Lots of people in Silicon Valley talk about taking the long view. Echelon and its CEO Ken Oshman really did.
The San Jose appliance networking company’s moment may have come. Its stock has been one of the hottest in Silicon Valley this year. Revenues are racing up. Customers are singing its praises. And the company found itself in the international spotlight last month when Gov. Arnold Schwarzennegger and the U.N. Secretary General stopped by for a tour.
This belated success was the result of a decision a few years ago to change direction and pursue a new market selling “smart meters” to utilities. That the company pulled it off is a testament to the patience and persistence of Oshman, the loyalty of his longtime lieutenant, Beatrice Yormark, the company’s president and chief operating officer, and the faith of the company’s major investors.
“It’s been a long, long tough road,” said Arthur Rock, a former Echelon board member and the prominent venture capitalist who persuaded Oshman to take the job. “The market hasn’t developed quite as fast as we originally hoped. But it’s starting to happen.”
Oshman’s name might not resonate among the current crop of baby-faced Web 2.0 entrepreneurs. But for executives and entrepreneurs of a previous generation, Oshman, 66, is a living legend for his role in founding ROLM (he’s the “O” in the name), a communications company that was one of the great Silicon Valley successes. The company was eventually sold to IBM for $1.25 billion.
“There are two or three people I consider princes or princesses of the valley, and he’s one of them,” said Scott McNealy, former chief executive and now chairman of Sun Microsystems, where Oshman has been on the board since 1988. “He was always very supportive of us taking the long view.”
After ROLM, Oshman found himself being courted by two other valley legends: venture capitalist Rock, who backed Intel, and Mike Markkula, another venture capitalist who had briefly served as Apple CEO in the early 1980s.
Markkula had started Echelon. He wanted to embed technology in every single electronic device in your house or office, so your refrigerator and lights could talk to each other, turn on and off automatically, and be controlled remotely. In theory, your air conditioning could sense whether you were in the room and turn on automatically.
Oshman joined in 1988. He hired Yormark in 1990. And a couple of years later, Echelon’s first product debuted, dubbed “LonWorks,” a module that allows devices to talk to each other and be controlled remotely.
It wasn’t exactly a flop, but neither was it a blockbuster.
The company struggled to convince manufacturers of things like light fixtures and fans to build LonWorks into their devices.
“We have always been unhappy with the level of growth of our LonWorks product line,” Oshman said. “Every device with an electronic heartbeat ought to have one of these in there.”
The company slogged along. It went public in 1998. But by 2000, it still had only $49 million in annual revenue.
Then Echelon got a break.
In 2000, Enel, the Italian utility company, announced it wanted to build Echelon’s products into its utility network. Enel wanted a more intelligent network that could track usage in greater detail. That might allow the company to offer a service that let customers know when electricity usage is lowest, and least expensive, and therefore a good time to turn on an appliance like a dishwasher.
The bottom line for the utility and customers was this: big cost savings thanks to far more efficient usage.
The light bulb went on at Echelon. An energy application could finally be the product that could trigger widespread adoption. It adapted its technology to create “smart meters” that Enel could use in its system.
“Their problem has always been that they didn’t have a killer application,” said William Gibson, an analyst at Nollenberger Capital Partners in Sacramento, who personally owns stock in Echelon. “Now they have the killer application: energy savings.”
But there was a catch. The product developed specifically for the Italians would still need lots of work so it could be used by any utility. And a new version would have to be developed for U.S. markets.
Rather than being deflated, Yormark said, the company was re-energized.
“We were prepared to take the losses because we believe this is an enormous market,” she said. “And we have great technology.”
As the revenue from the Italian project ran out, Echelon posted annual losses in 2005 and 2006. Once the product became ready, it took more time to convince utilities.
“We have always been too optimistic about timing,” Oshman said. “If there’s one thing I can be routinely faulted about, it’s my optimism about timing.”
But the fruit of its strategy change began to show up in its earnings this year. For the first six months of 2007, revenue rose to $65.5 million compared with $29.8 million for the same period in 2006. The stock is up 216 percent, to $25.28 on Monday from $7.88 at the start of the year.
With the growing cultural focus on energy issues, utilities around the world are turning to smart meters. Pacific Gas & Electric has 75,000 smart gas and electric meters installed, built by a competitor called ESCO, and plans to install 10.3 million smart meters. PG&E is currently accepting bids for the next round of this project.
The size of that market is what has investors excited about Echelon.
“I think this is a company that will be over a billion in sales annually at some point,” Gibson said.
For Oshman and Echelon, there’s still a long way to go. In recent weeks, the company had some notable victories, like McDonald’s signing up as a customer, and a utility in Denmark placing a big order. At the same time, trouble with shipping from a Chinese factory caused its most recent earnings to fall a bit short of expectations.
None of this appears to have dimmed Oshman’s belief that Echelon is finally on the cusp of breaking through.
“Basically, we all want to do something we think is important,” Oshman said. “We’re certainly not doing this to maximize our personal income. The reason people hop jobs is because they want to make more money. If we wanted to make more money, we’d go run a hedge fund.”
Contact Chris O’Brien at cobrien@mercurynews.com or (415) 298-0207.
