Q3 2021 Itron Inc Earnings Call

November 4, 2021

Good day, everyone and welcome to the icon incorporated third quarter 2021 earnings conference call today's call is being recorded.

For opening remarks, I would like to turn the call over to Ken <unk>. Please go ahead.

Thank you operator, good morning, and welcome to <unk> third 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.

A 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 their prepared remarks, we will open the call to take questions using the process. The operator described before I turn the call over to Tom. Please 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 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 discussed today November 4th 2021 name.

Materially change and we do not undertake any duty to update any of our forward looking statements now.

Now please turn to page four in the presentation and I'll turn the call over to our CEO Tom Dietrich.

Thank you Ken good morning, everyone and thank you for joining us I will start the call today by updating you on some significant actions we have taken since our Investor day on October 5th.

First we're pleased to announce the acquisition of silk a leader in smart lighting controls. This acquisition extends our smart city platform to an end to end solution, including the canopy network management platform and now lighting controls silk has been a longstanding <unk> partner for numerous marquee smart city deployments around the globe.

With <unk> and <unk> combined we will deliver more innovative solutions to our customers for many years to come.

Yesterday, we were pleased to announce that we signed the definitive agreement with dresser utility solutions to sell our European commercial and industrial mechanical gas meter business.

Our gas station meter and pressure regulation business and our global gas regulator business.

This arrangement includes two manufacturing facilities in Western Europe. This transaction has benefits for our customers our shareholders and our employees.

Dresser utility solutions, a veteran industry player in the gas utility industry has acquired a strong set of assets combined with a seasoned operational team. This deal is contingent upon local works council approvals with an anticipated close date in the first half of 2022.

It is important to point out that <unk> is not exiting the gas utility vertical <unk> focus is on higher value solutions and networks and outcomes such as the entellus gas static meter platform with integrated communications and safety features this transaction is fully aligned with our asset light manufacturing and overall.

All company strategies.

In conjunction with this transaction, we also announced a restructuring project if you will.

Hear more details from Joan in a moment, but the focus of this restructuring project is to drive overhead reductions in certain locations in support areas.

These actions are part of our ongoing efforts to ensure <unk> is stronger and more nimble as we outlined at our recent Investor day.

Now please turn to slide five as I hand over to Joe to review, our third quarter results.

Thank you Tom.

A high level. Our Q3 results were negatively impacted by continued global component constraints. These.

These constraints in particular semi conductors reduced our ability to meet the recovering customer demand and also resulted in higher input costs.

Third quarter revenue of $487 million decreased 10% versus last year the.

The year over year decline was due to the continued component constraints limited our ability to meet customer demand.

We estimate that the component shortage reduced Q3 revenue by approximately $100 million.

The majority of this was in the networked solutions segment, but it also impacted the device solutions segment.

Gross margin for the quarter was 27, 7% 120 basis points higher than last year, primarily due to favorable product mix.

This was partially offset by higher supply chain costs and manufacturing inefficiencies.

GAAP net loss of $2 million or negative <unk> <unk> per diluted share compared with a net loss of $25 million or negative <unk> 63 per diluted share in the prior year.

The year over year improvement was primarily driven by lower restructuring and interest expenses, partially offset by a higher tax rate.

Regarding non-GAAP metrics on slide six non-GAAP operating income was $16 million.

Adjusted EBITDA was $26 million or 5% of revenue.

Non-GAAP net income for the quarter was $9 million or 21 per diluted share.

Looking at the revenue by business segment on slide seven device solutions revenue was $152 million or $26 million or 15% year over year decrease on a constant currency basis the.

The decline was primarily due to the impact of component constraints limiting our ability to meet the customer demand.

Network solutions revenue was 274 million, a $33 million or 11% decline in constant currency.

This segment had the most significant impact from the component constraints.

Revenue in the outcomes segment was $60 million, a $2 million or 4% year over year increase in constant currency.

The increase was driven by higher product sales and software licensing.

Lastly, foreign currency changes resulted in $4 million higher revenue versus the prior year.

Moving to the non-GAAP year over year EPS bridge on slide eight our Q3 non-GAAP EPS was <unk> 21 per diluted share down <unk> 40 from the prior year.

The drivers of the year over year changes were net operating performance, which had a negative <unk> 46 per share impact versus Q3 of 2020, primarily due to the lower revenue caused by component shortages.

<unk> interest expense resulted in a 32 <unk> increase in EPS year over year.

A higher non-GAAP tax rate decreased EPS by <unk> 24 versus Q3 of 2020, the higher tax rate was due to fewer favorable discrete benefits in the current quarter.

Finally changes in foreign currency and a higher share count resulted in a <unk> <unk> per share decrease year over year.

Turning to slides nine through 11, I will discuss the Q3 results by business segment compared with the prior year.

Device solutions revenue was $152 million with gross margin of 15% and operating margin of 8%.

Gross margin increased 310 basis points year over year due to favorable product mix and reduced inefficiencies related to COVID-19.

Operating margin increased 160 basis points due to the fall through of higher gross margin, partially offset by higher operating expenses.

Networked solutions revenue was 274 million with gross margin of 33% and operating margin of 22%.

Gross margin decreased 60 basis points year over year due to inefficiencies related to the component constraints, partially offset by a favorable product mix.

Operating margin decreased 100 basis points year over year due to lower gross profit and continued R&D investment.

Outcomes revenue was 60 million with gross margin of 37%.

Gross margin increased 190 basis points year over year due to cost efficiencies.

Operating margin was 20%.

140 basis points lower than last year due to an increase in R&D investment, partially offset by the fall through of higher gross profit.

Turning to slide 12, I'll cover liquidity debt and capital allocation.

Free cash flow was $11 million in the third quarter versus $38 million a year ago.

The change in cash flow was due to lower profitability and an increase in working capital usage.

Cash and equivalents at the end of the third quarter were $189 million. During Q3, we repaid the remaining $31 million of our term loan.

As a reminder, we also have $500 million in bank revolver capacity.

Total gross debt was $460 million and net debt was $271 million at the end of the third quarter.

Net.

<unk> was one six times at the end of Q3 2021 compared to four three times a year ago.

On November one our board of directors authorized a new share repurchase program of up to $100 million of <unk> common stock over the next 18 months.

As we said last quarter, we expect the component headwinds to continue through 2021 and into 2022.

Q3 revenue impacted the component constraints of approximately $100 million was worse than we anticipated.

The full year revenue guidance provided on our last earnings call anticipated approximately $150 million to $200 million of full year component supply headwinds.

We now expect that constraint could be as much as $250 million for all of 2021.

Customer demand continues to show recovery, but given the components situation. We are now expecting the full year revenue to be below the range. We provided on last quarter's call.

Despite the top line shortfall, we still expect to be within the range of the prior guidance for non-GAAP EPS.

Once component constraints begin to ease we believe we will recover the vast majority of this delayed revenue in future periods.

Finally, as Tom mentioned at the start of the call. We continue to focus on executing our strategy with the acquisition itself the sale of our European mechanical gas and global regulator business and our restructuring project. The restructuring project is focused on driving cost reductions in certain locations and functional areas.

We estimate cash costs of approximately $60 million to $65 million and the actions will drive annualized savings of approximately $15 million to $20 million. The project is expected to be substantially complete by the end of 2024.

While we continue to navigate through the near term headwinds associated with component constraints, we remain confident in our long term financial model that we shared with you at our recent Investor Day, now I'll turn the call back to Tom.

Thank you Joan let me add some operational insights to the update John provided while.

While our third quarter was impacted by component constraints. Our team is continuing to aggressively work with the executive leadership teams of semiconductor suppliers associated with critical bottlenecks to maximize our allocation in alternatives.

We continue to work with customers to align project schedules as the vast majority of delayed revenue is not lost but shifted into future periods. The current visibility for supply recovery is uncertain, but we expect these constraints to linger into 2022.

Even as we faced challenges with component supply we continue to grow our distributed intelligence capable endpoints to over $3 4 million cumulatively expanding the footprint of our agile multipurpose multi application network.

We are also seeing customer success with the at scale deployment of distributed intelligence edge computing.

<unk> Electric company recently deployed 600000 apps across 200000 endpoints on the same network running their day to day metered cash operations <unk> is now able to obtain enhanced analytical insights more importantly, tico is acting upon those insights with targeted operational activities that drive improved really.

Liability and safety.

The expected benefits of DIR gratifying to see but what is truly exciting are the new benefits that are being uncovered now are distributed intelligence platform is more than just a product. It's about the speed of innovation. For example, new applications are moving from concept to field operations in less than three months. This was.

Unthinkable, a few years ago.

<unk> is a principal tool for the utility to enhance operations at rates of innovation that are new to our industry.

<unk> is the only provider in the industry to have this capability performing in the field today.

Turning to slide 14 with solutions like distributed intelligence, we are seeing strong demand from our customer base well it should be expected that quarterly bookings are lumpy. We are projecting a strong bookings year with a book to bill ratio of at least one to one current backlog remains at $3 4 billion in total with approximately one.

$1 4 billion and our 12 month backlog consistent with the improving demand for our solutions.

We are encouraged by the bookings achieved so far this year and continue to see a robust pipeline of additional opportunities.

A highlight of our third quarter bookings was a 10 year extension signed with American electric power.

The arrangement covers a broad geographical area across the Midwest into the southwest portions of the United States. Our current deployment provides Ams services to approximately $2 4 million AEP customers and is growing to $4 5 million at completion.

Interest and demand for our technology is high and we expect it to continue to grow with the dynamic challenges facing the utility industry. It's an exciting time for us at <unk> to providing such value and capabilities to the utilities and cities we serve.

As we close out today, we would like to thank everyone, who participated in our recent Investor day I drawn remains committed to our operating model and the targets. We laid out at Investor Day, We will continue to drive long term shareholder value by executing on the business being proactive with our efforts to deliver an effective operating model while continued to.

To ensure <unk> remains a market leader.

Thank you for joining today operator, please open the line for some questions.

Thank you if you wish to ask a question at this time, please signal by pressing star one and please make sure you must function on your phone is switched off that obviously, we will do each of equipment.

<unk> comes from.

From Stephens. Please go ahead.

Good morning, and thanks for taking my questions.

Good morning, Tommy.

Alright.

I wanted to start on on the update you gave us regarding guidance I'm curious it sounds like revenue.

It is expected to be below the prior range, but earnings per share still within the prior range.

So the inference, there would be margins better than you would've expected previously so I'm just curious what the driver is there or is it a mix issue.

Ed.

Really low margin revenue that's been pushed into next year or what would you point us to there.

Yes, I would say, it's more continuation of discretionary opex controls than it is margin.

Got it and just any context, you could give us around.

What that is John.

In terms of what the controls are yes.

Yes, well I mean, obviously, we have done very very little travel since the onset of Covid. Initially in some of our guidance. The expectation was Q3 and Q4, we'd pick up it really hasnt picked up so we're looking at continuation of just not spending any dollar we don't need to but I would say a lot of it has to do with kind of TNT and things of that nature.

Sure.

Okay. That's helpful. Thank you.

And following up from a strategic standpoint, you gave us some updates on a divestiture and our restructuring.

Both of these topics have been top of mind for some time now <unk> been part of your your footprint reduction strategy. So I'm curious should we think of these two updates is mostly cleaning up what was left to be done or are there are there more big initiatives, we should expect in the future. Thank you.

Sure Tommy this is Tom I can take that one.

I would encourage you to think about it very much as continuation of our stated strategy. We want to make sure. We are moving our portfolio towards communicating devices networks and outcomes. So the assets that we have.

Moved out we're primarily mechanically mechanical related devices, which didn't fit the strong long term portfolio good assets, but doesn't really fit well for us there are a couple of manufacturing facilities in western Europe that go along with that with the deal at close and that also is part of the strategy.

As we continue to move towards more asset light models to allow us to be a little bit more agile.

As demand would naturally ebb and flow.

The last piece of this is really the focus on sustainability and where we spend our R&D dollars towards things that are up the pyramid. That's really what is behind it so we'll be down to about five manufacturing facilities.

In Europe after after this.

The deal were to close.

Certainly we will continue to look at ways. We can continue to shape our portfolio aligned with our strategy, but this is a really good step for us and I think.

Dresser utilities got a really good set of assets to go along with the deal as well.

Thanks, Tom I appreciate the insight I'll turn it back.

Yes.

We'll now take our next question from Ben <unk> from Baird. Please go ahead.

Hey, Thank you guys. So much for taking my questions.

Bob.

Yes.

On the acquisition could you talk a little bit.

About how this.

<unk> fills in your portfolio, where you stand.

Being aggressive or other things to do in the portfolio.

And then I'll follow up.

Sure Good morning, Ben.

To think about it is we've had a streetlight offering for smart cities for for some time, the offering that was I'll say native too.

<unk> legacy <unk> was.

Can it be network and all of the management software the SaaS that goes along with with.

With the overall solution, we had been working with silk.

For the actual lighting controller.

And that's the piece that we added into the portfolio. So it gives us an opportunity to continue to integrate on the hardware side of things.

To create better and more innovative solutions. This total solution really is about making sure that we have a good vertical application to go into a smart city to be I'll call. It the anchor tenant for that canopy network switching out legacy luminaries towards led lighting.

Is a good operating cost savings for the city and they can therefore invest in canopy network, which allows them to monetize that network capability with many many other solutions going forward. So once you've built the base canopy to control the lights.

You now have the ability to do smart parking to do.

Town signage you can do safety you can do pollution types of applications. There is a lot of different things you can you can layer on top of that now that we have the full solution end to end on our side. It opens up the possibility for us too.

Bring more of those solutions to the market a bit faster that's really what was behind the acquisition and why we added it into to the portfolio relative to your larger question. What are we still thinking about clearly our strategy has not changed we want to advance in the outcomes space. We'll continue to think about ways, we can enhance.

Our portfolio in that area in the months and quarters ahead.

Okay.

I'm sure you saw the <unk>.

Acquisition.

Dr. <unk> will talk about more going into the home.

What should we think about you guys youre staying out more.

Smart cities and software.

Our utilities versus charted village.

Doug.

Sure Ben I would think that our.

Home turf, if you will from a market opportunity as more of a <unk> kind of <unk>.

Scenario, rather than a business to consumer marketing model that really isn't the sales channel. We are interested in that said I think that the newest version of the <unk>.

The meters that we sell the endpoints that are available do enable partnerships with with other companies for the inside the home kind of assets. We do have a ability for the meter to communicate with other devices inside of the house for efficiency programs for <unk>.

Availability of data to help the consumer understand how he or she is using a particular.

Service.

Or how their energy or water is being used to give them better control and insight at something that we generally do in partnership with our customers and it's a model that serves us well.

Thank you.

We will now take our next question from Jeff Osborne from Cowen and company. Please go ahead.

Yes. Good morning, guys. Just a couple of quick questions on the semiconductor issue I was wondering on the 100 million impact is there any risk to either market share losses or fines for lack of a better word premier customers any sort of repercussions.

The failure to deliver.

The revenue that that we did not fulfill in in the third quarter. The vast majority of that rolls into future periods, our customers are working with us.

To work through that the scheduling of that as components become available I would note that we have not seen cancellations in programs, we do not see.

Any significant market share loss or anything of the sort in general our customers tend to work over longer time horizons and not just a quarter to quarter deal. It's kind of the blessing of having those those long term relationships and long term contracts with customers. So I don't think that theres a market share or.

In particular.

Penalty risk here clearly our customers want to get the product deployed and so do we and hence we worked closely with the semiconductor manufacturers to find alternatives maximize.

Our allocation and make sure we're moving product through our supply chain as quickly as we can to fulfill the demand.

Makes sense, Tom that's what I thought was the case I just wanted to double check and then two other quick ones one maybe for John on the buyback does that suggest.

M&A is less of a priority in 2022, just given where current valuation is.

And then maybe for you Tom just quickly on 22 in your sort of Crystal ball around RFID and RF Q activity do you anticipate another robust year in 'twenty two just based on what Youre seeing now are.

A bit more moderate coming out of Covid.

Let me start with the first one I would say no. It does not really reflect any any concerns on our part on the M&A possibility, particularly in outcomes. We just think it's prudent to have that lever in our tool kit from a capital allocation standpoint, historically <unk> has his typically always had a share authorization out there so nothing specific to read.

And to that accounting on top at RF queue sure.

Definitely have good confidence in our business over the long term, our RFP <unk> whatever alert letter you want to use the pipeline of.

Opportunities in front of US is very robust very rich and we expect that to continue on our customers definitely are faced with a lot of challenges relative to how to integrate renewables into their solutions, how they can deal with increasing levels of natural disasters.

Climate disruption things of that sort as well as how they engage more closely with their consumers you put those things together it drives some some real demand for our technology.

<unk> technology in our portfolio.

And we think that the robust environment that we see in terms of customer activity is likely to continue.

Perfect Thats all I had thanks, thanks, so much.

Sure.

And I guess my question comes from Chip Moore from E. F. Please go ahead.

Good morning, everyone and thanks for taking the question.

Good morning, Jeff Great to speak with you.

Thanks.

You talked about bookings being a little softer this quarter, but obviously still right.

101 year to date.

I'm wondering if you're seeing any changes on the demand side it doesn't sound like it but just particularly as it relates to any pausing ahead of federal funding or anything like that that could be causing.

Many customers to think about those dynamics.

Good question Chip I don't see any change in customer behaviors, yes bookings tend to ebb and flow a bit quarter to quarter. So I wouldn't look at any one quarter is it as any sort of signal that something has changed in the marketplace year to date were even including a bit slower third quarter.

In terms of things coming into the backlog were $1 one two to one in terms of the.

The book to Bill and very robust opportunities in front of us for Q4, So no change in the marketplace relative to.

Government stimulus or infrastructure spending around the world or in the U S.

Clearly that could be a benefit it's not something that we're waiting for or basing our business around we've got a robust pipeline of opportunities, we don't see customers changing their behavior in the short run leading up to or any potential infrastructure spending so no change.

And in this particular case Thats a very good thing given that it's been pretty robust for the last several quarters and we would expect that to continue.

Right right Okay.

Maybe a follow up.

On the sale of the gas device assets I think.

You called out that in no way signals.

Less importance for gas markets in general just curious if you could expand on what youre seeing in gas and water.

Both markets thanks, guys.

Sure.

A very important point that you made there.

We're not walking away from the gas market.

That's all we continue to have a robust portfolio of communication devices as well as things like the entellus gas metering platform, which is a static meter with integrated comms and integrated safety features built into that that is a robust value added portfolio of products.

Which fits our strategy it goes into that whole notion of networks and then services that live on top of that with things like methane sensing an automatic alarms for triggering too.

To avoid safety incidents things of that sort of part of the portfolio that we did.

Divest good assets for.

For sure, but don't really fit our longer term strategy as they are non communicating and really more device oriented in and how they are used by our customers. So good interest on the part of customers for both gas and water products come into the second part of your question gas customers clearly are.

Are interested in in safety as well as automating their business processes. So communications become more important methane sensing and being able to use a canopy network becomes more and more important we definitely see.

Customers more willing to work together to reuse a common asset so more combo deals between electricity plus gas for example.

It comes to fruition on the water side of things water sustainability is obviously very important and that same trend about automating business processes wanting to get better value out of the data and run their business in a more automated.

Auto automated fashion as what we see in the water market as well.

So both robust parts of our portfolio Youll see us continue on but very much aligned to the overall strategic direction of the company.

Got it appreciate the color thanks, Tom.

The next question comes from Connor Lynagh from Morgan Stanley.

Yes. Thank you.

So just.

Question I appreciate the supply chain situation is very dynamic right now I'm curious we heard from some of your competitors that there.

Theres actually been a decrease in visibility from semiconductor supply in terms of losing.

Planned timelines from suppliers, just curious things gotten better or worse over the past few months here are you starting to get visibility on where things might get maybe back to normal is too strong a term, but to a stable level that you can sort of build from.

Yes.

In terms of the supply that we actually brought into the third quarter, and we're able to turn into revenue for our and get to our customer.

Yes.

Well indeed so.

So a little worse than what we had anticipated and that was reflected in John's comments that soon.

Ed in terms of the the overall visibility and things that are going on in the supply chain I'll be honest I don't see it as being.

Better than what we talked about previously some of the risks that I highlighted in our prior call things like.

Shutdowns are various.

Economies in Southeast Asia.

Yes.

Countries like.

Vietnam, or Malaysia, or <unk> or.

Or the fill.

In has to go on locked down as they work to wear.

Okay contain COVID-19 that put some some bumps into the earlier stages of the semiconductor cycle.

Or even in the assembly and test side of things what we saw in terms of the near term.

That was playing through in terms of deliveries in Q3, so that was where exactly the things that we talked about back in the second quarter I don't see it as particularly better or worse from what we were expecting overall, so I think that the environment. As you pointed out is extremely dynamic there is.

A lot of.

Uncertainty in terms of how quickly things can get back to normal what we really do need to watch for is lead times starting to.

Stabilize and two to retract again.

And that will play through in the months and quarters ahead last point I would make is we do think this will linger on into into 2022, which is what I said in some of our preferred preferred.

<unk> comments earlier on in the in the discussion again consistent with what we signaled back in Q2, but it's still the same environment, we see today.

Yes, I appreciate that.

So just just.

Dial in a little bit I think you gave some context on this but the.

The revenue shortfall that you guys have been discussing it sounds like it's mostly moving it into 2022 or beyond.

Should we think of that is basically entirely or at least the vast majority in the network solutions business.

And.

Basically the question is.

How do we think about the margin on that is it is it going to come through with normal margins is there any sort of pent.

Penalties or just higher input costs, we need to think about.

That revenue does manifest.

Yes, let me take a stab at that so I would say approximately 75% or so of that component impact hits the network segment.

And as Tom indicated that really isn't lawsuits delayed whether it's 22 or beyond really is a function of Tom's earlier answer which is when does the environment stabilized et cetera.

We are watching the environment closely for input costs I mentioned in my prepared remarks.

We did see higher input costs this quarter to the tune of approximately $10 million. So we're going to have to manage that as well.

Obviously networks margins are higher than than devices. As an example, and so when that revenue comes back certainly from a from a standpoint of the overall portfolio is higher margin stuff, but we'll have to manage the input cost side very carefully.

Alright, thanks for the color I'll turn it back.

And our next question comes from Noah Kaye from Oppenheimer. Please go ahead.

Thanks, so much for taking the questions I guess first one just on the contracting in booking environment can you comment a little bit on how you're seeing the.

Market right now, obviously, you've talked about kind of the robust demand.

Just not sure if there's any implications for <unk>.

The scope of projects or the tenant.

Projects given the legislation that's out there.

The industry wide supply chain headwinds just trying to understand.

How the.

Cadence and scope of <unk>.

Contracting discussions as is trending right now.

Sure I can I can jump in on that one.

I think that the customers are clearly driven by some of those big trends that I talked about looking to automate their business process being able to deal with renewables with climate disruption with engaging more closely with their consumers that all of that drives.

More technology and more digitalization in their overall infrastructure that those are the underlying trends that drive customer behavior and.

The pandemic and in some ways, while it certainly put some volatility into exact timing of things as we talked about back in 2020 in some ways. It is a longer term catalyst is as our customers definitely see the need to to automate their business and deploy the kind of technology.

E that we provide so I don't see customers hesitating or weighting based on.

Any potential infrastructure spending I don't see them.

Any longer.

Slowing things down in terms of the regulatory process things are starting to normalize on that side obviously.

Obviously, the time from contracting to actual starting a project does vary a little bit depending on the individual project at hand.

And now we'll have to watch component availability as things start to.

Come back into focus in 'twenty, two and beyond but.

Overall, I see it as a very robust demand environment, the underlying trends are there and strong.

And.

People aren't slowing down or waiting for for infrastructure spending and clearly it could be a tailwind when and if it would come but not something we're counting on are requiring for us to hit the models that we've been talking about.

Okay. Thanks, Tom and then in the context of the optimization targets and really division you shared at Investor day for <unk>.

Continuing to make the business more asset like can you kind of frame how much. This divestiture of these planned divestitures get you to that goal.

Yes, I think the easiest way to think about it and this is a gross over simplification a little bit is.

We were taken out to two factories that were associated with the products that we're talking about here. So we're down two to five factories in Europe Asia and the Americas are already kind of in the in the optimized state more or less that we would expect.

So still a portfolio work that we can continue to look at with that with our devices business, but.

But we really have have come a good step forward and we will continue to look for opportunities I think our mines turned a bit more towards growth.

On the outcomes side of things and Thats an area that we're continuing to look at.

Alright very helpful. Thank you.

Our next question comes from Pearce Hammond from Piper Sandler. Please go ahead.

Yes, good morning, and thank you for taking my questions. My first is so what specifically drove the backlog declined quarter to quarter.

Yes, it's basically flat.

Down very very slightly but it's normal variation so I would say that the way to think about it is that.

There weren't a lot of new big projects that came in just the normal timing of customers signing contracts and achieving regulatory approval I would remind everyone that we don't put something into backlog until you've got regulatory approval and that tends to happen at discrete moments in time.

So it's really we consumed some of the backlog no big projects came in and that said Thats, what led to the flat and slightly down kind of numbers that you. You saw the 12 month backlog is again really ever so fractionally up it rounds to more or less the same number from a.

Are you that you tend to see total backlog rounded down a little bit but.

I wouldn't look at it as something that is a signal the customer activity remains robust and we've got a great outline.

For opportunities ahead, and the backlog is still at near record levels.

Okay. Thank you and then just following up on John's prepared remarks earlier, so essentially this revenue loss.

Lost in the quarter pushes out to the right.

So essentially is it fair to say that the component shortages are kind of equally impacting your competitors, so that you're not necessarily losing sales thats just changing the timing of it.

When the sales occur.

Yes, that's basically true as I mentioned about 75% of the impact is in our networks segment and those are longer term contracts and committed business and so we're working closely with the customers as to when we'll have the components to build to fulfill the demand but in general your comments correct.

Thank you.

Thank you as a reminder to ask a question. Please take a look by pressing star one.

Our next question comes from Michael Mcginn from Wells Fargo. Please go ahead.

Okay.

Hey, good morning, everybody.

Aside from earnings it was interesting to get some channel checks on recently as our city upgrades the high pressure gas and I had somebody new <unk> equipment in the basement now so I appreciate that.

Yeah.

Great to hear you're going to get a little yeah.

I was looking to get a little more color on.

Kind of the free cash flow build into the out years.

It seems like the component shortages are limited to a narrow scope of bill of materials. So as the log jams starts to break here and you get back to growth.

Any color on what you think free cash flow conversion would look like.

If your inventory.

Billed as only isolated to a few items and kind of.

How that compares to your other growth periods.

Yes, the only thing I would probably offer is if you look at the information and the target model, we put out in Investor day, a couple of weeks ago.

<unk> 2024 targets, including cash flow at a range of 8% to 10% of revenue. So that's quite a bit higher than it has been and thats, probably the best color I can give you in terms of a normalized model going forward.

Okay, and then on the smart lighting side. It seems like a lot of the Oems are passing passing around these.

Asset.

I'm just curious GE has.

Some interesting history in the utility space as well.

But now that they have this full suite of C&I resi kind of exposure.

What do you see that kind of matches.

Their investment profile.

And Whiting.

In terms of I guess.

The smart lighting the value add relative to the legacy historical historically and where we are in kind of the adoption cycle.

Any color there would be great.

I would say that.

Our solution is pretty unique in the marketplace given that we've got.

And to end capability from the canopy network the management.

The SaaS components as well as the lighting controller.

That is a bit unique you've seen companies make moves that.

Luminaire plus plus.

Plus the lighting controller in cases like that Theres a bit of consolidation in other parts of the world relative to lighting control piece of that.

But really having that canopy network, which is a broader smart city offering we don't look at this as something thats unique to lighting, it's much more about a broader smart city play we want to bring the same ability to to have a very agile network in those types of environments to enable cities to really be attractive.

<unk> to live and enable it overall, so I wouldn't look at it as something that is a lighting thing, particularly it's more about that the network and the overall smart city play lighting happens to be a an application inside of that for us.

Okay.

Got it I appreciate the time.

Thank you.

As there are no further questions in the queue that concludes today's question and answer session and now I would like to hand, the call back over to Tom Dietrich for any additional or closing remarks.

Very good I, thank everyone for joining us today, and we look forward to talking to all of you again soon thanks so much.

Thank you. This concludes today's conference call. Thank you for your participation ladies and gentlemen, you may now disconnect.

[music].

Good day, everyone and welcome to the Icahn incorporated third quarter 'twenty to 'twenty One earnings conference call today's call is being recorded.

For opening remarks, I would like to turn the call over to Ken <unk>. Please go ahead.

Thank you operator, good morning, and welcome to <unk> third 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.

A 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.

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 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.

Materially change and we do not undertake any duty to update any of our forward looking statements.

Now please turn to page four in the presentation and I will turn the call over to our CEO Tom Deitrich.

Thank you Ken good morning, everyone and thank you for joining us I will start the call today by updating you on some significant actions we have taken since our Investor day on October 5th.

<unk> has been a longstanding <unk> partner for numerous marquee smart city deployments around the globe with icon and cell combined we will deliver more innovative solutions to our customers for many years to come.

Yesterday, we were pleased to announce that we signed the definitive agreement with dresser utility solutions to sell our European commercial and industrial mechanical gas meter business.

Our gas station meter and pressure regulation business and our global gas regulator business.

This arrangement includes two manufacturing facilities in Western Europe. This transaction has benefits for our customers our shareholders and our employees.

Our utility solutions, a veteran industry player in the gas utility industry has acquired a strong set of assets combined with a seasoned operational team. This deal is contingent upon local works council approvals with an anticipated close date in the first half of 2022.

It is important to point out that <unk> is not exiting the gas utility vertical <unk> focus is on higher value solutions and networks and outcomes.

As the entellus gas static meter platform with integrated communications and safety features this transaction is fully aligned with our asset light manufacturing and overall company strategies.

In conjunction with this transaction, we also announced a restructuring project you will hear more details from Joan in a moment, but the focus of this restructuring project is to drive overhead reductions in certain locations in support areas. These actions are part of our ongoing efforts to ensure <unk> is stronger and more nimble as we outlined at our recent Investor day.

Hey.

Now please turn to slide five as I hand over to Joe <unk> to review, our third quarter results.

Thank you Tom.

High level, our Q3 results were negatively impacted by continued global component constraints.

These constraints in particular semi conductors reduced our ability to meet the recovering customer demand and also resulted in higher input costs.

Third quarter revenue of $487 million decreased 10% versus last year the.

The year over year decline was due to the continued component constraints limited our ability to meet customer demand.

We estimate that the component shortage reduced Q3 revenue by approximately $100 million.

The majority of this was in the networked solutions segment, but it also impacted the device solutions segment.

Gross margin for the quarter was 27, 7% 120 basis points higher than last year, primarily due to favorable product mix. This was partially offset by higher supply chain costs and manufacturing inefficiencies.

The GAAP net loss of $2 million or negative <unk> <unk> per diluted share compared with a net loss of $25 million or negative <unk> 63 per diluted share in the prior year.

The year over year improvement was primarily driven by lower restructuring and interest expenses, partially offset by a higher tax rate.

Regarding non-GAAP metrics on slide six non-GAAP operating income was $16 million adjusted EBITDA was $26 million or 5% of revenue.

Non-GAAP net income for the quarter was $9 million or 21 per diluted share.

Looking at the revenue by business segment on slide seven device solutions revenue was $152 million or $26 million or 15% year over year decrease on a constant currency basis the.

The decline was primarily due to the impact of component constraints limiting our ability to meet the customer demand.

Network solutions revenue was 274 million, a $33 million or 11% decline in constant currency.

This segment had the most significant impact from the component constraints.

Revenue in the outcomes segment was $60 million or $2 million or 4% year over year increase in constant currency.

The increase was driven by higher product sales and software licensing.

Lastly, foreign currency changes resulted in $4 million higher revenue versus the prior year.

Moving to the non-GAAP year over year EPS bridge on slide eight our Q3 non-GAAP EPS was <unk> 21 per diluted share down <unk> 40 from the prior year.

Lower interest expense resulted in a 32 <unk> increase in EPS year over year.

A higher non-GAAP tax rate decreased EPS by <unk> 24 versus Q3 of 2020, the higher tax rate was due to fewer favorable discrete benefits in the current quarter.

And finally changes in foreign currency and a higher share count resulted in a <unk> <unk> per share decrease year over year.

Turning to slide nine through 11, I will discuss the Q3 results by business segment compared with the prior year.

Device solutions revenue was $152 million with gross margin of 15% and operating margin of 8%.

Gross margin increased 310 basis points year over year due to favorable product mix and reduced inefficiencies related to COVID-19.

Operating margin increased 160 basis points due to the fall through of higher gross margin, partially offset by higher operating expenses.

Networked solutions revenue was 274 million with gross margin of 33% and operating margin of 22%.

Gross margin decreased 60 basis points year over year due to inefficiencies related to the component constraints, partially offset by a favorable product mix.

Operating margin decreased 100 basis points year over year due to lower gross profit and continued R&D investment.

Outcomes revenue was 60 million with gross margin of 37%.

Gross margin increased 190 basis points year over year due to cost efficiencies.

Operating margin was 20%.

140 basis points lower than last year due to an increase in R&D investment, partially offset by the fall through of higher gross profit.

Turning to slide 12, I'll cover liquidity debt and capital allocation.

Free cash flow was $11 million in the third quarter versus $38 million a year ago.

The change in cash flow was due to lower profitability and an increase in working capital usage.

Cash and equivalents at the end of the third quarter were $189 million.

During Q3, we repaid the remaining $31 million of our term loan.

As a reminder, we also have $500 million in bank revolver capacity.

Total gross debt was $460 million and net debt was $271 million at the end of the third quarter.

Net leverage was one six times at the end of Q3 2021 compared to four three times a year ago.

On November one our board of directors authorized a new share repurchase program of up to $100 million of <unk> common stock over the next 18 months.

As we said last quarter, we expect the component headwinds to continue through 2021 and into 2022.

The Q3 revenue impacted the component constraints of approximately $100 million.

Was worse than we anticipated.

The full year revenue guidance provided on our last earnings call anticipated approximately $150 million to $200 million of full year component supply headwinds.

We now expect that constraints could be as much as $250 million for all of 2021.

Customer demand continues to show recovery, but given the components situation. We are now expecting the full year revenue to be below the range. We provided on last quarter's call.

Despite the topline shortfall, we still expect to be within the range of the prior guidance for non-GAAP EPS.

Once component constraints begin to ease we believe we will recover the vast majority of this delayed revenue in future periods.

Finally, as Tom mentioned at the start of the call. We continue to focus on executing our strategy with the acquisition itself the sale of our European mechanical gas and global regulator business and a restructuring project. The restructuring project is focused on driving cost reductions in certain locations and functional areas.

Thank you Joan let me add some operational insights to the update John provided.

Is not lost but shifted into future periods. The current visibility for supply recovery is uncertain, but we expect these constraints to linger into 2022.

We are also seeing customer success with the at scale deployment of distributed intelligence edge computing Tampa Electric company recently deployed 600000 apps across 200000 endpoints on the same network running their day to day metered cash operations <unk> is now able to obtain enhanced analytical insights.

More importantly, Chico is acting upon those insights with targeted operational activities that drive improved reliability and safety.

Was unthinkable a few years ago die as a principal tool for the utility to enhance operations at rates of innovation that are new to our industry.

<unk> is the only provider in the industry to have this capability performing in the field today.

$1 4 billion and our 12 month backlog consistent with the improving demand for our solutions.

We are encouraged by the bookings achieved so far this year and continue to see a robust pipeline of additional opportunities.

Highlight of our third quarter bookings was a 10 year extension signed with American electric power.

As we close out today, we would like to thank everyone, who participated in our recent Investor day I Tron remains.

Committed to our operating model and the targets we laid out at Investor Day, We will continue to drive long term shareholder value by executing on the business being proactive with our efforts to deliver an effective operating model, while continuing to ensure <unk> remains a market leader.

Thank you for joining today operator, please open the line for some questions.

Thank you if you wish to ask a question at this time, please signal by pressing star one and please make sure you must function on your phone is switched off that obviously, we will do which are equivalent.

Question comes from.

Tommy Moll from Stephens. Please go ahead.

Good morning, and thanks for taking my questions.

Good morning, Tommy.

I wanted to start on on the update you gave us regarding guidance I'm curious it sounds like revenue.

It is expected to be below the prior range, but earnings per share still within the prior range.

So the inference, there would be margins better than you would've expected previously so I'm just curious what the driver is there or is it a mix issue.

It.

Really low margin revenue that's been pushed into next year or what would you point us to there.

Yes, I would say, it's more a continuation of discretionary opex controls than it is margin.

Got it and just any context, you could give us around what.

What that is John.

In terms of what the controller, yes.

Sure.

Okay. That's helpful. Thank you.

And following up from a strategic standpoint, you gave us some updates on a divestiture and our restructuring both.

Sure Tommy this is Tom I can take that one.

As we continue to move towards more asset light models to allow us to be a little bit more agile.

As demand would naturally ebb and flow.

In Europe after after this.

The deal were to close.

Certainly we will continue to look at ways. We can continue to shape our portfolio aligned with our strategy, but this is a really good step for us and I think.

Our utilities got a really good set of assets to go along with the deal as well.

Thanks, Tom I appreciate the insight and I'll turn it back.

Yes.

We'll now take our next question from Ben <unk> from Baird. Please go ahead.

Hey, Thank you guys. So much for taking my questions.

<unk>.

Yes.

On the acquisition could you talk a little bit.

About how this.

<unk> fills in your portfolio and where you stand.

Being aggressive or other things to do in the portfolio.

And then I'll follow up.

Sure Good morning, Ben.

To think about it is we've had a street fight offering for smart cities for for some time, the offering that was I'll say native too.

<unk> legacy <unk> was.

Can it be network and all of that the management software the SaaS that goes along with with.

With the overall solution, we had been working with silk.

For the actual lighting controller.

And that's the piece that we added into the portfolio. So it gives us an opportunity to continue to integrate on the hardware side of things.

Now have the ability to do smart parking to do.

Our portfolio in that area in the months and quarters ahead.

Okay.

I'm sure you saw that <unk>.

Acquisitions and Dr. <unk> will talk about more going into the home.

What should we think about you guys youre staying out more to spot.

Smart cities.

Software.

<unk> versus charter <unk>.

Thank you.

Sure Ben I would think that our home turf, if you will from a market opportunity as more of our b to b kind of.

Scenario, rather than a business to consumer marketing model that really isn't the sales channel. We're interested in that said I think that the newest version of the <unk>.

The meters that we sell the endpoints that are available do enable partnerships with with other companies for the inside the home kind of assets, we do have a.

The ability for the meter to communicate with other devices inside of the house for efficiency programs for.

Availability of data to to help the consumer understand how he or she is using a particular.

Service or how their energy or water is being used to give them better control and insight is something that we generally do in partnership with our customers and it's a model that serves us well.

Thank you.

Well now we will now take our next question from Jeff Osborne from Cowen and company. Please go ahead.

Yes. Good morning, guys. Just a couple of quick questions on the semiconductor issue I was wondering on the $100 million impact is there any risk to either market share losses or fines for lack of a better word premier customers any sort of repercussions.

The failure to deliver.

The revenue that that we did not fulfill in in the third quarter. The vast majority of that rolls into future periods, our customers are working with us.

To work through that the scheduling of that as components become available I would note that we have not seen cancellations in programs, we do not see.

Or a particular.

Penalty risk here clearly our customers want to get the product deployed and so do we and hence we worked closely with the semiconductor manufacturers to find alternatives maximize our allocation and make sure we're moving product through our supply chain.

Quickly as we can to fulfill the demand.

Makes sense, Tom that's what I thought was the case I just wanted to double check and then two other quick ones one maybe for John on the buyback does that suggest that M&A is less of a priority in 2022, just given where current valuation is.

Then maybe for you Tom just quickly on 22 in your sort of Crystal ball.

Around RFID and RF <unk> activity do you anticipate another robust year in 'twenty two just based on what Youre seeing now are a bit more moderate coming out of COVID-19.

Let me start with the first one I would say no. It does not really reflect any any concerns on our part on the M&A possibility, particularly in outcomes. We just think it's prudent to have that lever in our toolkit from a capital allocation standpoint, historically I try and has hedged typically always had a share authorization out there so nothing specific to <unk>.

Read into that Etame, One cup at RF queue sure. We definitely have good confidence in our business over the long term, our RFP RF Q whatever alert letter you want to use the pipeline of.

<unk> in front of US is very robust very rich and we expect that to continue on our customers definitely are faced with a lot of challenges relative to how to integrate renewables into their solutions, how they can deal with increasing levels of natural disasters.

Climate disruption things of that sort as well as how they engage more closely with their consumers you put those things together it drives some some real demand for our technology.

<unk> technology in our portfolio.

And we think that the robust environment that we see in terms of customer activity is likely to continue.

Perfect Thats all I had thanks, thanks, so much.

Sure.

And I would ask the question comes from Chip Moore from E. F. Please go ahead.

Good morning, everyone and thanks for taking the question.

Good morning, Jeff Great to speak with you.

Thanks.

Talk about bookings being a little softer this quarter, but obviously still right.

101 year to date, just wondering if you're seeing any changes on the demand side. It doesn't sound like it but just particularly as it relates to any pausing ahead of federal funding or anything like that that could be causing any customers to think about those dynamics.

In terms of things coming into the backlog, where 112 to one in terms of the.

The book to Bill and very robust opportunities in front of us for Q4, So no change in the marketplace relative to.

Government stimulus or infrastructure spending around the world or in the U S.

And in this particular case, that's a very good thing given that it's been pretty robust for the last several quarters and we would expect that to continue.

Right right Okay.

Maybe a follow up.

On the sale of the gas device assets I think.

You called out that in no way signals.

Less importance for gas markets in general just curious if you could expand on what you're seeing in gas and water.

<unk>.

Both buckets thanks, guys.

Sure.

Important point that you made there.

We're not walking away from the gas market.

We continue to have a robust portfolio of communication devices as well as things like the Intel us gas metering platform, which is a static meter with integrated comms and integrated safety features built into that that is say a robust value added portfolio of products.

Which fits our strategy goes into that whole notion of networks and then services that live on top of it with things like methane sensing an automatic alarms for triggering.

To avoid safety incidents things of that sort of part of the portfolio that we did.

It does thats good assets.

We're interested in in safety as well as automating their business processes. So communications become more important methane sensing and being able to use a canopy network becomes more and more important we definitely see.

Customers more willing to work together to to reuse a common asset so more combo deals between electricity plus gas for example.

Comes to fruition on the water side of things water sustainability is obviously very important and that same trend about automating business processes wanting to get better value out of the data and run their business in a more orderly.

Animated fashion is what we see in.

And the water market as well.

So both robust parts of our portfolio in Europe, Youll see us continue on but very much aligned to the overall strategic direction of the company.

Got it appreciate the color thanks, Tom.

The next question comes from Connor Lynagh from Morgan Stanley.

Yes. Thank you.

So just.

Question I appreciate the supply chain situation is very dynamic right now I'm curious we heard from some of your competitors that.

Theres actually been a decrease in visibility from semiconductor supplier in terms of losing.

Planned timelines from suppliers, just curious things gotten better or worse over the past few months are you starting to get visibility on where things might get maybe back to normal is too strong a term, but to a stable level that you can sort of build from.

Yeah.

In terms of the supply that we actually.

<unk> into the third quarter, and we're able to turn into revenue for our and get to our customer.

Well indeed so.

So a little worse than what we had anticipated and that was reflected in John's comments that soon.

Ed in terms of the overall visibility and things that are going on in the supply chain I'll be honest I don't see it is ethical to get.

Better than what we talked about previously some of the risks that I highlighted in our prior call things like.

Shutdowns are various.

Economies in Southeast Asia.

Sure.

Countries like.

Vietnam or Malaysia or.

Or the fill.

In has to go on lockdown as they work to wear.

Okay contain COVID-19 that put some some bumps into the earlier stages of the semiconductor cycle.

Or even in the assembly and test side of things what we saw in terms of the near term.

That was playing through in terms of deliveries in Q3.

Where exactly the things that we talked about back in the second quarter I don't see it as particularly better or worse from from what we were expecting overall, so I think that the.

The environment as you pointed out is extremely dynamic.

There is.

A lot of.

Uncertainty in terms of how quickly things can get back to normal what we really do need to watch for is lead times starting to.

Stabilize and two to retract again.

And that will play through in the months and quarters ahead last point I would make is we do think this will linger on into into 2022, which is what I said in some of our preferred preferred prepared comments earlier on in the in the discussion again consistent with what we signaled back in Q2, but it is still the same environment we see.

See today.

Yes, I appreciate that.

Just just.

Dial in a little bit I think you've made some context on this but the.

The revenue shortfall that you guys have been discussing it sounds like it's mostly moving into 2022 or beyond.

Should we think of that is basically entirely or at least the vast majority in the network solutions business.

<unk>.

Basically the question is.

How do we think about the margin on that is it is it going to come through with normal margins is there any sort of pent.

Penalties or just higher input costs, we need to think about that.

That revenue does manifest.

Yes, let me take a stab at that so I would say approximately 75% or so of that component impact hits the network segment and.

And as Tom indicated that really isn't lawsuits delayed whether it's 22 or beyond really is a function of Tom's earlier answer which is when does the environment stabilized et cetera.

We are watching the environment closely for input costs I mentioned in my prepared remarks that.

We did see higher input costs this quarter to the tune of approximately $10 million. So we're going to have to manage that as well.

Alright, thanks for the color I'll turn it back.

Our next question comes from Noah Kaye from Oppenheimer. Please go ahead.

Thanks, so much for taking the questions I guess first one just on the contracting in booking environment can you comment a little bit on how you're seeing the.

Market right now, obviously, you've talked about kind of the robust demand.

Just not sure if there's any implications for.

The scope of projects or the tenor.

Projects given the legislation that's out there.

The industry wide supply chain, but it's just.

Trying to understand.

How the.

Cadence and scope of <unk>.

Contracting discussions as is trending right now.

Sure I can I can jump in on that one.

More technology and more digitalization in their overall infrastructure.

Are the underlying trends that drive customer behavior and.

The pandemic and in some ways, while it certainly put some volatility into exact timing of things as we talked about back in in 2020 in some ways. It is a longer term catalyst is as our customers definitely see the need to to automate their business and deploy the kind of technology.

<unk> that we provide so I don't see customers hesitating or weighting based on.

Any potential infrastructure spending I don't see them.

Any longer.

Slowing things down in terms of the regulatory process things are starting to normalize on that side obviously.

Obviously, the time from contracting to actual starting a project does vary a little bit depending on the individual project at hand.

And now we'll have to watch component availability as things start to.

Come back into focus in 'twenty, two and beyond but.

Overall, I see it as a very robust demand environment, the underlying trends are there and strong.

And.

People aren't slowing down or waiting for for infrastructure spending it clearly it could be a tailwind when and if it would come but not something we're counting on are requiring for us to hit the models that we've been talking about.

Okay. Thanks, Tom and then.

The context of the.

The optimization targets and really division you shared at Investor day for <unk>.

Continuing to make the business more asset like can you kind of frame how much. This divestiture of these planned divestitures get you to that goal.

Yes, I think the easiest way to think about it and this is a gross over simplification a little bit is.

We were taken out to two factories that were associated with the products that we're talking about here. So we're down two to five factories in Europe.

Asia and the Americas are already kind of in the in the optimized state more or less that we would expect.

So still a portfolio work that we can continue to look at with that with our devices business, but.

But we really have have come a good step forward and we will continue to look for opportunities I think our mines turned a bit more towards growth.

On the outcomes side of things and Thats an area that we're continuing to look at.

Alright very helpful. Thank you.

Our next question comes from Pearce Hammond from Piper Sandler. Please go ahead.

Yes, good morning, and thank you for taking my questions. My first is so what specifically drove the backlog declined quarter to quarter.

Yes, it's basically flat.

Down very very slightly but it's normal variation so I would say that the way to think about it is that.

So it's really we consumed some of the backlog no big projects came in and that's that's what led to the flat and slightly down kind of numbers that you. You saw the 12 month backlog is again really ever so fractionally up it rounds to more or less the same number from.

Are you that you tend to see total backlog rounded down a little bit but.

I wouldn't look at it as something that is a signal customer activity remains robust and we've got a great outline.

For opportunities ahead, and the backlog is still at near record levels.

Okay. Thank you and then just following up on John's prepared remarks earlier, so essentially this revenue.

Lost in the quarter pushes out to the right.

So essentially is it fair to say that the component shortages are kind of equally impacting your competitors, so that youre not necessarily losing sales thats just changing the timing of when the sales occur.

Yes, that's basically true as I mentioned about 75% of the impact is in our networks segment and those are longer term contracts and.

And committed business and so we're working closely with the customers as to when we'll have the components to build to fulfill the demand but in general your comments correct.

Thank you.

Thank you as a reminder to ask a question. Please signal by pressing star one.

Our next question comes from Michael Mcginn from Wells Fargo. Please go ahead.

Hey, good morning, everybody.

Aside from earnings it was interesting to get some channel checks on recently as our city upgrades the high pressure gas and I have some new <unk> equipment in the basement now so I appreciate that.

Okay.

Great to hear you're going to get a little.

I was looking to get a little more color on.

Kind of the free cash flow build into the out years.

It seems like the component shortages are limited to a narrow scope of bill of materials. So as the log jam starts to break here and you get back to growth any color on what you think free cash flow conversion would look like.

If your inventory.

Billed as only isolated to a few items and kind of.

How that compares to your other growth periods.

Yes, the only thing I would probably offer is if you look at the information and the target model, we put out in Investor Day, a couple of weeks ago, We showed 2024 targets, including cash flow at a range of 8% to 10% of revenue. So that's quite a bit higher than it has been and thats, probably the best color I can give you in terms of a normalized model going forward.

Okay, and then on the smart lighting side. It seems like a lot of the Oems are passing passing around these days.

These assets and I'm just curious GE.

Some interesting history in the utility space as well.

But now that they have the full suite of C&I and Brexit kind of exposure.

What do you see that kind of matches.

Their investment profile.

And Whiting.

In terms of I guess.

The smart lighting the value add relative to the legacy historical historically and where we are in kind of the adoption cycle.

Any color there would be great.

I would say that.

Our solution is pretty unique in the marketplace given that we've got.

And to end capability from the canopy network management.

The SaaS components as well as the lighting controller.

That is a bit unique you've seen companies make moves that luminaire plus plus.

Plus the lighting controller in cases like that that there is a bit of consolidation in other parts of the world relative to lighting control piece of that.

Okay.

Got it I appreciate it Scott.

Thank you.

As there are no further questions in the queue that concludes today's question and answer session and now I would like to hand, the call back over to Tom Dietrich, putting additional or closing remarks.

Very good I, thank everyone for joining us today, and we look forward to talking to all of you again soon thanks so much.

Thank you. This concludes today's conference call. Thank you for your participation ladies and gentlemen, you may now disconnect.

Q3 2021 Itron Inc Earnings Call

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