Q4 2021 Itron Inc Earnings Call

February 28, 2022

Good day, everyone and welcome to the.

Q4, 2021 earnings conference call today's call is being recorded.

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

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

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 current expectations and assumptions that are subject to risks and uncertainties actual results to 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 .

In other reports and filings with the Securities and Exchange Commission.

In addition, due to the fluid nature of the COVID-19, pandemic and global supply chain constraints company estimates regarding the impact of these events 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.

<unk> discussed today February 28, 2022 may 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'll turn the call over to our CEO Tom Dietrich.

Thank you Kevin Good morning, and thank you for joining us turning to slide four market demand for <unk> solutions has reached new heights, resulting in record bookings and backlog for the fourth quarter.

Bookings in Q4 were $1 $1 billion, which is our largest quarter on record. This pushed 2021 to be a record year with over $2 $8 billion in bookings.

Due to the strength of our portfolio and domain expertise, we are accelerating our leadership position with utilities in cities around the globe.

Our bookings performance drove fourth quarter book to Bill ratio to two two at one four for full year 2021. This was well above our full year target of a one to one ratio.

Record bookings led to a total backlog exiting the fourth quarter of over $4 billion. This eclipsed our previous record of $3 5 billion.

Additionally, we were pleased to see our 12 month backlog increased to approximately $1 5 billion. This is a key metric used to gauge the strength of near term demand.

Based on the rich pipeline of visible opportunities, we anticipate the strong demand environment will continue into 2022, and we are again targeting a full year book to bill ratio of at least one to one.

Noting that the vast majority of our Q4 bookings support our networked solutions and outcomes segments I would like to quickly highlight some examples of our customer wins this quarter.

The first is an example of our ability to combine technology and business model innovation to benefit our customers.

We are pleased to announce that San Antonio water system will leverage the existing <unk> network technology in San Antonio to deploy their new water Ami solution proving our build it once and use it multiple times axiom.

<unk> will also manage the SaaS based data management solution, ensuring data is safe and secure while lowering the total cost of ownership for both saws and Cps energy.

Next I would like to highlight <unk> commitment to safety and the gas solutions market <unk>.

Centerpoint Energy service company, one of the leaders in the utility industry will deploy our entellus gas solution across their service territories.

Our entellus solution.

Not only enable centerpoint with two way communications for monitoring and billing their gas assets, but we'll push intelligence to the edge of the network are entellus gas meter offer self monitoring capabilities. So the smart meter can shut itself off without utility intervention in the event of a high flow or high temperature event.

<unk>.

Simultaneously alarms can be sent via the <unk> network alerting, both the utility and local authorities or potential concerns thus minimizing the risk of gas safety incidents.

Finally, our outcomes business signed a 15 year agreement with Sarawak energy in Malaysia to deploy iphones network as a service solution, including the monitoring and maintenance of the communication network.

The Nash solution for Sarawak Energy includes a 180000 advanced metering infrastructure endpoints as well as the deployment of our operations Optimizer and utility you IQ software as a service offerings.

<unk> open standards based network enables SAR walk energy to improve customer service safety and operational efficiency by providing valuable insights for daily operations.

These are just a few examples of how <unk> solutions are driving our bookings and backlog performance. As these projects are executed over the next few years, they will add to our $3 8 million cumulatively deployed distributed intelligence capable endpoints and are $82 million customer endpoints that are under <unk> management.

Both metrics are important leading indicators of our outcomes growth.

Turning to slide five I will now provide some operational insights to the prior quarter and 2022.

While demand for <unk> solutions is at record levels, the supply chain constraints and inflationary pressures continued in Q4 strong customer demand was more than offset by semiconductor component constraints for the full year 2021 component supply constraints engage our revenue by approximately.

<unk> $225 million.

Additionally, we anticipate our revenue will be impacted by semiconductor constraints through the first half of 2022 at similar levels experienced in the second half of 2021.

We continue to manage through these macro constraints, we are grateful for the support and collaboration of our customers on project profiles and emphasize that we have not seen any cancellation of backlog the long term nature of our business, particularly in the networked solutions and outcomes areas serves us well in this regard.

<unk>.

Turning next to our efforts around price cost actions, we are actively working to protect our margins from cost pressures that stemmed from the pandemic and resulting inflation that we saw last year and is continuing into 2022.

We are aggressively moving to lower cost secure supply and adjust pricing with customers to adapt to the new market realities as component constraints ease we anticipate increased factory utilization combined with our continued efforts to move to a more asset light model will improve our margins.

Finally today, we anticipate the completion of the sale of our non communicating mechanical gas businesses that were announced last fall.

Since 2019, we have divested or exited over $300 million of annualized revenue from non core non strategic assets, including an annualized approximately $100 million of revenue in this most recent transaction.

While this revenue was highly concentrated in our devices solutions segment. It has allowed us to focus our efforts and develop innovative product offerings for our networked solutions and outcomes segments, which has led to our record bookings in 2021.

Close of this transaction with dresser utility solutions is another milestone on our journey towards more advanced networks distributed intelligent endpoints and data driven outcomes to better serve our customers for the next decade and beyond.

Now please turn to slide seven as a hand off to Joan to cover our fourth quarter results and our 2022 outlook.

Thank you Tom as Tom discussed, we continued to be impacted by supply chain constraints in the fourth quarter and expect a similar environment through the first half of 2022.

Slide seven has a summary of consolidated GAAP results.

Fourth quarter revenue of $486 million decreased 8% from last year or 6% in constant currency the.

The year over year decline was due to supply constraints, which limited our ability to meet customer demand, reducing revenue by approximately $75 million in the quarter.

Gross margin for the quarter was 25% 330 basis points lower than last year, primarily due to higher component costs and manufacturing inefficiencies driven by the supply constraints.

The GAAP net loss of $59 million or $1 30 per share compares with net income of $22 million or <unk> 53 per diluted share in the prior year.

The net loss in the current period was primarily due to lower gross profit higher restructuring expenses and a loss related to the expected sale of our mechanical C&I gas business.

Regarding non-GAAP metrics on slide eight non-GAAP operating income was a loss of $7 million.

Adjusted EBITDA was $3 million non-GAAP net income for the quarter was $34 million or <unk> 75 per diluted share.

Looking at revenue by business segment on slide nine device solutions revenue was $157 million or $25 million or 13% year over year decline on a constant currency basis.

The decrease was due in part to component shortages, which resulted in him fulfill customer demand.

Also it was a tough year over year compare is the fourth quarter of 2020 reflected a catch up of shipments from delays caused by earlier Covid shutdowns in Europe .

Networked solutions revenue was $265 million or $12 million or 4% decrease year over year in constant currency. The decline is attributable to the component shortages.

Revenue in the outcomes segment was $64 million, a $3 million a 4% increase in constant currency from 2020, the increase was due to higher software and professional services.

Lastly, foreign currency changes resulted in $5 million lower revenue versus the prior year.

Moving to our non-GAAP year over year EPS Bridge on Slide 10, our Q4 non-GAAP EPS was <unk> 75 per diluted share up <unk> 10 from the prior year a negative tax provision in 2021 had a very positive benefit to the year over year, non-GAAP EPS, adding $1 per share.

The unusually low tax rate in the quarter was due to a tax benefit driven by the impact of certain transfers of business activities and assets.

The tax benefit to EPS was mostly offset by net operating performance, which had a negative <unk> 96 per share impact versus Q4 of 2020.

This was primarily due to the impact of component constraints and cost inflation on gross profit as well as higher variable compensation.

Lower interest expense resulted in a 16% increase year over year, and finally changes in foreign currency and share count resulted in a <unk> <unk> per share decrease year over year.

Turning to slides 11 through 13, I'll discuss the Q4 results by business segment compared with the prior year.

Device solutions revenue was $157 million with gross margin of 9% and operating margin of 2%.

Gross margin decreased 280 basis points due to manufacturing inefficiencies related to component shortages and inflationary cost pressures opt.

Operating margin decreased 460 basis points due to the fall through of lower gross profit as well as higher opex.

Networked solutions revenue was $265 million with gross margin of 30%.

Gross margin decreased 600 basis points from the prior year, primarily due to manufacturing inefficiencies related to the component constraints and inflationary cost pressures.

Operating margin of 19% decreased 690 basis points due to the fall through of lower gross profit.

Outcomes revenue was 64 million with gross margin of 43%, which was essentially flat with the prior year.

I would note that in both Q4 of 'twenty, one and in Q4 of 'twenty. The outcomes segment achieved stronger than average gross margin due to the recognition of software license sales.

Lastly, outcomes operating margin was 25% 450 basis points lower due to higher R&D investment in 2021.

Now to briefly recap full year 2021 results on slide 14.

But the 2021 results were significantly impacted by supply constraints, particularly in the back half of the year Rev.

Revenue of approximately 2 billion was down 9% from 2020, the reduction was largely attributable to the impact of the supply constraints, which reduced our full year 2021 revenue by approximately $225 million.

Gross margin was 28, 9%, a 120 basis points higher than 2020 <unk>.

Adjusted EBITDA was $115 million compared with $178 million in the prior year.

non-GAAP earnings per share was $1 75, compared to $1 85 in 2020.

Free cash flow was $120 million compared with $63 million in the prior year the strong year over year improvement in cash flow was driven primarily by lower variable compensation and interest payments in 2021.

Turning to slide 15, I'll cover liquidity and debt.

Free cash flow was $7 million in the fourth quarter cash and equivalents at the end of the fourth quarter were $172 million, including $10 million related to the pending sale of our mechanical C&I gas business, which was reclassified to assets held for sale.

Okay.

Total debt remained flat at $460 million and net debt was $288 million net leverage was two five times at the end of Q4.

As we announced on our last earnings call. The board of directors authorized a share repurchase program of up to $100 million over an 18 month period as of today, we have repurchased $25 million or approximately 400000 shares under the program with an average repurchase price of $61 67.

Please turn to slide 16, I'd like to provide some color on our 2022 expectations.

We anticipate full year 2022 revenue to be in a range of $2 <unk> to $2 $1 billion.

We expect revenue in the first half of 2022 will be constrained by the supply chain shortages similar to our experience in the back half of 2021. Our current expectation is the supply constraints will begin to improve in the second half of the year, allowing us to catch up on a portion of the first half shortfall.

At the midpoint for 2020 to annual revenue guidance is approximately 3% year over year growth.

This is driven by growth in both our networked solutions and outcomes segments, partially offset by a decline in device solutions.

We continue to make portfolio decisions and our devices segment, which has led to lower revenue. This guidance also reflects the sale of our mechanical C&I gas business, which reduced revenue by approximately $100 million on an annualized basis.

If you normalize for the impact of the sale the 2022 revenue growth rate at the midpoint of guidance would be approximately 8%.

We anticipate full year non-GAAP EPS to be within a range of $1 25 to $1 75 per diluted share.

At the midpoint of the guidance and normalizing the tax rate to 25% for both years the year over year earnings growth rate is over 50% higher than our 2021 performance.

Given the continued high level of supply constraints, we expect in the first half of the year the earnings will be heavily skewed to the second half of 2022.

Other guidance assumptions are a euro to U S. Foreign currency exchange rate of one one for an average non-GAAP effective tax rate of approximately 25%.

Average shares outstanding for the full year of approximately 45 5 million shares.

In summary, it was a challenging year given the macro supply chain headwinds, we faced we worked diligently to mitigate the impact but our results were obviously disappointing to us while we see the supply constraints continuing through the first half of 'twenty. Two we anticipate the situation will improve in the second half of the year.

Our record bookings and backlog, we will facilitate a strong recovery when the supply chain rebalancing <unk> now I'll turn the call back to Tom.

Thank you Joan.

Despite the impact that semiconductor constraints have had on our 2022 outlook. We are extremely pleased with the demand and opportunity pipeline for our technology and solutions. We continue to organically invest in solutions that enable our customers to overcome the dynamic challenges facing our industry.

One final item I would like to highlight prior to opening for Q&A earlier. This month <unk> formally launched our optimizer solution set this solution combines EV charging management distributed energy resource management, and low voltage distribution management into a platform with real time insights and <unk>.

Distributed edge intelligence.

Available globally, <unk> optimize our portfolio, including the first of its kind EV charging optimizer is endpoint agnostic combining grid elements, such as EV Chargers electric vehicles solar inverters local energy storage and grid transformers, allowing these disparate distribution network.

Assets to be visible under a single pane of glass for management and service optimization.

With <unk> optimize our portfolio utilities can use these assets do balanced loading optimize costs and improve service reliability as part of an end to end grid solution.

For example, this solution enables EV charging fleet management to work cohesively with other assets present in the grid.

Our first of its kind solution <unk> is integrated EV charging control and grid management solutions into a single platform, allowing load management and optimization are open standards based solution is vehicle and charger agnostic and it alleviates a significant barrier in the development and deployment.

Multiple commercial and industrial EV fleets on the utilities low voltage distribution network.

Our optimizer portfolio is a result of our continued to invest in outcomes to enable our customers to effectively manage and optimize services in the face of an exponential increase in grid complexity.

We cover a lot of ground today, providing insight into the current supply and demand environment as well as proof points for our belief in our long term model, we take pride in serving the technology needs of utilities and cities around the globe and are confident in the business. Thank.

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

Yes, Thank you and if you would like to ask a question. Please signal by pressing star one on your telephone keypad.

Using a speaker phone. Please make sure your mute function is turned off to allow your signal to reach.

Equipment.

Once again that is star one if you would like to ask a question.

We will now take a question from Noah Kaye with Oppenheimer.

Good morning, Thanks for taking the questions.

Pretty impressive bookings I wonder if with their.

Just give us a sense you mentioned that.

Related.

In networks.

How how are some of the regulatory changes they're supporting.

<unk> from Capex to Opex and utility World, how is that manifesting in your bookings pattern.

And how much.

Are you seeing on the outcome side from that transition as well any kind of metrics you can provide around that would be very helpful as well as qualitative color.

Sure I can take that one Noah this is Tom.

The <unk>.

Bookings that we saw in the fourth quarter and really a continuation of the trend that we saw for the full year was heavily tilted towards networks and outcomes. So that was 90% of the bookings and that really flows through into the position in the backlog.

The type of bookings that we're seeing are for more advanced network applications and.

Nearly every one of the bookings has a and outcomes component that goes along with it.

Outcomes component is generally a SaaS or a network as a service based solution that rides on top of the networking technology itself that is longer term recurring revenue.

Very essence, we have more than two dozen.

Customers that are already deploying our distributed intelligence based endpoint solution.

And we see good growth in distribution automation and in Streetlights Smart city applications, which contributes to the bookings.

Okay very helpful. Thanks.

Just on the operation.

Supply chain.

Number one you mentioned that you're expecting.

<unk> utilization to improve I wonder if you could provide.

A little bit more color there.

And of course, you can think about the back half of the years I'm not talking about I mean.

How about kind of where your utilization that we're going to bump it up but I guess can you kind of strategically update us on your.

Progress in.

Fortifying our supply base.

Beer spring initiatives, you can talk about.

To help provide a little bit more visibility into the back half of the year.

Sure happy to do so.

As we talked about in our prepared remarks, we do expect the.

Supply chain to begin to rebalance during the second half of the year.

What you will see in our <unk>.

<unk> as that begins to happen is factories filling up and then you get obviously the benefit of the revenue and the fall through but also the utilization that goes along with it important to note that all of those bookings that we just spoke about a moment ago do flow through so we've got a very strong and healthy demand environment, what we really need is the <unk>.

Components that go along with it.

We have continued to work hard on utilizing that are optimizing rather the factory footprint itself. Most of our factories are now well positioned close to the markets that they serve so for example, the north American market by and large is served out of.

Supply that comes from I'll say this side of the globe. So the notion of near shoring shoring has been our.

Our supply chain strategy that we undertook over the last four or five years across the board.

In terms of the margin improvement I think it comes in three forms one is rare.

Our revenue fall through as you get components you start to see the top line grow and that flows through you see.

The cost improvements that we've been working on in terms of the factory footprint and then of course. The third is the utilization of those manufacturing assets all of that accrues into the back half of the year, which is what our guidance and commentary was based on.

Great very helpful. Thanks, so much.

We will now take our next question from Jeff Osborne with Cowen and company.

Yes. Good morning, a couple on my end on the semiconductor impact I was wondering if you could remind us what that was in Q3, Joe and I heard you say $2 25 for the year 75 for Q4, I'm just trying to get a sense of impact for for the first half of 2022.

Yes, it was about $100 million in Q3.

Okay. So about 175 as an impact for semi and then 100 from the acquisition I'm just trying to bridge the gap on the guidance there.

100, 100 is an annualized number on the divestiture.

Okay got it.

If theyre looking for kind of first sorry, if youre looking kind of first half <unk>.

<unk>, we would have owned that business for through February so kind of four months worth.

Got it okay.

And then on the $1 1 billion in bookings the two you flagged in the prepared remarks, Centerpoint and San Antonio.

I wouldn't think that those are chunky percentages of that was there any large electric orders that you didn't name of the customer that you could give us a flavor of because you mentioned to Noah's question that da in networking for some electric applications, where there so could you.

Detail that.

Sure.

The Centerpoint booking clearly was one of the larger that was in that fourth quarter.

Bookings number it is.

Territory wide gas deployment for the smart gas.

<unk> solution that we offer so it was one of the largest there are numerous other bookings that are inside of there in the electricity space TNMP, Texas, New Mexico power is probably one of the larger but I would see say is what youre starting to see in the bookings themselves is a lot of add on type of.

<unk> with existing customers. So in that particular case it comes perhaps in smaller pieces, but it's also coming as well.

Long term recurring revenue and added applications, which is exactly what our strategy is playing out to be.

Got it that's helpful. Tom as the Centerpoint is that an upgrade of the network that was put in in 2007 through 10, I think they had a legacy Tri network pre the silver spring acquisition or was that only for the electric piece of it is.

Yes. This is this is the gas side of it so.

Think about it is the network and the endpoints and really because of our solution. The endpoints are the network themselves in terms of how it plays through but it is advanced endpoints.

The gas meter the advanced functionality in the comms equipment that goes along with it.

Got it and then lastly is there any progress that's been made on the semiconductor side in terms of qualifying additional suppliers or product redesign to avoid some of the issues or are you just hoping that your existing suppliers have ramped up capacity and youll have better allocation in the second half of 2022.

Certainly we've made tremendous progress on.

Qualifying multiple suppliers, we do have.

Good support on that front.

That said, it's still a very very constrained environment. So we're instead of being allocation being on allocation with one supplier youre likely to be on allocation with with two suppliers, but as that supply chain begins to rebalance. We do believe that multi sourcing effort that we've undertaken for certainly.

The last few years will serve us well in terms of being able to ramp up in service that strong backlog that's ahead of us.

It's great to hear that's all I had thank you.

Thanks, Jeff.

We will now take our next question from Tommy Moll with Stephens.

Good morning, and thanks for taking my questions.

Good morning, Tommy.

Tom I wanted to circle back on bookings in the quarter, you've been bullish for some time on network and outcomes and it sounds like those were 90% of the driver there.

At the same time, you've been bullish, but maybe not $1 1 billion in the quarter bullish.

No I just I wonder if you could.

Identify anything possibly.

Seasonal season related calendar year end related.

Anything that was specific to that quarter.

Just to walk us back from the potential repeatability, there I mean, I don't think embedded in your outlook for book to Bill, you're assuming that kind of a run rate on orders going forward.

So anything you could do to.

Some of that together would be helpful. Thank you.

Sure so.

Don't see it as particularly seasonal meaning a fourth quarter or.

A particular time of the year bookings by their very nature in terms of some of the larger deployments that we do tend to come in buckets or big chunks. So it is a little bit lumpy. Overall. So you are correct I think it would be unwise to expect.

New run rate of $1 1 billion for quarter. Four for example that said, we do see a very rich pipeline of opportunities that are ahead of us.

And all of that is based on just the strength of the technology and the breadth of the applications that we provide so we are very bullish about what the demand environment looks like in the short run.

But also what the bookings environment will be throughout 2022.

The caveat that I would give you though is the the bookings will be a little bit lumpy quarter to quarter, but I wouldn't blame that necessarily on pure seasonality final point I think that is important to point out.

None of the guidance for 2022, and the bookings that you see today are really related to a government stimulus.

It's still somewhere ahead of us.

On the stimulus work that the U S government is working through when defining all of the rules on how that money will be allocated in opening up the <unk>.

The opportunity for customers of ours to apply for the various grants and things that will start to happen during.

This year, which will result in revenue somewhere beyond this year. So our guidance for the year is not based on any tailwind nor is the strong pipeline of opportunities that we see today is I still think thats somewhere ahead of us as future opportunity.

Thanks, Tom and shifting gears to the EV charging optimizer announcement that you referenced can you talk to us about how long that had been and development internally.

Where you see the.

<unk> solution in terms of the adoption curve I presume your answer is going to be very early but just any context you could.

If you could give about level of adoption or conversations with customers.

And I guess finally can.

Can you hazard, a guess quantitative or qualitative on what's the magnitude of the tailwind from <unk>.

<unk> adoption.

<unk> as a whole how big of a needle mover can that be for you in the next few years.

Sure. So the portfolio of the optimizer solution. So evs that you mentioned, but also the low voltage grid assets things like Transformers, and then distributed energy resources batteries rooftop solar things of that nature. The notion that we've had all the way back.

Probably the 2018 2019 timeframe as the grid complexity was going to increase pretty dramatically as these things started to.

To show up on the grid and our customers would need a way to understand where those assets are and be able to to begin to optimize and plan load balancer around those types of solutions. So we have been putting the building blocks in place for a couple of years.

Now and ended up doing some pilots early on this year around a very small scale.

<unk> management types of things, we formalized all of that with the optimizer portfolio when launch that during just the last couple of months.

So what we have today is.

A number of customer pilots, we signed Duke energy as a as our first commercial deployment on the EV optimize our portfolio and look to continue to add to it.

The really interesting part about this is this is all network or endpoint agnostic. So we can apply the analytics package over top of it.

Any existing assets that the customer has clearly it works much much better the more insights you have into those assets. So if you have already deployed <unk> network and have distributed intelligence you can even do quite a bit more with with these.

The solutions that we do have today. So we're fiercely fiercely proud of being able to build on all of these solutions in all of this was done with the inorganic.

R&D investments, which is how we've been thinking about it in terms of future optimization, our opportunity rather to the last point of your question I don't know that I could hazard a guess I think distributed energy resource management is one of the largest challenges that electricity utilities have today and the problem is.

Definitely getting worse in terms of how they can ensure reliable and resilient service in the face of these challenges. So I think it is an enormous opportunity and indeed, it's a place that the stimulus money is heading as well. So I think it will be a growth driver for our outcomes based business and incremental network business in the years.

Ahead.

Thanks, Tom I'll turn it back.

We will now take our next question from.

<unk> with Raymond James.

Thank you for taking the question.

Component supply was limitless.

How much higher would revenue be this year.

It's really tough for me to put a perfect number on that I would guess a couple of hundred million dollars higher than what our guidance point is I would say that based on where our.

12 month backlog sits today, which is now.

At $1 5 billion I look at it through the lens of where our customer deployment projects are today, and and think about that through the lens of the installed capacity that we have in place that we are eager to fill so I would say a few hundred million dollars higher than what we are expecting.

<unk> today that is based on the first half that is a bit depressed in terms of where our guidance is that us and our ability to begin to catch up and fill some of that in the second half of the year.

Ken then zooming in on backlog for 4 billion total.

How much of that is in the outcomes segment.

Yes, we haven't really broken out, but the outcomes piece, specifically I would say that 90% of that $4 billion in the <unk>.

<unk> an outcome space clearly networks is bigger in that portion just because of the size of the business today, but the portion that is outcomes is steadily growing and.

We're looking forward to continue to do that with the types of products that we just spoke about and Tommy's question on the on the optimize our portfolio.

Okay. Thank you very much.

Okay.

We will now take our next question from Ben <unk> with Baird.

Hey, good morning, Thanks for taking my questions.

As we think about and maybe just.

Paul's question.

As we think about next year.

23 could you talk to us about some of the.

The cost reductions or restructuring impacts through Opex first and then second.

How do we think about the cadence of just because you have such a big backlog here for.

Through into next year or is it something that just.

When you have the components and also did you can turn the spigot on or is it.

More moderate kind of build back.

Thank you.

Yeah, I'll start Ben and then I'll pass it to Joan on the restructuring flow through but that $4 billion in backlog.

Right way to think about it as that plays out over roughly a three year, maybe sometimes for the long tail four year kind of period of that backlog $1 5 billion of it is in the.

As in the next 12 months.

Once you start a project with a customer and it starts to go well and deployment is underway, we tend to see that our customers generally accelerate that deployment.

Starts a bit slow, but it accelerates along the path. So as we can supply that the hardware. We do believe we can ramp up and be able to supply and fill fulfill that backlog over let's say roughly the next three year kind of period based on the visibility that we have today the gating item very much is component.

At the moment.

Yes, I think about.

Incremental year over year 'twenty, one to 'twenty two from restructuring at somewhere between $15 million to $20 million. If you look forward to 'twenty three maybe it's another $10 million in total the majority of that's actually not in the Opex line, though the majority of that is actually in the in the gross margin line.

Think about the factory closures et cetera.

Got it and so when I think about.

Gross margins in this kind of normalizing thereafter.

We did pass component shortages.

What's a good year to look back too.

<unk> thousand 18, just on networks.

And then and then maybe Tom just on the regulatory front I know that there were.

We started shutdowns in Covid regulatory delays were happening for a variety of reasons could you give us some update there we're still stands now.

Yes, let me take a shot at at margins and I wouldn't do it by networks that for the company. So given that the supply constraints are still with us and we expect them to be comparable in the first half of 'twenty two versus the last half of 'twenty. One I would say that will continue to be very challenged in the first half of the year, assuming the supply does start to read.

Balanced in the second half of the year, which is what we're anticipating I think our full year margins will get close to kind of the company 2019 level, which was approximately 30%.

Again networks is obviously higher than the average of the company and given that the preponderance of the backlog is networks that bodes well for the future, but think about it from that perspective. We're obviously are dealing with an inflationary environment now we're doing everything we can to the flow through of those cost increases to customers, but that would be the best.

Estimate I would have right now.

Thank you and with respect to the regulatory front, we really have seen the regulatory environment normalize that happened during two.

<unk> 2021 and continues on today, so so regulatory decisions are being made.

And rate cases, being approved that is I would say more or less a normalized environment. Today, we do see regulatory commissions very interested in addressing resiliency and reliability types of.

Issues.

To make sure that their communities are well served so the regulatory environment is absolutely moving in the right direction.

And I would suspect as infrastructure money flows that that would continue.

Great. Thank you.

Thanks Ben.

And as a final reminder, that is star one if you would like to ask a question.

We will take our next question from Chip Moore with E.

Yeah.

Thanks.

Very impressive to see the demand without any benefit yet.

Can you maybe talk about what you're seeing that gives you comfort to get some improvement on component shortages in the back half of the year.

Sure.

The environment that we see today with respect to the supply chain I would summarize it as follows the number of Decommit really has slowed to a trickle of decommit being when a supplier says they're going to deliver something and then they don't turn up with the goods. So I will say the reliability in terms of components.

Supply from a say do ratio is certainly much better than it was.

Just several months ago, we definitely see lead times very very long. So you have lead times that could be 40, 50, 70, 80 weeks long those lead times remain elongated and we have not yet seen any sort of.

Normalization a retraction on those those lead times just yet.

The.

The situation remains fluid there are a number of shocks that keep going into the system. So some of the things that happened from the early days of <unk>.

<unk> and Delta rattle through the supply chain that's not.

<unk>, our first tier suppliers, but it's deeper into the supply chain itself and as we work with our suppliers and tried to understand the allocation that we have against those lead times, because we're living in that long range kind of world, That's where we think the second half.

It looks quite a bit better than what we have experienced back half of last year and the environment that we're operating in today.

Again remains fluid. So we've got to continue to watch it really closely but we'll continue to work on self help on our side.

Qualifying multiple suppliers and making sure that we take advantage of every component that is available we will work with customers to plan out schedules and make sure that we can support the projects that they have our customers are absolutely working with us and not canceling.

Any backlog so it is a timing related issue, but that's the basis that we use for the second half supply situation being better than what we experience today.

Thanks, that's helpful and maybe just a quick follow up there.

Blue chip.

1.5 billion 12 months backlog backlog, a fair amount of book and ship.

To get through this year as well just your positioning there.

And visibility.

The environment certainly on the book and ship business.

Following what you see in the bookings environment customers are hungry for product.

We're not always in a great position to be able to fulfill that based on some of the component constraints, but the book and ship business.

He has also been healthy.

I would watch out closely.

To see what will happen in Europe with some of the conflict there to make sure that environment remains good but I do believe that it will be a supply gated environment did not demand data environment or even on the book and ship business.

Thanks very much.

Thanks, Jeff.

Yeah.

Well take our next question from Thomas Jonsson with Morgan Stanley .

Alright, thanks for thanks for taking my call today.

A question on the margin side of things helpful color in the presentation, just thinking through year over year dynamics, but can you kind of just help us think about the sequential change in operating margins for the device solutions business and the.

<unk> fourth quarter and maybe.

Kind of help us set some expectations on path to normalization and what that might look like in the first half of the year as well.

Yes, So let me focus I guess first on just sticking with the gross margin level. So as Tom indicated the supply constraints were pretty heavy in Q4 again total of $75 million. Most of that is networks, but a portion of that impacts devices as well so that creates utilization issues in the <unk>.

Factories. In addition to kind of inflationary cost pressures. So both of those contributed to the lower gross margin in the quarter versus what what we would have experienced in prior quarters in the year.

Going forward, we're obviously I mentioned, we've been doing a lot of work on exiting businesses and kind of reshaping the devices portfolio certainly would expect that gross margin to be higher going forward, but again lower in the first half higher in the second half as the supply rebalancing.

Great.

Understood and then maybe just.

Just one more on the margin recovery.

This can be at the consolidated basis, but clearly utilization and volume is a big driver of the two H recovery, but can you maybe add any incremental color on what you guys have been able to achieve from a pricing standpoint, and how that might support the kind of two H normalization as well.

Sure our guidance is definitely based on working price cost actions, so that the cost side as component cost as well as utilization being able to use that here much better, but there are a number of pricing initiatives underway today.

We certainly had.

Passed along price increases on turns based business, where we had.

New orders starting to come in we have written contracts based on an indexing. So that we're better protected in terms of.

The pricing in contracts going forward.

We're working now on working on the backlog side of things to try to make sure. We address the pricing side EBIT on the backlog that is a more difficult equation, but it is all part of how we're thinking about our 2022 guidance.

Great. Thank you guys very much.

Thank you.

And it appears there are no further telephone questions I'd like to turn the conference back over to Mr. Chuck for any closing comments.

Thank you operator and I. Thank everyone for joining today, we look forward to talking to you again in the next couple of months, Thanks and have a great day.

Yes.

And once again that does conclude today's conference.

There will be an audio replay of today's conference available. This afternoon, you can access the audio replay by dialing 18880.

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Okay.

Yes.

[music].

Good day, everyone and welcome to the <unk>.

In Q4, 2021 earnings conference call today's call is being recorded.

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

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.

Conciliations 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 and.

Cereals discussed today February 28, 2022 may 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'll turn the call over to our CEO Tom Dietrich.

Thank you Ken good morning, and thank you for joining us turning to slide four market demand for <unk> solutions has reached new heights, resulting in record bookings and backlog for the fourth quarter.

<unk> in Q4 were $1 1 billion, which is our largest quarter on record. This pushed 2021 to be a record year with over $2 8 billion in bookings.

Due to the strength of our portfolio and domain expertise, we are accelerating our leadership position with utilities in cities around the globe.

Our bookings performance drove fourth quarter book to Bill ratio to two two at one four for full year 2021. This was well above our full year target of a one to one ratio.

Record bookings led to a total backlog exiting the fourth quarter of over $4 billion. This eclipsed our previous record of $3 5 billion. Additionally.

Additionally, we were pleased to see our 12 month backlog increased to approximately $1 5 billion.

This is a key metric used to gauge the strength of near term demand.

Noting that the vast majority of our Q4 bookings support our networked solutions and outcomes segments I would like to quickly highlight some examples of our customer wins this quarter.

The first is an example of our ability to combine technology and business model innovation to benefit our customers.

<unk> will also manage the SaaS based data management solution, ensuring data is safe and secure while lowering the total cost of ownership for both saws and Cps energy.

Next I would like to highlight <unk> commitment to safety and the gas solutions market Centerpoint Energy service company one of the leaders in the utility industry, we will deploy our entellus gas solution across their service territories.

Our entellus solution not only enable centerpoint with two way communications for monitoring and billing their gas assets, but we'll push intelligence to the edge of the network are entellus gas meter offer self monitoring capabilities. So the smart meter can shut itself off without utility intervention in the event of a <unk>.

High flow or high temperature event.

Simultaneously alarms can be sent via the <unk> network alerting both the utility and local authorities as potential concerns thus minimizing the risk of gas safety incidents.

Finally, our outcomes business signed a 15 year agreement with <unk> energy in Malaysia to deploy iphones network as a service solution, including the monitoring and maintenance of the communication network.

The Nast solution for Sarah Walk energy includes a 180000 advanced metering infrastructure endpoints as well as the deployment of our operations Optimizer and utility you IQ software as a service offerings.

<unk> open standards based network enables Sarawak energy to improve customer service safety and operational efficiency by providing valuable insights for daily operations.

These are just a few examples of how <unk> solutions are driving our bookings and backlog performance.

These projects are executed over the next few years, they will add to our $3 8 million cumulatively deployed distributed intelligence capable endpoints and are 82 million customer endpoints that are under <unk> management, both metrics are important leading indicators of our outcomes growth.

Turning to slide five I will now provide some operational insights to the prior quarter and 2022.

$225 million.

Additionally, we anticipate our revenue will be impacted by semiconductor constraints through the first half of 2022 at similar levels experienced in the second half of 2021.

The long term nature of our business, particularly in the networked solutions and outcomes areas serves us well in this regard.

Turning next to our efforts around price cost actions, we are actively working to protect our margins from cost pressures that stemming from the pandemic and resulting inflation that we saw last year and is continuing into 2022.

Finally today, we anticipate the completion of the sale of our non communicating mechanical gas businesses that were announced last fall.

The close of this transaction with Dresser utility solutions is another milestone on our journey towards more advanced networks distributed intelligent endpoints and data driven outcomes to better serve our customers for the next decade and beyond.

Now please turn to slide seven as a hand off to Joan to cover our fourth quarter results and our 2022 outlook.

Thank you Tom as Tom discussed, we continued to be impacted by supply chain constraints in the fourth quarter and expect a similar environment through the first half of 2022.

Slide seven has a summary of consolidated GAAP results.

Fourth quarter revenue of $486 million decreased 8% from last year or 6% in constant currency.

The year over year decline was due to supply constraints, which limited our ability to meet customer demand, reducing revenue by approximately $75 million in the quarter.

Gross margin for the quarter was 25% 330 basis points lower than last year, primarily due to higher component costs and manufacturing inefficiencies driven by the supply constraints.

The GAAP net loss of $59 million or $1 30 per share compared with net income of $22 million or <unk> 53 per diluted share in the prior year.

The net loss in the current period was primarily due to lower gross profit higher restructuring expenses and a loss related to the expected sale of our mechanical C&I gas business.

Regarding non-GAAP metrics on slide eight non-GAAP operating income.

Was a loss of $7 million adjusted EBITDA was $3 million non-GAAP net income for the quarter was $34 million or <unk> 75 per diluted share.

Looking at revenue by business segment on slide nine device solutions revenue was $157 million or $25 million or 13% year over year decline on a constant currency basis the.

The decrease was due in part to component shortages, which resulted an unfulfilled customer demand.

Also it was a tough year over year compare as the fourth quarter of 2020 reflected a catch up of shipments from delays caused by earlier Covid shutdowns in Europe .