Jun 6 2000 4:00AM ET
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Echelon Triples on Investor Enthusiasm
By Hal Plotkin
Silicon Valley
Correspondent
You may think that talking toasters are a far-fetched concept, but Palo
Alto-based Echelon Corp. is banking on them for its business. And investors
agree, having bid up the company's stock more than 300 percent this year.
By talking, Echelon wants toasters and other household appliances to
communicate with each other over networks, and not verbally (for now). But
several analysts say Echelon Corp. {ELON} will become a tech sector leader
because of its strong management team and connections in the business
world, despite of the novelty of networked home appliances and other gadgets.
"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 "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 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," says Todd. "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 thru 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. |
