Q3 2022 Itron Inc Earnings Call
Good day and welcome to the Icahn incorporate quality 2022 earnings call. Today's conference is being recorded at this time I would like to turn the conference over to the Vice President Investor relation.
Please go ahead Sir.
Thank you operator, good morning, and welcome to <unk> third quarter 2022 earnings Conference call. We issued a press release earlier today announcing our results. The press release includes replay information about today's call.
Presentation to accompany our remarks on this call is also available through the webcast and on our corporate website under the Investor Relations tab.
On the call today, we have Tom Dietrich, <unk>, President and Chief Executive Officer, and Joan Hooper, Senior Vice President and Chief Financial Officer.
Following our prepared remarks, we will open the call to take questions using the process. The operator described before.
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.
All company comments estimates or forward looking statements are made in a good faith attempt to provide appropriate insight to our current and future operating and financial environment.
Materials discussed today November three 2022 may 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 Deitrich.
Yes.
Thank you Ken good morning, and thank you for joining us.
You will hear third quarter details from Joan coming up shortly but here is a brief overview of the quarter revenue was $421 million adjusted EBITDA was $24 million.
non-GAAP earnings per share was <unk> 23.
And free cash flow was $11 million.
Turning to slide five despite the ongoing macroeconomic cross wins, we continue to see strong market demand for our technology. This is reflected in our third quarter bookings of $578 million.
Our total backlog, reaching another new record of $4 2 billion.
We anticipate the demand for our technology to remain robust as our customers require more insight and control over their energy and water assets.
This was extremely evident through the discussions we had with our customers partners and suppliers in our inspire conference in September the alignment of our offerings with the needs of our customers has never been stronger driven by the proliferation of electric vehicles, the need for distributed energy resource management.
And the utilities desire to actively engage with their consumers.
Some of our key bookings this quarter highlight how <unk> enables the integration of renewable and distributed energy technologies onto the grid with our optimizer distributed energy management solution, our customers Pepco Holdings, and Tampa Electric company chose our optimizer solution to allow them to analyze and control their distributed energy.
Resources more efficiently.
Next we're proud to announce electric utilities Corporation as one of our newest logos.
Already a leader in utility innovation in Canada, we were selected for their next generation technology refresh, including leveraging our Gen. Five <unk> network and distributed intelligence enabled end points to enhance the visibility and control at the edge of their distribution grid.
Now turning to slide six I would like to provide some operational updates and insights for the quarter.
We see robust market demand with a pipeline that remains plentiful and a regulatory environment that continues at a healthy pace, while the market environment is positive and our backlog is resilient in a case of possible macroeconomic slowdown we continue to experience macro supply chain constraints slowing our ability to convert.
Backlog into revenue.
Global constraints remain focused in analog RF and mixed signal semiconductors that are commonly used in the automotive industry and other industrial applications unexpected shortages inbound shipment delays and non linear deliveries of critical components within the quarter hampered our visibility and created inefficiencies.
Within our factories, resulting in quarterly revenue constraints above our expectations.
We remain in an inflationary environment, which was partially offset by pricing actions, while the costs plateaued during the quarter, we recognized volatility may still carry forward.
These headwinds have directly impacted the performance of the company, particularly in the network solutions segment. During recent quarters indirectly the near term growth of our outcomes segment has been deferred as well well outcomes growth remains at the forefront of our strategic direction. The supply constraints have driven delays of new projects.
Typically those involving our distributed intelligence solutions managed services software and value added applications impacting our near term growth trajectory.
As supply stabilizes and our project deployment scheduled to resume that pace. We are confident the outcomes business will get back on track <unk>.
While these headwinds are disappointing, we do not sit idle and continue to proactively work through this difficult macro situation, including taking on more inventory for improved backlog conversion maintaining controls over discretionary spend finding new ways to be more innovative and agile in the introduction.
Of new products to the market improving our operational footprint with our asset light strategy and of course, maintaining close engagement with our customers to plan, but delayed deployments. We do anticipate improvement in these macro driven headwinds moving forward, allowing us to get back on track.
Looking out beyond the current situation, we remain constructive on the long term secular tailwind combined with our market and technology advantage that will allow us to enhance our performance.
I will now hand off to Joan to cover our third quarter results in more detail and an update on our fourth quarter outlook.
Thank you Tom.
Turn to slide seven for a summary of consolidated GAAP results.
Third quarter revenue of 421 million was down 14% versus last year or 9% in constant currency.
The year over year decline was due to the strategic exit of certain device solutions product lines, along with continuing semi conductor supply shortages limiting our ability to fulfill customer demand.
Q3, gross margin was 28, 5% 80 basis points higher than last year due to favorable product mix, which was partially offset by inflationary cost pressures and inefficiencies related to the component shortages.
GAAP net income of approximately $4 million or <unk> <unk> per diluted share compared with a net loss of $2 million or <unk> <unk> per share in the prior year.
Regarding non-GAAP metrics on slide eight non-GAAP operating income was $15 million adjusted EBITDA was $24 million non-GAAP net income for the quarter was $11 million or 23 cents per diluted share.
Looking at revenue by business segment on slide nine device solutions revenue was $94 million of $42 million or 27% year over year decline on a constant currency basis. The decrease was primarily due to the strategic exit of certain product lines, including the sale of our non communicating mechanical C&I gas business.
Combined with component shortages limiting shipments.
Network solutions revenue was $270 million, a $2 million or 1% year over year decline in constant currency as component shortages continue to significantly impact. This segment revenue in the outcomes segment was $57 million, a $1 million or 2% decrease in constant currency versus last year with the declining prepaid.
Business in EMEA is the primary driver.
Lastly, foreign currency changes resulted in $21 million lower revenue versus the prior year.
Moving to the non-GAAP year over year EPS Bridge on Slide 10, our Q3 non-GAAP EPS was <unk> 23 per diluted share up <unk> <unk> from the prior year net operating performance had a negative <unk> <unk> per share impact due to the lower revenue and gross profit driven by the component shortages and cost inflation, partially offset by lower <unk>.
Operating expenses.
A lower tax rate and FX each had a positive <unk> <unk> per share impact versus the prior year.
Turning to slides 11 through 13, I'll discuss the Q3 results by business segment compared with the prior year.
Device solutions revenue was $94 million with gross margin of 15, 7% and operating margin of seven 5%.
Gross margin was up 90 basis points year over year, primarily due to improved product mix, partially offset by inflationary cost pressures.
Operating margin decreased 40 basis points due to the fall through on lower revenue.
Network solutions revenue was $270 million with gross margin of 33%.
Gross margin declined 250 basis points from the prior year due to unfavorable mix inflationary cost pressures and inefficiencies related to the component shortages.
Operating margin of 22% decreased 210 basis points due to the fall through of lower gross profit, which was partially offset by lower operating expenses.
Outcomes revenue was $57 million with gross margin of 41% an increase of 350 basis points year over year the.
The gross margin improvement is due to the realization of managed services operational efficiencies.
Outcomes operating margin was 19, 9% 30 basis points higher than last year due to a fall through of higher gross profit, partially offset by increased R&D investment.
Turning to slide 14, I'll cover liquidity and debt.
Free cash flow was approximately $11 million in the third quarter, a similar level as the same period last year.
Cash and equivalents at the end of the third quarter were $215 million.
Gross debt remained flat at $460 million and net debt was $245 million.
Net leverage was three eight times at the end of Q3, the same as last quarter.
Now please turn to slide 15.
As Tom mentioned during the third quarter, we were hampered by unanticipated supplier decommitments.
<unk> deliveries below our expectations and non linear timing of key components, arriving at our factories.
While we were receiving more positive signals from suppliers their deliveries did not meet the promise performance resulted in lower than expected company results.
Recent discussions with key suppliers leave us cautiously optimistic about supply availability improving over time.
However, we anticipate this volatile supply environment will continue into the fourth quarter.
As a result, we are providing a Q4 2022 revenue and earnings outlook.
Our expectations for the fourth quarter of 2022, our revenue in the range of $420 million to $460 million and non-GAAP earnings per share between zero and <unk> 15 per share now I will turn the call back to Tom.
Thank you Joan Thank you everyone for joining us today operator, please open the line for some questions.
Thank you Sir.
A reminder to the participants if you would like to ask a question. Please signal by pressing star one on your telephone keypad.
Using a speakerphone. Please make sure your mute function is turned off to allow your signal to reach our equipment.
Again.
Star one to ask a question.
We will take the first question from Noah Kaye from Oppenheimer. Your line is open. Please go ahead.
Good morning, and thanks for taking the questions. If I just look at the low end of the <unk> Rev Guide.
Houston imply basically no improvement sequentially.
<unk> in the supply chain situation.
Some of the folks the automotive industry and maybe some smart grid peers have commented to the supply chain improving as we kind of go through the.
Back half of the year here in early into <unk>. So I guess, if you could just comment on the visibility you have.
Now.
So you touched on some of the surprises in the quarter, but.
But as we kind of sit here and in the fourth quarter can you talk a little bit about your visibility maybe maybe entering 2023.
Sure happy to do so.
I would think about it is.
The supply chain River has been frozen for a pretty long period of time and as that starts to break up its breaking up in big chunks and you can end up with some jams accordingly, so what.
We saw in the third quarter was a lot of volatility in the timing of shipments you can see that even in the third quarter inventory.
We ended up with higher inventory at the end of the quarter with components pop it in at the end of the quarter the predominant.
The situation still remains some lumpiness in the in the supply cautiously optimistic based on what suppliers are telling us today for for improved supply, but making sure you've got that last golden screw to to move something out of.
A component level it into a finished goods is what we are a bit cautious on so I would say that the situation is improving the ice is melting.
Expect it to be a little bit lumpy, even during the fourth quarter. That's the outlook that I would put that.
Tried to convey in maybe a visual to help you understand what it looks like.
Yes, yes.
That's helpful. Tom and I guess, just to clarify that I mean, if we see some similar dynamics in <unk>, where you're just getting more of that inventory late in the quarter does that maybe apply imply a little bit of a higher run rate.
Kind of even on a month to month basis, as you exit <unk> and into next year.
Yes, I think it's probably difficult to draw a line through it we do expect it to continue to be volatile.
Again cautiously optimistic that it is getting better it's still difficult to draw a lot of influences in terms of linear improvement demand remains very strong no customers are canceling or are backing off on anything they are eager for the product and of course, we are eager to turn it and we'll work hard to make sure we've got.
The capability to turn it as quickly as we get to the needed components in the door.
Yes.
And then.
<unk> does convert you mentioned kind of cost starting to plateau, a little bit here. You also referred to some pricing initiatives can you catch us up on where youre at now in terms of price cost dynamics, and what kind of pricing recoveries sure.
You are able to get.
For new products, and then potentially in the backlog.
Sure.
We as we talked about in prior quarters, we have been working hard on the pricing side of things and saw decent traction that is still building.
For us and it improves a bit quarter on quarter.
I would say, we havent fully caught up.
As the size of the backlog and some of that pricing that was in there based on design wins for quite some time ago. It probably is still another quarter or two before we cross that threshold.
But the pricing program continues to gain traction I would mentioned that new agreements that we have been putting in place for for several quarters now our index. So it does give us.
More protection against inflation volatility in the quarters ahead, but still havent fully caught up and would look for that to happen over the coming few quarters.
Okay. So just if I can reply back what I'm hearing.
<unk> costs, maybe set to inflect at least neutral or positive.
In the medium term to near term and then.
Still some obviously.
The margin headwinds in the backlog that was inked prior to some of these indexing agreements, but that improves maybe as we look through 'twenty and into 'twenty four is that a fair way to characterize it.
Yes, I think <unk> got the right dynamic there on the backlog itself.
That is absolutely how we think about it and what we see rolling through remember that our backlog is probably something three years four years in time length.
Stuff that went in there three or four years ago was not as robust against inflation volatility, but the things that have gone in there in the last year or so.
I have definitely put us on the right side of that so that.
That part of that is still working through the system.
Okay very helpful. Thank you.
Thank you.
We will take the next question from Jeff Osborne from Cowen <unk> Co. Your line is open. Please go ahead.
Hey, good morning, Tom and John Ken a.
Couple of questions on my end.
You may have missed it but I think in prior calls you had highlighted the revenue impact from the <unk>.
Component shortages is that something you've quantified for the third quarter I was just curious if it's getting better or worse.
We didn't really quantify it for the third quarter I would say it with similar levels to what we experienced in the first couple of quarters.
So it was definitely worse than we expected when we set our guidance in the middle of the year.
Got it and then.
Tom with the variability of.
Components coming in would you say the sort of peak to trough variability of things getting better or worse.
Yeah.
Is that are those.
Peaks and drops narrowing.
Round the volatility is it getting less I'm, just trying to look for green shoots.
As it relates to the product coming in given your inventories a bit higher it seems like maybe things are better but.
For your response on that.
Yes, I think that it definitely is is getting better the green shoots that are.
The number of components that are severely constrained by absolute number is dropping if you will.
While we havent, yet seen things breaking through of those couple of components that are severely constrained.
A number of areas that has constrained is dropping and that there's that the green shoots that we are optimistic about working hard on making sure we have visibility into to those last golden screws to use the.
The euphemism and that's what creates a little bit of volatility as to when we get those statements is still a bit difficult to predict which makes us.
Cautious in terms of how we would set the outlook for Q4.
Got it and then some other than auto and industrial companies are pointing more towards analog as being an issue in highlighting that things like memory and Microcontrollers I've got better is that still your proverbial golden screw or no.
Absolutely yes.
The places that we are constrained our analog or ask a little bit of mixed signal, but all kinds of semi categories.
In that general the digital side the memory side is in good shape as the mechanical side has been in pretty good shape for quite some time.
Transportation freight.
<unk> may be volatile by something measured in days, but also not material. It really does come down to the analog and associated components in the semi space, which is the problem for us.
Today again cautiously optimistic that the <unk>.
Number of those components.
Getting better in terms of constraints dropping off the list, but not all the way through it just yet.
Got it and my last question is just it was great to see the Pepco and Teco announcement around the optimizer solution can you talk about the funnel for that in particular and when.
Customers that already have that our cannot be up and running I assume there is no lag on when things like that could be implemented versus.
Your narrative there on outcomes being depressed because you're having to wait for the new networks to be built I'm just trying to understand the dynamics of short selling to the installed base versus new customers.
Yes, the optimized our portfolio in particular doesn't.
Depend on.
A network performance underneath there it obviously gets better with better data to operate on but it operates.
Quite nicely across the top and there we do see a rich pipeline of opportunities oftentimes over top of our network with our existing customers and in some cases.
Even over competitive products. So it is a strong analytics package strong demand in the marketplace. As customers are are working hard to understand what's actually happening at better balanced supply and demand.
The initial use cases are using it for proactive outreach to to EV owners.
And Roland programs, but obviously.
The tip of the iceberg.
It grows from there with the management and visibility and control over.
Wide variety of distributed energy resources. So certainly that is a bright spot in terms of recent wins that are coming into to the backlog and rolling through but a rich pipeline of opportunities beyond that.
Great to hear that's all I have thank you.
Thank you.
The next question is from <unk> Mohan from Raymond James Your line is open. Please go ahead.
Thanks for the question.
As some of the semiconductor suppliers are reporting literally in recent days that there seems to be a glut forming in the market.
Presumably that that is reflected in your <unk>.
Supplier of conversations.
Is that in fact the case.
Could we be on the cusp of.
Pretty dramatic loosening of the supply chain as we have a recession.
At a blinking red all around the world.
Okay.
We're at.
At least from what I can see where there is a glut of inventory and even some of the semi guys are writing down inventory tends to be in other portions of the marketplace you see it in processors for Pcs for example at the PC market is very weak consumer is also reasonably well.
A week, which is a different segment of the semi world that where we stand today.
Scraping beneath the surface I still think that the automotive market.
There are some pockets in the industrial space like ours, meaning the part that's a little bit further away from consumers where supply is still pretty tight.
So I do believe that capacity is coming online we see good evidence of that we do see exists.
Existing capacity moving more in our direction.
Which gives us the cautiously optimistic views that we have as it breaks free I think it will begin to pick up traction and acceleration in terms of what the supply will look like it's been difficult to predict exactly when that would happen, which is a little bit behind our outlook. So again.
If you look across the tops of the trees I think it is improving the Devil's in the details as we try to get those last bits.
The bill of materials to convert backlog into revenue it will come it's a timing question.
Okay and then my.
Follow up is on the outcomes segment, it's certainly more resilience than network and device, but still down year over year, even though most of it is software and services.
What's the reason for that.
Decline.
The.
The probably the biggest year over year decline component of it really has been in the prepaid sector for us specifically in Europe .
Paid usage has actually been pretty light given the pricing that is prevalent in the energy space in Europe , that's been that the truth.
Decline, if you will in a year over year.
So that's in the absolute numbers the actual SaaS portion of it.
The recurring revenue piece has been reasonably flat.
What we are looking forward to though in terms of what the growth is as new networks come onboard and distributed intelligence that notion of downloadable agents into to the endpoint starts to ramp up as those deployments start to have to happen that is the growth sector. So it's been a little bit picked up in terms of.
The growth side.
<unk>.
We're waiting to convert in the quarters ahead.
Alright.
Appreciate it.
Sure.
Again, a reminder to all participants if you wish to ask a question. Please signal by pressing star one on your telephone keypad.
Thank you. The next question from Chip Moore from Hudson. Your line is open. Please go ahead.
Hi, good morning, Thanks for taking the question.
I wanted to ask about 12 month backlog.
If we look back is there a sense of.
How much lack of components is pushed out some of those deployments and more recent history and maybe how that's trended.
Trying to get to handicap, how likely it is that you can work through that.
6 billion.
Over the coming year.
I think the way to think about it is.
The full backlog is there there is the normal shifting around in timeline.
As we look at the size of the backlog that snowplows are pushed ahead of us based on component constraints.
We're trying to work with customers now to make sure we understand what their capacity is in the order in which they want to do various territories and some of that is what you see rolling through with I would say a normal ebb and flow in terms of the 12 month backlog, we feel very good about the strength of the overall backlog.
It is very resilient against any sort of macro economic ebbs and flows it's really driven in terms of conversion by number one supply and then planning out the timing of those deployments in terms of installation capacity with our customers and thats. The profiling that you see in the <unk>.
Five months honestly that has been far less of a concern for us customers are working very closely with us in a.
A very collaborative manner to plan out that deployment timing.
Got it that's helpful and good to hear its element.
My follow up.
Talked about holding more inventory here to help.
You may be expand on those efforts and I guess.
Some of the more critical components.
How are those stocks.
What's the outlook there.
The inventory that we have onboard is due to a component deliveries at the end of the quarter or actually anxious to convert that it's all good inventory no no concerns from our excess of obsolescence risk.
We need to work through.
Making sure we get the last pieces of the bill of material to unlock a full conversion.
Do expect certainly those boats constrained components will continue to be a little bit lumpy in terms of the.
The demand sorry, the supply coming into.
Our inventory.
But feel good about the strength of the inventory and happy to have him on board as it allows us to unlock the conversion faster in the quarters ahead.
Got it that's helpful. All right thanks very much.
It appears that there is no further question at this moment.
Now hand, the call over to our CEO , Mr. Tom Deitrich for any closing remarks. Please go ahead Sir.
Very good. Thank you all for joining us today and thank you operator, and we look forward to updating everyone next quarter. Thanks, so much.
That concludes today's event. Thank you for your participation you may now disconnect.
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Good day and welcome to the Icahn incorporate quality 2022 earnings call. Today's conference is being recorded at this time I would like to turn the conference over to the Vice President Investor Relations. Please go ahead Sir.
Thank you operator, good morning, and welcome to <unk> third quarter 2022 earnings Conference call. We issued a press release earlier today announcing our results. The press release includes replay information about today's call a.
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 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. 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'll 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.
Company comments estimates or forward looking statements are made in a good faith attempt to provide appropriate insight to our current and future operating and financial environment.
The terrorists discussed today November three 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.
We will hear third quarter details from gentleman coming up shortly but here is a brief overview of the quarter revenue was $421 million adjusted EBITDA was $24 million non-GAAP earnings per share was 23.
And free cash flow was $11 million.
Turning to slide five despite some ongoing macroeconomic cross wins, we continue to see strong market demand for our technology. This is reflected in our third quarter bookings of $578 million.
And our total backlog, reaching another new record of $4 $2 billion, we anticipate the demand for our technology to remain robust as our customers require more insight and control over their energy and water assets.
This was extremely evident through the discussions we had with our customers partners and suppliers in our <unk> inspire conference in September the alignment of our offerings with the needs of our customers has never been stronger driven by the proliferation of electric vehicles.
Need for distributed energy resource management, and the utilities' desire to actively engage with their consumers.
Some of our key bookings this quarter highlight how <unk> enables the integration of renewable and distributed energy technologies onto the grid with our optimizer distributed energy management solution, our customers Pepco Holdings, and Tampa Electric company chose our optimizer solution to allow them to analyze and control their distributed energy.
<unk> resources more efficiently.
Next we're proud to announce electric utilities Corporation as one of our newest logos.
Already a leader in utility innovation in Canada, we were selected for their next generation technology refresh, including leveraging our Gen. Five <unk> network and distributed intelligence enabled end points to enhance the visibility and control at the edge of their distribution grid.
Now turning to slide six I would like to provide some operational updates and insights for the quarter.
We see robust market demand with a pipeline that remains plentiful and a regulatory environment that continues at a healthy pace.
The market environment is positive and our backlog is resilient in a case of possible macroeconomic slowdown we continue to experience macro supply chain constraints slowing our ability to convert backlog into revenue.
These global constraints remain focused in analog RF and mixed signal semiconductors that are commonly used in the automotive industry and other industrial applications unexpected shortages inbound shipment delays and non linear deliveries of critical components within the quarter hampered our visibility and created inefficiencies.
Within our factories, resulting in quarterly revenue constraints above our expectations.
We remain in an inflationary environment, which was partially offset by pricing actions, while the costs plateaued during the quarter, we recognized volatility may still carryforward.
These headwinds have directly impacted the performance of the company, particularly in the network solutions segment during recent quarters.
Indirectly in the near term growth of our outcomes segment has been deferred as well while outcomes growth remains at the forefront of our strategic direction. The supply constraints have driven delays of new projects, particularly those involving our distributed intelligence solutions managed services software and value added applications.
<unk> impacting our near term growth trajectory as.
As supply stabilizes and our project deployment scheduled to resume that pace. We are confident the outcomes business will get back on track <unk>.
While these headwinds are disappointing, we do not sit idle and continue to proactively work through this difficult macro situation, including taking on more inventory for improved backlog conversion maintaining controls over discretionary spend finding new ways to be more innovative and agile in the introduction.
Of new products to the market improving our operational footprint with our asset light strategy and of course, maintaining close engagement with our customers to plan, but delayed deployments. We do anticipate improvement in these macro driven headwinds moving forward, allowing us to get back on track.
Looking out beyond the current situation, we remain constructive on the long term secular tailwind combined with our market and technology advantage that will allow us to enhance our performance.
I will now hand off to gentlemen to cover our third quarter results in more detail and an update on our fourth quarter outlook.
Thank you Tom Please turn to slide seven for a summary of consolidated GAAP results.
Third quarter revenue of $421 million was down 14% versus last year or 9% in constant currency.
The year over year decline was due to the strategic exit of certain device solutions product lines, along with continuing semi conductor supply shortages limiting our ability to fulfill customer demand.
Q3, gross margin was 28, 5% 80 basis points higher than last year due to favorable product mix, which was partially offset by inflationary cost pressures and inefficiencies related to the component shortages.
GAAP net income of approximately $4 million or <unk> <unk> per diluted share compared with a net loss of $2 million or <unk> <unk> per share in the prior year.
Regarding non-GAAP metrics on slide eight non-GAAP operating income was $15 million adjusted EBITDA was $24 million non-GAAP net income for the quarter was $11 million or <unk> 23 cents per diluted share.
Looking at revenue by business segment on slide nine device solutions revenue was $94 million of $42 million or 27% year over year decline on a constant currency basis. The decrease was primarily due to the strategic exit of certain product lines, including the sale of our non communicating mechanical C&I gas business.
Combined with component shortages limiting shipments.
Network solutions revenue was $270 million or $2 million or 1% year over year decline in constant currency as component shortages continue to significantly impact. This segment revenue in the outcomes segment was $57 million, a $1 million or 2% decrease in constant currency versus last year with the declining prepaid.
Business in EMEA is the primary driver.
Lastly, foreign currency changes resulted in $21 million lower revenue versus the prior year.
Moving to the non-GAAP year over year EPS Bridge on Slide 10, our Q3 non-GAAP EPS was <unk> 23 per diluted share up <unk> <unk> from the prior year net operating performance had a negative <unk> <unk> per share impact due to lower revenue and gross profit driven by the component shortages and cost inflation, partially offset by lower <unk>.
Operating expenses.
A lower tax rate and FX each had a positive <unk> <unk> per share impact versus the prior year.
Turning to slides 11 through 13, I'll discuss the Q3 results by business segment compared with the prior year.
Device solutions revenue was 94 million with gross margin of 15, 7% and operating margin of seven 5%.
Gross margin was up 90 basis points year over year, primarily due to improved product mix, partially offset by inflationary cost pressures.
Or any margin decreased 40 basis points due to the false grew on lower revenue.
Network solutions revenue was $270 million with gross margin of 33%.
Gross margin declined 250 basis points from the prior year due to unfavorable mix inflationary cost pressures and inefficiencies related to the component shortages.
Operating margin of 22% decreased 210 basis points due to the fall through of lower gross profit, which was partially offset by lower operating expenses.
Outcomes revenue was 57 million with gross margin of 41% an increase of 350 basis points year over year to.
The gross margin improvement is due to the realization of managed services operational efficiencies.
Outcomes operating margin was 19, 9% 30 basis points higher than last year due to a fall through of higher gross profit, partially offset by increased R&D investment.
Turning to slide 14, I'll cover liquidity and debt.
Free cash flow was approximately $11 million in the third quarter, a similar level as the same period last year.
Cash and equivalents at the end of the third quarter were $215 million.
Gross debt remained flat at $460 million and net debt was $245 million.
Net leverage was three eight times at the end of Q3, the same as last quarter now.
Now please turn to slide 15.
As Tom mentioned during the third quarter, we were hampered by unanticipated supplier decommitments component deliveries below our expectations and non linear timing of key components, arriving at our factories.
We were receiving more positive signals from suppliers their delivery did not meet the promise performance, resulting in lower than expected company results.
Recent discussions with key suppliers leave us cautiously optimistic about supply availability improving over time however.
However, we anticipate this volatile supply environment will continue into the fourth quarter.
As a result, we are providing a Q4 2022 revenue and earnings outlook.
Our expectations for the fourth quarter of 2022, our revenue in the range of $420 million to $460 million and non-GAAP earnings per share between zero and <unk> 15 per share now I will turn the call back to Tom.
Thank you Joan Thank you everyone for joining us today operator, please open the line for some questions.
Thank you Sir a reminder to the participants if you would like to ask a question. Please signal by pressing star one on your telephone keypad.
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We will take the first question from Noah Kaye from Oppenheimer. Your line is open. Please go ahead.
Good morning, and thanks for taking the questions. If I just look at the low end of the <unk> Rev Guide.
Houston imply basically no improvements sequentially.
<unk> in in the supply chain situation.
Some of the folks the automotive industry and maybe some smart grid peers.
Commented to the supply chain, improving as we kind of go through the <unk>.
Back half of the year here in early into <unk>. So.
I guess, if you could just comment on the visibility you have.
Now.
You also touched on some of the surprise in the quarter, but.
But as we kind of sit here and in the fourth quarter can you talk a little bit about your visibility maybe maybe entering 2023.
Sure happy to.
Do so.
The way I would think about it is the supply chain River has been frozen for a pretty long period of time and as that starts to break up its breaking up in big chunks and you can end up with some jams accordingly, so what.
We saw in the third quarter was a lot of volatility in the timing of shipments you can see that even in the third quarter inventory.
We ended up with higher inventory at the end of the quarter with components pop and then at the end of the quarter the predominant.
The situation still remains some lumpiness in the in the supply cautiously optimistic based on what suppliers are telling us today for for improved supply, but making sure you've got that last golden screw to move something out of.
A component level it into a finished goods is what we are a bit cautious on so I would say that the situation is improving.
This is melting.
But expect it to be a little bit lumpy, even during the fourth quarter. That's the outlook that we tried to convey in maybe a visual to help you understand what it looks like.
Yes, yes.
That's helpful. Tom.
Yes, just to clarify that I mean, if we see some similar dynamics in <unk>, where you're just getting more of that inventory late in the quarter does that maybe apply imply a little bit of a higher run rate.
Even on a month to month basis, as you exit <unk> and into next year.
Yes, I think it's probably difficult to draw a line through it we do expect it to continue to be volatile.
Again cautiously optimistic that it is getting better it's still difficult to draw a lot of influences in terms of linear improvement demand remains very strong no customers are canceling or are backing off on anything they are eager for the product and of course, we are eager to turn it and we'll work hard to make sure we've got.
The capability to turn it as quickly as we get to the needed components in the door.
And then as backlog does convert you mentioned kind of cost starting to plateau, a little bit here. You also referred to some pricing initiatives can you catch us up on.
Where youre at now in terms of price cost dynamics, and what kind of pricing recoveries your euro.
You are able to get.
For new products, and then potentially in the backlog.
Sure.
We as we talked about in prior quarters, we have been working hard on the pricing side of things and saw decent traction that is still building.
For us and it improves a bit quarter on quarter I would say, we havent fully caught up.
As the size of the backlog and some of that pricing that was in there based on design wins for quite some time ago. It probably is still another quarter or two before we've crossed that threshold.
But the pricing program continues to gain traction I would mention that new agreements that we have been putting in place for for several quarters now our index. So it does give us.
More protection against inflation volatility in the quarters ahead, but still havent fully caught up and would look for that to happen over the coming few quarters.
Okay. So just if I can reply back what I'm hearing.
This cost maybe set to inflect at least neutral or positive.
In the medium term to near term and then.
Still some obviously.
Margin headwinds in the backlog that was inked prior to some of these indexing agreements, but that improves maybe as we look through 2003 and into 'twenty four is that a fair way to characterize it.
Yes, I think <unk> got the right dynamic there on the backlog itself.
That is absolutely how we think about it and what we see rolling through remember that our backlog is probably something three years four years in time length.
The stuff that went in there three or four years ago was not as robust against inflation volatility things.
Things that have gone in there in the last year or so.
Definitely put us on the right side of that so.
That part of it is still working through the system.
Okay very helpful. Thank you.
Thank you.
We will take the next question from Jeff Osborne from Cowen <unk> Co. Your line is open. Please go ahead.
Hey, good morning, Tom and John Ken a.
A couple of questions on my end.
I may have missed it but I think in prior calls you had highlighted the revenue impact from the <unk>.
Component shortages is that something you've quantified for the third quarter I was just curious if it's getting better or worse.
We didn't really quantify it for the third quarter I would say it with similar levels to what we experienced during the first couple of quarters.
So it was definitely worse than we expected when we set our guidance in the middle of the year.
Got it and then.
Tom with the variability of components coming in would you say the sort of peak to trough variability of things getting better or worse.
Sure.
Is that are those peaks and drops narrowing.
Round the volatility is it getting less I'm, just trying to look for green shoots.
As it relates to the product coming in given your inventories a bit higher it seems like maybe things are better but be.
I'd be curious for your response on that.
Yes, I think that it definitely is is getting better the green shoots.
The number of components that are severely constrained by absolute number is dropping if you will.
While we haven't yet seen things breaking through all of those couple of components that are severely constrained.
The number of areas that has constrained is dropping and the green shoots that we are optimistic about working hard on.
Making sure we have visibility into to those last golden screws to use the.
The euphemism.
What creates a little bit of volatility as to when we get those savings is still a bit difficult to predict which makes us.
Cautious in terms of how we would set the outlook for Q4.
Got it and then some other than auto and industrial companies are pointing more towards analog as being an issue in highlighting that things like memory and microcontrollers have gotten better is that still your <unk> golden screw or no.
Absolutely yes.
In the places that we are constrained our analog or ask a little bit of mixed signal, but all kinds of semi categories.
And that general day, the digital side the memory side is in good shape as the mechanical side has been in pretty good shape for quite some time.
So transportation rate.
<unk> may be volatile by something measured in days, but also not material. It really does come down to the analog and associated debt components in the semi space, which is the problem for us.
Today again cautiously optimistic that the <unk>.
Number of those components.
Getting better in terms of constraints dropping off the list, but not all the way through it just yet.
Got it and my last question is just it was great to see the Pepco and <unk> announcement around the optimizer solution can you talk about the funnel for that in particular and when.
Customers that already have that our canopy up and running I assume there is no lag on when things like that could be implemented versus.
Your narrative there on outcomes being depressed because you're having to wait for the new networks to be built I'm just trying to understand the dynamics of short selling to the installed base versus new customers.
Yes, the optimize our portfolio in particular doesn't.
It depend on.
A network performance underneath there it obviously gets better with better data to operate on but it operates.
Quite nicely across the top and there we do see rich pipeline of opportunities oftentimes over top of our network with our existing customers and in some cases even.
And then over competitive products. So it is a strong analytics package strong demand in the marketplace. As customers are are working hard to understand what's actually happening at better balanced supply and demand.
The initial use cases are using it for proactive outreach to to EV owners.
Two enrollment programs, but obviously.
The tip of the iceberg and it grows from there with the management and visibility and control over.
Wide variety of distributed energy resources. So certainly that is a bright spot in terms of recent wins that are coming into to the backlog and rolling through but a rich pipeline of opportunities beyond that.
Great to hear that's all I have thank you.
Thank you.
The next question is from <unk> Mohan from Raymond James Your line is open. Please go ahead.
Thanks for the question.
As some of the semiconductor suppliers are reporting literally in recent days that there seems to be a glut forming in the market.
Presumably that that is reflected in your <unk>.
Supplier of conversations.
Is that in fact the case.
Could you could we be on the cost.
Pretty dramatic loosening of the supply chain.
We have a recession.
At a blinking red all around the world.
Okay.
We're at.
At least from what I can see where there is a glut of inventory and even some of the semi guys are writing down inventory tends to be in other portions of the marketplace you see it in processors for Pcs for example, the PC market is very weak consumer is also reasonably well.
Which is a different segment of the semi world that where we stand today.
Scraping beneath the surface I still think that the automotive market.
There are some pockets in the industrial space like ours, meaning the part that's a little bit further away from consumers where supply is still pretty tight.
So I do believe that capacity is coming online we see good evidence of that we do see exists.
Existing capacity moving more in our direction.
Which gives us the cautiously optimistic views that we have as it breaks free I think it will begin to pick up traction and acceleration in terms of what the supply will look like it's been difficult to predict exactly when that would happen, which is a little bit behind our outlook. So again.
If you look across the tops of the trees I think it is improving the Devil's in the details as we try to get those last bits of the.
The bill of materials to convert backlog into revenue it will come it's a timing question.
Okay and then my.
Follow up is on the outcomes segment, it's certainly more resilience than network and device, but still down year over year, even though most of it is software and services.
What's the reason for that.
Decline.
The.
The probably the biggest year over year decline component of it really has been in the prepaid sector for us specifically in Europe .
Paid usage has actually been pretty light given the pricing that is prevalent in the energy space in Europe , that's been that the true.
Decline, if you will in a year over year.
So that's in the absolute numbers the actual SaaS portion of it.
The recurring revenue piece has been reasonably flat.
So what we are looking forward to though in terms of what the growth is as new networks come onboard and distributed intelligence that notion of downloadable agents into to the endpoint starts to ramp up as those deployments start to have to happen that is the growth vectors. So it's been a little bit picked up in terms.
The growth side.
We're waiting to convert in the quarters ahead.
Alright I appreciate it.
Sure.
Again, a reminder to all participants if you wish to ask a question. Please signal by pressing star one on your telephone keypad.
We will take the next question from Chip Moore from Hudson Line is open. Please go ahead.
Hi, good morning, Thanks for taking the question.
I wanted to ask about 12 month backlog.
Look back is there a sense of.
How much lack of components is pushed out some of those deployments and more recent history.
Maybe how that's trended.
To get to handicap, how likely it is that you can work through that.
Billion.
Over the coming year.
I think the way to think about it is.
The full backlog is there there is the normal shifting around.
<unk> as.
We look at the size of the backlog that snowplows are pushed ahead of us based on component constraints.
We're trying to work with customers now to make sure we understand what their capacity is in the order in which they want to do various territories and some of that is what you see rolling through with I would say a normal ebb and flow in terms of the 12 month backlog, we feel very good about the strength of the overall backlog.
Doug.
It is very resilient against any sort of macro economic ebbs and flows.
It's really driven.
In terms of conversion by number one supply and then planning out the <unk>.
Timing of those deployments in terms of installation capacity with our customers and thats. The profiling that you see in the 12 months honestly that has been far less of a concern for us customers are working very closely with us very collaborative manner to plan out that deployment timing.
Got it that's helpful and good to hear its element maybe just my follow up.
Talked about doubled its more inventory here to.
To help continue to expand on those efforts and I guess.
The more critical components.
How are those stocks.
What's the outlook there.
Okay.
The inventory that we have onboard is due to a component deliveries at the end of the quarter or actually anxious.
Convert that it's all good inventory no no concerns from our excess of obsolescence risk.
What we need to work through with is making sure we get the last pieces of the bill of material to unlock a full conversion we do expect certainly those dose.
Strained components will continue to be a little bit lumpy in terms of the.
The demand sorry that the supply coming into.
Our inventory.
But feel good about the strength of the inventory and happy to have it onboard as it allows us to.
Mark the conversion faster in the quarters ahead.
Got it that's helpful. All right thanks very much.
It appears that there is no further question at this moment.
Now hand, the call over to our CEO , Mr. Tom Deitrich for any closing remarks. Please go ahead Sir.
Very good. Thank you all for joining us today. Thank you operator, and we look forward to updating everyone next quarter. Thanks, so much.
That concludes today's event. Thank you for your participation you may now disconnect.