Q2 2021 Itron Inc Earnings Call
[music].
Good day, everyone and welcome to the I tried incorporated Q2.2021 earnings conference call for.
Today's conference is being recorded.
For opening remarks, I'd like to turn the call over to Mr. Ken GNL.
Please go ahead Sir.
Thank you operator, good morning, and welcome to <unk> second quarter 2021 earnings Conference call. We issued a press release earlier today announcing our results. The press release includes replay information about today's call are for.
Presentation to accompany our remarks on this call is also available through the webcast and on our corporate website under the Investor Relations tab.
On the call today, we have Tom Dietrich, <unk>, President and Chief Executive Officer, and Joan Hooper, Senior Vice President and Chief Financial Officer.
Following our prepared remarks, we will open the call to take questions using the process. The operator described.
Before I turn the call over to Tom Let me remind you of our non-GAAP financial presentation, and our Safe Harbor statement.
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 our 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 the comments made during this conference call and in the risk factors section of our form 10-K.
And other reports and filings with the Securities and Exchange Commission.
In addition, due to the fluid nature of COVID-19 pandemic company estimates regarding the impact of COVID-19 on current 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.
As discussed today August 5.2021 may materially change and we do not undertake any duty to update any of our forward looking statements.
Now please turn to page 4 in the presentation and I'll turn the call over to our CEO Tom Dietrich.
Thank you Ken good morning, and thank you for joining us.
We'll hear details from Joan shortly but to summarize our second quarter performance revenue was $489 million adjusted EBITDA was $36 million non-GAAP earnings per share was 28.
And free cash flow was $64 million.
Our operational results were below our expectations, primarily due to component shortages that increased through the quarter.
These constraints reduced revenue within the quarter by approximately 40% to $50 million.
While our second quarter revenue level was disappointing the demand outlook started to recover during the quarter as anticipated with numerous customer projects beginning to move forward again.
Barring any negative impacts from COVID-19, resurgence, we expect the demand to continue to recover into the second half of the year and into 2022.
This increased confidence is reflected in our latest bookings and backlog numbers.
Turning to slide 5 for the third consecutive quarter, we saw very strong customer activity for our network solutions and outcomes segments.
We achieved a book to bill ratio over 1.2 to 1 driven by bookings of approximately $596 million, allowing a new record total backlog of approximately $3.5 billion.
And a 12 month backlog of approximately $1.4 billion.
We are pleased with the continued increase in the 12 months backlog, but note. It remains approximately $100 million below the view, we had pre pandemic.
This quarter's bookings performance is highlighted by an agreement with national grid to upgrade their gas communication solutions in New York and New England.
On an expansion of our footprint in Asia Pacific with Singapore power.
A complete solution for AMRI, great operations data management with Gainesville, Florida, and importantly, the continued expansion of our standing partnerships with excel in Colorado, and an extension of our SaaS agreement with Con Ed and New York.
We are encouraged by the bookings achieved over the past few quarters and see our demand rebounding across the customer base and the globe.
However, we do anticipate component constraints to persist through the second half of the year and likely into 2022.
Turning to slide 6 I would like to have a brief discussion on the component constraints that impacted the quarter and the temporal effect that is having on our operations and near term outlook.
For the past few quarters, we have been navigating through macroeconomic driven supply challenges from supplier factory disruptions logistics constraints raw material and component shortages stemming from the pandemic.
Up until the second quarter, we saw minimal impact from the component supply constraints as our mitigation efforts served as well. This includes the consumption of buffer inventory on key components partnering with our customers to increase the visibility of their needs beyond our normal lead times, increasing our order coverage for key components driving alternative.
Sources and targeting low value low margin products for discontinuation.
Entering the quarter, we saw elevated supply and cost pressures on steel resins logistics and in particular semiconductors during the quarter. The revenue related hotspots largely fell away on all except for semiconductors in the semiconductor space, specifically for Microcontrollers and matching analog components we.
Significant on unexpected delays in delivery, coupled with limited delivery commitments.
The components and focus here are in general commonly used industrial and automotive applications that are experiencing industry wide allocations.
These heavily constrained semiconductors were the primary driver for the unfulfilled demand within the quarter and predominantly impacted our network solutions segment performance.
Our team is continuing to aggressively mitigate constraints by working with the executive leadership teams at the handful of semiconductor suppliers associated with these bottlenecks to maximize our allocation and alternatives.
We are also working with customers to align project schedules as the delayed demand is not lost but shifted into future periods.
The situation remains fluid and is expected to continue to be volatile for <unk> and across multiple industries in the near term.
With that let me hand off to Joan to discuss our second quarter results.
Thank you Tom I will cover the second quarter results and then provide an update on our outlook for the full year.
As Tom mentioned, our Q2 results were lower than expected primarily due to component constraints.
As anticipated we saw customer demand begin to recover on the second quarter, but due to the parts shortages and delayed deliveries we were unable to fulfill a portion of that demand.
Turning to slide 7 which is a summary of the Q2 consolidated GAAP results.
Second quarter revenue of $489 million decreased 4% versus last year or 7% in constant currency.
Year over year decline was primarily due to component constraints limiting our ability to meet customer demand.
We estimate that the component shortage negatively impacted Q2 revenue by approximately $40 million to $50 million with the largest impact being felt in the network solutions segment.
Gross margin for the quarter was 36% 340 basis points higher than last year due to favorable product mix and lower manufacturing inefficiencies related to COVID-19.
This was partially offset by higher supply chain costs.
The GAAP net loss of $33 million or negative <unk> 73 per diluted share compared with a net loss of 63 million on a negative $1.56 per diluted share in the prior year.
Net loss in Q2, 2021 was primarily due to changes concerning the 2020 divestiture in Latin America.
Regarding non-GAAP metrics on slide 8 non-GAAP operating income was $27 million.
Adjusted EBITDA was $36 million or 7.4% of revenue.
Non-GAAP net income for the quarter was $13 million or 28 <unk> per.
Per diluted share.
Looking at the revenue by business segment on slide 9.
<unk> solutions revenue was $163 million or $24 million on 19% year over year increase on a constant currency basis.
The increase was due to a favorable year over year compare with Covid related factory closures impacting the prior year, partially offset by the impact of component constraints. This year.
Networked solutions revenue was $265 million of $63 million on 19% decline year over year in constant currency. The decrease was due to the impact of component constraints limiting our ability to meet customer demand as well as the delayed timing of customer projects.
Revenue in the outcomes segment was $61 million, a $4 million or 6% increase in constant currency for 2020, the increase was driven by higher managed and professional services.
And lastly, foreign currency changes resulted in $16 million higher revenue versus the prior year.
Moving to the non-GAAP year over year EPS Bridge on Slide 10, our Q2 non-GAAP EPS was <unk> 28 per diluted share up 25 for.
From the prior year.
The drivers of the year over year improvement were net operating performance, which had a positive <unk> <unk> per share impact versus Q2 of 2020.
Improved operating performance was driven by better product mix and improved manufacturing efficiencies. This was partially offset by the negative impact related to component shortages.
Lower interest expense resulted in a <unk> increase in EPS year over year.
A lower non-GAAP tax rate increased EPS by <unk> <unk> versus Q2 of 2020, and finally changes in foreign currency and a higher share count resulted in a <unk> <unk> per share decrease year over year.
Turning to slides 11 through 13, I'll discuss the Q2 results by business segment compared with the prior year.
Device solutions revenue was $163 million with gross margin of 19% and operating margin of 12%.
Most margin increased 940 basis points year over year, primarily due to reduced manufacturing inefficiencies related to COVID-19 opt.
Operating margin increased 13 points due to the higher gross margin and lower operating expenses.
Network solutions revenue was $265 million with gross margin of 36% and operating margin of 24%.
Gross margin increased 280 basis points year over year due to favorable product mix and reduced manufacturing inefficiencies related to COVID-19.
Operating margin increased 60 basis points year over year due to higher gross margin, partially offset by higher operating expenses.
Outcomes revenue was $61 million with gross margin of 38%.
Gross margin increased 560 basis points year over year due to favorable solution mix as well as cost efficiencies.
Operating margin was 20% 390 basis points higher than last year with the gross profit improvement, partially offset by higher investments.
Turning to slide 14, I'll cover liquidity and debt.
As discussed on our last call, we completed a convertible bond offering and an equity raise in the first quarter, which enabled us to accelerate our paydown of debt and in turn strengthen our balance sheet.
While the transaction was completed in the first quarter some of the Delevering didn't occur until Q2, including the repayment of the 5% senior notes, which with the call premium totaled $410 million.
Free cash flow was $64 million in the second quarter versus a negative $10 million a year ago. The strong cash flow improvement was primarily driven by lower interest and capex and better working capital some of which is timing.
Cash and equivalents at the end of the second quarter were $207 million.
Total gross debt was $491 million on net debt was $284 million at the end of the second quarter.
Net leverage was 1.6 times at the end of Q2.2021 down from 3.8 times at the end of Q2.2020.
Now turning to our full year 2021 outlook on slide 15.
Our full year outlook for customer demand continues to show recovery from COVID-19, and is in line with our original guidance expectations, albeit at the low end of the range.
However, as you just heard from Tom we expect the component constraints that we experienced in Q2 will continue through the second half of the year.
We estimate the component shortages will result in lower revenue of approximately $150 million to $200 million for the full year, including the $40 million to $50 million, we experienced in Q2.
Factoring in these component constraints results in a revised full year 2021 revenue range of 2.5 to $2..1 5 billion versus the 223 to $2.3.3 billion, we provided in February.
We expect to recover most of this delayed revenue beyond 2021, when the component supply chain recovers and allows us to fulfill this demand.
The earnings will be negatively impacted by these component shortages given the fall through of lower revenue as well as higher supply chain related costs. Our estimate of this impact is a reduction of pre tax income of approximately $65 million to $95 million.
This results in a non-GAAP EPS outlook of $1 to $1.50 per share versus previous guidance of $2.30 to $2.70 per share.
This updated outlook assumes approximately $44.7 million average shares outstanding for the full year 2021, we are assuming a euro to U S. Dollar foreign exchange rate of 1.2 in the second half of the year, our full year non-GAAP effective tax rate between 32% and 34%.
Full year interest expense of approximately $11 million.
In summary, we were pleased to see customer demand begin to recover in Q2, and our second half demand outlook continues to reflect that recovery Q.
Q2 was another strong quarter for new bookings, which signals future demand growth.
However, due to the component constraints and the resulting negative impact it will have on our 2021 performance our full year outlook for revenue and earnings is now lower than the original guidance.
The operational projects, we have underway to reduce our fixed cost will continue as we navigate these near term headwinds and we remain confident in our long term financial model targets now.
Now I will turn the call back to Tom.
Thank you Joan.
We remain positive on the overall outlook for the company as we work through the near term component constraints with our strong balance sheet record backlog and increased strategic flexibility. We are in a great position to drive our business forward.
We have grown our distributed intelligence capable endpoints to over $3 million cumulatively delivering on our strategy to expand the footprint of our advanced multipurpose multi application network.
During the second quarter, we saw continued year over year growth in our outcomes segment demonstrating that once we install on network. We can then expand our value to our customers with our outcome solutions.
We continue to execute on our asset light strategy, reducing our fixed costs and becoming nimbler in this dynamic environment.
While these are just a few examples of the progress we have made so far in 2021. It is also why we remain positive on the efforts that will continue to create value as we execute our long term strategy.
Thank you for joining today operator, please open the line for some questions.
Thank you.
If you'd like to ask a question. Please signal by pressing star 1 on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Again press Star 1 to ask a question.
And our first question today comes from Tommy Moll with Stephens.
Thanks for taking my questions.
Good morning can you hear me.
We can net uncertainty on good morning.
Yes, Tom.
Tom I wanted to start.
If you could address.
In terms of the disruption.
Any.
A major contract cancellation or dissolve its just.
Pushed to the right and then anecdotally last year, you had bad debt.
Nick related delays now substantial component related delays.
It feels like on the back end of the spring is going to be pretty well compressed and ready to pop.
Are your customers grow how impatient.
Your customers at this point.
Very good Tommy good morning.
Tom here I would start by saying no contract cancellations at all.
We have been pleased with the response of the customers in terms of working with us on making sure that project schedules are aligned appropriately. So the demand that is unfulfilled.
In the second quarter and the stuff that we were thinking about for the back half of the year that is rolling forward into future periods, So not lost but.
But delayed in time.
Just on the nature of the contracts and the customer relationships we have.
Clearly customers are interested in improving the reliability and resiliency of their networks, which is that the point of the investment and where our technology is really helping them for sure.
For up their business in that regard or doing the various automation projects that are out there that's where we see the desire on the part of the customers to implement those technologies as quick as possible so appropriate level of impatience as.
And we're very aligned on that from our standpoint, we very much want to fulfill those agreements as quickly as possible.
Based on the supply of the components themselves. So.
That's how I would characterize it good customer relationships and they remained strong the demand is indeed pushed out into future periods.
And Tom as a follow up any any impact from these component delays to your M&A appetite and could you characterize.
On the pipeline, there and refresh us on what the priorities might be.
Sure.
Current environment doesn't change our strategy, nor our long term financial model that we've talked about clearly the pandemic has pushed it out a little bit first demand and now supply, but all sort of related to debt. The nature of the pandemic itself no change in our financial model no change.
Our desire to continue to grow our business organically and inorganically on the organic front our.
Our interest remains high in solutions that really will target, where the market is going so more resiliency reliability automation cyber security better ability to.
Incorporate renewables in safety applications into the energy and water space that's out there we certainly can.
To look at that space actively yes, I will.
I'd say most likely in the outcome space is where you would see us make an inorganic move.
Thank you Tom I'll turn it back.
Thanks Tommy.
And our next question will come from Jeff Osborne with Cowen <unk> Company.
Hey, Good morning, I had a couple on my end I was wondering on the debt.
Debt component.
Syed if using contract manufacturing would have mitigated some of these issues I know you've got both your own facilities like in South Carolina, but also third parties are you finding that relative to auto maybe you are having a tougher time for carrying direct but maybe your contract manufacturing is having.
Having less of an issue I'm just curious if this changes your manufacturing footprint longer term.
No change in our manufacturing strategy whatsoever.
Electronics components.
That are constrained today in the semiconductor space, specifically things like Microcontrollers and all of the associated analogue <unk>.
Components that sit around it on the board itself that is work, we largely do in partnership with the contract manufacturers and we clearly are leveraging their spend power as well as our direct relationships with our suppliers to maximize the supply.
Certainly that is an area where the components that are in play are largely very commonly used and they are constrained across the chain itself. So.
I definitely believe that our relationships with contract manufacturing is helping us in this.
Regard, but it certainly doesn't insulate us from the macroeconomic conditions that led to the shortage.
Based on on our business environment, though the demand that we are not fulfilling in this quarter rolls forward. So it isn't lost it is it's a timing issue for us.
Got it and just a couple of other quick ones as Covid coming back in Southeast Asia in particular on Malaysia, making the situation worse for the second half or you are not as exposed to that region.
From a demand perspective or are thinking about it from a revenue side.
Yes, it's not an issue that's where I was going so not an issue on on revenue certainly it is something to consider on the.
The supply side of things.
We are not directly exposed in terms of where the hotspots are today from a manufacturing environment, but I do look through the chain. There are a lot of raw materials and raw components that come out of that part of the world that seed that broader ecosystem. So they are suppliers to semiconductor suppliers as an example that are.
Often in.
In that part of the world and that is something that we'll need to be watched closely.
All of that is absolutely considered in the guidance that we've provided.
Got it 2 other quick ones you had some nice wins in the quarter can you just articulate what the RFP pipeline and quoting activity looks like for the second half and then just another quick 1 is the board have any outstanding.
Capability on our buyback plan in place.
So on.
I'll take the first and Joan can address the second.
We definitely continue to see very strong interest on the part of our customers for the types of technology, we provide so grid resiliency and reliability is high on everyone's mind safety in the gas space is important and.
Security and automation is very important in the water vertical so each and every 1 of the verticals that we serve the pipeline remains strong and we're very optimistic about where things stand bookings in the quarter in second quarter for very strong we have another record total backlog.
<unk>.
In terms of where we are heading so the future is bright in terms of for the <unk>.
Need for our customers.
The wins that we highlighted really revolve around those basic functions in technologies and were excited to provide it.
And on the question on there is no current board authorization for any stock buyback.
Got it thanks John.
Mhm.
Yeah.
And we will hear next from Paul Costner with Jpmorgan.
Yes. Good morning. This is mark Strauss, thanks for taking our questions.
To follow up on on Jeff's question sticking on little bit deeper there.
To the extent that you are aware.
Your direct competitors.
Or are they using the same semiconductor components.
Potentially using different suppliers I mean, it sounds like you are you are booking activity remains pretty strong, but I'm. Just curious if you think there's a risk of some kind of near term market share shifts here.
In terms of the supplier base I don't know that Ive got any insight.
Net.
Is significant in terms of supply base I would say that in general the kind of components that are really constrained today are very commonly used across the industry in industrial and automotive applications. So I would suspect given the consolidation in the semiconductor industry we are.
On.
In discussions with <unk> with the same sets of suppliers across the board.
<unk>.
See any particular share move.
The long term agreements that we have on.
Our certainly.
Important to us in terms of the engagements, we have and when we contract with a customer for a long term agreement. It usually takes a couple of years to implement the project and then a long term.
SaaS and service agreement follows after that I don't detect any particular movement in terms of.
Sure Okay.
The board, we remain very strong and in a number of the verticals that we play in and we're pleased to work with the customers on that front.
Okay. Thanks, Tom and then just a quick follow up.
Can you just talk about some of the give a bit more color on the mitigation efforts within the.
For semiconductor specifically are you are you looking to add additional suppliers are you are you.
<unk> into longer term supply agreements.
What can be done there near term.
I would say that.
That's the standard types of the things that you mentioned are alive, and well and work we work with the suppliers on every day, so certainly exploring alternatives whether they are another supplier or they are specification changes to common parts. That's something we have been working on and.
We'll continue to do so we had undertaken a number of multi sourcing efforts over the last couple of years and those have indeed been a benefit but again given the current state of the macroeconomics I think it is.
A wider set of shortages than any 1 particular supplier long term agreements with with suppliers too to have firmed forecasts and purchase orders out there is part of it working closely with the customers to align on there longer term.
The demand outlook, so that we can provide better information over a longer time horizon to the suppliers themselves is another all of those are efforts that we will continue to work in the short run. The most important part is maintaining the current continuity of supply and and the allocations as <unk>.
Components are really really tight.
Got it thank you very much.
And our next question today comes from Ben <unk> with RW Baird.
Hey, Tom Hey, John Kim.
Thanks for taking my question, maybe could we talk about just the cadence of.
The shortage.
As you related to the auto industry just because.
There was like last year, there wasn't as much stores when volumes were talking about it and so was there a lag or.
Not remembering correctly.
It was my first question. The second question is volume.
And then maybe just the differences on.
Your business.
Talk about the competitive environment.
Thank you for that but just some of the differences where you saw you see more headwinds as the Europe exposure on the factory footprint there.
<unk>.
And then on the third question was just on costs.
What kind of levers can you call.
Just because you said the visibility.
Todd could stretch into 'twenty, 2 and so what are you doing on the cost front. Thank you very much.
Very good so a number of things there let me see if I can't cover the malls so on debt that the shortage side of things.
We started to see.
Lead times start to stretch out in I'll say late 2020, we reacted appropriately to that end.
Placed orders and actually came into the year with some some good buffer inventory during the first quarter and most of second we consume that buffer inventory and sadly we ended up with shortages really starting to materialize in the second half of.
Q2, and that is the position that we are in today.
On the shortages, obviously been well publicized and discussed in the.
On the broader press it.
It is hit and been present in a number of different industries auto clearly Gus a fair amount of discussion on it given that the nature of their manufacturing footprint on our side of things when it when it comes to the regional differences.
The European market, while a bit behind North America in terms of debt the pace of the recovery on the demand side post pandemic.
It is up nicely year over year, you could use the <unk>.
Devices business as a pretty good proxy, where we were up 25%.
For the second quarter last year to second quarter. This year. So the demand on the European side is coming back.
Nicely compared to 2020, albeit a little bit behind the pace of recovery in North America, where the.
Revenue shortfall on the unfulfilled demand really happened in Q2, and what we have baked into our guidance is really a bit more on the electronics side, which means that the networking business. The networking business has very very strong backlog at network on outcomes relates to about.
3 quarters plus of our total backlog. So we feel good about the trajectory of that business over time.
<unk> got to be able to fulfill the demand and work with our customers to implement the projects on the cost side of things clearly we will continue to work aggressively on mitigating the components supply getting that revenue.
Back on the board is the best Medicine for sure for US will continue to be.
Careful in terms of operating expenses, we will continue to work to make sure that our factories are operating as efficiently as they can given the revenue constraints themselves all of the projects for ongoing asset light.
<unk> and the restructuring types of things that we announced back in 2020 continue on that pace with no change in in our overall plans there.
That will be part of the longer term portfolio. We also as a final point use this current situation to continue to make the portfolio changes that we are.
Had been working on for quite some time now as we phase out.
And end of life certain products that are lower margin for us overall, so that would be a quick snapshot or perhaps a lengthy snapshot of the overall game plan and how we go from here. So I hope I've had on your point spend no you got it. Thank you Tom.
Very good thank you.
And we'll hear next from Pearce Hammond with Piper Sandler.
Yes. Thank you for taking my questions just to clarify on the prepared remarks were you, saying that the specialty steel and resins for the shipping those are getting better but really from here, it's more on the semiconductors.
To clarify that.
Correct.
The exact context.
To repeat it again on the revenue side meeting, where it is gating our shipments it is down 2 to semiconductors.
The only material delay on the other areas that we've seen hotspots earlier in the year that they are no longer getting us on the revenue side, we continue to work to monitor that and make sure that nothing pops up again, but that's not a high concern for us today that said, we do see cost.
<unk>.
Pressures across the board so the environment is definitely remaining.
Under pressure for them from an overall cost.
Across the board, meaning steel and resin and logistics as well as semiconductors.
And that's something we work hard to mitigate through productivity means to make sure that it doesn't impact our bottom line.
And thank you for that and then in the.
In the press release, you had said.
<unk> the second half of the year and then.
Also impact into 'twenty, 2 so I'm just curious how far do you expect this to kind of bleed into 'twenty..2 is it more first quarter or first half for longer than that.
Yes, very difficult to to put on.
A fine point on it generally given my experience on.
On the semiconductor side as well as on the.
Pardon me on the equipment side. These things tend to run a little a couple of quarters when they start to happen until things come back into balance again, we don't have great visibility as to what it would look like.
B force.
It's coming that it may not be done by the end of the year, but no specific guidance that we've placed for 2022 at this time.
And then thank you and then last 1 for me.
Biden infrastructure Bill I'm, just curious how do you see <unk> being a beneficiary if that bill gets passed.
As you know that the process continues on in D. C. The bipartisan pack.
Package Thats out there looks to be making its way through its working through a long series of amendments right. Now if you look inside of that 1.1 an approximate <unk> trillion.
Package there are provisions in there for energy water and for all cold on grid EV related electric vehicle types of PREPA.
Preparedness.
There are a couple of hundred million dollars approximately spread across those a couple of hundred billion sorry dollars spread across.
For those various provisions in particular in the electricity space. There is funding for smart grid graci matching grants, which.
Is very similar to the types of programs that happened back in the <unk> 9 kind of timeframe, which reached directly on the types of products and services we do.
Thank you very much.
Okay.
And our next question comes from Noah Kaye with Oppenheimer.
Hi, good morning, Thanks for taking the questions.
In the plastic tank when we've seen some guidance provision, sometimes they've gotten a bridge for.
Prior to the current U.
Do have a couple of assumptions.
Given us on the.
On the guidance slide, but I wonder if it'd be possible to ask for something like a bridge just help us understand the moving parts here include lower networks and Theyre relatively high margin business, so understand there'll be margin dilutive.
Do you have some other levers to potentially offset or mitigate so just.
Just help us maybe understand how you think of some of the moving parts here within the revised guidance.
Yeah, let me take that so if you look at the.
If I think about the prior guidance to the new guidance, Let me let me just take it at the mid point just to make the math simple. So the midpoint of the revenue guidance is about $180 million as we discussed it's really all supply chain component related constraints. So on that range of 150 to 180 to 200 roughly 180 in between.
Comments I made in the script, where that pre tax income would be down in a range of $65 million to $95 million, so call that kind of $80 million at the midpoint. So the flow through to income is quite high much higher than our average gross margin in the company and that's for real.
3 reasons 1 is the component impact is primarily in our networks solutions segment, and so that by definition has higher gross margins than our overall company level and it is it has some high margin business that is getting pushed out right. Now. So that's kind of number 1.2 is as Tom mentioned there is cost.
Pressure on components freight et cetera, so that is factored in our revised guidance as well and then a third issue is theres factory overhead absorption issue. So all of those.
And up with a higher flow through to earnings from the revenue shortfall and again. This shortfall, we expect to recover in the future, but it is quite quite heavy fall through right. Now so think that really the majority of the fall through that we provided in the EPS is margin related for Pall mall through so if you looked at what we're expecting for the year when.
We started out.
Basically to get back to gross margins at the pre COVID-19 level call. It 30% all of this probably cost us a point or so.
That's really what that is obviously we continue to.
To try to control Opex as best we can we really haven't resumed kind of travel and things like that across the company. So opex spending controls continue to be in place, but in general most of this lowering of the EPS is is margin related to the component shortage.
John that's very helpful. I guess, a question really around product.
Design and ability to mitigate this in the future.
It's not a fair comparison, maybe but in industries like auto we've seen.
Trucks and cars shipped.
Maybe reduce functionalities such as using older chipsets.
To be able to still meet customer demand.
I guess can you help us understand why exactly.
There's not as much flexibility.
In this business in terms of specific components constraining the ability to make products.
And is there a possibility to design for greater flexibility in the future. It just feels like what you are using is typically kind of off the shelf.
<unk> and <unk>.
I think the ability to design and greater flexibility in the future would certainly help the company and reduce this kind of volatility.
Agree with your general premise.
<unk>.
The current generation of products that we are working with in terms of in design in the latest.
Products that we have reduced we do have.
<unk> better control from a I'll call on a platform kind of perspective, and the ability to mix and match and modify.
<unk>.
From the start that does give us a lot more agility and ability to weather these types of events.
The debt issue that we are struggling with tends to be over multiple generations of products with given the lifecycle of the product itself older generations were not designed with that methodology and that thought process in mind. So we're into the journey to be able to operate in a with a <unk>.
<unk> model for me and R&D perspective, we're only a few years into that journey, whereas debt.
Large number of our products and our bulk of our revenue is based on.
Previous generations of products, which is where the the lack of flexibility is driving some volatility into the results.
Again that.
Is 1.
Area that we've been working on actively for for several years now and we will continue to do so and it pays benefits in the future. The flip side of it is the long term customer contracts that we do have which means those multiple year deployments and that the long term agreement, whereas the demand rolls forward rather than debt.
Being canceled or lost which is why we get it back going forward so future sets.
We have the best of both which is why we've been working on it for the last couple of years.
Thanks, Thomas for your help I mean, I guess the follow up would be.
Maybe this is unrealistic to expect just given that a lot of these deployments need regulatory approval on some very specific specs.
Why isn't it possible to just go to customers with a more modern better functioning product that you can make easier versus like deal.
Second and third generation.
On a legacy products and just.
We can make this so we can upgrade your system.
To provide even more functionality is that just not possible for financially prudent to do.
It is.
I would say possible in certain cases, if you look at how we work with some of the customers that are on the latest generation of platform we can.
<unk> to increase that and mix between generations of products. So if I would take the.
On the Gen X network as an example, we have customers that have a set of endpoints running 3 gen..3 gen 4 and Gen..5 all in in the same network at the same time. It allows the customer to have an increased level of functionality and they can deploy it as they need in the area that is targeting that capability. That's.
Absolutely the model that we continue to pursue.
The utility space, though at the same time does absolutely.
Lids on the notion of assets have to go in and have to be amortized over a long period of time and when you deploy something you want to be able to get the benefit for a very very long period of time. So how you design the product from the start which is the latest generations of products that's where.
For you get that ability to to pay as you as you go from a customer standpoint on an AD is you need which is a very beneficial business model when it comes to managing.
Ebbs and flows in terms of business and in the macroeconomic environment. So I agree and that's exactly the direction that we are are heading.
Well I appreciate that and it does seem like you're bearing a disproportionate level of the risk around supply chain and your customers aren't and so hopefully we can see that model.
Continue to evolve I will jump back in queue.
Okay.
And our next question will come from Graham price with Raymond James.
Hey, good morning.
Thanks for taking our questions.
Let's quickly on timing was wondering do you expect.
On shortage impact to be spread pretty evenly across the second half for is that something where we should expect it to be weighted.
More towards 1 quarter for the other.
Yeah, I don't know that we've got specific timing as Tom mentioned, it's really hard to predict the situation is pretty fluid I mean, hopefully we will be talking in a quarter on the Q3 call to say, we think the worst is behind us but at this point I don't really have any color for Q3 versus Q4.
Okay got it.
And then.
Secondly.
You've touched on it already but I was wondering if you could talk a little bit about how you see the revenue impact.
Kind of broken down by segment maybe between devices.
Networked solutions and outcomes as you said it looks like it's primarily networked solutions, but.
Just wanted to on a little color there.
Yes, the vast majority is network solutions, which you would expect just given the.
Higher end technology more use of electronics. So the vast majority is networks and then there is a.
So a fair amount that's in devices very little outcomes other than outcomes growth tends to follow follow network. So to the extent that our deployments are delayed you won't see the same kind of growth that we would have normally expected with outcomes, but but that will catch up as well as the.
As the demand shifts to the right so no material impact on outcomes now.
Okay got it thank you very much.
And as a reminder, if you'd like to ask a question today, you may say well by pressing star 1 on your telephone keypad.
And we will go next to Thomas Jonsson with Morgan Stanley.
Hi, yes, thanks for taking my call day.
Just kind of wanted to start off on the order front clearly another strong quarter for orders I know kind of with some of your competitors they've seen customers start to pull orders forward in hopes of kind of offsetting some of the longer lead times for components. So I was just wondering.
What are you guys seeing on on the customer side.
There is some deceleration on a year over year basis here. So.
Just any outlook for the second half of the year and order trends.
Okay.
The backlog itself remains very very strong we see a strong pipeline of customer activities and that's what is reflected in that 3.5 approximate $1 billion of total backlog.
On the order front call it basic demand as John commented in our prepared remarks, we see demand.
Definitely continuing to improve it as customers have.
Desire to put the new technology in.
In practice to to solve the problems that.
Are really putting pressure on their business.
So I continue to expect that demand will continue to increase and.
The.
The pipeline of opportunities beyond that remains very very strong.
Great. Thank you and then just 1.
1 question.
Related to the backlog. So obviously the bulk of the revenue is being pushed out as in the electronic component side of things for network solutions. It's clearly margin accretive. So I guess as we're thinking about some of these projects getting pushed farther to the right do do that kind of component headwind issue.
Can you just maybe talk to us about your ability to pass through any price on that front end and possibly how you see the margin profile of the backlog evolving for 2022.
The best way to think about it is is our business really has 2 types.
There is a book and ship business, our turns based business, which is.
An area that we have a bit more ability to manage price.
And pass that cost through in a more tactical sense clearly there is a competitive environment out there and we need to be competitive in the marketplace, but on that turns based business that there is ability to work with price on an ongoing basis.
On the longer term contract side of things, which is largely in the backlog piece of it that is.
And pricing that we have agreed with customers on so that they can work with their regulatory commissions to to make sure. The proper rate of return is present in the business case at the customer level. So their pricing flexibility on our side is is very very limited.
That said what is in that backlog is primarily networks and outpace come space business, which is where our business is overall driving too in the area that were keenly interested in growing and that is accretive to the corporate gross margin.
Great. Thanks, very helpful I'll turn it back now.
And this concludes our question and answer session I would like to turn the conference back to Mr. Tom Deitrich for any additional or closing remarks.
Thank you operator, we appreciate everyone joining today as a reminder, in conjunction with <unk> on inspire which is our large industry event that is held in October will also be holding our 2021 investor day that.
That will be hosted both virtually and hopefully as.
Conditions permit live so please mark your calendars and we look forward to seeing everyone. There. Thank you for joining.
Okay.
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And this concludes today's conference you may now disconnect.
Yeah.
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