If you've read some of my previous discussions, you'll know I advocate
shorting Echelon if it has any major price spikes (as it did the day
of Q4 earnings release last week). I have a sneaking suspicion there's
a Jim Cramer-type hedge fund manager out there manipulating this
little-followed stock like mad. Having said that...

What the hell is wrong with this company?! How do they piss away money
quarter after quarter, year after year? I've worked with two major
HVAC controls companies so I have an intimate knowledge of Echelon's
product and have used it for the past 5 years. There are two major
open control systems used by all HVAC control companies: BACnet
(ASHRAE standard) and LON (developed by Echelon). I like LON much
better simply because it truly is "open". It infuriates many people
because it's so constraining - all you get are SNVTs and LNS server -
but I like that because it means I know I can talk to any LON device.
As long as it's got SNVTs and I have LNS server, we're in business.
BACnet is of course being pushed hard by the HVAC controls industry
because it's not controlled by one company, but so far I find it very
poor on the "openness" side. You might as well flip a coin to
determine if you can talk to a competitor's controller.

So here's Echelon - sitting on a gold-mine of a market and yet they
can't seem to turn that into any real profits. I keep hearing stuff
about China and energy metering in their press releases. Why don't
they work on getting a neuron chip in every HVAC controller? BACnet is
still in its early stages for being an industry standard, if Echelon
can come out on top, the rewards would be enormous.

The interesting thing is their LonTalk protocol practically sells
itself. I've worked on several government jobs that required an open
system so the customer wouldn't be locked into one controls company
and BACnet wasn't allowed because it wasn't deemed open enough. I
don't own any stock but am thinking about doing so just to get their
annual report to see where all the money's going! (And don't get me
started on #%@!ing non-GAAP profitability).

Any thoughts?

Your post is valuable and informative.  I have been observing this
stock for several years now, since the decline of the ENEL contract.
That contract provided a spike in the stock and revealed the potential
in the product.  I noted multiple insder sales in the stock's recent
climb to $32, and zero buying at current levels.  I find this
surprising because energy prices continue to climb making the case for
smart controllers more compelling.  If those managing the company
noted traction for their products, it seems odd they would not
increase their position.

But the fact that this stock seems at a discount to its potential
valuation given its recent precipitous drop, its narrow float, and its
relative unknow status to the market, this might be the time to by.  I
am considering a position as well, and your comments help frame the
industry environment.  Based on your comments, it sounds as though you
see LON works as very competitive.  The fact that it works every time
seems much more compelling than another product that has extra
trappings but compatibility problems.

I am interested if you consider ELON's product upgrade cycle
competitive.  Do they have the capital/resources to consistently out
innovate the competition, or have you noted them falling off compared
to competing manufacturer's products?

In theory, Echelon's product upgrade cycle should be extremely
competitive since they can push almost all the development cost onto
the OEM. In the HVAC controller world (my expertise), Echelon's has to
design the neuron chip - the brains of any LON device - and then
contract chip manufactures to produce them. These chips are then sold
to Siemens, Honeywell, Johnson Controls, TAC, Loytec, etc, and those
companies then have to design their own controllers around the chip.
I've routinely put together LON networks where not a single device -
controllers, routers, front-end, etc - was manufactured by Echelon.
Only the neuron chip in each device made it a LON network.

This is what I like about the position Echelon is in. The company
doesn't have to deal with the end user, they merely have to get their
network standard accepted over BACnet (the major competition) and then
sit back and take a cut of every profit made on each LON device
produced by someone else! Unfortunately, from my vantage point, I
don't see Echelon doing much in the way of selling their product over
the competitors. Fortunately, as I mentioned in my last post , LON
often times sells itself because it is truly open, but it worries me
that BACnet is gaining significant traction because ASHRAE is behind
it.

Getting back to the stock - be very careful about valuation in
relative terms. True, ELON has dropped significantly since its high
last fall, but what makes you think that spike was anything other than
the market's exuberance of everything "energy" related? I feel Echelon
has a good foundation and will be around for decades to come, but
until they can make a profit for a year or two, I just can't bring
myself to invest.

One exception- if the stock dropped into the single digits, I might
consider buying a little simply because I wouldn't be risking much and
the payoff - if they do start being profitable - is just too good to
pass up. Like buying a lottery ticket but with slightly better odds.

Caveat Emptor

Just my opinion, but it looks like Wall St. is treating Echelon as
though it is heavily levered to the subprime mess.  With HVAC &
elevator controls, analysts may be assuming that if less buildings are
being built, Echelon won't do well.  There is a lot of similarity
between a the charts for Echelon and Wachovia over the past 6 mos.
With Echelon being the more speculative of the two plus not having a
dividend, it fared worse over that time.

It looks like all these companies in this sector have taken a hit.
Some due to investor jitters over the Sub Prime crap and some due to
the ENOC case and some due to other reasons. I think the truth is that
the industry has had a correction and is where it should be and will
be for a few years. IMO these are Long buys.

any chance this company is going under???

Barring something criminal, like Enron, absolutely not. From my
perspective, this is the type of company that sells itself. The
problem right now is bad management. There are so many smart devices
out there with neuron chips that Echelon would become a prime takeover
target before they went under.

Disclosure: I own no shares at this time.