Q4 2022 Itron Inc Earnings Call
The code.
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Good morning, ladies and gentlemen, and welcome to the icon fourth quarter 2022 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session.
Quick question during the session you will need your Crestar one one on your telephone.
We'll then hear an automatic message advising yohan its waste please.
Please note that today's conference is being recorded I will now hand, the conference over to you speak of host today, David <unk> Director of Investor Relations. Please go ahead.
Thank you operator, good morning, and welcome to <unk> fourth 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.
Patients 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 John Cooper, 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 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 good faith attempt to provide appropriate insight to our current and future operating and financial environment materials discussed today February 27, 2023 may materially change and we do not undertake any duty to update any of our forward looking statements now please turn.
Turn to page four in the presentation and turn the call over to our CEO Tom Dietrich.
Thank you David Good morning, and thank you for joining us.
Our fourth quarter details from Joan coming up shortly but here is a brief overview of the quarter revenue was $467 million adjusted.
Adjusted EBITDA was $34 million and non-GAAP earnings per share was <unk> 71.
Our fourth quarter financial results were a step in the right direction the team executed well to convert and deliver additional components that were supplied late in the quarter, which unlock revenue and EBITDA ahead of our expectations.
Turning to slide five for the third consecutive quarter, we achieved a new record level for total backlog, which reached $4 6 billion.
Continued strong demand drove bookings in the fourth quarter to $898 million or a one nine book to bill ratio.
The full year bookings were approximately $2 5 billion.
Which is a book to bill ratio of one four.
Our key bookings in the fourth quarter continued to be driven by distributed intelligence and analytics over our network technologies, our network solution to outcomes offerings continued to contribute over 90% of the total backlog.
Hydro one received regulatory approval for their <unk> two pointed out program, which is an important step and moving forward with deploying our gen. Five Riva solution. This includes our distributed intelligence capabilities across their service territory in Ontario, Canada to support the grid reliability and resiliency.
And consumer engagement initiatives.
In the water vertical the city of Detroit is upgrading to our water network and <unk> will also provide managed services Cps energy extended our SaaS contract by the additional 10 plus years, which strengthens our technology partnership in San Antonio, Texas, a fast growing community that is now leveraging <unk> network.
Technology to deploy Ami and distribution automation across electricity and gas as well as water in conjunction with our sister utilities thaws.
We are now excited to begin deployment of our entellus gas solution, bringing market, leading safety functionality and increased edge intelligence to Cps energy.
Lastly, in Paris, France, Allison icon entered a long term strategic collaboration to provide Paris, a citywide canopy network connecting more than 200000 street and traffic lights across the city.
Coupled with deploying innovative breakthrough services, Paris will be able to cut public lighting energy by up to 30% beyond the impact of Leds, resulting in massive energy savings and improvements and sustainability.
Now turning to slide six I would like to provide some operational updates and insights from around the business.
We have a robust pipeline of opportunities ahead as our customers' needs are aligned with our technology portfolio and continued investments while quarter to quarter bookings will vary we anticipate the strong demand environment to continue seasonally I note that first quarter bookings are typically lower than the fourth quarter.
The current supply environment is showing improvement with choppy component deliveries in the near term specifically for some analog and power semiconductors. We will continue to work aggressively to mitigate these constraints, including increasing inventory levels of selected components as it becomes available to improve supply chain security.
Customer support remains strong and we have not experienced nor expect any material cancellations of backlog.
Looking forward, we expect improving supply availability across the year, we are watching the macro situation closely including the timing of supplier capacity expansion demand in the automotive industry potential impacts from China reopening and the overall inventory level across the full spectrum of the supply chain.
The underlying improvements supply trend is positive with some degree of volatility as the global supply chain rebalancing.
Input cost inflation rates have leveled out but component costs remain elevated tactical pricing actions combined with the increased pricing flexibility and more recent contracts have improved margin on a portion of the backlog.
Finally, I want to cover that we announced a plan to further streamline our global manufacturing operations and company overhead as we continue to execute our stated strategy.
When complete this plan will improve our operational and financial performance I will now hand off to Joan to cover the fourth quarter results 2023 outlook and the details of our recently launched restructuring plan.
Thank you as Tom mentioned, we received earlier than anticipated component supply late in the fourth quarter, allowing us to ship and recognize more revenue than expected.
The additional component supply had been anticipated in Q1 of 'twenty three so a portion of Q4 strong performance was a shift from Q1.
I'll provide more color on our 2023 expectations, but first let me cover fourth quarter and fiscal year 2022 results.
Please turn to slide seven for a summary of consolidated GAAP results.
Fourth quarter revenue of $467 million decreased 4% versus last year and was flat in constant currency.
Revenue declined year over year due to the sale of our C&I gas business in our device solutions segment. This decline was offset by higher revenue in both our networked solutions and outcomes segments.
Gross margin for the quarter was 31% 510 basis points higher than last year, primarily due to favorable mix, partially offset by elevated component costs.
GAAP net income of $22 million or <unk> 49 per diluted share compares with a net loss of $59 million or $1 30 per share in the prior year the.
The improvement in the current period was due to higher GAAP operating income, partially offset by a lower tax benefit.
Regarding non-GAAP metrics on slide eight non-GAAP operating income was $25 million adjusted EBITDA was $34 million non-GAAP net income for the quarter was $32 million or <unk> 71 per diluted share.
Free cash flow was negative $18 million in Q4, driven by an increase in working capital, particularly inventory.
We will continue to invest in critical components as they become available.
Looking at revenue by business segment on slide nine.
Device solutions revenue was $100 million of $42 million or 27% year over year decline on a constant currency basis. The decline was due to the sale of our C&I gas business as well as continued product pruning.
Network solutions revenue was $301 million, a $39 million or 15% increase in constant currency. The increase was driven by a ramp of new and existing deployments network solutions benefited from the extra components supply and received late in the fourth quarter.
Revenue in the outcomes segment was $66 million, a $4 million or 7% increase in constant currency.
The increase was due to higher software license in product sales, partially offset by the continuing decline in the EMEA prepaid business.
Lastly, foreign currency changes resulted in $19 million lower revenue versus the prior year.
Moving to the non-GAAP year over year EPS bridge on slide 10.
Q4, non-GAAP EPS was <unk> 71 per diluted share down <unk> <unk> from the prior year net.
Net operating performance had a positive <unk> 48 per share impact due to the fall through of higher gross profit and lower operating expenses.
A negative tax impact of <unk> 52 per share more than offset our positive operating performance the negative year over year tax impact was due to a large tax benefit booked in Q4 of 2021.
Turning to slides 11 through 13, I'll discuss Q4 results by business segment compared with the prior year.
Device solutions revenue was 100 million with gross margin of 11% and operating margin of 3%.
Gross margin increased 230 basis points due to improving mix, partially offset by elevated component costs.
Operating margin increased 40 basis points due to the fall through of the higher gross margin, partially offset by a higher percentage of operating expenses.
Network solutions revenue was $301 million with gross margin of 33% gross margin increased 260 basis points from the prior year due to favorable mix, partially offset by higher component costs.
Operating margin of 23% increased 480 basis points due to the fall through of higher gross profit and lower operating expenses.
Outcomes revenue was 66 million with gross margin of 46% gross margin increased 390 basis points due to very favorable solutions mix and improved operational efficiencies.
Operating margin of 26% increased 130 basis points due to the fall through of the higher gross profit, partially offset by higher R&D investment.
Now to briefly recap full year 2022 results. Please turn to slide 14.
Revenue of approximately $1 8 billion was down 9% from 2021.
On a constant currency basis revenue was down 6% and when further adjusted for the sale of our C&I gas business revenue was down only 2% the revenue decline.
Klein was due to the component shortages, which limited our ability to fulfill customer demand.
Gross margin was 29, 1% 20 basis points higher than 2021.
Adjusted EBITDA was $95 million compared with $115 million in the prior year.
non-GAAP earnings per share was $1 13 per share versus $1 75 in 2021.
Free cash flow was $5 million compared with $120 million in the prior year.
The year over year decrease in free cash flow was due to higher working capital usage higher variable compensation payments and lower EBITDA, partially offset by lower capital expenditures.
Turning to slide 15, I'll cover liquidity and debt at the end of the fourth quarter.
Total debt remained flat at $460 million and net debt was $258 million.
Net leverage was two seven times at the end of Q4.
Cash and equivalents at the end of the fourth quarter were $202 million.
Please turn to slide 16, I'd like to provide you some color on our 2023 expectations.
We anticipate full year 2023 revenue to be in a range of $1 85 to $1 95 billion.
We remain cautious to start the year is component supply continues to be constrained and somewhat unpredictable, including the non linear timing of deliveries within a quarter, but.
But we do anticipate that the supply environment will improve gradually throughout the year.
At the midpoint to 2023 annual guidance is approximately 6% year over year growth.
This is driven by growth in our networks and outcomes segments, partially offset by a continued decline in our devices segment.
We anticipate full year non-GAAP EPS to be within a range of 70 to $1 10 per diluted share at.
At the midpoint of this guidance and normalizing the tax rate to 28% for both years the year over year operational earnings growth is approximately 6%.
This growth is somewhat muted due to an expected increase in variable compensation expense in 2023.
The variable compensation costs in our 2022 results, we're not at the target payout and we are planning to achieve targeted payout in 2023.
Given our expected gradual improvement of supply throughout the year earnings will be heavily skewed to the second half of the year.
Other full year guidance assumptions are a euro to U S dollar foreign currency exchange rate of one 5%.
An average non-GAAP effective tax rate of approximately 28%.
Average shares outstanding for the full year of approximately $45 7 million.
Now please turn to slide 17 for our first quarter outlook.
Given the continued volatility in the component supply I am also providing our view of Q1 we.
We anticipate first quarter revenue to be in a range of $460 to $475 million, which at the midpoint is flat versus our Q4 performance.
As I mentioned in my opening comments the unexpected deliveries supply late in the fourth quarter was initially anticipated to be delivered and converted to revenue in the first quarter. This supply shift is contributing to slightly lower revenue in Q1.
We anticipate first quarter non-GAAP EPS to be within a range of $5 15 per diluted share. This is down sequentially from Q4 due to the very favorable product mix in Q4, an increase in variable compensation expense and a much higher tax expense given Q4's rate was negative 30%.
While we anticipate the full year 2023 tax rate to be approximately 28%.
Quarterly rates will fluctuate based on the amount of earnings and any one time true ups.
For the first quarter, we are expecting a one time increase in tax expense of approximately $2 million. This is related to a required true up as prior stock grants vest incur.
Including the impact of this $2 million true up we expect the overall tax rate in Q1 to be in a range of 40% to 60%.
In summary, the constrained and unpredictable nature of components supply continues to impact our results. However signs of supply improvements starting to appear in our fourth quarter.
We are optimistic we will see improvement of supply availability throughout 2023.
Please turn to slide 18 for details on the restructuring announcement, we made this morning.
Last week, our board of directors approved a new restructuring plan. This plan is a continuation of our asset light strategy and includes further actions to streamline our manufacturing operations as well as overall overhead in the company.
We expect this project to cost between 40, and $45 million and generate annualized savings between 14 and $17 million. The project should be substantially complete by early 2025.
Now ill turn the call back to Tom.
Thank you Joan.
I would like to close today by highlighting our expanding distributed intelligence offerings to date, we have shipped approximately $5 8 million Gi capable end points and have approximately 7 million applications and operations today.
Through partnerships are proven and scalable <unk> platform will enable a new and innovative approach to improving grid resiliency and transforming the relationship between utilities and consumers.
We recently announced a partnership with smart energy water to transform the utility consumer relationship to enable the management of distributed energy resources.
Builds upon our partnership ecosystem that already included in our long term collaboration with Microsoft to accelerate cloud adoption and the next generation of consumer and grid solutions for the utility and Smart City industries with partnerships, we will transform how end users view and manage their energy and how utility to meet the demands of <unk>.
Happily changing industry.
Thank you everyone for joining today operator, please open the line for some questions.
Thank you, ladies and gentlemen to ask a question you will need to Westar one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby will be compile the Q&A roster.
Okay.
Now first question coming from the line of Noah Kaye with Oppenheimer. Your line is now open.
Good morning, Thanks for taking the questions and Tom I want to pick up right, where you left off with remarks around the expansion of the <unk> platform can you talk a little bit about the interest you've gotten from different players in the.
Ecosystem following your announcement in January .
Who are you seeing the demand coming most strongly from.
I think in the release you mentioned the revenue opportunities around this would really start to manifest in 2024, but maybe give us a sense of what the revenue model might actually look like for some of these <unk> offerings.
Sure. Thanks Miller.
We see interest in <unk> applications from a broad swath of the industry certainly there are utilities that want to develop their own.
<unk> and then a host of ecosystem partners from large companies small companies.
Is that our interest in the applications that they are working on tend to be a mix of great efficiency types of things as well.
Consumer engagement types of applications it really depends on on what problem, they're trying to solve revenue model.
Is largely a result of this.
Subscription kind of model, where an application.
Use for a certain period of time and on a per usage basis or a per ton basis.
And the proportion of that revenue that accrues to iPhone, that's dependent on whether it's power application or whether it's a third party because the third party.
<unk> and think of a more of a usage fee.
In our own applications is quite a bit higher in terms of.
The revenue that we get.
Right in terms of the timing think of it as a case where networks are deployed initial applications.
<unk> use cases and stabilized by the utility and then they start layering in incremental services. So it tends to go up.
To follow on in terms of deployments by maybe 18 months or so and Thats, where youre starting to see the scalability now I've mentioned in our pre recorded remarks of about $7 million applications running the deal today subjects, one per endpoint oftentimes multiple applications running in parallel.
Or like a smartphone kind of model in terms of balance sheets.
Very helpful I might leave it for others to pull on the threat of what that means for outcomes I did want to ask just a couple of clarifying questions around the outlook. It sounded like we had some some revenue shift from <unk> 23 in to <unk>. So if I just add a little bit.
Two one Q.
It seems like the revenue outlook for the full years as annualized once you would've been with not much improvement so just.
Given that your comments around expectations for the improving supply chain I wonder if we could square that up a little bit.
Kind of conservative.
Is the outlook in terms of the revenue run rate and what kind of level of.
Increase are you assuming as we go throughout the year.
Yeah, Let me, let me take a stab at that so.
The outlook that we provided is based on our current expectations. After discussions with suppliers in terms of when supply will will arrive certainly to the extent that the suppliers are able to exceed our current view there is upside to the view, but right. Now we would say is that we expect gradual improvement through the year and so.
All things being equal we would expect he wanted to be the low point and we will continue to grow.
So the range is pretty wide and you say, if you take that and high end of the range as to different assumptions.
The range.
We will see somewhere around the midpoint of our higher revenue growth, which would be over 6% and.
And the way to unpack that if I add one additional point of color as well.
Fourth quarter definitely.
Demonstrated.
Upside potential in terms of being able to turn that revenue. We got components very late in the quarter and the team really did an exceptional job of turning that customers are eager for the.
Our products and the technology that we provide so as we get those components, whether it be in a position to turn them as quickly as we can we do things as Jim mentioned that there will be.
A view of improving supply over the year with variations in some volatility in terms of timing certainly in the first half of the year.
Very helpful.
Paul I'll turn it over.
Thank you one moment please for our next question.
And our next question coming from the line of Jeff Osborne with Cowen Your line is open.
Hey, good morning, just a couple quick ones here I was wondering.
Joan can you quantify what the semiconductor impact was for the quarter and the full year.
Yes, I would say the fourth quarter was pretty similar to the prior quarters, we experienced in 2022, so somewhere call. It 100 million yourself quarter may be slightly better in Q4 of us exiting the year, we probably had about $400 million of revenue that was constrained because of circumstances.
Got it and then on the restructuring just a couple of quick housekeeping, there the $14 million to $17 million as the majority of that savings on the cost of goods line yes.
Yes, I'd say, 80% or salaries.
At this time.
Got it and then what was the outsource production mix and then what do you anticipate that to be sort of post these actions.
We're probably running around 45% may be 50% it varies quarter to quarter internal external today and I think this takes it up probably another 5% or so so.
By the time, we finish it off.
Meaningfully above.
50% in terms of the.
The amount of outsourced production.
Got it and then my last one.
Tom was just from the book to Bill obviously, a great Q4, your implied that Q1 would be a bit softer seasonally do you anticipate it to be above one for the year. How should we think about just the level of activity that you are quoting.
We do definitely think that the book to Bill for the full year will be above one to one pipeline of opportunities remains very rich very strong.
Based on needs from our customers for resiliency reliability as well as new technology applications, whether they be consumer side were immediate terms integration. So rich set of opportunities and we're we're bullish on what the year will bring in terms of bookings that said that the only caution.
We provide and it'll be a little bit lumpy quarter to quarter.
Normal seasonality as well as timing of individual contracts coming through.
Great. Thank you that's all I had.
Thank you one moment. Please for our next question and our next question coming from the line of Chip Moore with F. Hutton Group. Your line is now open.
Good morning, Hey, Thanks for taking the question.
Tom I wanted to ask one the regulatory environment. It seems like more and more states are looking at performance space mechanisms to meet their goals, that's something you're seeing with your customers.
For some of the more advanced solutions.
Indeed.
The regulatory environment continues to.
Understands the need.
Need for new technology, and new models.
The amount of states that.
The allowance on the type of performance based rates where capitalization.
<unk> is about is nearly 40 out of the 50, right now and plenty of changes underneath each one of those.
Along the way so in general the regulatory model is moving in the direction of it.
Enabling the technologies that we are investing.
Great to hear and Joe you talked about.
The weighting in the back half on the guidance can you give us any color on sort of mix and perhaps cadence of implications for cadence of margins for the year.
Yeah, I mean, I would say for the full year, we would look at margins being pretty similar to what they were.
Once they learn in full year 'twenty, two so certainly as we get more supply.
More factory.
<unk> production and therefore less absorption issues, but we're also.
Hi.
Great. Thanks, subsequent multiyear I would say 'twenty two levels are pretty consistent and those will start out slower in the first quarter things were a few years. After the first quarter I would say the gross margin to be similar to Q1 of last year.
That's super helpful.
And just more housekeeping gentlemen on the restructuring can you just remind us where we are.
Higher programs.
Just to get keep us.
The breadth of the new program.
The 2020 program is basically complete and so we still are working on on a 2021 platform, which should be complete mostly.
Early next year and those are all on track if anything to payback a little bit higher because we just had a little bit less severance that we expected one of the first initial clients. So those are going according to planning again this line will be.
Savings should be complete by early 'twenty five the cash out is roughly 24 to 26, so really no impact on cash of 23.
Okay, and sorry, one last one it looks like.
The impairment charge on a software project.
Any more there.
Yes, we had a we had a software approach to cloud based project going on.
Really the last couple of years, and we continue to struggle with that.
The vendor in terms of being able to deliver software that bump for easy functionality that we are expecting so we made a determination in Q4.
On exercise project, we ended up having to write off of capitalized both external cost as well as the internal labor cost for a total of about $8 $7 million.
Okay I'll hop back in queue, thanks very much.
Thank you and our next question coming from the line of Ghansham.
<unk> Harrison with Piper Sandler Your line is open.
Okay.
Good morning, and thanks for taking the questions.
So you've previously indicated 2024 opex target of I think 22% 23% of sales two.
2022 came in at 26%, which is slightly up from <unk> 21, and so I'm just curious how youre thinking about the progression of Opex for 'twenty, three and then where your confidence level is on the 'twenty 'twenty four targets.
Yes. So we gave the 2024 targets in the fall of 'twenty, one and at that point, we did not expect the kind of supply constraints that we saw in 'twenty, two and continue to see in 'twenty. Three so I'd say, while those are still our longer term targets I don't believe those targets will be met in 2024 that said the APA.
Next target of 22% to 23% is the longer term target is just I think that's going to be pushed out a year or so as we work through the backlog as I think there have been delayed because of the supply component. So silver right long term target, we do not expect it to be 2024.
Helpful. Thank you.
And then for my follow up I, just wanted to touch just a follow up just to ask a question on free cash flow I think you generated just under $5 million in 2022, how are you thinking about free cash flow during 2023.
And then to the extent that we do get some sort of recovery in the supply chain environment, and you unlock that $100 million per quarter.
Network Network solutions revenue.
What are is how do you think about use of potential free cash flow.
Yes, so our cash flow was a positive $5 million for all of <unk>. It was actually negative in the fourth quarter to the tune of around 18 million and lot of that was continuing to invest in inventory. So we will continue to as components become available invest to make sure. We got all the components necessary my expectation for free cash flow.
For 2023 is negative for the full year really for a couple of reasons. One is we have some large cash tax payments due in the second quarter. Those relate to two things. One is settled Haynes international tax audits that we had crews that hadn't paid but the bigger issue is the legislative.
Since that happened with the <unk> 2017 tax reform, which essentially forced you to.
Capitalizing R&D, we were expecting on wants to get a return that was everybody else and they haven't yet so the current tax law relative to the capitalization of R&D creates quite a bit larger cash tax payments. So as an example, just cash tax alone is going to be up something like $25 million year over year.
In addition, we will.
We'll continue to invest in working capital as we go out with it so our guidance is to grow the business.
When that happens you've got growth in receivables and as I mentioned, we will continue to make sure. So while it is negative for the full year I expect it to turn in the second half so expect Q1.
In Q2 to be negative Q1 volatility this quarter, where we will take a discretionary bonus to non executive team in Q2 as the large cash payments by the time, we get to Q3 and four where earnings are starting to improve versus the first half I would expect cash flow to be positive again for the full year something in the range of like mine.
25 to minus $35 million.
Helpful. Thank you.
Thank you and our next question coming from the line of Glenn Kellow with Baird. Your line is now open.
Hey, good morning, Thanks, guys and congrats on the bookings.
Just quickly maybe.
So the environment for new projects with Greg maybe bookings this quarter exports at all but yes. There has been some reports of smaller utilities Robert.
Co op.
Not being able to pull birds.
Total LOE variety of electricity prices.
Could you guys at all.
A couple of points.
Very good.
Bookings environment or the pipeline of opportunities maybe correctly stated it continues to be very robust.
The need for investment in resiliency and reliability or whether you are a larger small utility.
Are there the need to prepare your environment for growth in Evs and <unk>.
Continued growth in things like rooftop solar means an awful lot of investments in the distribution grid. So we feel very bullish about what the future will bring for us in terms of demand from customers.
That is something we hear directly from customers.
Range of opportunities continues to expand we launched a product called the <unk>.
The distributed intelligence network interface card really it allows us to put into third party types of devices like smart panels and others to again continue to broadening out the range of applications on your point about smaller utilities delaying investments.
On affordability in energy prices I would say I see that on occasion, but certainly hasnt been as widespread.
There are a broad range of municipalities and cities that are investing and investor IOU.
Investing very aggressively in driving up the big bookings projects that you see in our backlog today.
The work is going on that certainly is a multi year and probably in multi decade growth in terms of needs of the electricity grid.
Water systems and that is good.
Future growth for the company.
Okay.
Yeah.
Well.
A portion of our backlog was fraud.
Joe before regard deflationary environment.
Just how do we think about the backlog and pricing.
That impacts margins or if you're able to re price with customers.
Going forward.
Sure I can.
Jumping on that one and then perhaps Joe you want to add.
Anything additional.
Work that we've been doing over the last year plus on changing contracts for new agreements to provide a little bit more.
Flexibility around pricing specifically in an inflationary environment that has gone well I would say the vast majority of the bookings are in a place where you've got to that.
A little bit better protection against inflation.
We still have a fair amount of overhang of bookings prior to.
That change in our operations more than a year ago and that work.
It has sometimes been there.
With us and sometimes we havent been able to achieve a price increase so I would say that in terms of backlog with inflation protected.
Above a third but probably less than half in terms of what the size of that is but.
New projects as they continue to roll through and as deliveries happen. It rolls off that stuff slide where we do have a margin pension and gets us into a better ZIP code from a margin perspective.
Okay.
Just maybe lastly, just could you remind us of the cadence.
First of all outcomes.
I think a solid service.
Pick up more but just like all the trajectory of your.
Healthy promoted with.
Your service before.
<unk>.
Larger portfolio great.
Sure so.
Few steps on the outcomes side of things I think are helpful. So roughly.
75% of that revenue is recurring revenue the.
The majority of that is.
Sort of SaaS or service based revenue, which has a meaningful higher margin, which is why outcomes tends to run a materially above in the gross margin line compared to <unk>.
The networks or even devices.
The timing of outcomes revenues generally let's call it 18 months after.
The.
The network deployment in terms of timing it changes a little bit project to project, but that's a.
Some of the year number to understand what the timing would be and that revenue tends to come over a very long period of time. So I think 10 year SaaS or managed service agreements.
You get that revenue over a very long period of time.
Thank you and our next question coming from the line of Pam.
Rice with Raymond James Your line is now open.
Hey, it's Bob <unk> here thanks for.
Taking the question.
Same question I asked a few months ago in kind of quasi recessionary environment.
Is there any improvement in terms of multiples from an M&A perspective, as you look at private companies.
I think that valuations are certainly coming down.
There is still a meaningful difference between that I.
I would say hardware valuations in software valuations, where software tends to be a bit higher.
Indeed valuations are coming down a bit.
Large scale enterprise.
Software evaluation is still tend to be pretty rich compared to us.
The traditional valuation that you've seen but come.
I went down a little.
Okay can you give an update also on demand response.
Business.
It's obviously one slice of outcomes.
We get these extreme weather dynamics, which I would imagine.
Pushes up.
The.
Appetite among ISO for demand response.
Indeed, the demand response world continues to move along pretty nicely and honestly, what I've seen is not only using that capability from a traditional demand response, let's shaved peak often.
And deal with.
A very high pressure kind of situations using that capability much more as a normal course of practice.
I understand when to charge things like Evs and how to do use rooftop solar much more effectively so I think it is.
Moving from our demand response peak shaving kind of situation to much more of a localized control or distributed energy resource management.
Is is where the industry tends to be heading in a lot of the discussions we have with our customers. We accomplished both of those use cases.
Understood Thanks very much.
Thank you and our next question coming from the line of my.
Malloy with Johnson Rice <unk> company. Your line is open.
Thank you for taking my question I.
I wanted to ask about the guidance.
I would have.
<unk>.
So the level of revenue that you're guiding to that the earnings per share would be higher.
Could you maybe give us some help in terms of the magnitude for the variable comp that you talked about and also any help would be appreciated on the gross profit margin side.
Yes, I think I answered the gross profit already so from an annual perspective.
At or slightly above the full year 2022 level.
In terms of Opex I think he's going to talk about that one which is we're going to continue to be a little bit higher revenue.
<unk> levels for Opex.
As a percentage similar to 2022, which would imply higher dollar opex between 'twenty to 'twenty, three and as I mentioned on the call a lot of that is variable comp. So really don't want to talk about exactly how much our variable comp base, but it was material materially.
Sure.
We mentioned the other thing I would point to 2022 Etfs versus 2023 when normalized for you.
A discussion point, so the tax rate and the overall 2002, it was 4% the tax rate in 'twenty three is 28% and so we had a lot of favorable discrete mostly linked to statute limitations explorations in 2010. It can normalized for the same tax rate year to year 2020.
<unk> would have been 85.
At the midpoint of our guidance is nine roughly 6% and again.
We built the guidance based on.
Our current view of <unk>.
Player commitments and to the extent they are better than that and more predictable will be in a position to update the guidance in the August timeframe.
Okay.
Helpful.
In terms of the record backlog here can you.
Breakdown.
Maybe what's the how much of that is the outcomes.
How much of that network solutions.
Yes, I mean, all over 90% this network in a constant.
Materially changed much quarter to quarter.
Okay.
<unk>.
Thank you and I will now turn the call back over to Mr. Tom Deitrich for any closing remarks.
Very good. Thank you all for joining US today, we look forward to updating you on our progress after our Q1. Thanks Paul.
Ladies and gentlemen that does conclude our conference for today. Thank you for your participation you may now disconnect.
Potential to.
To raise and lower Johan during Q&A, you can dial one one.
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Yes.
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Okay.
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Okay.
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The conference will begin shortly to raise and lower Johan during Q&A you can dial one one.
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Yes.
Okay.
Yes.
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Yes.
Thanks.
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Yes.
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Yes.
Yes.
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Good morning, ladies and gentlemen, and welcome to the <unk> fourth quarter 2022 earnings Conference call. At this time, all participants are in a listen only mode.
After the Speakers' presentation delving, a question and answer session to ask a question. During this session you will need to westar one one on your telephone you will there.
Then here in automatic message advising Yohanan Suisse.
Please note that today's conference is being recorded I will now hand, the conference over to your speaker host today, David <unk> Director of Investor Relations. Please go ahead.
Thank you operator, good morning, and welcome to <unk> fourth 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.
<unk> 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 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.
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 February 27, 2023 may materially change and we do not undertake any duty to update any of our forward looking statements now please turn to <unk>.
Page four of the presentation and turn the call over to our CEO Tom Dietrich.
Thank you David Good morning, and thank you for joining US you will hear fourth quarter details from Joan coming up shortly but here is a brief overview of the quarter revenue was $467 million adjusted EBITDA was $34 million and non-GAAP earnings per share was <unk> 71.
Our fourth quarter financial results were a step in the right direction the team executed well to convert and deliver additional components that were supplied late in the quarter, which unlock revenue and EBITDA ahead of our expectations.
Turning to slide five for the third consecutive quarter, we achieved a new record level for total backlog, which reached four 6 billion.
Continued strong demand drove bookings in the fourth quarter to $898 million or a one nine book to bill ratio.
The full year bookings were approximately $2 5 billion.
Which is a book to bill ratio of one four.
Our key bookings in the fourth quarter continued to be driven by distributed intelligence and analytics over our network technologies are networked solutions and outcomes offerings continue to contribute over 90% of the total backlog.
Hydro one received regulatory approval for their <unk> two pointed out program, which is an important step and moving forward with deploying our gen. Five Riva solution. This includes our distributed intelligence capabilities across their service territory in Ontario, Canada to support the grid reliability and resiliency.
And consumer engagement initiatives.
In the water vertical the city of Detroit is upgrading to our water network and <unk> will also provide managed services Cps energy extended our SaaS contract by an additional 10 plus years, which strengthens our technology partnership in San Antonio, Texas, a fast growing community that is now leveraging <unk> network <unk>.
Knowledge to deploy Ami and distribution automation across electricity and gas as well as water in conjunction with our sister utilities thaws.
We are now excited to begin deployment of our entellus gas solution, bringing market, leading safety functionality and increased edge intelligence to Cps energy.
Lastly, in Paris, France, CLS and icon entered a long term strategic collaboration to provide Paris, a citywide canopy network connecting more than 200000 street and traffic lights across the city.
Coupled with deploying innovative breakthrough services, Paris will be able to cut public lighting energy by up to 30% beyond the impact of Leds, resulting in massive energy savings and improvements and sustainability.
Now turning to slide six I would like to provide some operational updates and insights from around the business.
We have a robust pipeline of opportunities ahead as our customers' needs are aligned with our technology portfolio and continued investments while quarter to quarter bookings will vary we anticipate the strong demand environment to continue.
Lee I note that first quarter bookings are typically lower than the fourth quarter.
The current supply environment is showing improvement with choppy component deliveries in the near term specifically for some analog and power semiconductors.
We will continue to work aggressively to mitigate these constraints, including increasing inventory levels of selected components as it becomes available to improve supply chain security customer support remains strong and we have not experienced nor expect any material cancellations of backlog.
Looking forward, we expect improving supply availability across the year, we are watching the macro situation closely including the timing of supplier capacity expansion demand in the automotive industry potential impacts from China reopening and the overall inventory level across the full spectrum of the supply chain.
The underlying improvements supply trend is positive with some degree of volatility as the global supply chain rebalancing.
Input cost inflation rates have leveled out but component costs remain elevated tactical pricing actions combined with the increased pricing flexibility and more recent contracts have improved margin on a portion of the backlog.
Finally, I want to cover that we announced a plan to further streamline our global manufacturing operations and company overhead as we continue to execute our stated strategy.
When complete this plant will improve our operational and financial performance I will now hand off to Joan to cover the fourth quarter results 2023 outlook and the details of our recently launched restructuring plan.
Thank you as Tom mentioned, we received earlier than anticipated component supply late in the fourth quarter, allowing us to ship and recognize more revenue than expected.
The additional components supply had been anticipated in Q1 of 'twenty three so a portion of Q4 strong performance was a shift from Q1 <unk>.
I'll provide more color on our 2023 expectations, but first let me cover fourth quarter and fiscal year 2022 results.
Please turn to slide seven for a summary of consolidated GAAP results.
Fourth quarter revenue of $467 million decreased 4% versus last year and was flat in constant currency.
Revenue declines year over year due to the sale of our C&I gas business in our device solutions segment. This decline was offset by higher revenue in both our networked solutions and outcomes segments.
Gross margin for the quarter was 31% 510 basis points higher than last year, primarily due to favorable mix, partially offset by elevated component costs.
GAAP net income of $22 million or <unk> 49 per diluted share compares with a net loss of $59 million or $1 30 per share in the prior year the.
The improvement in the current period was due to higher GAAP operating income, partially offset by a lower tax benefit.
Regarding non-GAAP metrics on slide eight non-GAAP operating income was $25 million adjusted EBITDA was $34 million non-GAAP net income for the quarter was $32 million or <unk> 71 per diluted share.
Free cash flow was negative $18 million in Q4, driven by an increase in working capital, particularly inventory.
We will continue to invest in critical components as they become available.
Looking at revenue by business segment on slide nine.
Device solutions revenue was $100 million of $42 million or 27% year over year decline on a constant currency basis. The decline was due to the sale of our C&I gas business as well as continued product pruning.
Network solutions revenue was $301 million, a $39 million or 15% increase in constant currency.
The increase was driven by a ramp of new and existing deployments network solutions benefited from the extra components supply received late in the fourth quarter.
Revenue in the outcomes segment was $66 million, a $4 million or 7% increase in constant currency.
The increase was due to higher software license in product sales, partially offset by the continuing decline in the EMEA prepaid business.
Lastly, foreign currency changes resulted in $19 million lower revenue versus the prior year.
Moving to the non-GAAP year over year EPS bridge on slide 10.
Our Q4, non-GAAP EPS was <unk> 71 per diluted share down <unk> <unk> from the prior year.
Net operating performance had a positive <unk> 48 per share impact due to the fall through of higher gross profit and lower operating expenses.
A negative tax impact of 52 per share more than offset our positive operating performance the negative year over year tax impact was due to a large tax benefit booked in Q4 of 2021.
Turning to slides 11 through 13, I'll discuss Q4 results by business segment compared with the prior year.
Device solutions revenue was $100 million with gross margin of 11% and operating margin of 3%.
Gross margin increased 230 basis points due to improving mix, partially offset by elevated component costs.
Operating margin increased 40 basis points due to the fall through of the higher gross margin, partially offset by a higher percentage of operating expenses.
Network solutions revenue was $301 million with gross margin of 33% gross margin increased 260 basis points from the prior year due to favorable mix, partially offset by higher component costs.
Operating margin of 23% increased 480 basis points due to the fall through of higher gross profit and lower operating expenses.
Outcomes revenue was $66 million with gross margin of 46% gross margin increased 390 basis points due to very favorable solutions mix and improved operational efficiencies.
Operating margin of 26% increased 130 basis points due to the fall through of the higher gross profit, partially offset by higher R&D investment.
Now to briefly recap full year 2022 results. Please turn to slide 14.
Revenue of approximately $1 8 billion was down 9% from 2021.
On a constant currency basis revenue was down 6% and when further adjusted for the sale of our C&I gas business revenue was down only 2%. The revenue decline was due to the component shortages, which limited our ability to fulfill customer demand.
Gross margin was 29, 1% 20 basis points higher than 2021.
Adjusted EBITDA was $95 million compared with $115 million in the prior year.
non-GAAP earnings per share was $1 13 per share versus $1 75 in 2021.
Free cash flow was $5 million compared with $120 million in the prior year the.
The year over year decrease in free cash flow was due to higher working capital usage higher variable compensation payments and lower EBITDA, partially offset by lower capital expenditures.
Turning to slide 15, I'll cover liquidity and debt at the end of the fourth quarter.
Total debt remained flat at $460 million and net debt was $258 million.
Net leverage was two seven times at the end of Q4.
Cash and equivalents at the end of the fourth quarter were $202 million.
Please turn to slide 16, I'd like to provide you some color on our 2023 expectations.
We anticipate full year 2023 revenue to be in a range of $1 85 to $1 95 billion.
We remain cautious to start the year is component supply continues to be constrained and somewhat unpredictable, including the non linear timing of deliveries within a quarter.
But we do anticipate that the supply environment will improve gradually throughout the year.
At the midpoint to 2023 annual guidance is approximately 6% year over year growth.
This is driven by growth in our networks and outcomes segments, partially offset by a continued decline in our devices segment.
We anticipate full year non-GAAP EPS to be within a range of 70 to $1 10 per diluted share at.
At the midpoint of this guidance and normalizing the tax rate to 28% for both years the year over year operational earnings growth is approximately 6%.
This growth is somewhat muted due to an expected increase in variable compensation expense in 2023.
The variable compensation cost in our 2022 results, we're not at the target payout and we are planning to achieve targeted payout in 2023.
Given our expected gradual improvement of supply throughout the year earnings will be heavily skewed to the second half of the year.
Other full year guidance assumptions are a euro to U S. Dollar foreign currency exchange rate of one 5% and average non-GAAP effective tax rate of approximately 28%.
Average shares outstanding for the full year of approximately $45 7 million.
Now please turn to slide 17 for our first quarter outlook.
Given the continued volatility in the component supply I am also providing our view of Q1 we.
We anticipate first quarter revenue to be in a range of $460 million to $475 million, which at the midpoint is flat versus our Q4 performance.
As I mentioned in my opening comments the unexpected delivery as supply late in the fourth quarter was initially anticipated to be delivered and converted to revenue in the first quarter. This supply shift is contributing to slightly lower revenue in Q1.
We.
<unk> first quarter non-GAAP EPS to be within a range of $5 15 per diluted share. This is down sequentially from Q4 due to the very favorable product mix in Q4, an increase in variable compensation expense and a much higher tax expense given Q4's rate was negative 30%.
While we anticipate the full year 2023 tax rate to be approximately 28% the quarterly rates will fluctuate based on the amount of earnings and any one time true ups.
For the first quarter, we are expecting a onetime increase in tax expense of approximately $2 million. This is related to a required true up as prior stock grants vest include.
Including the impact of this $2 million true up we expect the overall tax rate in Q1 to be in a range of 40% to 60%.
In summary, the constrained and unpredictable nature of component supply continues to impact our results. However signs of supply improvements started to appear in our fourth quarter.
We are optimistic we will see improvement of supply availability throughout 2023.
Please turn to slide 18 for details on the restructuring announcement, we made this morning.
Last week, our board of directors approved a new restructuring plan. This plan is a continuation of our asset light strategy and includes further actions to streamline our manufacturing operations as well as overall overhead in the company.
We expect this project to cost between 40, and $45 million and generate annualized savings between 14 and $17 million. The project should be substantially complete by early 2025.
Now ill turn the call back to Tom.
Thank you Joan.
I would like to close today by highlighting our expanding distributed intelligence offerings to date, we have shipped approximately $5 8 million <unk> capable end points and have approximately 7 million applications and operations today.
Through partnerships are proven and scalable <unk> platform will enable a new and innovative approach to improving grid resiliency and transforming the relationship between utilities and consumers.
We recently announced a partnership with smart energy water to transform the utility consumer relationship to enable the management of distributed energy resources.
Builds upon our partnership ecosystem that already includes our long term collaboration with Microsoft to accelerate cloud adoption and the next generation of consumer and grid solutions for the utility and Smart City industries with partnerships, we will transform how end users view and manage their energy and how utility to meet the demands of <unk>.
Thirdly changing industry.
Thank you everyone for joining today operator, please open the line for some questions.
Thank you, ladies and gentlemen to ask a question you will need to Westar one one on your telephone and wait for your name to be announced.
Your question. Please press star one again, please standby will be compile the Q&A roster.
Okay.
First question coming from the line of Noah Kaye with Oppenheimer. Your line is open.
Good morning, Thanks for taking the questions and Tom I wanted to pick up right, where you left off with remarks around the expansion of the <unk> platform can you talk a little bit about the interest you've gotten from different players in the.
Ecosystem following your announcement in January .
Who are you seeing the demand coming most strongly from.
I think in that release, you mentioned the revenue opportunities around this would really start to manifest in 2024, but maybe give us a sense of what the revenue model might actually look like for some of these offerings.
Sure. Thanks Miller.
We see interest in <unk> applications from a broad swath of the industry certainly there are utilities that want to develop their own applications and then a host of ecosystem partners from <unk>.
Large companies small companies.
Is that our interest in the applications that they are working on tend to be a mix of great efficiency types of things as well as consumer engagement types of applications. It really depends on on what problem, they're trying to solve revenue model.
Is that largely a.
Subscription kind of model.
An application is.
<unk>.
Use for a certain period of time and on a per usage basis or a per time basis.
And the proportion of that revenue that accrues to iPhone is dependent on whether it's power application or whether it's a third party the third party.
Hosting fee and think of a more of a usage fee.
In our own applications is quite a bit higher in terms of.
The revenue that we get.
Right in terms of the timing think of it as a case where networks are deployed initial applications that AMRI.
Use cases stabilized by the utility and then they start layer and then incremental services. So it tends to lead to follow on in terms of deployments by maybe 18 months or so and Thats, where youre starting to see the scalability now I've mentioned in our pre recorded remarks of about $7 million applications running.
Today, sometimes one per endpoint oftentimes multiple applications running in parallel at Indian point more like a smartphone kind of model in terms of balance sheets.
Very helpful I might leave it for others to pull on the threat of what that means for outcomes I did want to ask just a couple of clarifying questions around the outlook. It sounded like we had some some revenue shift from Q3 into four Q. So if I just add a little bit.
Two one Q.
Seems like the revenue outlook for the full years.
Is annualizing.
<unk> would've been with not much improvement so just.
Given your comments around expectations for the improving supply chain I wonder if we could square that up a little bit.
Kind of conservative.
Is the outlook in terms of the revenue run rate and what what kind of level of.
Increase are you assuming as we go throughout the year.
Yes, let me, let me take a stab at that.
The outlook that we provided is based on our current expectations. After discussions with suppliers in terms of when supply low will arrive certainly to the extent that the suppliers are able to exceed our current view there is upside to the view, but right now we would say is that we expect gradual improvement <unk> cell.
All things being normal we expect he wanted to meet with our clients are continuing to grow.
So the range is pretty wide and you say if you take that and high end of the range is a different assumption then.
The range.
We will be somewhere around the midpoint or higher revenue growth, which would be over 6% and.
And the way to unpack that if I had one additional point of color as were fourth quarter definitely.
Demonstrated.
Outside potential in terms of being able to turn that revenue. We got components very late in the quarter and the team really did an exceptional job of turning that customers are eager for the.
The products and the technology that we provide so as we get those components, whether it be in a position to determine as quickly.
We can we do things as Jim mentioned that there will be.
A view of improving supply over the year with variations in some volatility in terms of timing.
In the first half of the year.
Very helpful I'll turn it over.
Thank you Juan Luis next question.
And our next question coming from the line of Jeff Osborne with Cowen Your line is open.
Hey, good morning, just a couple quick ones here I was wondering.
Can you quantify what the semiconductor impact was for the quarter and the full year.
Yes, I would say.
Fourth quarter was pretty similar to the prior quarters, we experienced in 2022, so somewhere call. It 100 million <unk> coordinating slightly better in Q4 of us exiting the year, we probably had about $400 million of revenue that was constrained.
Right.
Got it and then on the restructuring just a couple of quick housekeeping, there the $14 million to $17 million as the majority of that savings on the cost of goods line.
Yes, I'd say, 80% or salaries.
Got it and then what.
Was the outsource production mix and then what do you anticipate that to be sort of post these actions.
We are probably running around 45% may be 50% it varies quarter to quarter internal external today and I think this takes it up probably another 5% or so so.
By the time, we finish it off meetings.
Meaningfully above.
50% in terms of the.
The amount of outsourced production.
Got it and then my last one.
Tom was just on the book to Bill obviously, a great Q4, your implied that Q1 would be a bit softer seasonally do you anticipate it to be above one for the year. How should we think about just the level of activity that you are quoting.
We do definitely think that the book to Bill for the full year will be above one to one pipeline of opportunities remains very rich very strong.
Based on needs from our customers for resiliency reliability as well as new technology applications, whether they be consumer side. We're <unk> in terms of integration. So rich set of opportunities and we're we're bullish on what the year will bring in terms of bookings.
The only caution I would provide is it'll be a little bit lumpy quarter to quarter, just with normal seasonality as well as timing of individual contracts coming through.
Great. Thank you that's all I had.
Thank you one moment please for our next question.
And our next question coming from the line of Chip Moore with F. Hutton Group. Your line is now open.
Good morning, Hey, Thanks for taking the question.
Tom I wanted to ask one the regulatory environment. It seems like more and more states are looking at performance space mechanisms to meet their goals.
And you are seeing with your customers.
For some of the more advanced solutions.
Indeed they.
The regulatory environment continues to.
I understand the need pardon me for new technology and new models.
The amount of states that allow us some type of performance based rates with <unk>.
Capitalization.
Is about that is nearly 40 out of the 50, right now and plenty of changes underneath each one of those along.
Along the way so in general the regulatory model is moving in the direction of enabling the technologies that we are investing.
Great to hear and Joe you talked about.
<unk>.
<unk> in the back half on the guidance can you give us any color on sort of mix and perhaps cadence of implications for cadence of margins for the year.
Yeah, I would say for the full year, we would look at margins being pretty similar to what they were.
What they were in full year 'twenty two so certainly as we get more supply you get the benefit.
More factory.
Even after production and therefore less absorption issues, but we're also.
Fantastic.
Thanks.
For the full year I would say 'twenty two levels are pretty consistent and those will start out slower in the first quarter things were a few years. After the first quarter I would say the gross margin to be similar to Q1 of last year.
That's super helpful.
And just more housekeeping gentlemen on the restructuring can you just remind us where we are in the prior programs.
Just to get keep us.
Breath with the New program. The 2020 program is basically complete and so are we.
We still are working on 2021 pro forma should be complete mostly maybe early next year and those are all on track if anything to payback a little bit higher because we just had a little bit less severance than we expected. When we first initially booked for clients. So those are going according to plan again this one will be.
Savings should be complete by early 'twenty five the cash out is roughly 24% 26 now no impact.
On cash flow 23.
Okay, and sorry, one last one it looks like there was a.
Impairment charge.
Software project.
Any more there.
Yes, we had a we had a software approach to cloud based project going on term.
Really the last couple of years, and we continue to struggle with that.
The vendor in terms of being able to deliver software that bulk trading functionality that we are expecting so we made a determination in Q4.
Exercise project, we ended up having to write off of capitalized both external cost as well as the internal labor cost for a total of about $8 7 million.
Okay I'll hop back in queue, thanks very much.
Thank you and our next question coming from the line of Ghansham.
<unk> Harrison with Piper Sandler Your line is open.
Okay.
Good morning, and thanks for taking the questions.
So you've previously indicated 2024 opex target of I think 22% to 23% of sales two.
2022 came in at 26%, which is slightly up from 21, and so I'm just curious how youre thinking about the progression of Opex for 'twenty, three and then where your confidence level is on the 2024 target.
Yes. So we gave the 2024 targets in the fall of 'twenty, one and at that point, we did not expect the kind of supply constraints that we saw in 2002 and continue to see in 'twenty. Three so I'd say, while those are still our longer term targets I don't believe those targets will be that in 2024 that said the opt.
<unk> target of 22% to 23% is the longer term target is just I think that can be pushed out a year or so.
We worked through the backlog as I think it has been delayed because of the supply component. So silver rate long term targets, we do not expect it to be 2024.
Helpful. Thank you.
And then for my follow up I, just wanted to touch just a follow up just to ask a question on free cash flow I think you generated just under $5 million in 2022, how are you thinking about free cash flow during 2023.
And then to the extent that we do get some sort of recovery in the supply chain environment, and you unlock that $100 million per quarter.
Network Network solutions revenue.
What are is how do you think about use of potential free cash flow.
Yes.
Cash flow was a positive $5 million for all of 2002 and was actually negative in the fourth quarter to the tune of around 18 million and models that we're continuing to invest in inventory. So we'll continue to as components become available invest to make sure. We got all the components necessary on the expectation for free cash flow for 2023.
Negative for the full year really for a couple of reasons. One is we have some large cash tax payments due in the second quarter. Those relates to two things. One is settled Haynesville international tax audits that we have crews they hadn't paid but the bigger issue is the legislative change that happened with the <unk>.
2017 tax reform, which essentially.
You too.
Capitalizing R&D, we were expecting those laws to get overturned edge was everybody else and they haven't yet so the current tax law relative to the capitalization of R&D creates quite a bit larger cash tax payments. So as an example, just cash tax alone is going to be up something like $25 million year over year in.
We will continue to invest in working capital as we grow the business. So our guidance is to grow the business and typically when that happens you've got growth in receivables and as I mentioned, we will continue to make sure. We cross sell while it is negative for the full year I expect it to turn in the second half so expect Q1.
In Q2 to be negative Q1 volatility this quarter, where we will take a discretionary bonus to non executive team in Q2 as the large cash payments by the time, we get to Q3 and four where earnings are starting to improve versus the first half I would expect cash flow as activity positive, but again for the full year something in the range of like mine.
It's 25 to minus $35 million.
Helpful. Thank you.
Thank you and our next question coming from the line of <unk> with Baird. Your line is now open.
Hey, good morning, Alright, thanks, guys congrats on the bookings.
Just quickly Tom.
So the environment for new projects with Greg maybe bookings this quarter exports at all but there is good.
Reports of smaller utilities Robert.
Co op.
We'll not be able to <unk>.
The Coke zero variety of electricity prices.
Could you guys at all.
A couple of points.
Very good.
The bookings environment or the pipeline of opportunities may be correctly stated it continues to be very robust.
The need for investment in resiliency and reliability or whether you are a larger small utility.
Are there the need to prepare your environment for growth in Evs.
Continued growth in things like rooftop solar means an awful lot of investments in the distribution grid. So we feel very bullish about.
The future will bring for us in terms of demand from customers.
That is something we hear directly from customers.
Range of opportunities continues to expand we launched a product called the <unk>.
The <unk>.
Distributed intelligence network interface card really that allows us to put into third party types of devices like smart panels and others to again continue to broaden out the ratio of applications on your point about the smaller utilities delaying investments.
Based on affordability and energy prices I would say I see that on occasion, but certainly hasnt been as widespread.
There are a broad range of municipalities and cities that are investing as investor IOU.
The investing very aggressively in driving up the big bookings projects that you see in our backlog today.
The work is going on and that certainly is a multi year and probably a multi decade growth in terms of needs of the electricity grid.
Water systems and that is good.
Future growth for the company.
Great.
Okay.
Well.
Good portion of our backlog was fraud.
Joe before we go out deflationary environment.
Just how do we think about the backlog and pricing.
Thanks, Mark or if you are able to re price with customers.
Going forward.
Sure.
Jumping on that one and then perhaps Joe you want to add.
Anything additional.
Work that we've been doing over the last year plus on the change in contracts for new agreements to provide a little bit more.
Flexibility around pricing specifically is the inflationary environment that has gone well I would say the vast majority of new bookings are already in a place where you've got.
A little bit better protection against inflation.
We still have a fair amount of overhang of bookings prior to.
That change in our operations more than a year ago and that work.
It has sometimes been there.
With us and sometimes we havent been able to achieve a price increase so I would say in terms of backlog with inflation protected.
Above a third but probably less than a half in terms of what the size of that is but.
New projects.
We continue to roll through and as deliveries happened it rolls off that stuff slot, where we do have a margin pension and gets us into a better ZIP code from a margin perspective.
Okay.
Hum.
Maybe lastly, just could you remind us of the cadence so.
First of all outcomes.
I think or sorry, the service.
Picked up more but just like all the trajectory of your house.
<unk> work.
Your service record sub regionals.
Different larger portfolio great.
Sure so.
Few steps on the outcomes side of things that I think are helpful. So roughly.
75% of that revenue is recurring revenue.
<unk> of that is.
Sort of SaaS or service based revenue, which has a meaningful higher margin, which is why outcomes tends to run a materially above in the gross margin line compared to two networks or even the devices.
Timing of outcomes revenues generally let's call it 18 months after.
The.
The network deployment in terms of timing it changes a little bit project to project, but thats a good some of the year number to understand what the timing would be and that revenue tends to come over a very long period of time. So I think 10 year SaaS or managed services agreements.
You get that revenue over a very long period of time.
Thank you and our next question coming from the line of Pam <unk>.
Rice with Raymond James Your line is now open.
Hey, it's Bob <unk> here thanks for.
Taking the question.
Same question I asked a few months ago.
Kind of quasi recessionary environment.
Is there any improvement in terms of multiples from an M&A perspective, as you look at private companies.
I think that valuations are certainly coming down.
There is still a meaningful difference between that.
I would say hardware valuations in software valuations, where software tends to be a bit higher.
But indeed valuations are coming down a bit.
Large scale enterprise.
Software evaluation still tend to be pretty rich compared to us.
The traditional valuation that you've seen.
Comes down a little.
Okay can you give an update also on demand response.
Business.
It's obviously one slice of outcomes.
We get these extreme weather dynamics, which I would imagine.
Sure.
The.
Appetite among ISO for demand response.
Indeed, the demand response world continues to move along pretty nicely and honestly, what I've seen is not only using that capability from a traditional demand response, let shaved peak often.
And deal with.
A very high pressure kind of situations using that capability much more as a normal course of practice.
I understand when to charge things like Evs and how to use rooftop solar much more effectively so I think it is.
Moving from our demand response peak shaving kind of situation to much more of a localized control or distributed energy resource management is is where the industry tends to be heading in a lot of the discussions we have with our customers. We accomplished both of those use cases.
Understood Thanks very much.
Thank you and our next question coming from the line of Mark.
Dan Malloy with Johnson Rice <unk> company. Your line is open.
Thank you for taking my question.
I wanted to ask about the guidance.
I would have.
<unk>.
For the level of revenue that you're guiding to that the earnings per share would be higher.
Could you maybe give us some help in terms of the magnitude for the variable comp that you talked about and also any health.
Would be appreciated.
Gross profit margin side.
Yes, I think I answered the gross profit already so from an annual perspective at.
At or slightly above the full year 2022 level.
In terms of Opex I think you certainly talked about that one.
To continue to be a little bit higher than revenue.
Levels are for Opex.
And the percentage similar to 2022, which would imply higher dollar opex between 'twenty to 'twenty, three and as I mentioned on the call. Thank a lot of that is the variable comp. So really don't want to talk about exactly how much our variable comp base, but it was material materially.
<unk>.
We mentioned that the other thing I would point to 2022 Etfs versus 2023 when normalized for you.
A discussion point, so the tax rate and overall 22 was 4% a tax rate of 23 is 28% and so we had a lot of favorable discrete mostly linked to statute limitations expirations in 2010, if you normalized for the same tax rate year to year 2020.
<unk> would have been 85.
The midpoint of our guidance of nine roughly a 6% and again.
We built the guidance based on.
Our current view of supply our commitments and to the extent that better than that and more predictable will be in a position to update the guidance in the August timeframe.
Okay.
And in terms of the record backlog here can you.
Breakdown.
Maybe what's the how much of that is outcomes and how much of that.
<unk> solutions.
Yes over 90% is network and our customer doesn't materially change much from quarter to quarter.
Okay.
Thank you.
Thank you and I will now turn the call back over to Mr. Tom Deitrich for any closing remarks.
Very good. Thank you all for joining US today, we look forward to updating you on our progress after Q1. Thanks all.
Ladies and gentlemen that does conclude our conference for today. Thank you for your participation you may now disconnect.