Itron, Inc. (NASDAQ:ITRI) Q1 2023 Earnings Call Transcript May 6, 2023

Operator: Good day and thank you for standing by. Welcome to the 2023 Q1 Itron Earnings Call. At this time, all participants are in listen-only mode. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today.

David Means: Good morning and welcome to Itron’s first quarter 2023 earnings conference call. Tom Deitrich, Itron’s President and Chief Executive Officer and Joan Hooper, Senior Vice President and Chief Financial Officer, will review Itron’s first quarter results and provide a general business update and outlook. Earlier today, the company issued a press release announcing its results. This release also includes details related to the conference call and webcast replay information. Accompanying today’s call also is a presentation that is available through the webcast and on our corporate website under the Investor Relations tab. Following prepared remarks, the call will be open for questions using the process the operator described.

Before Tom begins, a reminder that our earnings release and financial presentation include non-GAAP financial information that we believe enhances the overall understanding of our current and future performance. Reconciliations of differences between GAAP and non-GAAP financial measures are available in our earnings release and on our Investor Relations website. We will be making statements during this call that are forward-looking. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially from these expectations because of factors that were presented in today’s earnings release and comments made during this conference call as well as those presented in the Risk Factors section of our Form 10-K and other reports and filings with the Securities and Exchange Commission.

All company comments, estimates or forward-looking statements are made in a good faith attempt to provide appropriate insight to our current and future operating and financial environment. Materials discussed today, May 4, 2023, may materially change and we do not undertake any duty to update any of our forward-looking statements. Now please turn to Page 4 of our presentation as our CEO, Tom Deitrich, begins his remarks.

Operator: And now I hand the call over to Tom.

Tom Deitrich: Thank you, and welcome to Itron, all. Good morning to everyone listening. For the call today, I will review our first quarter highlights and Joan will discuss our first quarter financial results before I conclude with some final thoughts. Our first quarter revenue increased 4% year-over-year and 6% sequentially to $495 million. Adjusted EBITDA was $39 million a year-over-year increase of 109% and non-GAAP earnings per share was $0.49, a 345% improvement over the first quarter of 2022. These results reflect the execution of our team in navigating a dynamic supply chain environment and the benefit of improved access to component supply. Demand for our solutions continues to grow and the strong start to 2023 is encouraging.

Turning to Slide 5, bookings were $428 million for a book-to-bill ratio of 0.9, which is comparable to the first quarter in prior years. As a market leader, we pride ourselves on providing differentiated platform solutions to a wide array of water, energy, and smart city customers. The underlying drivers for our $4.6 billion of total backlog are the macro trend challenges our customers face, such as climate disruption, electrification in the global economy, increasing consumer expectations, and the need for resilient infrastructure investment. Our customers are seeking more advanced approaches to asset management with increased agility and there’s no question that our products and solutions allow for more effective, higher return operation of infrastructure assets as well as enhanced consumer experience.

Although we never take new business for granted, we expect to meet our target book-to-bill ratio of 1:1 or better this year and are bullish on the prospects of the long-term customer adoption of next-generation technologies such as distributed intelligence. The commercial highlights from the first quarter demonstrate the value of offering an integrated suite of data collection, networking and measurement capabilities. In Illinois, Peoples Gas and North Shore Gas are working with Commonwealth Edison to leverage their network to increase service effectiveness. Benefiting 1 million Peoples Gas and North Shore Gas consumers, this significant network-as-a-service partnership will eliminate over 600 tons of greenhouse gas emissions per year while creating at least $5.5 million in annual cost savings.

This is a model example of how innovative network solutions can be leveraged by our customers to achieve financial and environmental goals while simultaneously enhancing consumer experience. Also of note, Duquesne Light Company, serving 600,000 consumers in Southwestern Pennsylvania will deploy Itron’s smart lighting solution, including the Smart City Management Software as a Service package and integrated field operations platform. Itron’s industrial IoT solutions will enable Duquesne Light’s vision of clean energy to become a reality. We also achieved a significant milestone this quarter with the delivery of our 1 millionth Intelis gas endpoint. As infrastructure ages, integrating communications capability with our accurate static metrology while improving gas safety continues to gain momentum and scale.

Now turning to Slide 6, I will cover some operational insights from around the business. Demand remains strong and we expect this favorable environment to persist as our customers have pressing needs, integrating distributed energy resources, addressing water scarcity, improving safety and reducing emissions related to gas distribution while meeting bold, long-term sustainability objectives. We anticipate capital deployment by utilities and municipalities to address these themes will remain robust and the regulatory environment continues to be constructive. While volatility related to component deliveries continues to be present, the overall trend shows improvement. Inflationary cost pressures persist, but with a slowing pace of increase. Semiconductor lead times appear to have plateaued, but have not yet materially retracted as the most constrained portions of the global supply chain are still rebalancing.

These factors lead to a thoughtful mindset as we continue to plan for degrees of uncertainty and risk. We do not expect a step function recovery, but see a more measured return to an unconstrained component supply and system deployment. The efforts we have undertaken over the past quarters, including component multi-sourcing, factory capacity adaptation and consolidation, product pricing initiatives, and thoughtful inventory buffering, combined with joint customer planning bore fruit in the first quarter in the form of improved financial leverage. Our strong backlog and customer demand should create continued business momentum as the remaining supply chain constraints rebalance. With that said I will ask Joan to spend some time reviewing our first quarter results in greater detail and provide a review of the second quarter.

Joan?

Joan Hooper: Thank you. As Tom mentioned, increased component supply and strong execution drove Q1 results above our guidance. While we are pleased with our Q1 performance, we continue to monitor market conditions and supply chain dynamics to remain agile in the face of an uncertain macro environment. Please turn to Slide 7 for a summary of consolidated GAAP results. First quarter revenue of $495 million increased 6% sequentially and 6% year-over-year on a constant currency basis. This was the highest quarterly revenue for Itron since Q1 of 2021. Gross margin for the quarter was 31.6%, 320 basis points higher than last year, primarily due to very favorable product and solutions mix and operational efficiencies. Our GAAP net loss of $12 million or $0.26 per share compared with net income of $1 million or $0.02 per diluted share in the prior year.

The decrease in the current period was due to a restructuring charge related to the recently announced 2023 plan that will further optimize our manufacturing footprint. Regarding non-GAAP metrics on Slide 8, non-GAAP operating income was $31 million, up $22 million from the prior year. Adjusted EBITDA increased 109% to $39 million. This was the highest quarterly EBITDA for Itron since Q1 of 2021. Non-GAAP net income for the quarter was $22 million or $0.49 per diluted share. Year-over-year revenue comparisons by business segment are on Slide 9. Device Solutions revenue was $118 million, a $15 million or 11% year-over-year decline on a constant currency basis. After further adjusting for the sale of our mechanical C&I gas business, Devices revenue was essentially flat year-over-year.

Networked Solutions revenue was $313 million, a $36 million or 13% increase in constant currency. The strong performance was enabled by increased access to key components, which allowed us to fulfill more customer demand. Outcomes segment revenue was $63 million, a $7 million or 12% increase in constant currency. We saw growth in software licenses, solution sales and services activity. Lastly, foreign currency changes resulted in a $9 million reduction in revenue versus Q1 2022. Moving to the non-GAAP year-over-year EPS bridge on Slide 10, our Q1 non-GAAP EPS was $0.49 per diluted share, up $0.38 from the prior year. Net operating performance had a positive $0.33 per share impact due to the fall-through of higher gross profit. Tax had a positive impact of $0.06 per share.

Foreign currency and share count had a small negative impact of $0.01 per share. Turning to Slides 11 through 13, I’ll review Q1 segment results compared with the prior year. Device Solutions revenue was $118 million with gross margin of 20% and operating margin of 12%. Gross margin increased 450 basis points due to improved product and customer mix and operational efficiencies. Operating margin increased 360 basis points due to the fall-through of the higher gross margin, partially offset by a higher percentage of operating expenses. Networked Solutions revenue was $313 million and gross margin was 34%. Gross margin increased 90 basis points from the prior year due to favorable product and solutions mix and improved operational efficiencies.

Operating margin of 24% increased 200 basis points due to higher gross profit and operating leverage. Outcomes revenue was $63 million with a gross margin of 43%. Gross margin increased 390 basis points due to favorable solutions mix and improved operational efficiencies. Operating margin of 21% increased 590 basis points due to higher gross profit and increased operating leverage. Turning to Slide 14, I’ll cover liquidity and debt at the end of the first quarter. Total debt remained flat at $460 million and net debt was $264 million. Net leverage was 2.3x at the end of Q1. Cash and equivalents at the end of the first quarter were $196 million. Free cash flow was negative $5 million in the first quarter, primarily due to increases in inventory.

As previously discussed, we continue to invest in raw material components to enable us to accelerate shipments when that last remaining golden screw becomes available. This strategy served us well in the first quarter. Now please turn to Slide 15 for our second quarter outlook. We anticipate second quarter revenue to be between $510 million and $525 million. The midpoint of this range represents 20% year-over-year growth and about 5% sequential growth. Sequentially, we expect lower Q2 gross margin due to a very favorable Q1 mix that won’t repeat. We also expect higher operating expenses primarily due to employee salary increases that were effective April 1. For the second quarter, we anticipate non-GAAP EPS to be in a range of $0.25 to $0.35 per diluted share.

This compares to $0.07 per share in Q2 of 2022. We are hopeful that our recent results represent an inflection point for growth and look to build on the momentum created during Q1. While a great deal of global economic and supply chain uncertainty remains, we have put ourselves in a better position to navigate the environment. Our strong backlog provides opportunities to accelerate growth, and we continue to focus on disciplined cost management. Now, I will turn the call back to Tom.

Q&A Session

Tom Deitrich: Thank you, Joan. Our platform solutions, including distributed intelligence, enable market-leading visibility and operational agility at the grid edge. Over 6.4 million DI capable endpoints are in service today, a 34% increase compared to last year, and we’ve only scratched the surface. We are proud to partner with innovators like Peoples Gas, North Shore Gas, ComEd, and Duquesne Light Company to apply new technology and business models to address modern challenges that can’t and won’t be solved by conducting business as usual. The opportunity to enhance the performance of the low voltage grid and integrated distributed energy resources at the edge is substantial and no one is better positioned to participate than Itron. These are only some of a few of the innovative solutions that power our $4.6 billion of total backlog and a robust pipeline of opportunities ahead. Thank you for joining us today. Michaela, please open the line for some questions.

Operator: Thank you. [Operator Instructions] We now have Noah Kaye.

Operator: We now have Jeff Osborne.

Operator: Alright. We now have Ben.

Operator: Alright. Up next is Chip Moore.

Operator: [Operator Instructions] Up next we will have Kashy Harrison. Alright, Kashy, you are now live.

Operator: Alright. That concludes our Q&A. I will now turn the call back over to the CEO, Tom Deitrich, for closing remarks.

Tom Deitrich: Very good. Thank you, Michaela. And I thank everyone for joining the call. We can close it there.

Operator: Alright. Well, thank you for your participation in today’s conference. This concludes the program. You all may now disconnect.