revenue growth is quite likely.
6. Summary and Analysis
Echelon has crossed the chasm as defined in the RFM at page 29: "The chasm
is a hiatus in market development during which there is no natural customer for
the discontinuous innovation." Decidedly, Echelon has plenty customers.
Echelon has knocked down the building automation pin in the bowling alley,
and they have the "capability to support a new value chain's formation?" (p33
RFM) What we are witnessing with Echelon is a new marketplace coming into
being. Also at page 33 of the RFM: "The bowling alley stage is thus the earliest
moment that a high-tech company can truly define itself as a going concern,
because for the first time it has committed customers and a protected
marketplace to support it in the years to come?." And for us Gorilla Gamers,
"it is also the earliest investable moment in the gorilla game." Home networking
is another story. Here, Echelon is currently crossing the chasm, and, of
necessity, slowly I might add.Their progress here is absolutely dependent
upon, and must await, permanent always-on broadband connections into the
home. The most recent statistics show 1.9 million households having
broadband access as of 1999. The Strategis Group forecasts more than 25
million high-speed households by 2004.
devices.internet.com As broadband rolls out,
Echelon is optimally situated with products and partners to capitalize on home
networking. According to the RFM "each new niche creates a moment of
micro-hypergrowth?. The reason niche markets are called the ?bowling alley'
is that ongoing market growth will be niche to niche, each entry into a new
niche being eased by leveraging the prior niche's solution set and reference
base of customers?." Echelon is poised to play a significant role in the home
networking arena.Their iLON server which currently sells for $1200 is
expected to be sold in future at price points acceptable to consumers on Main
Street. Meanwhile, witness Echelon's ties to manufacturers of consumer
electronics, white goods, home lighting and security for the home. They are
well positioned. It is still early in this game, and I expect their home networking
growth will mirror the explosive growth of broadband. Howardroark in a
posting on the Motley Fool board reported that Echelon expects volume
product shipments by 2001 in the home networking market, and that Ken
Oshman feels "pretty good" about LonWorks becoming the leading standard
for home networking. In the meantime, manufacturers are already making and
shipping LonWorks enabled appliances. My conclusion: Echelon has already
crossed the chasm in building automation, and I'm awaiting tornado formation
in the near term. This part of their business is in "micro-hypergrowth" as
defined by the RFM. Echelon is not yet a gorilla, but on the strength of the
building automation market alone, I would say this company is a "YPGWA,"
young potentialgorilla with attitude, whose near-term execution and earnings
must be closely monitored for any signs of tornado-likeactivity. Analysts are
expecting profitability in Q2. Echelon bears very close watching.
Disclosure: I am long this stock.
7. References echelon.com Echelon's home page
lonworks.echelon.com Echelon Lonworks page
biz.yahoo.com SEC 10-Q
echelon.com Open Control Tech Standards
for Bldgs. intellicom.se„ssor
lonmark.org |
