Itron, Inc. (NASDAQ:ITRI) Q3 2024 Earnings Call Transcript

Itron, Inc. (NASDAQ:ITRI) Q3 2024 Earnings Call Transcript October 31, 2024

Itron, Inc. beats earnings expectations. Reported EPS is $1.84, expectations were $1.13.

Operator: Good day. Thank you for standing by. Welcome to Itron’s Third Quarter 2024 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 will 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 2024 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 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, October 31st, 2024, 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 to everyone, and thank you for joining our call. Itron’s third quarter results were ahead of our expectations and reflect another quarter of solid execution delivered by our team. The continued market demand fueled by growth in energy and water needs supports our substantial pipeline of opportunities for the future. Financial highlights for the third quarter are shown on Slide 5 and include revenue of $615 million, adjusted EBITDA of $89 million, non-GAAP earnings per share of $1.84, free cash flow of $59 million. Turning to Slide 6. Our backlog at the end of third quarter was $4 billion and bookings during the quarter were $487 million. Noteworthy bookings in the third quarter include Arkansas Valley Electric Cooperative selected Itron’s GenX technology platform through our distribution partner NRTC.

Arkansas Valley was one of the first Department of Energy Smart Grid program awardees to complete negotiations with the DOE, receiving a grant for their grid intelligence and distribution automation project. Additionally, CenterPoint Energy is working with Itron to offer the additional safety features of Intelis gas endpoints to commercial and industrial users. The enhanced safety capabilities include an integrated shutoff valve and pressure sensing with edge intelligence. This expansion further demonstrates CenterPoint’s commitment to the safety of their users. Finally, we have expanded our support of Duke Energy to include our latest grid edge and distributed intelligence capabilities for DERMS control. In our prior quarterly call, we commented that regulatory and funding processes can extend the time from project award to booking recognition due to our disciplined approach to register and award as backlog.

This can increase the quarter-to-quarter variability in bookings for any given period, and calendar 2024 is no exception. We are pleased with the pace of the various regulatory and funding processes within the first month of this quarter, fourth quarter ’24. As a result, we maintain conviction for a book-to-bill ratio of 1:1 or greater for the full year. Now Joan will provide details of our third quarter results and our fourth quarter outlook.

Joan Hooper: Thank you, Tom. Please turn to Slide 7 for a summary of consolidated GAAP results. Third quarter revenue of $615 million increased 10% year-over-year and was stronger than expected. The higher revenue was driven by solid operational performance as well as shipments of customer orders initially anticipated in the fourth quarter and early 2025. Gross margin of 34.1% was 70 basis points higher than last year due to operational efficiencies. GAAP net income of $78 million or $1.70 per diluted share compares to $40 million or $0.87 per diluted share in the prior year. The improvement was driven by higher levels of operating and interest income and less tax expense. Both our GAAP and non-GAAP net income and earnings per share benefited from a favorable resolution of a foreign tax audit.

This resulted in an increase in net income of approximately $14 million or $0.30 per share. Regarding non-GAAP metrics on Slide 8. Non-GAAP operating income of $79 million increased 34% year-over-year. Adjusted EBITDA of $89 million was a record and increased 29% year-over-year. Non-GAAP net income for the quarter was $84 million or $1.84 per diluted share versus $0.98 a year ago. Free cash flow was $59 million in Q3 versus $28 million a year ago. The improvement reflects strong year-over-year earnings growth. Year-over-year revenue growth by business segment is on Slide 9. Device Solutions revenue increased 10% on a constant currency basis, primarily driven by growth in smart water sales and electric demand. Network Solutions revenue grew 8% year-over-year, driven by increased volume associated with new projects and ongoing deployments.

Outcomes revenue increased 16% on a constant currency basis, primarily due to higher recurring revenue services and software. Moving to the non-GAAP year-over-year EPS bridge on Slide 10. Our Q3 non-GAAP earnings per share of $1.84 per diluted share was an all-time quarterly record and increased $0.86 year-over-year. Pre-tax operating performance contributed $0.61 per share year-over-year improvement, driven by the fall-through of higher revenue and gross profit, partially offset by higher operating expenses. Third quarter tax expense was reduced by $14 million due to a favorable resolution of a foreign tax audit, resulting in higher net income and a $0.30 earnings per share increase. Turning to Slides 11 through 13, I’ll review Q3 segment results compared with the prior year.

Device Solutions revenue was $123 million. Gross margin was 27.2% and operating margin was a record 21.6%. Gross margin was up 290 basis points year-over-year, and operating margin was up 560 basis points, reflecting volume and operational efficiencies and effective cost management. Network Solutions revenue was $417 million with gross margin of 35.9% and operating margin of 27.7%. This quarter was another record level of revenue for this segment. Gross margin increased 80 basis points year-over-year, and operating margin was up 110 basis points, driven by volume and operational efficiencies. Outcomes revenue was $76 million with gross margin of 35% and operating margin of 14.7%. Gross margin decreased 360 basis points year-over-year and operating margin was down 110 basis points due to a lower margin revenue mix and increased services cost.

Turning to Slide 14. I’ll review liquidity and debt at the end of the third quarter. Total debt was $1.265 billion and net debt was $282 million. As of September 30, net leverage was 0.9 times and cash and equivalents were $983 million. Now please turn to Slide 15 for our fourth quarter outlook. We anticipate fourth quarter revenue to be between $600 million to $610 million. The midpoint of this range represents growth of $28 million or 5% year-over-year. For non-GAAP earnings per share, we expect a range of $1 to $1.10 per diluted share, which assumes an effective tax rate of approximately 25%. At the midpoint, this implies a decrease of $0.18 versus Q4 of last year. But Q4 of 2023 had an effective tax rate of just 8%. When normalizing Q4 of last year to a 25% effective tax rate, this Q4 2024 outlook is an increase of $0.06 or 6% year-over-year.

Now please turn to Slide 16 for an update to our annual 2024 outlook incorporating this Q4 update. We now anticipate 2024 full year revenue to be within a range of $2.428 billion to $2.438 billion. At the midpoint, this represents an increase of 12% versus 2023 and 1% from our prior 2024 annual guidance. Continued customer demand, strong operational execution and the timing of customer shipments is driving our higher 2024 revenue expectations. Earnings will also be positively impacted by the fall-through of higher revenue. Our non-GAAP earnings per share full year outlook range is $5.28 to $5.38 per diluted share. At the midpoint, the updated non-GAAP EPS estimate is up 59% versus 2023 and 17% versus prior guidance. Although we are not ready to provide formal 2025 financial guidance at this time, the combination of 2024 performance being consistently ahead of expectations, a normalizing operating environment and very back-end loaded 2024 bookings make it reasonable to assume a lower revenue growth profile for 2025.

We remain committed to the 2027 financial targets provided at this year’s March Investor Day. Now I’ll turn the call back to Tom.

Tom Deitrich: Thank you, Joan. Operational momentum and efficiency gains continue to accrue during the third quarter. And while we expect growth rates to normalize in the coming quarters, the larger trends are clear. Customer demand is growing. Our broad portfolio of innovative products and services gives us confidence that our strategic direction is well placed and the 2027 financial targets remain appropriate. Before opening the line for Q&A, there are a few non-financial highlights of note. We recently held Itron’s annual Inspire customer event, where the power of data and grid edge intelligence was on full display. It is clear from the depth of interaction with utility executives, ecosystem partners and other influential industry leaders that we have the necessary motivation and thought leadership across our industry to resolve the most complex and pressing energy and water resource challenges facing us today.

Significantly, the nature of the discussions has shifted from what to do to how to get it done. This is encouraging and will serve to accelerate the pace of the industry. During the conference, we announced our Grid Edge Essentials offering. Grid Edge Essentials solution dramatically simplifies the process for our utility customers to adopt new advanced technologies, accelerating the time to value. Also, in conjunction with Inspire, we released our resourcefulness report, which explored artificial intelligence and machine learning trends within the utility industry. The key findings of the research include that 82% of utility executives report active AI projects. AI and ML are already helping utilities optimize asset utilization, advancing sustainability progress, and enhancing consumer engagement.

And perhaps unsurprisingly, reflective of broader considerations related to AI adoption, 43% of utilities cited the lack of expertise as a current barrier to greater AI adoption. AI and ML are focus areas for the utility industry, which places even greater value on thoughtful approaches to data capture, analytics and agile infrastructure. The report is available for download at itron.com, and I encourage everyone to review the findings. Thank you for joining our call today. Operator, please open the line for some questions.

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question coming from the line of Ben Kallo with Baird. Your line is now open.

Ben Kallo: Hey, guys. Congratulations on the quarter. Joan, I just want to clarify, when you talked about growth next year, there will be growth next year. It’s just not the same level of growth.

Joan Hooper: Yeah. Well, we’re obviously not in a position to give ’25 guidance yet, but I wanted to make sure people remember a couple of things. One is, we had $125 million of catch-up revenue in ’24. So be careful that you grow on a normalized 2024, and the fact that the bookings are so back-end loaded is another factor. So really no different than what I’ve said on previous calls. If you look at the compounded growth from the current ’24 estimates to get to the ’27 targets, it’s only 2.5% to 5% growth because ’24 was so much higher than we expected. So just be careful with the growth rates. We never expected a linear from ’23 to ’27.

Ben Kallo: Thank you for that. And then the next question is just kind of behind the bookings that you expect in this quarter. Could you just talk about the state of the market and deals out there to continue kind of the strength that you guys have going on for the last couple of quarters or years? Thank you.

Tom Deitrich: Thanks, Ben. Tom here. The market remains extremely constructive. The needs of utilities to deal with things like climate disruption or increasing demand or doing a better job managing water, gas safety, all of those trends are alive and well. And I think we’re well positioned to be able to take advantage of that. We are definitely seeing progress on the regulatory and funding front. Last quarter, I referenced something like $1 billion of pending awards that were in process. We definitely have seen progress, I would say, well over 50%, probably closer to 75% of that regulatory process is now behind us, and that’s really what is underlying the 1:1 for the full year on a book-to-bill basis that I referenced in the prepared remarks.

So feeling good about the overall market. On a global level, the commentary I just gave was largely around the Americas, but Europe has, at least through Q3, continued to perform a little bit ahead of the expectations, and you saw that in our third quarter results.

Ben Kallo: Thank you, guys.

Operator: Thank you. And our next question coming from the line of Jeff Osborne with TD Cowen. Your line is now open.

Jeffrey Osborne: Thank you. Maybe just to follow-up on that last point, Tom. If I heard you right, you mentioned bookings were strong in October and then you said 50% to 75% of the $1 billion came in after the quarter. Is that the way you’re trying to couch that for fourth quarter?

Tom Deitrich: Well, not quite, you’re close. But of the $1 billion that I referenced last time, we’ve seen progress on the regulatory front. It doesn’t mean it’s quite to the point that we registered as a booking yet. But certainly, we expect to achieve the 1:1 for the year on a book-to-bill ratio. So feeling good about the progress. And I wanted to give that color just to give people a little bit of context as to what we see behind the curtain and why we remain pretty excited about the market opportunity ahead.

Jeffrey Osborne: Got it. And just to be clear, is the regulatory front you’re referring to both federal and state if it requires both, just given that there were some federal awards from the GRIP Program?

Tom Deitrich: Yes. It’s a combination of the two. And again, those bookings are primarily the Americas, but there’s some international things that have government funding activities associated with it, and it’s lumped into the commentary we gave.

Jeffrey Osborne: Perfect. And then just two other quick ones. Can you just — how in retrospect, would you frame the strength in water all year? And do you expect that to continue next year for the Devices segment? And then what’s the M&A pipeline in light of the recent debt offering that you’ve done and how has that evolved in the past few months?

Tom Deitrich: So let me start with water. Water has certainly been performing above our expectations thus far in the year. The terms have been really good. We set expectations for maybe $100 million to $100 million plus on the devices run rate. And you can look at the last three quarters, we’re kind of running a bit above that. I don’t know that I would expect it to continue at that level, as we get into the fourth quarter and for next year. What we see is lead times are starting to normalize again after some extended period of constraints in supply channels on — supply chains rather on a global basis. And as lead times start to reduce across the industry, that means that the amount of inventory that our customers are holding tends to pull back a little bit.

So I do think the turns rate probably slows down over the coming quarters. But that doesn’t mean the market is anyway going backwards. It’s more just the accordion effect that you get in the supply chain itself. On the M&A front, I would say that very similar commentary to what we have mentioned in the past. We’re pleased with the position of our balance sheet that puts us in a good place to move when those opportunities present themselves. We’re very active in the market looking for those opportunities. What we are really seeking is something that will accelerate our outcomes growth rate. I t’s growing a bit faster than some of the other segments in the company, but we’re really looking for ways to accelerate that even more, and that’s where a lot of that acquisition attention is placed on our side.

We want something that will add to our grid edge intelligence platform and something that really would be scalable across many, many customers. That’s what we are looking for. And as those opportunities present themselves, we’ll obviously be sharing it with the market.

Jeffrey Osborne: Perfect. That’s all I had. Thank you.

Tom Deitrich: Thanks, Jeff.

Operator: Thank you. Our next question coming from the line of Noah Kaye with Oppenheimer. Your line is now open.

Noah Kaye: All right. Thanks very much for taking the question. Tom, you mentioned that the launch of Grid Edge Essentials, really a bundled solution for managing a range of outcomes for these utilities. And we understand that, that is not actually kind of commercially available broadly until December. But can you just talk at an early stage about the adoption of whether it’s this solution or just more usage of the DI network that is now kind of growing pretty rapidly? And what does that mean for how the mix within outcomes in terms of revenue composition should evolve over, let’s say, the next 12 months to 18 months? Are we going to see more recurring revenue, higher margin? I mean just what is your visibility to that inflection?

Tom Deitrich: So three different concepts that I think are important to pull out of the question that you asked. First and foremost, grid edge intelligence as an offering. That is a very full featured platform that allows you as a utility to have a lot of agility in your infrastructure. When you buy something, you put it in the ground, you can use it as you need and perform a lot of different grid efficiency or consumer engagement kinds of applications through things like distributed intelligence. At this point, we’ve got more than 12 million grid edge or DI capable endpoints that are in the field, millions more in backlog, millions of applications that are out there running for things like safety or things like distributed energy resource management out of the edge.

That said, a lot of that fielded equipment and much of what’s in backlog is for larger utilities, think large IOUs, where they have a pretty robust capability inside to be able to take advantage of that. As we broaden that grid edge intelligence capability and take it towards more midsized or muni co-op kinds of customers, the ability to say DI in a box is what Grid Edge Essentials is really all about. It packages up the endpoint, the network, the head-end software, the analytics, the DI capability and really makes it easy for a utility that doesn’t have perhaps a massive IT department to be able to integrate into that overall offering. So it broadens out the opportunity for us as we think about serving more customers with this important capability.

So that’s what Grid Edge Essentials is really all about. Relative to market adoption, again, we’re super excited about what we see our customers doing. The pace of innovation is there. The idea of the spark in someone’s eye about what they might be able to do to being able to prototype and put some applications out in the field is something measured in months rather than in quarters or years, which is the typical innovation cycle if you look in the years past for utilities. So pace of innovation grows, and this becomes something that is a very robust part of our business in the years ahead. So I hope that sort of unpacks and pulls together the three threads that you mentioned in your question.

Noah Kaye: It does, Tom. And the follow-up was really around the implications for mix, right, and the growth of recurring revenues within the Outcomes segment. How should we think about that trend over the next…

Tom Deitrich: Indeed, sorry, I missed that one. Indeed, I missed that one. Outcomes certainly last quarter and what you saw in — even in second quarter was revenue that was a bit more tilted towards services and one-time services. We definitely think that Outcomes will bounce back and those targets we laid out for 2027 to put the gross margin into the 40s kind of range is what we would expect to see. I still think it will be a little bit lumpy quarter-to-quarter depending on the mix until the business gets a little bit more scale to it and a little bit more heft. But certainly, we see it swinging back more towards some of that SaaS and licensing types of revenue in the quarters ahead.

Noah Kaye: Great. Just one quick follow-up for Joan. Taxes, again, a good guide this quarter. I’m not sure if that relates to more release of valuation allowances. But can you help us frame out what should sort of be the normalized tax rate for the business going forward?

Joan Hooper: Yeah. I would say probably about 25% would be a normalized rate. So yes, this quarter, the $14 million or the $0.30 per share I alluded to was the favorable basically a settlement of a foreign tax audit that pertained to many, many years ago, 2014 to ‘17. So yes, we had some reserves on our books. And once we settled the audit, we were able to release those. So that was really an anomaly. But if you ignore discretes, which are hard to predict, I would say about 25%.

Noah Kaye: Great. Thanks very much.

Operator: Thank you. And our next question coming from the line of Joseph Osha with Guggenheim Partners. Your line is now open.

Joseph Osha: Thank you. Good morning. Following on Noah’s question a little bit, I’m wondering if you can try and give us a sense as to how this quarter’s bookings and this sort of bolus of an additional $1 billion coming in at the end of the year, what the mix for that round of bookings looks like relative to the revenue that you’re realizing now?

Tom Deitrich: The bookings themselves will be very heavily skewed towards Networks and Outcomes. To be honest, that’s similar to our backlog position as it is today. So that $4 billion of existing backlog is 90% plus Networks and Outcomes. And I would suspect that fourth quarter bookings looks a lot like that in terms of the mix. The outcomes portion of that portfolio is growing a little bit faster than networks in terms of third quarter revenue as an example, but that’s also true in the bookings themselves. So bookings rate for outcomes is quite a bit higher today than it was a year or two ago within the mix itself. What’s underneath that, it’s all the grid edge intelligence platform and the associated software and services that go along with that. So it all flows from the types of offering discussion that I outlined earlier.

Joseph Osha: Now with that in mind, is it possible as we actually get to 2026 and 2027 that there’s some kind of shorter-term book and ship business in devices, obviously, you can tell what I’m trying to figure out here in terms of what the revenue mix looks like or should we think of that backlog as being representative more of the actual — what the actual revenue mix might look like in 2026?

Tom Deitrich: Yeah. I think that our devices business, probably that $100 million to a bit above that on a run rate basis is the right ZIP code to be in, whereas the Networks and the Outcomes side probably continues to grow more like the rates that we’ve talked about in our prepared remarks. So I think that, that would be a good way to think about the business itself. Devices tends to be a bit more turns-based than the other portions of our business. So a lot of that doesn’t truly flow through the long-term backlog trends that we’re talking about.

Joan Hooper: Yeah. And I would say if you look at the segment level targets that we provided for 2027 in Investor Day, those are still appropriate.

Joseph Osha: Okay. And then just quickly as a follow-up, given you’ve spoken, Joan, very clearly about the fact that stuff hitting bookings now is not going to show up in 2025 revenue. What would you say is the window for bookings showing up in 2026 revenue? Can we think about perhaps anything that shows up by the first half of ’25, maybe making it into the ’26 revenue? I’m just trying to understand a little bit how to roll this booking strength forward into ’26 and ’27.

Joan Hooper: Yeah. I mean, obviously, each deal is a little bit different, but I think what we’ve been assuming is sort of a nine month to 12 month lag from the time you close a booking until when revenue starts to flow.

Joseph Osha: Okay. Thank you.

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

Pavel Molchanov: Yeah. Thanks for taking the question. If we look at outcomes, year-over-year growth past two quarters is double-digits, which is meaningfully higher than probably the last kind of two straight years. Are these one-offs or is there some kind of structural change in that segment that explains the double-digit growth all of a sudden?

Tom Deitrich: Well, I think there’s a number of factors inside of there. Remember that a lot of the outcomes revenue tends to be tilted towards recurring revenue. So it takes a little bit of time to show up. And every time we do a booking, it adds a small slice on top of that. So as we’ve mentioned on previous calls, when networks got — started to catch up on some of that constrained revenue due to component shortages in years gone by, the Outcomes revenue was going to follow. It’s usually a bit of time from — for customers to get the network up and running and then some of that outcomes revenue starts to flow in on top of it. And it’s just following that normal trend that we’ve seen. So it’s maybe that 12 month lag between networks growing, which yielded the Outcomes growth.

That’s what you see showing through in terms of Outcomes. But it is largely tilted towards recurring revenue, and we are excited about the quarters ahead in terms of where we can continue to grow that business, which is why in our ’27 targets, we’ve outlined it as one of the faster growing segments.

Pavel Molchanov: Right. A follow-up on outcomes as well. In the context of the kind of AI euphoria, a lot of headlines recently about virtual power plants. Can you talk about the role that Itron is playing in virtual power plant development, which I guess, would be within outcomes?

Tom Deitrich: Correct. There are a lot of assets that are out at the edge of the grid, whether it is a battery that’s in your garage or whether it is a rooftop solar or adding load control capabilities to existing assets, maybe something as simple as a pool pump. So Outcomes really has a lot of the software capability house within it to be able to control those assets for the good of the grid and the optimization of what is going on. So a DI app to be able to pull charge out of the battery to be able to supply to the house and pull some of the load of that house off the grid is a perfect example of a VPP, virtual power plant kind of application that’s going on in the Outcomes segment. Several quarters ago, we announced something called Grid Edge Optimizer, which is really all about being able to utilize those edge assets to be able to balance supply and demand out at the edge.

And those are very ripe and growing opportunities for us as more and more local hotspots and constraints are showing up in our customers’ grids, whether it is because of EV growth or whether it is just more data centers in the area, you got to figure out a way to balance supply and demand where you don’t quite have everything that you need and you can’t afford to upsize everything. You got to make the assets you have in the field a bit more agile, which is exactly where outcomes comes to the scene and can help our customers.

Pavel Molchanov: Got it. Thanks very much.

Tom Deitrich: Thank you.

Operator: Thank you. And our next question coming from the line of Austin Moeller with Canaccord Genuity. Your line is open.

Austin Moeller: Hi. good morning. Congrats on the quarter. Just my first question here. Given the water demand needed for data centers, do you expect the increase in demand for electricity meters on the grid to mirror water meters due to the data center demand for coolant?

Tom Deitrich: I think that electricity probably outpaces water growth on a global level. Water will continue to grow as an entire segment for us in the years ahead, but I think electricity outpaces that as there is a lot more that needs to be done on the electrical infrastructure side. So I think our growth aspirations are in both segments, but probably a bit more tilted towards electricity over water.

Austin Moeller: Okay. And just a follow-up. How much of the non-inflation index inventory still remains? And did we get a significant reduction in that this quarter just in the reflection on the gross margin?

Tom Deitrich: Yes. Our backlog today is a bit over 75% that is either repriced or indexed for the new environment we are operating in, that less than 25%-ish that is still left to flow through as of the end of Q3. Most of that remaining, call it, 25% is — it will flow through within the next 12 months. So we’re almost through that period. As new backlog starts to come in, and certainly, we noted that we expect Q4 to be a bit more of a heavy bookings quarter that will add to the right side of that equation for the quarters ahead. But call it, 75%-25% today.

Austin Moeller: Excellent. Thank you for the details.

Operator: Thank you. [Operator Instructions] Our next question coming from the line of Scott Graham with Seaport Research Partners. Your line is open.

Scott Graham: Hey, good morning. Thanks for taking my questions. Joan, I kind of wanted to go back to your math on the assumed or implied, I should say, CAGR for revenue between ’24 and ’27, 2.5% to 5%. I come up with that same number, of course. What I’m wondering is, I thought I heard you say ’25 down. Did you mean growth down or revenue down?

Joan Hooper: I didn’t say either, I don’t believe. So what I was relating to is, first comment would be 2027 targets are still appropriate, and that was a revenue range of $2.6 billion to $2.8 billion, and we had the EBITDA range of 15% to 17%. So at the time we did Investor Day, we anchored the charts of ’23 actuals. So to get to the — from the ’23 actuals to the ’27 targets, it was a revenue CAGR of 5% to 7%. However, ’24 is a lot stronger than ’23. So if you take the updated annual guidance at the midpoint, you get the, call it, 2.5% to 5% is what’s required going forward to get to the ’27 targets. And again, all we said is we don’t expect that to be a straight line. So at this point, it’s too — it’s premature to talk about ’25. I would expect some growth. But again, I would caution people, you got to do the growth off a normalized ’24. You got to take $125 million out of our full year estimate, which was catch-up one-time in nature that won’t recur.

Scott Graham: Got it. Yeah. Thanks for that clarification. Very much appreciated. The other question I wanted to ask is kind of more for both you and Tom. So when you provided your targets earlier this year. I believe this moving $1 billion pipeline was only kind of thought of as, let’s say, a couple, maybe several hundred million, and that has graduated greatly to this $1 billion number. So it would suggest that your guidance did not contemplate that. Could you comment on that?

Joan Hooper: Yeah. I’d be — I don’t think that’s the case. So what we’re talking about with the $1 billion is a delay in getting it through the funnel to call it a booking. It’s not saying it’s $1 billion higher than what we would have expected. So I don’t think we see any change in terms of the market demand that would get us to the ’27 targets that we laid out. The $1 billion is a timing issue in terms of regulatory approvals.

Tom Deitrich: Yeah. We started the year saying book-to-bill of 1:1 or greater. That’s still our belief today. But we note that, okay, with the first three quarters of this year were whatever, 0.8%, 0.9%, something like that, well below 1:1, which means that there is a bit of a catch-up on the bookings side in Q4, which is what Joan referenced. So it’s more timing within the year on the bookings themselves rather than some fundamental shift or change in the marketplace.

Scott Graham: Understood. Thank you for that clarification. If I could just sneak this one more in. Joan, the non-GAAP incremental operating margin has been fairly steady in like the last six quarters in this sort of 32%, 35% last quarter, 41% range, just in this sort of 5% to 10% range. Are you comfortable with that on a go-forward basis, call it, in the low-30s type thing?

Joan Hooper: Yeah. Again, not in a position to talk ’25 guidance. What I would anchor you to is the ’27 targets that we gave, which again, weren’t operating income, but you can figure that out, EBITDA percentage of revenue of 15% to 17%. So from quarter-to-quarter, you’re going to get some variability. As an example, OpEx for us will tend to go up in Q4. We just did our customer event. We have a lot of marketing spend, a lot of travel, outside services. So it will vary quarter-to-quarter, but I think the targets we laid out for ’27 are still appropriate.

Scott Graham: Understood. Thank you.

Operator: Thank you. [Operator Instructions] Our next question coming from the line of Chip Moore with ROTH Capital Partners. Your line is open.

Chip Moore: Good morning. Hey, thank for taking the question. I guess I just wanted to do a clarification. I think you referenced, Joan, some pull forward with some of that coming from ’25, which would be an incremental headwind. I think we understand the growth dynamics there, but maybe just expand on that.

Joan Hooper: Yeah. I mean, if you look at the revenue range we provided for Q3, at the midpoint, it was about $595 million, so we ended up $20 million higher than that. We did not try to low ball our guidance when we gave you that number. So obviously, we work with customers in terms of when they want the shipments and some shipments that we would have expected to be Q4 or early ’25 actually occurred in Q3. So that’s all we were trying to point out.

Tom Deitrich: Yeah. The dynamic there is as projects start to move, generally, they can accelerate a little bit once the installation crews really hit their stride and things go a little faster. And that’s kind of what you saw in Q3. It was nothing particularly overt. It was just the market moving in the right direction for us.

Chip Moore: Perfect. Yes, and not particularly material. And maybe just my follow-up on the outlook for Q4. I think that implies maybe that margins stepped down a bit. Anything on product mix? Or I think you just referenced some of the year-end OpEx, maybe, Joan, but anything there to keep in mind? And then the margin trajectory, I guess, next year with some of the growth dynamics with what you’re seeing in backlog? Thanks.

Joan Hooper: Yeah. So if I start on the top line, I would say, again, the midpoint of our range is slightly down from Q3, call it, $10 million or so. Most of that is really strong Q3 performance for devices. So as Tom mentioned, we typically think about devices as maybe a little over $100 million a quarter. They were $123 million in Q3. So really quite high. On an EPS standpoint, you’ve got obviously to factor in the tax benefit that was booked in Q3. So that’s not going to recur in Q4. That’s got to be $0.30 or so just right there and then higher OpEx. From a gross margin perspective, maybe flat to slightly down, we don’t typically guide to gross margin, but nothing in particular there. It is the last quarter that we’re in the process of closing our two factories. So you typically get a little bit of lack of productivity as you’re ramping from one factory to another, and we factored that in as well.

Chip Moore: Perfect. Very helpful. Appreciate it.

Operator: Thank you. And I’m showing no further questions in the Q&A queue at this time. I will now turn the call back over to Mr. Tom Deitrich for any closing remarks.

Tom Deitrich: Thank you, Olivia. We are pleased with our progress and certainly the performance of the team. You’re starting to see the proof points in the strategy play out, and we are excited about the future and where the market is heading. So look forward to updating everyone next quarter. Thank you for joining today.

Operator: Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.