Itron, Inc. (NASDAQ:ITRI) Q3 2023 Earnings Call Transcript

Itron, Inc. (NASDAQ:ITRI) Q3 2023 Earnings Call Transcript November 2, 2023

Itron, Inc. beats earnings expectations. Reported EPS is $0.98, expectations were $0.51.

Operator: Good day, ladies and gentlemen and welcome to Itron’s Third Quarter 2023 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]. Please note that today’s conference is being recorded. I would now hand the conference over to your speaker host, Paul Vincent, Vice President of Investor Relations. Please go ahead.

Paul Vincent: Good morning, and welcome to Itron’s third 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 third 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 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 includes 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, November 2, 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.

Tom Deitrich: Thank you, Paul. Good morning, everyone. Thank you for joining. Operational activity continued to accelerate during the third quarter, supported by an improving supply environment and impressive execution from our global operations team and broader organization. The performance highlights include Q3 revenue increased by 33% year-over-year, and 4% sequentially to $561 million, the highest level since Q1 of 2020. Adjusted EBITDA was $68 million, an increase of 181% year-over-year to 12% of revenue. Non-GAAP earnings per share was $0.98, a $0.75 improvement compared to the third quarter of 2022. Free cash flow was $28 million, an increase of $18 million year-over-year. Itron’s strategic positioning and improved asset utilization coupled with the accelerating trends in electrification, energy transition, grid edge digitalization, gas safety, water efficiency, and consumer demand for improved services give us confidence that our investments are closely aligned with the critical customer needs for many years to come.

Our team’s execution has allowed us to pull activity into 2023 that was previously anticipated to occur in 2024. Portions of the supply chain have improved more quickly than we had expected coming into the year, which has enabled the fulfillment of some supply constrained revenue. Turning to Slide 5, bookings were $413 million as we continue to experience a steady turns rate. 2023 bookings to date and awards activity have been in line with expectations and we continue to progress towards at least $2 billion in annual bookings. It is worth noting that our relationships, projects, and deployments are long-term in nature with most of the backlog consisting of our Networked Solutions and Outcomes segments. The total backlog ending the third quarter of $4.3 billion represents several years of visibility and is comprised of projects with signed contracts, assured funding, and regulatory approval.

Projects within our backlog are related to critical infrastructure, grid resiliency, service modernization and revenue assurance for our customers who are deploying capital to improve visibility, agility, and return on their assets. These projects tend to be non-discretionary in nature and are durable during periods of economic volatility and uncertainty. Our funnel of future bookings is continuing to grow due to clear macro trends supported by constructive regulatory policies that accelerate the modernization of distribution grids globally and incentives increasingly available to our customers to support energy transition, decarbonization, and sustainability targets. The recently announced grant awards under The Infrastructure Investment and Jobs Act, or IIJA, include grid resiliency, smart grid, and innovation topic areas that further underscores the growing focus on utility infrastructure resulting in opportunity expansion for Itron.

There are a few commercial highlights during the quarter of note. In September, we signed an agreement with Exelon to extend the utilization of Itron’s Operations Optimizer Solution, which enables Exelon’s operating companies to utilize valuable distribution grid data for analytics that unlock operational efficiencies and increased business intelligence. This agreement supports Itron’s focus on outcomes with Exelon in the ongoing effort to expand the value and return on Exelon’s investment in grid-edge infrastructure across its operating companies. Singapore Power has awarded Itron with the expansion of their field area network. Throughout the Asia-Pacific regions, more utilities are confronting challenges related to grid stability and reliability, and this award is an excellent opportunity for Itron to continue to expand the reach of its technology into new areas and applications.

Additionally, we recently began a sizable project to provide our IntelliPEAK load control switches, which enable demand response and more effectively manage load during critical periods. This project will benefit our customers, end users and support more efficient grid operations. Now, turning to Slide 6, I will cover some operational insights from around the business. Q3 2023 is the fourth consecutive quarter of revenue growth and margin expansion. We have taken very deliberate measures across our manufacturing and supply chain organizations to maximize operating leverage as demand and activity accelerates. At the segment level, portfolio optimization, new product introductions, improved manufacturing asset utilization, and talent expansion have contributed to the improving performance trend.

These initiatives resulted in a record quarterly revenue for network solutions and a new gross margin record for device solutions. Supply chain conditions have improved and although we do not expect a return to pre-pandemic component lead times in the near-term, our production output levels have meaningfully accelerated. We will continue to be proactive in managing our supply chain and adjusting our inventory management strategies as needed to address the increased global supply chain volatility. Our backlog increasingly consists of projects related to grid edge digitalization as aging infrastructure continues to be upgraded or replaced. Customer awareness is growing that the solutions of the past no longer meet future needs. As the leading provider of grid edge solutions and intelligence at scale, we see a very long runway of opportunity ahead.

Lastly, when we consider our impact on people and planet, we continue to thoughtfully reduce our emissions. During 2022 alone, Itron’s offerings helped our customers void 180x more carbon than Itron’s own operations generated. This is up from 100x in 2021. This ratio will continue to grow as the breadth and adoption rates of our solutions expand. Now I will ask Joan to provide a financial update for the third quarter and our outlook for the remainder of the year.

Joan Hooper: Thank you, Tom. I’ll cover the third quarter results first and then provide our latest outlook for the fourth quarter. Please turn to Slide 7 for some rate of consolidated GAAP results. Third quarter revenue of $561 million increased 33% year-over-year ahead of our expectation due to better supply chain conditions and strong operational execution resulting in increased shipments to our customers. Gross margin for the quarter was 33.4%, 490 basis points higher than last year, and the highest level since Q3 of 2017. The better than expected margin expansion was due to very favorable product mix and operational efficiencies realized as volumes ramped. GAAP net income of $40 million or $0.87 per diluted share compares to $4 million or $0.09 per diluted share in the prior year and was driven by higher operating income, partially offset by higher taxes.

Regarding non-GAAP metrics on Slide 8, non-GAAP operating income was $59 million, up $44 million from the prior year. Adjusted EBITDA of $68 million was also up $44 million in the highest quarterly EBITDA since Q3 of 2019. Non-GAAP net income for the quarter was $45 million or $0.98 per diluted share versus $0.23 a year ago. Year-over-year revenue comparisons by business segment are on Slide 9. Device solutions revenue was $111 million, a $12 million or 13% year-over-year increased on a constant currency basis, primarily due to growth in water meter sales. Networked solutions revenue was a record $385 million, increasing 43% or $115 million over last year. The year-over-year growth was due to continued improvement of supply chain conditions, which enabled higher shipments.

Outcomes revenue of $65 million increased $7 million or 13% in constant currency, primarily due to an increase in recurring services. Moving to the non-GAAP year-over-year EPS bridge on Slide 10. Our Q3 non-GAAP EPS was $0.98 per diluted share, up $0.75 from the prior year. Pre-tax operating performance had a positive $1.07 per share impact through the fall through of higher gross profit partially offset by higher operating expenses. Higher tax expense had a negative impact of $0.29 per share. And FX and share accounted a negative year-over-year impact of $0.03 per share. Turning to Slides 11 through 13, I will review Q3 segment results compared with the prior year. Device solutions revenue was $111 million with gross margin of 24.3% and operating margin of 16%.

Gross margin was up 860 basis points and operating margin was up 850 basis points year-over-year reflecting a higher value product mix and operational efficiencies. We are very pleased with the improvement in devices profitability throughout 2023 as they execute on their product portfolio roadmap. Network solutions revenue was $385 million and gross margin was 35.1%. Gross margin increased 480 basis points year-over-year due to very favorable product mix and improved operational efficiencies. Operating margin of 26.6% increased 640 basis points due to higher gross profit and operating leverage. Outcomes revenue was $65 million with gross margin of 38.6%. Gross margin decreased 240 basis points as lower software license activity was partially offset by increased recurring services.

One-time software license revenue is typically high margin and generally lumpier, which can impact comparisons between periods. Operating margin of 15.8% decreased 410 basis points due to the fall through of lower gross margin and higher expenses. Turning to Slide 14, I’ll cover liquidity and debt at the end of the third quarter. Total debt remained flat at $460 million and net debt was $205 million. Net leverage was 1.1x at the end of Q3. Cash and equivalents at the end of the third quarter were $255 million. Free cash flow was $28 million in Q3, up $18 million year-over-year, driven by higher profitability, partially offset by an increase in working capital to support business growth. Recently, we amended the credit agreement related to our $500 million revolver to extend it through 2026.

This credit facility is currently undrawn and provides flexibility to execute on opportunities that further our strategic growth objectives. Now, please turn to Slide 15 for our updated fourth quarter outlook. We anticipate fourth quarter revenue to be between $565 million to $575 million. The midpoint of this range represents 22% year-over-year growth. For Q4 non-GAAP EPS, we expect to be in a range of $0.70 to $0.80 per diluted share. At the midpoint, this is up 6% versus Q4 of last year. The year-over-year growth rate of 6% is muted due to a negative effective tax rate of minus 30% in Q4 of last year. Now, please turn to Slide 16 for an update to our annual 2023 outlook. Incorporating this updated Q4 guidance, the full-year expectations are now a revenue range of $2.16 to $2.17 billion, which at the midpoint represents a $265 million increase versus our initial guidance provided in February.

This 14% improvement in annual revenue guidance was driven by a faster than expected recovery of component availability, which enabled us to ship more out of the backlog. Initially, we expected most of this higher revenue to be realized in 2024. Obviously, we and our customers are very pleased that we are able to deliver shipments ahead of earlier expectations. The higher revenue and strong gross margins have had a very positive impact on earnings, and our full-year non-GAAP EPS range is now between $2.83 to $2.93 per diluted share. At the midpoint, this represents an increase of $1.98 per share from our initial 2023 guidance issued in February. In summary, we are pleased with the operational execution in 2023. We took advantage of a faster than expected component supply recovery and delivered more shipments to customers, resulting in significantly higher revenue than expected.

In addition, we remain focused on initiatives to improve profitability, which is evident in our expanding margins and increased cash flow. We are well positioned with a flexible balance sheet to support our strategic objectives. Now, I’ll turn the call back to Tom.

Tom Deitrich: Thank you, Joan. Our third quarter results reflect the convergence of preparation and execution. The magnitude of change related to how energy is being produced, distributed, and consumed is accelerating, and our strategy aligns with the evolving needs of our customers. Customer success is a critical metric for Itron, and we are deeply invested in coordinating our efforts with our customers’ business objectives. Our annual Itron Inspire event held recently in San Antonio showcases our commitment to bring together the best minds in the industry to share insights and plan the future together. This unique event attended by industry experts including customer executives, technology developers, and channel partners from the diverse ecosystem of energy and water industries.

During this event, we are continually reminded of the wide range of challenges, utilities, cities, and municipalities confront in providing reliable, secure, and affordable energy and water to the communities they serve. We are also reminded of our obligation to continue to innovate, collectively learn, and be prepared to solve problems as they arise to help our customers fulfill their missions in a future that is increasingly complex and dynamic. A tremendous amount of work goes into creating an environment like Itron Inspire, and I’m grateful for all who have participated. Your work is important, and this event truly helps us. All focus on actions we can take in pursuit of a more sustainable future. Thank you for joining us today. Operator, please open the line for some questions.

Operator: Thank you. [Operator Instructions]. And our first question coming from the line of Jeff Osborne with TD Cowen. Your line is open.

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Q&A Session

Jeffrey Osborne: Yes, thank you. Good morning. Tom, just a question on the backlog. I was curious if you could just walk through since you’re pulling forward a lot to ’24 into ’23 as the components have become more available. How do we think about 2024 and some of the backlog that wasn’t inflation protected for some of the higher cost semiconductors? How do we think about that lapsing itself in essence? I would imagine there’s a point in time where some of the inflation protected backlog will start flowing through the P&L and you would have a more meaningful margin expansion?

Tom Deitrich: Sure. Thanks, Jeff. The total backlog right now is call it right around 70%, maybe a touch above. Of that $4.3 billion has been repriced or priced indexed. The majority of the pre-inflation run up, meaning the un-repriced portion of the backlog should roll through in the next call it 12 months’ time frame. So that gives you a sense of the split of where we stand. The things that were rolling into backlog now, meaning new bookings, they are indeed repriced and it is something that will improve margins as we roll through some of that pre-pandemic backlog.

Jeffrey Osborne: And maybe just one follow-up on that topic. Are you starting to see as some industries in auto and industrial have rolled over a bit. Are you seeing lower cost semiconductors that may be in the past were more challenging to get either on the analog side or other areas that you need?

Tom Deitrich: Sure. I would say that in general supply has been much better. So let’s start with the basics of putting your hands on the components. Supply improving, lead times are still pretty long. So we haven’t seen a meaningful retraction in the lead times themselves relative to costs, I would say the cost profile, you get pretty flat overall. We aren’t seeing increases any longer, but we haven’t seen a meaningful retraction just yet on the cost level of components, whether that is mechanical or semiconductor related.

Jeffrey Osborne: Got it. And then just very quickly, if you could touch on the quoting activity and then the goal of $2 billion in bookings, I think you said for the year. How would you categorize the quoting activity? And is there maybe projects that you’ve wanted that are awaiting regulatory approval that that would then flip into backlog and it’s not necessarily a new RFD you’re chasing, if you could just walk through the mechanics on how you would achieve the goal of $2 billion would be helpful.

Tom Deitrich: Sure. So, the amount of bookings we’ve had year-to-date is in line with expectations since the very beginning of the year. We thought that bookings would be back half weighted and that’s indeed what’s playing out. In terms of making the $2 billion or more for the year, we have very good line of sight to that. You have correctly diagnosed. We have awards that are in our hands that we’re going through the final steps, meaning getting contracts signed and working through regulatory approval, which gives us a good view as to where the year should land or perhaps more. So, feeling very good relative to quoting levels, I would characterize them as very robust. We have an awful lot of activities going on with customers as they are focused on improving resiliency and reliability.

So things like outage management and vegetation management are strong. The ability to handle distributed energy resources and deal with increasing rates of whether they would be EVs or batteries or rooftop solar, all of these distributed energy resources need to be managed to ensure resilient, reliable, stable grid. And as those things continue to grow in volume, our customers are reacting to that and continue to make good investments. The scenario that I’ve laid out there is primarily a North America and Asia-Pacific area within in water, in Europe specifically, we’ve seen very strong turns rates and ongoing business as water infrastructure investment continues in Europe. So that gives you a little bit of a regional flavor overall, but very pleased with the positioning, the visibility relative to bookings and quoting activities is strong as we head through the back of the year into 2024.

Jeffrey Osborne: It’s great to hear. That’s all I have. Thank you.

Tom Deitrich: Thanks, Jeff.

Operator: Thank you. And our next question coming from the line of Martin Malloy with Johnson Rice & Company. Your line is open.

Martin Malloy: Good morning. Congratulations on the strong quarter. My question is about the Outcomes segment revenues there, year-to-date, your Networked Solutions shipments have picked up quite a bit. Can you maybe talk us through the timing of when we should look for an increase in the Outcomes segment revenue related to this pickup in the end points and the Networked Solutions shipments that occurred this year or it’s been occurring.

Joan Hooper: Yes, I’ll take that. In general, we think about it in a kind of a 12 to 18 month timeframe. So it’s great news as you indicated that networks has really started to ramp and we would expect to follow on Outcomes sort of in the 12 to 18 month flag period. The other thing I would just caution again, we’ve talked about it in the past is, given the fact that there are sometimes one-time license revenue, you can get some lumpiness from quarter-to-quarter in the Outcomes top line, but we continue to be very optimistic about our ability to grow that business and have it be more come SaaS based.

Martin Malloy: Okay. And then my follow-up question is also on the Outcomes segment. If we look at over an annual basis, could you maybe remind us what the percentage of the revenue in Outcomes, it would be considered reoccurring the non-licensing?

Tom Deitrich: Sure, the amount of recurring revenue in the Outcomes business is about 75% of the total Outcomes piece. Okay, it can move up and down by a few percentage points on a quarterly basis. As Jim pointed out, sometimes you get some lumpy one-time things in there, which generally are margin accretive, but they would take that recurring percentage down. But if you average it over the last, let’s say, three, four quarters, you’re right at 75%. We think that number continues to creep upward. It probably gets closer to 80% as that business will scale and you’ll have more recurring revenue in the form of SaaS based activities as well as services where we would run the network for someone or provide ongoing maintenance services, things of that nature. So, I think 75% today probably on its way to 80% over the next year or so.

Martin Malloy: Great, thank you, appreciate the responses.

Paul Vincent: Thanks, Marty.

Operator: Thank you. And our next question coming from the line of Pavel Molchanov with Raymond James. Your line is open.