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spk03: To ask a question during the session, you will need to press star 11 on your telephone. You'll then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to have the conference over to your speaker today.
spk04: Good morning.
spk06: and welcome to ITRON's first quarter 2023 earnings conference call. Tom Dietrich, ITRON's president and chief executive officer, and Joan Hooper, senior vice president and chief financial officer, will review ITRON's 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 is a presentation that is available through the webcast and on our corporate website under the Investor Relations tab. Following prepared remarks, the call will be open 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 today's earnings release and comments made during this conference call as well as those presented in the risk factor 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 4, 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.
spk04: And now I'll hand the call over to Tom. Thank you and welcome to ITRON, Paul.
spk05: Good morning to everyone listening. For the call today, I will review our first quarter highlights and Joan 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 49 cents, a 345% improvement over the first quarter of 2022. These results reflect the execution of our team in navigating a dynamic supply chain environment and the benefit of improved access to component supply. Demand for our solutions continues to grow, and the 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 in 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 trend challenges our customers face, such as climate disruption, electrification in the global economy, increasing consumer expectations, and the need for resilient infrastructure investment. Our customers are seeking more advanced approaches to asset management with increased agility, and there's no question that our products and solutions allow for more effective, higher return operation of infrastructure assets, as well as enhanced consumer experience. Although we never take new business for granted, we expect to meet our target book-to-bill ratio of one-to-one or better this year and are bullish on the prospects of long-term customer adoption of next-generation technologies such as distributed intelligence. The commercial highlights from the first quarter demonstrate the value of offering an integrated suite of data collection, networking, and measurement capabilities. In Illinois, Peoples Gas and North Shore Gas are working with Commonwealth Edison to leverage their network to increase service effectiveness. benefiting 1 million people's 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 creating 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 600,000 consumers in southwestern Pennsylvania, will deploy ITRON's smart lighting solution, including the smart city management software as a service package and integrated field operations platform. ITRON's industrial IoT solutions will enable Duquesne Light's vision of clean energy to become a reality. We also achieved a significant milestone this quarter with the delivery of our one millionth Intelis 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 have pressing needs integrating distributed energy resources, addressing water scarcity, improving safety, and reducing emissions related to gas distribution while meeting bold 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 are still rebalancing. These factors lead to a thoughtful mindset as we continue to plan for degrees of uncertainty and risk. We do not expect a step function recovery, but see a more measured return to an unconstrained component supply and system deployment. The efforts we have undertaken over the past quarters, including component multi-sourcing, factory capacity adaptation and consolidation, product pricing initiatives, and thoughtful inventory buffering, combined with joint customer planning bore 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. Joan?
spk02: 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 ITRON 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 26 cents per share compared with net income of 1 million or 2 cents per diluted share in the prior year. 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 8, 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 ITRAN since Q1 of 2021. Non-GAAP net income for the quarter was $22 million or $0.49 per diluted share. Year-over-year revenue comparisons by business segment are on slide nine. Device Solutions revenue was $118 million, a $15 million or 11% year-over-year decline on a constant currency basis. After further adjusting for the sale of our mechanical CNI gas business, Devices revenue was essentially flat year-over-year. Network solutions revenue was $313 million, a 36 million or 13% increase in constant currency. The strong performance was enabled by increased access to key components, which allowed us to fulfill more customer demand. Outcome segment revenue was $63 million, a 7 million or 12% increase in constant currency. We saw growth in software licenses, solution sales, and services activities. Lastly, foreign currency changes resulted in a $9 million reduction in revenue versus Q1 of 2022. Moving to the non-GAAP year-over-year EPS bridge on slide 10, our Q1 non-GAAP EPS was 49 cents per diluted share, up 38 cents from the prior year. Net operating performance had a positive 33 cents per share impact due to the fall through of higher gross profit. Tax had a positive impact of 6 cents per share. Foreign currency and share count had a small negative impact of one cent per share. Turning to slides 11 through 13, I'll review Q1's 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 a higher percentage of operating expenses. Network solutions revenue was $313 million and 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 leverage was 2.3 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 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 1st. For the second quarter, we anticipate non-GAAP EPS to be in a range of 25 to 35 cents per diluted share. This compares to 7 cents 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 we'll turn the call back to Tom.
spk05: Thank you, Joan. Our platform solutions, including distributed intelligence, enable market-leading visibility and operational agility at the grid edge. Over 6.4 million DI-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, ComEd, 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. The opportunity to enhance the performance of the low-voltage grid and integrated distributed energy resources at the edge is substantial, and no one is better positioned to participate than NITRON. These are only some of the few of the innovative solutions that power our $4.6 billion of total backlog and the robust pipeline of opportunities ahead. Thank you for joining us today. Michaela, please open the line for some questions.
spk03: 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 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. All right, we now have Nella Kay.
spk09: 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. I think the delta between the 1Q guide in late February and the run rate that you're kind of seeing for 2Q Obviously, the big story here is the improvement in component supply. Can you maybe walk us through what you've seen and how you think about the sustainability of that improved flow?
spk05: Thanks, Noah. Tom here. What we saw during 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 golden screws, for lack of a better term, to come through, and that's 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. There's pretty heavy sustained demand on the automotive side as well as in industrial applications. The global supply chain is still a bit fragile in places, so we're mindful of that as we think about things. But short-term visibility is definitely improving, and that's what led to the second quarter guide or outlook anyway that Joan provided.
spk02: Yeah, and the other thing I think Tom was referring to this, but the linearity of when we got the supply chain. in the quarter was really impactful. So, to the extent 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 it didn't get turned to revenue. So, just getting it in a much more predictable fashion during the quarter was key to the performance.
spk09: Very helpful. And, you know, you guys don't typically update full year guidance in one queue. I just want to make sure that's what's going on here. I mean, obviously anyone can annualize the 2Q run rate and 1Q results and say, well, you know, this is well over, you know, the prior guide. Is that correct? Or is there anything that we should be thinking about in terms of potential back half drags?
spk02: Yeah. 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 than it is longer-term. So you're correct. We chose not to update officially The annual guidance will do that in October. Sorry, August. But obviously, we are off to a good start. And, you know, for now, I would say, you know, 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 previous annual guidance. And, again, we'll be in a better position in August having one more quarter behind us.
spk09: Yeah, and maybe if I could speak one more in, you know, for devices margins to perform the way they did year over year, obviously there's 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 and the extent that that's sustainable?
spk02: Yeah, I mean, it was absolutely great that they got 20%. I think the last quarter they were at a 20% gross margin. It was all the way back in 2018. So certainly there's been a lot of self-help. One was the sale of a business. One was just exiting more unprofitable product lines. There was an element of timing mix, though, in Q1. So to the extent we got... the key components, they were shipped toward customers that had higher margins. 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 factories certainly was important in terms of absorption.
spk09: Okay. Great to see.
spk04: Thank you. We now have Jeff Osborne.
spk07: Hey, Jeff Osborne here. Quick question on the mix, Joan, 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.
spk02: I would say it's a little bit across the board. In part, I mentioned when I was talking about OPEX, the raises that went in effect in April, those also actually affect the gross margin. So anybody that works in the supply chain, et cetera, so the raises that create 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 in Q2. So from a Q2 gross margin standpoint, while I expect it to be lower than Q1, I think it'll be at or above what it was a year ago. Last year was, but I'll call it 29 and a half. So maybe it's closer to 30% for Q2.
spk07: Got it. I appreciate the detail there. Tom, the 6.4 million DI endpoints of 30 plus percent is impressive. One stat you don't give, but I was wondering if you could just put it in perspective, is the backlog. figure, 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, you know, the past couple of years with the DI rollout.
spk05: Certainly the majority of that $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 for 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 endpoints that is in backlog. And as we look at the pipeline of opportunity, there's more to come. So, I think that this is fertile ground. It leads directly on the problems and challenges that utilities and cities face. They need infrastructure, which is far more agile than what they've had in the past to deal with changes in their service territory as more EVs, more distributed energy resources come, as more renewables are put into place on the generation side of things. That creates impacts on the distribution grid, which are well addressed with technologies like distributed intelligence.
spk07: Makes sense. That's all I had. I appreciate the detail.
spk04: Thanks, Jeff. All right, we now have Ben.
spk01: Hey, guys. I assume that's me.
spk02: Hey, Ben.
spk01: Hey, guys. Congratulations on the quarter. It's great to see the results and the progress. Maybe just following up kind of on Jeff's question on mix, he has a margin, but if I look at revenue to get to that 510, just the low end of Q2 guidance, where does that come from? And maybe if I could ask it this way, too. You know, Tom, you talked about outcomes being delayed because you couldn't get the network out there, and just wondering when we start seeing that growth in the outcome side, and then I'll have a follow-up.
spk02: Yeah, I'll take the kind of the revenue mix embedded in the QQ guidance. So for devices, I would actually expect it to come down a little bit. So the heat allocation business within devices is seasonally very strong in Q1 as it was this year. So Devices will actually 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.
spk01: And the question was on outcomes, too, and how we see that trending now that you've got... Yeah, I expect... Yeah, we expect outcomes growth as well from
spk02: from Q1 to Q2, and certainly year over year, if you look at kind of overall last year was a pretty low quarter. So expect outcomes growth. Again, to your point of our earlier comments about lagging the network's 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 growth all year.
spk01: And then just in terms of on the operating expense side, could you just talk about, I think you said that operating expense would be up in Q2, but could you just talk about maybe what the last restructuring plan and how that's flowing through and tracking right now?
spk02: Yeah, the one that we announced last quarter really will have very minimal impact in 23. The main pieces of that plan are to additional factory closures, which will take a year or two to happen. So the real savings in that year are kind of 24, 25, not really in 23. So very minimal impact from the last plan. Overall, in the original plan we had for the year, there's about an $8 million benefit year over year from the prior plans, and that's split about 50-50 between cost of goods sold and OPEX. So it's only $5 million of OPEX in terms of year over year.
spk01: Great. And then just thinking about overall market activity, could you just talk a bit about how we should expect new projects? I know you talked about this in prepared remarks in the past too, but should we think about it as replacements of endpoints at meters and so smaller orders almost like a turns business within the U.S. or is there a whole new replacement cycle and how do we think about timing of that and just overall market activity for new orders? Thank you.
spk05: Sure. I can take that one, Ben. The market activity is robust all around the globe, actually, from North America or the America's perspective, which is our largest market. We see a healthy mix of, I'll call it add-on business, meaning we have a network already installed and then additional applications are added to an existing capability. So you've got AMI running and now you add distribution automation or you add street lighting or 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 down the timeline. We also see larger upgrades to an AMI 2.0 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. The water market has been robust and hasn't shown signs of slowdown. and in the markets that we play in in Asia Pacific, equally robust with a lot of focus on distributed energy resource integration and managing upgrades to networks themselves. So all across the board, a pretty healthy market, and it looks to continue to head down that path for us.
spk04: Thank you. All right, up next is Chip Moore.
spk08: Morning. Hey, everybody. Thanks for taking the question. I wanted to ask about the improvement in key components you saw in the quarter. Have you been able to stockpile any of those golden screws, as you termed it? You know, inventory was up fairly substantially. Just wondering how much of that is sort of close to finished goods.
spk05: So indeed, inventory is up, and that's something that we are pleased about as we've been able to get our hands on more of what we need. Relative to the notion of stockpiling golden screws, sadly, no. They're golden because they're rare and hard to come by. So as we get them, we largely turn it into finished goods. So if you look at that, amount of inventory we had on the balance sheet at the end of the quarter. The vast majority of it was in raw materials because we don't hold a lot of finished goods. We're building it as fast as we can get it, and customers are eager to take it. That scenario, we would look for it to continue on, meaning there's not a lot of our inventory that is held in finished goods. We'll move it along pretty quickly.
spk08: Perfect. That's helpful, Tom. And I guess my follow-on would be on, I think you mentioned sort of opportunities to accelerate growth from back one. Maybe just remind us of sort of the natural limits there versus, you know, I think you've referenced not being able to have a step function, but just what are the opportunities to accelerate growth realistically?
spk05: Thanks. 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 the Q4 and Q1 results, we've built in a bit of burst capacity, if you will, within a quarter. So, if we do get components towards the end of a quarter, we've been able to turn it into finished goods and get things out in the field. So, component 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 that the slew 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 there's a lot of steps in the process to go from a component to turn it into revenue for us.
spk08: Great. I appreciate the call.
spk04: Thanks.
spk03: All right, and as a reminder, to ask a question, please press star 1-1 on your telephone, and to withdraw your question, please press star 1-1 again. Up next, we will have, oh, we are having Kashi Harrison. All right, Kashi, you are now live.
spk10: Oh, sorry. Good morning, and thanks for taking my question. Tom, you indicated that you think book to bill is likely to exceed 1.1 times this year. Can you speak to what you're hearing from your customers that gives you the confidence to make that comment so early in the year?
spk05: Sure. It is driven by the pipeline of opportunities, the number of RFIs and RFQs that are on the street, and the add-on business that we see happening to address things like climate disruption, integration of these 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 use to include it as a booking. And the visibility that we have still gives us confidence that that one-to-one or perhaps greater on a book-to-bill ratio is achievable for us for the year.
spk10: 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 prior quarters there's been reference to about $100 million. I'm just curious where we are today based on Q1 results. And then can you remind us if that's network solutions, device solutions, or how to think about the mix between those two segments? Thank you.
spk02: Yeah, you're correct. I did not actually mention it. We do continue to be constrained by these key components, albeit at a lesser rate. So you're right. Last year, it was roughly $100 million a quarter. This year, it was less than that, somewhere in the, call it $50 to $75 million range in terms of revenue impacted, very much primarily networks.
spk04: Thanks very much.
spk03: All right. That concludes our Q&A. I will now turn the call back over to the CEO, Tom Dietrich, for closing remarks.
spk05: Very good. Thank you, Michaela. And I thank everyone for joining the call. We can close it there.
spk03: All right. Well, thank you for your participation in today's conference. This concludes the program. You all may now disconnect.
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