Itron Inc. Q1 2023 Earnings Call
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All right good day and thank you for standing by welcome to the 2023 Q1 earnings call. At this time all participants are in listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to pass.
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Good morning, and welcome to <unk> first quarter 2023 earnings Conference call.
Tom Dietrich <unk>, President and Chief Executive Officer, Joan Hooper, Senior Vice President and Chief Financial Officer will review <unk> first quarter results and provide a general business update and outlook.
Earlier today, the company issued a press release announcing its results.
This release also includes details related to the conference call and webcast replay information.
Accompanying today's call also as a presentation that is available through the webcast I don't know corporate website under the Investor Relations tab.
Following prepared remarks, the call will be opened for questions using the process. The operator described.
Before Tom begins a reminder, that 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 todays earning release and comments made during this conference call as well as those presented 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 May four 2023.
May materially change and we do not undertake any duty to update any of our forward looking statements.
Now please turn to page four of our presentation as our CEO , Tom Dietrich begins his remarks.
And now I'll hand, the call over to Tom.
Thank you and welcome to <unk>, good morning to everyone listening for the call today I will review our first.
Quarter highlights and Joe will discuss our first quarter financial results before I conclude with some final thoughts.
Our first quarter revenue increased 4% year over year, and 6% sequentially to $495 million.
Adjusted EBITDA was $39 million a year over year increase of 109%.
And non-GAAP earnings per share was <unk> 49, a 345% improvement over the first quarter.
2022.
These results reflect the execution of our team in navigating a dynamic supply chain environment and the benefit of improved access to components supply.
Demand for our solutions continues to grow and a strong start to 2023 is encouraging.
Turning to slide five bookings were $428 million for a book to Bill ratio of 0.9, which is comparable to the first quarter and prior years.
As a market leader, we pride ourselves on providing differentiated platform solutions to a wide array of water energy and smart city customers.
The underlying drivers for our $4 6 billion of total backlog are the macro trends challenges our customers face such as climate disruption electrification in the global economy, increasing consumer expectations and deliver the resilient infrastructure investments.
Our customers are seeking more advanced approaches to asset management with increased agility and Theres no question that our products and solutions allow for more effective higher returned operation of infrastructure assets as well as enhanced.
Consumer experience.
Although we never take new business for granted we expect to beat our target book to Bill ratio of one to one or better this year and are bullish on the prospects for the long term customer adoption of next generation technologies, such as distributed intelligence.
The commercial highlights from the first quarter demonstrates the value of operating offering an integrated suite of data collection networking and measurement capabilities.
Illinois peoples gas and north shore gas or working with Commonwealth Edison to leverage their network to increase service effectiveness benefiting $1 billion of peoples gas and north shore gas consumers. This significant network as a service partnership will eliminate over 600 tons of greenhouse gas emissions per year, while Korea.
<unk> at least $5 $5 million in annual cost savings.
This is a model example of how innovative network solutions can be leveraged by our customers to achieve financial and environmental goals, while simultaneously enhancing consumer experience.
Also of note Duquesne light company, serving 600000 consumers in southwestern Pennsylvania, and will deploy <unk> smart lighting solution, including the Smart City management software as a service package and integrated field operations platform <unk> industrial Iot solutions will enable Duquesne light.
<unk> vision.
Clean energy to become a reality.
We also achieved a significant milestone this quarter with the delivery of our $1 billion and tell us gas endpoint.
As infrastructure ages, integrating communications capability with our accurate static metrology, while improving gas safety.
Continues to gain momentum and scale.
Now turning to slide six I will cover some operational insights from around the business.
Demand remains strong and we expect this favorable environment to persist as our customers are pressing needs integrating distributed energy resources addressing water scarcity, improving safety and reducing admissions related to gas distribution, while meeting both long term sustainability objectives.
We anticipate capital deployment by utilities and municipalities to address these themes will remain robust and the regulatory environment continues to be constructive.
While volatility related to component deliveries continues to be present, the overall trend shows improvement inflationary cost pressures persist, but with a slowing pace of increase.
Semiconductor lead times appear to have plateaued, but have not yet materially retracted as the most constrained portions of the global supply chain, you're still rebalancing. These factors lead to our four mindset as we continue to plan for degrees of uncertainty and risk we do not expect a step function recovery.
A more measured return to an unconstrained components supply and system deployment.
The efforts, we have undertaken over the past quarters, including component multi sourcing factory capacity adaptation consolidation product pricing initiatives and thoughtful inventory buffering combined with joint customer planning for fruit in the first quarter in the form of improved financial leverage.
Our strong backlog and customer demand should create continued business momentum as the remaining supply chain constraints rebalance.
With that said I will ask Joan to spend some time reviewing our first quarter results in greater detail and provide a review of the second quarter Joe.
Thank you as Tom mentioned increased component supply and strong execution drove Q1 results above our guidance. While we are pleased with our Q1 performance. We continue to monitor market conditions and supply chain dynamics to remain agile in the face of an uncertain macro environment.
Please turn to slide seven for a summary of consolidated GAAP results.
First quarter revenue of $495 million increased 6% sequentially and 6% year over year on a constant currency basis. This was the highest quarterly revenue for <unk> since Q1 of 2021.
Gross margin for the quarter was 31, 6% 320 basis points higher than last year, primarily due to very favorable product and solutions mix and operational efficiencies.
Our GAAP net loss of 12 million or <unk> 26 per share compared with net income of $1 million or <unk> <unk> per diluted share in the prior year the.
The decrease in the current period was due to a restructuring charge related to the recently announced 2023 plan that will further optimize our manufacturing footprint.
Regarding non-GAAP metrics on slide eight non-GAAP operating income was $31 million up $22 million from the prior year.
Adjusted EBITDA increased 109% to $39 million.
This was the highest quarterly EBITDA for <unk> since Q1 of 2021.
non-GAAP net income for the quarter was $22 million or <unk> 49 per diluted share.
Year over year revenue comparisons by business segment are on slide nine.
Device solutions revenue was $118 million and $15 million or 11% year over year decline on a constant currency basis.
After further adjusting for the sale of our mechanical C&I guests business devices revenue was essentially flat year over year.
Network solutions revenue was $313 million or $36 million or 13% increase in constant currency.
Strong performance was enabled by increased access to key components, which allowed us to fulfill more customer demand.
Outcomes segment revenue was $63 million, a $7 million or 12% increase in constant currency.
We saw growth in software licenses solution sales and services activity.
Lastly, foreign currency changes resulted in a $9 million reduction in revenue versus Q1 2022.
Moving to the non-GAAP year over year EPS Bridge on Slide 10, our Q1 non-GAAP EPS was <unk> 49 per diluted share up 38 from the prior year net.
Net operating performance had a positive <unk> 33 per share impact of the fall through of higher gross profit.
<unk> had a positive impact of <unk> <unk> per share.
Foreign currency and share count had a small negative impact of <unk> <unk> per share.
Turning to slides 11 through 13, I'll review Q1 segment results compared with the prior year.
Device solutions revenue was $118 million with gross margin of 20% and operating margin of 12%.
Gross margin increased 450 basis points due to improved product and customer mix and operational efficiencies.
Operating margin increased 360 basis points due to the fall through of the higher gross margin, partially offset by higher percentage of operating expenses.
Network solutions revenue was $313 million in gross margin was 34%.
Gross margin increased 90 basis points from the prior year due to favorable product and solutions mix and improved operational efficiencies.
Operating margin of 24% increased 200 basis points due to higher gross profit and operating leverage.
Outcomes revenue was $63 million with gross margin of 43% gross margin increased 390 basis points due to favorable solutions mix and improved operational efficiencies.
Operating margin of 21% increased 590 basis points due to higher gross profit and increased operating leverage.
Turning to slide 14, I'll cover liquidity and debt at the end of the first quarter.
Total debt remained flat at $460 million and net debt was $264 million net.
Net leverage was two three times at the end of Q1.
Cash and equivalents at the end of the first quarter were $196 million.
Free cash flow was negative $5 million in the first quarter, primarily due to increases in inventory.
As previously discussed we continue to invest in raw material components to enable us to accelerate shipments when that last remaining golden screw becomes available.
This strategy served us well in the first quarter.
Now please turn to slide 15 for our second quarter outlook.
We anticipate second quarter revenue to be between 510 and $525 million the.
The midpoint of this range represents 20% year over year growth and about 5% sequential growth.
Sequentially, we expect lower Q2 gross margin due to a very favorable Q1 mix that won't repeat.
We also expect higher operating expenses, primarily due to employee salary increases that were effective April one.
For the second quarter, we anticipate non-GAAP EPS to be in a range of 25% to 35 per diluted share. This compares to <unk> <unk> per share in Q2 of 2022.
We are hopeful that our recent results represent an inflection point for growth and look to build on the momentum created during Q1.
While a great deal of global economic and supply chain uncertainty remains we have put ourselves in a better position to navigate the environment. Our strong backlog provides opportunities to accelerate growth and we continue to focus on disciplined cost management.
Now I will turn the call back to Tom.
Thank you Jim.
Our platform solutions, including distributed intelligence enabled market, leading visibility and operational agility at the grid edge over $6 4 billion DIY capable endpoints are in service today, a 34% increase compared to last year and we've only scratched the surface.
We are proud to partner with innovators like peoples gas North shore gas commented and Duquesne light company to apply new technology and business models to address modern challenges that can't and won't be solved by conducting business as usual walk the.
The opportunity to enhance the performance of the low voltage grid and integrated distribute distributed energy resources at the edge is substantial and no one is better positioned to participate the nitron.
These are only some of a few of the innovative solutions that power our $4 6 billion of total backlog and a robust pipeline of opportunities ahead.
Thank you for joining us today.
Taylor Please open the line for some questions.
Okay.
Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one on your telephone only for your name to be announced to withdraw. Your question. Please press star one again please.
Please standby, while we compile the Q&A roster.
Alright, we now have no okay.
Well good morning, and thanks for taking the questions.
I guess, if we can start with maybe what has happened over the month of March and April to kind of get us to where we are today.
The delta between the <unk> guide.
Yes.
Late February and the run rate that you're kind of seeing for <unk> obviously.
The Big story here is the improvement in components supply can you maybe walk us through.
What you've seen and how do you think about the sustainability of that improved flow.
Thanks, Noah Tom here.
What we saw during the.
The time periods that you're talking about is.
More of the components that we needed to unlock the inventory of components that we had on hand come in and we saw good operational execution on the part of the team to turn that into revenue, meaning finished goods and installation services all the way out.
To the customer.
The demand was obviously there we were waiting on a few of those.
Sure.
Golden screws for lack of a better term to come through and Thats Indeed, what happened.
So we were pleased with the performance of the supply chain team to be able to make that happen.
What do we see going forward I would say that the trend is steadily improving on the supply chain side. There are still some potholes in the road if you will.
Specifically in power semiconductors still are pretty constrained out there where.
There is a pretty heavy sustained demand on the automotive side as well as industrial applications.
The global supply chain is still a bit fragile in places.
We're mindful of that as we think about things, but short term visibility is definitely improving and thats, what led to the second quarter guide or outlook any way that John provided yes, and the other thing I think Tom was referring to this but the linearity of when we got the supply in the quarter was really impactful so to the extent we.
We were able to get that supply and turn it into revenue in other quarters. It might have come very very late in a quarter and you didn't get turned to revenue so and just getting it at a much more predictable fashion during the quarter was was key to the.
Performance.
Very helpful.
You guys don't typically update full year guidance.
Q I just want to make sure that's what's going on here.
Obviously anyone can annualize the <unk> run rate in <unk> results and say well. This is well over the prior guide is that correct or is there anything that we should be thinking about in terms of potential back half correct.
Yes, I mean, one of the things that Tom mentioned is the short term visibility on supply chain has improved and in fact, it's better short term that it has longer term. So you are correct. We chose not to update officially the annual guidance, we'll do that in October .
Sorry August .
But obviously, we are off to a good start and for now I would say.
If you look at what we guided for Q2, it's probably not a bad assumption to assume a similar Q3 and Q4, which if you do the numbers would suggest we're above our our previous annual guidance and again, we'll be in a better position in August having one more quarter behind us.
And maybe if I could sneak one more in for devices margins too.
The way they did year over year.
Obviously, there is some benefit from the divestitures, but can you talk a little bit about maybe some of the internal improvements within devices to kind of drive these higher gross margins.
To the extent that that's sustainable.
Yes, I mean, it was absolutely great that they got 20% I think the last quarter. They are at a 20% gross margin was all the way back in 2018, So certainly theres been a lot of self help one was on the.
The sale of a business one was just exiting more unprofitable product lines. There was an element of timing mix now in Q1, so to the extent we got.
The key components they were shipped toward customers that had higher margin. So our expectations going forward is a little bit of a dip in devices gross margin, but certainly relative to the last couple of years a lot of self help getting.
Much more volume through the factory's certainly was important in terms of absorption.
Okay, great to see thank you.
We now have Jeff.
Okay.
Okay.
Hey.
Jeff Osborne here, a quick question on the <unk>.
Mix, John that you mentioned for Q2.
Is that less software license revenue or decline in networking or an improvement in.
The device side I'm, just trying to understand the puts and takes on the gross margin comment that you made I would say, it's a little bit across the board in part I mentioned.
I was talking about opex, the raises that went into effect in it.
April those also actually affect the gross margin so anybody that works in our supply chain et cetera. So the raises that creates some issues I just talked about devices I would say.
More of it is probably in the network space and it's around very favorable solutions and services mix in Q1, which we would expect to be a little less favorable than Q2. So from a Q2 gross margin standpoint, while I expect it to be lower than Q1, I think it will be at or above what it was a year ago last year was about call it $29 five so.
Maybe it's closer to 30% for Q2.
Got it I appreciate the detail there.
Tom the $6 4 million endpoints up 30% is impressive once that you don't get it but I was wondering if you could just put it in perspective is the backlog bigger.
Roughly how many endpoints are in backlog I'm, just trying to put that in perspective relative to what you've been able to achieve.
The past couple of years with the <unk> rollout.
Certainly the majority of that six four I'm, sorry, $4 6 billion in total backlog dollars is on our latest generation technology.
So that solution, which is the network and the communication capable and downloadable.
Endpoints downloadable apps.
Applications at the endpoint.
Is the majority of that total backlog that's out there. So it is definitely.
Over $10 million in terms of additional.
And points that is in backlog and as we look at the pipeline of opportunity there is more to come.
So I think.
This is fertile ground it leads directly on the problems and challenges that utilities and cities space, They need infrastructure, which is far more agile than what they've had in the past deal with <unk>.
Changes in their service territory has more evs more distributed energy resources come as more renewables are put into place on the generation side of things that that creates.
Impacts on the distribution grid, which are well addressed with the technologies like distributed intelligence.
Makes sense, that's all I had I appreciate the detail.
Thanks, Jeff.
Alright.
Okay.
Alright, we now have been.
Okay.
Hey, guys I assume that's great.
Ben.
Hey, guys congratulations on the quarter, it's great to see.
See the results from our progress.
Maybe just following up on.
Jeff's question regarding mix, yes, our margin, but if I look at Florida revenue too.
Five somewhere one of Q2 guidance.
Where does that come from and maybe sorry.
Ask you this way too Tom you've talked about.
Outcomes.
Because it kind of getting the network out there and just wondering when we start seeing the.
Growth.
Slide and then I'll.
A follow up.
Yes, I'll take the kind of the revenue mix.
Embedded in the Q2 guidance so for devices that we'd actually expect expected to come down a little bit so the heat and allocation business within devices is seasonally very strong in Q1 as it was this year so devices I'll actually could come down a little bit expect sequential growth in both networks and outcomes, obviously, both will grow but networks is.
The bigger piece of the pie and so they're growing at a decent rate in order to get to that guidance level.
Okay.
Yeah.
The question was on outcomes through and how we see that trending.
Yes, I expect yes, we expect outcomes growth as well as strong from Q1 to Q2 and certainly year over year. If you look at kind of overall last year was it was a pretty low quarter. So expect outcomes growth again to your to your point of our earlier comments about lagging the networks deployments certainly accelerating outcomes growth.
Might be a little bit off in the future, but we're happy where we are and expect to see correctly here.
And then just.
In terms of.
On the operating expense side.
Yes.
Could you just talk about.
All participants will be all.
In Q2.
But could you just talk about what you are.
The last restructuring plan and how that's flowing through and trucking right Allen.
Yes, the one that we announced last quarter really will have very minimal impact in 'twenty three.
The main pieces of that plan are two additional factory closures, which will take a year or two to happen. So the real savings and that you are kind of 2425, not really in 'twenty three so very minimal impact from the last plan overall and the original plan, we had for the year and there is about an $8 million benefit.
Year over year from the prior plans and that split about 50 50 between cost of goods sold and Opex. So it's only $12 million of Opex in terms of year over year.
Great and then just thinking about overall market activity.
Just talk a bit about how we should expect new.
Projects, So I know you've talked about this.
Our remarks and in the past too but.
Should we think about it as well.
Placements of endpoints.
And so smaller orders.
Turns business within the U S.
Or those are all new replacement cycle, how do we think about timing of just overall.
Connectivity.
For new orders. Thank you.
Sure I can take that one Ben.
Market activity is robust.
All around the globe actually from that.
In North America, or the Americas perspective, which is our largest market, we see a healthy mix of coal.
Call It add on business meeting, we have and network already installed.
And then additional applications are added to an existing capability. So you've got a omri running and now you add distribution automation, where you add.
Street lighting.
Our demand response, so that sort of add on business generally is smaller in size compared to initial deployment.
But it happens much more seamlessly.
As you move download download the timeline we.
Also see larger.
Upgrades to.
Omri, two point, though or an initial installation.
Scenario happening so we see both in the Americas in the Europe space I think street lighting is very active in smart city projects.
Water market has been robust and hasnt shown signs of slowdown.
And in the markets that we play in an Asia Pacific equally robust with a lot of focus on distributed energy resource integration.
Managing upgrades to networks themselves so all across the board.
Healthy market and it looks to continue to head to head down that path for us.
Okay.
Thank you.
Okay.
Okay.
Alright next is chip Moore.
Good morning, everybody. Thanks for taking the question.
Wanted to ask about the improvement in key components you saw in the quarter.
Specifically have you been able to stockpile any of those Goldman screws as.
As determined it.
Inventory was up.
Fairly substantially just I'm just wondering how much of that is sort of close to finished goods.
Thank you.
So.
Inventory is up.
That's something that we are pleased about.
We've been able to get our hands on more of what we need.
Relative to the notion of stockpiling Goldman screws, Sadly no theyre golden because they are rare and hard to come by so as we get them we largely.
Turned it into finished goods. So if you look it at that.
The amount of inventory, we had on the balance sheet at the end of the quarter. The vast majority of it was in in raw materials.
Because if we don't hold a lot of finished goods as we're building it as fast as we can get it and customers are eager to take it.
That scenario, we would look at it for it to continue on meeting Theres not a lot of our inventory that is held in finished goods will move it along pretty quickly.
That's helpful. Tom and I guess my follow on would be on I think you mentioned sort of opportunities to accelerate growth from backlog, maybe just remind us of sort of the natural limit there versus <unk>.
Thank you Robyn is not not being able to have a step function, but just what are the <unk>.
Opportunities to accelerate growth realistically.
Sure the first.
Growth driver absolutely is component supply that has been the trouble spot for us we've done a good job of.
Keeping up with capacity and as evidenced in both Q4 and Q1 results. We built in a bit of burst capacity. If you will within a quarter. So if we do get components towards that.
End of <unk> of a quarter, we've been able to turn it into finished goods and get things out in the field. So.
<unk> supply is absolutely the gate at the moment at some point if the supply chain continues to improve at the rate that we saw in the last couple of quarters, which is by no means guaranteed but if that were the scenario I think.
This low rate would start to be limited by.
Deployment capacity and the number of territories that customers would want to start in parallel the backlog is there, but I think it's better to think about it as a more measured recovery rather than something which is a step function.
As Theres a lot of steps in the process to go from a component to turn it into revenue for us.
Great I appreciate the color. Thanks.
Sure.
Okay.
Alright, and as a reminder to ask a question. Please press star one on your telephone and to ensure your question. Please press star one again.
Next we'll have.
The Rx.
Having kashi Harris.
Yes.
Okay, Kathy you annualize.
Oh, sorry.
Good morning, and thanks for taking my question.
Tom You indicated that you think book to Bill was likely to exceed one one times. This year can you speak to what Youre hearing from your customers that gives you the confidence to make that comment so early in the year.
Sure.
It is driven by the pipeline of opportunities the number of <unk>.
<unk> and RF skews that are on the street and the add on business that we see happening to address things like climate disruption.
Integration of the new Streetlight projects, New Smart city projects.
Things of that nature, so there's plenty of opportunity.
Albeit back end loaded in terms of the timing of when we believe it's likely to turn into a signed contract plus regulatory approval, which are the gates that we used to two included as a booking.
And.
The visibility that we have still gives us confidence that that one to one or perhaps greater on the book to bill ratio is achievable for us or for the year.
Thanks for the context, there and then.
For my follow up question and apologies. If this was mentioned in the prepared remarks and I just missed it but can you quantify the extent to which revenues were constrained during Q1.
I know in the prior quarters Theres been reference to about $100 million I'm, just curious where we are today based on Q1 results.
Then can you remind us if thats.
Network solutions device solutions or.
Yes, you are correct I did not actually mentioned it.
<unk> continued to be constrained by these key components.
Albeit at a lesser rate. So you are right last year, it was roughly $100 million a quarter and this year it was less than that somewhere in the call it $50 million to $75 million range.
In terms of revenue impacted very much primarily networks.
Thanks very much.
Yes.
All right that concludes our Q&A I will now turn the call back over to the CEO , Tom <unk> for closing remarks.
Very good thank you micaela.
Thank everyone for joining the call we can close it there.
Alright, well. Thank you for your participation in today's conference. This concludes the program you all may now disconnect.
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