Itron, Inc.

Good day. Thank you for standing by. Welcome to ITRON's third quarter 2024 earnings release conference call. At this time, all participants on the 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 press star 1-1 on your telephone. You will then hear an automatic message advising your hand is raised. Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, Paul Vincent, vice president of Investations. Please go ahead.

Good morning, and welcome to ITRON's third quarter 2024 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 third 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 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 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. Reconciliation 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 10K 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, October 31st, 2024, 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.

Thank you, Paul. Good morning to everyone and thank you for joining our call. ITROM's third quarter results were ahead of our expectations and reflect another quarter of solid execution delivered by our team. The continued market demand fueled by growth in energy and water needs supports our substantial pipeline of opportunities for the future. Financial highlights for the third quarter are shown on slide five and include revenue of $615 million, adjusted to 89 million dollars, non-GAAP earnings per share of $1.84, free cash flow of $59 million. Turning to slide six, our backlog at the end of third quarter was $4 billion and bookings during the quarter were $487 million. Noteworthy bookings in the third quarter include Arkansas Valley Electric Cooperative selected ITROM's GenX technology platform through our distribution partner, NRTC. Arkansas Valley was one of the first department of energy smart grid program awardees to complete negotiations with the DOE receiving a grant for their grid intelligence and distribution automation project. Additionally, CenterPoint Energy is working with ITROM to offer the additional safety features of IntellisGAS endpoints to commercial and industrial users. The enhanced safety capabilities include an integrated shutoff valve and pressure sensing with edge intelligence. This expansion further demonstrates CenterPoint's commitment to the safety of their users. Finally, we've expanded our support of Duke Energy to include our latest grid edge and distributed intelligence capabilities for DERMS control. In our prior quarterly call, we commented that regulatory and funding processes can extend the time from project award to booking recognition due to our disciplined approach to register an award as backlog. This can increase the quarter to quarter variability in bookings for any given period. And calendar 2024 is no exception. We are pleased with the pace of the various regulatory and funding processes within the first month of this quarter, fourth quarter 24. As a result, we maintain conviction for a book to bill ratio of one to one or greater for the full year. Now, Joan will provide details of our third quarter results and our fourth quarter outlook.

Thank you, Tom. Please turn to slide seven for a summary of consolidated gap results. Third quarter revenue of 615 million increased 10% year over year and was stronger than expected. The higher revenue was driven by solid operational performance, as well as shipments of customer orders initially anticipated in the fourth quarter and early 2025. Gross margin of .1% was 70 basis points higher than last year due to operational efficiencies. Gap net income of 78 million or $1.70 per diluted share compares to 40 million or 87 cents per diluted share in the prior year. The improvement was driven by higher levels of operating and interest income and less tax expense. Both our gap and non-gap net income and earnings per share benefited from a favorable resolution of a foreign tax audit. This resulted in an increase in net income of approximately 14 million or 30 cents per share. Regarding non-gap metrics on slide eight, non-gap operating income of 79 million increased 34% year over year. Adjusted EBITDA of 89 million was a record and increased 29% year over year. Non-gap net income for the quarter was 84 million or $1.84 per diluted share versus 98 cents a year ago. Free cash flow was 59 million in Q3 versus 28 million a year ago. The improvement reflects strong year over year earnings growth. Year over year revenue growth by business segment is on slide nine. Device solutions revenue increased 10% on a constant currency basis, primarily driven by growth in smart water sales and electric demand. Network solutions revenue grew 8% year over year, driven by increased volume associated with new projects and ongoing deployments. Outcomes revenue increased 16% on a constant currency basis primarily due to higher recurring revenue services and software. Moving to the non-gap year over year EPS bridge on slide 10. Our Q3 non-gap earnings per share of $1.84 per diluted share was an all time quarterly record and increased 86 cents year over year. Pre-tax operating performance contributed 61 cents per share year over year improvement, driven by the fall through of higher revenue and gross profit, partially offset by higher operating expenses. Third quarter tax expense was reduced by 14 million due to a favorable resolution of a foreign tax audit resulting in higher net income and a 30 cent earnings per share increase. Turning to slides 11 through 13, I'll review Q3 segment results compared with the prior year. Device solutions revenue was 123 million, gross margin was .2% and operating margin was a record 21.6%. Gross margin was up 290 basis points year over year and operating margin was up 560 basis points, reflecting volume and operational efficiencies and effective cost management. Network solutions revenue was 417 million with gross margin of .9% and operating margin of 27.7%. This quarter was another record level of revenue for this segment. Gross margin increased 80 basis points year over year and operating margin was up 110 basis points driven by volume and operational efficiencies. Outcomes revenue was 76 million with gross margin of 35% and operating margin of 14.7%. Gross margin decreased 360 basis points year over year and operating margin was down 110 basis points due to a lower margin revenue mix and increased services cost. Turning to slide 14, I'll review liquidity and debt at the end of the third quarter. Total debt was 1.265 billion and net debt was 282 million. As of September 30th, net leverage was 0.9 times and cash and equivalents were $983 million. Now please turn to slide 15 for our fourth quarter outlook. We anticipate fourth quarter revenue to be between 600 to $610 million. The midpoint of this range represents growth of 28 million or 5% year over year. For non-GAAP earnings per share, we expect a range of a dollar to a $1.10 per dilute share, which assumes an effective tax rate of approximately 25%. At the midpoint, this implies a decrease of 18 cents versus Q4 of last year. The Q4 of 2023 had an effective tax rate of just 8%. When normalizing Q4 of last year to a 25% effective tax rate, this Q4 2024 outlook is an increase of 6 cents or 6% year over year. Now please turn to slide 16 for an update to our annual 2024 outlook incorporating this Q4 update. We now anticipate 2024 full year revenue to be within a range of 2.428 billion to 2.438 billion. At the midpoint, this represents an increase of 12% versus 2023 and 1% from our prior 2024 annual guidance. Contingent customer demand, strong operational execution, and the timing of customer shipments is driving our higher 2024 revenue expectations. Earnings will also be positively impacted by the fall through of higher revenue. Our non-GAAP earnings per share full year outlook range is $5.28 to $5.38 per diluted share. At the midpoint, the updated non-GAAP EPS estimate is up 59% versus 2023 and 17% versus prior guidance. Although we are not ready to provide formal 2025 financial guidance at this time, the combination of 2024 performance being consistently ahead of expectations, a normalizing operating environment, and very backend loaded 2024 bookings make it reasonable to assume a lower revenue growth profile for 2025. We remain committed to the 2027 financial targets provided at this year's March investor day. Now I'll turn the call back to Tom.

Thank you, Joan. Operational momentum and efficiency gains continue to accrue during the third quarter. And while we expect growth rates to normalize in the coming quarters, the larger trends are clear. Customer demand is growing. Our broad portfolio of innovative products and services gives us confidence that our strategic direction is well-placed and the 2027 financial targets remain appropriate. Before opening the line for Q&A, there are a few non-financial highlights of note. We recently held ITRON's annual Inspire customer event where the power of data and great edge intelligence was on full display. It is clear from the depth of interaction with utility executives, ecosystem partners, and other influential industry leaders that we have the necessary motivation and thought leadership across our industry to resolve the most complex and pressing energy and water resource challenges facing us today. Significantly, the nature of the discussions has shifted from what to do to how to get it done. This is encouraging and will serve to accelerate the pace of the industry. During the conference, we announced our great edge essentials offering. Great edge essentials solution dramatically simplifies the process for our utility customers to adopt new advanced technologies, accelerating the time to value. Also in conjunction with Inspire, we released our resourcefulness report, which explored artificial intelligence and machine learning trends within the utility industry. The key findings of the research include that 82% of utility executives report active AI projects. AI and ML are already helping utilities optimize asset utilization, advancing sustainability progress, and enhancing consumer engagement. And perhaps, unsurprisingly, reflective of broader considerations related to AI adoption, 43% of utilities cited the lack of expertise as a current barrier to greater AI adoption. AI and ML are focus areas for the utility industry, which places even greater value on thoughtful approaches to data capture, analytics, and agile infrastructure. The report is available for download at itron.com, and I encourage everyone to review the findings. Thank you for joining our call today. Operator, please open the line for some questions.

Thank you. Ladies and gentlemen, to ask a question, you'll need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, simply press star 1-1 again. Please stand by while we compile the canning roster. Our first question coming from the line of Ben Callow with Baird, the line is now open.

Hey, guys. Congratulations on the quarter. Jo, I just want to clarify, when you talked about growth next year, there will be growth next year. It's just not the same level of growth.

Yeah, well, we're obviously not in a position to give 25 guides yet, but I wanted to make sure people remember a couple of things. One is we had 125 million of catch-up revenue in 24, so be careful that you grow on a normalized 2024, and the fact that the bookings are so back and loaded is another factor, so really no different than what I've said on previous calls. If you look at the compounded growth from the current 24 estimates to get to the 27 targets, it's only 2.5 to 5 percent growth because 24 was so much higher than we expected, so just be careful with the growth rates. We never expected a linear from 23 to 27.

Thank you for that. Then the next question is just kind of behind the bookings that you expected in this quarter. Could you just talk about the state of the market and the deals out there, but to continue to have the strength that you guys have, you know, going on for the last couple quarters or years? Thank you.

Thanks, Ben. Tom here. The market remains extremely constructive. The needs of utilities to deal with things like climate disruption or increasing demand or doing a better job managing water, gas safety, all of those trends are alive and well, and I think we're well positioned to be able to take advantage of that. We are definitely seeing progress on the regulatory and funding front. Last quarter, I referenced something like a billion dollars of pending awards that were in process. We definitely have seen progress, I would say well over 50 percent, probably closer to 75 percent of that regulatory process is now behind us, and that's really what is underlying the -to-one for the full year on a -to-bill basis that I referenced in the prepared remarks. So feeling good about the overall market. On a global level, the commentary I just gave was largely around the Americas, but Europe has, at least through Q3, continued to perform a little bit ahead of the expectations, and you saw that in our third quarter results.

Thank you,

guys. Thank you. Now, next question coming from the lineup. Jeff Osmond with TD Cowan. Your line is now open.

Thank you. Maybe just to follow up on that last point, if I heard you right, you mentioned bookings were strong in October, and then you said 50 to 75 percent of the billion came in after the quarter. Is that the way you're trying to couch that for fourth

quarter? Well, not quite. Not quite. You're close. But of the billion that I referenced last time, we've seen progress on the regulatory front. That doesn't mean it's quite to the point that we've registered it as a booking yet, but certainly we expect to achieve the -to-one for the year on a -to-bill ratio. So, feeling good about the progress, and I wanted to give that color just to give people a little bit of context as to what we see behind the curtain and why we remain pretty excited about the market opportunity ahead.

Okay. And just to be clear, is the regulatory front, you're referring to both federal and state, if it requires both, just given that there was some federal awards from the GRIP program?

Yes. Yeah. It's the combination of the two. And again, those bookings are primarily the Americas, but there's some international things that have government funding activities associated with it, and it's lumped into the commentary we gave.

Perfect. And then just two other quick ones. Can you just, how in retrospect would you frame the strength in water all year, and do you expect that to continue next year for the devices segment? And then what's the M&A pipeline in light of the recent debt offering that you've done? How has that evolved in the past few months?

So, let me start with water. Water has certainly been performing above our expectations thus far in the year. The terms have been really good. We set expectations for maybe $100 million to $100 million plus on the devices run rate, and you can look at the last three quarters. We're kind of running a bit above that. I don't know that I would expect it to continue at that level as we get into the fourth quarter and for next year. What we see is lead times are starting to normalize again after some extended period of constraints in supply channels, on supply chains rather, on a global basis. And as lead times start to reduce across the industry, that means that the amount of inventory that our customers are holding tends to pull back a little bit. So, I do think the turns rate probably slows down over the coming quarters. But that doesn't mean the market is any way going backwards. It's more just the accordion effect that you get in the supply chain itself. On the M&A front, I would say that very similar commentary to what we have mentioned in the past. We're pleased with the position of our balance sheet that puts us in a good place to move when those opportunities present themselves. We're very active in the market looking for those opportunities. What we are really seeking is something that will accelerate our outcomes growth rate. It's growing a bit faster than some of the other segments in the company, but we're really looking for ways to accelerate that even more. And that's where a lot of that acquisition attention is placed on our side. We want something that will add to our grid edge intelligence platform and something that really would be scalable across many, many customers. That's what we are looking for. And as those opportunities present themselves, we'll obviously be sharing it with the market. Perfect, that's all I

have. Thank you.

Thanks, Joe.

Thank you. Our next question coming from the line of Noa K. with Oppenheimer. Yolana, it's now open.

All right, thanks very much for taking the questions. Tommy, you mentioned that the launch of Grid Edge Essentials, really a bundled solution for managing range of outcomes for these utilities. And we understand that that is not actually commercially available broadly until December, but can you just talk at an early stage about the adoption of whether it's this solution or just more usage of the DEI network that is now growing pretty rapidly? And what does that mean for how the mix within outcomes in terms of revenue composition should evolve over, let's say, the next 12 to 18 months? Are we gonna see more recurring revenue, higher margin? And just what is your visibility to that inflection?

So three different concepts that I think are important to pull out of the question that you asked. First and foremost, Grid Edge Intelligence as an offering. That is a very full-featured platform that allows you, as a utility, to have a lot of agility in your infrastructure. When you buy something, you put it in the ground, you can use it as you need and perform a lot of different grid efficiency or consumer engagement kinds of applications through things like distributed intelligence. At this point, we've got more than 12 million Grid Edge or DEI-capable endpoints that are in the field, millions more in backlog, millions of applications that are out there running for things like safety or things like distributed energy resource management out of the edge. That said, a lot of that fielded equipment and much of what's in backlog is for larger utilities, think large IOUs, where they have a pretty robust capability inside to be able to take advantage of that. As we broaden that Grid Edge Intelligence capability and take it towards more mid-sized or muni-coop kinds of customers, the ability to say, DEI in a box, is what Grid Edge Essentials is really all about. It packages up the endpoints, the network, the head-end software, the analytics, the DEI capability, and really makes it easy for a utility that doesn't have perhaps a massive IT department to be able to integrate into that overall offering. So it broadens out the opportunity for us as we think about serving more customers with this important capability. So that's what Grid Edge Essentials is really all about. Relative to market adoption, again, we're super excited about what we see our customers doing, the pace of innovation is there, the idea of the spark in someone's eye about what they might be able to do to being able to prototype and put some applications out in the field is something measured in months rather than in quarters or years, which is the typical innovation cycle if you look in the years past for utilities. So pace of innovation grows, and this becomes something that is a very robust part of our business in the years ahead. So I hope that sort of unpacks and pulls together the three threads that you mentioned in your question.

It does, Tom, but in the follow-up was really around the implications for mix, right? And the growth of recurring revenues within the outcome segment. How should we think about that trend? Indeed,

sorry, I missed that one. Indeed, I missed that one. Outcomes certainly last quarter and what you saw even in second quarter was revenue that was a bit more tilted towards services and one-time services. We definitely think that outcomes will bounce back and those targets we laid out for 2027 to put the gross margin into the 40s kind of range is what we would expect to see. I still think it'll be a little bit lumpy quarter to quarter, depending on the mix until the business gets a little bit more scale to it and a little bit more heft, but certainly we see it swinging back more towards some of that SaaS and licensee types of revenue in the quarters ahead.

Great, just one quick follow-up for Joan. Taxes, again, a good guy this quarter. Not sure if that relates to more release evaluation allowances, but can you help us frame out what should sort of be the normalized tax rates for the business going forward?

Yeah, I would say probably about 25% would be a normalized rate. So yeah, this quarter the 14 million or the 30 cents per share I alluded to was the favorable, basically a settlement of the foreign tax audit that pertained to many, many years ago, 2014 to 17. So yeah, we had some reserves on our books and once we settled the audit, we were able to release those. So that was really an anomaly, but if you ignore discreet, which are hard to predict, I would say about 25%.

Thanks very much.

Thank you. And our next question coming from the line of Joseph Osha with Guggenheim Partners. Healan is now open.

Thank you, good morning. Following on Noah's question a little bit, I'm wondering if you can try and give us a sense as to how this quarter's bookings and this sort of bolus of an additional billion dollars coming in at the end of the year. What the mix for that round of bookings looks like relative to the revenue that you're realizing now?

The bookings themselves will be very heavily skewed towards networks and outcomes. To be honest, that's similar to our backlog position as it is today. So that four billion of existing backlog is 90% plus networks and outcomes. And I would suspect that fourth quarter bookings looks a lot like that in terms of the mix. The outcomes portion of that portfolio is growing a little bit faster than networks in terms of third quarter revenue as an example, but that's also true in the bookings themselves. So bookings rate for outcomes is quite a bit higher today than it was a year or two ago within the mix. What's underneath that, it's all the great edge intelligence platform and the associated software and services that go along with that. So it all flows from the types of offering discussion that I outlined earlier.

Now, with that in mind, is it possible as we actually get to 2026 and 2027 that there's some kind of shorter term book and ship business in devices? Obviously you can tell what I'm trying to figure out here in terms of what the revenue mix looks like, or should we think of that backlog as being representative more of the actual, what the actual revenue mix might look like in 2026?

Yeah, I think that our devices business, probably that 100 million, a bit above that on a run rate basis is the right zip code to be in, whereas the networks and the outcome side probably continues to grow more like the rates that we've talked about in our prepared remarks. So I think that that would be a good way to think about the business itself. Devices tends to be a bit more turns-based than the other portions of our business, so a lot of that doesn't truly flow through the long-term backlog trends that we're talking about.

Yeah, and I would say if you look at the segment level targets that we provided for 2027 in investor day, those are still appropriate.

Okay, and then just quickly as a follow-up, given you've spoken, Joan, very clearly about the fact that stuff hitting bookings now is not gonna show up in 2025 revenue. What would you say is the window for bookings showing up in 2026 revenue? Can we think about perhaps anything that shows up by the first half of 25, maybe making it to the 26 revenue? I'm just trying to understand a little bit how to roll this booking strings forward into 26 and 27.

Yeah, I mean, obviously each deal is a little bit different, but I think what we've been assuming is sort of a nine to 12-month lag from the time you close a booking till when revenue starts to flow.

Okay, thank you.

Thank you. Our next question, coming from the lineup, Bafa Mokhanov with Dream and James Yelonis-Nagopin.

Yeah, thanks for taking the question. If we look at outcomes, -over-year growth past two quarters is double digits, which is meaningfully higher than probably the last kind of two straight years. Are these one-offs or is there some kind of structural change in that segment that explains the double-digit growth all of a sudden?

Well, I think there's a number of factors inside of there. Remember that a lot of the outcomes revenue tends to be tilted towards recurring revenue, so it takes a little bit of time to show up, and every time we do a booking, it adds a small slice on top of that. So as we've mentioned on previous calls, when networks started to catch up on some of that constrained revenue due to component shortages in years going by, the outcomes revenue was going to follow. It's usually a bit of time for customers to get the network up and running, and then some of that outcomes revenue starts to flow in on top of it, and it's just following that normal trend that we've seen. So it's maybe that 12-month lag between networks growing, which yielded the outcomes growth. That's what you see showing through in terms of outcomes, but it is largely tilted towards recurring revenue, and we are excited about the quarters ahead in terms of where we can continue to grow that business, which is why in our 27 targets, we've outlined it as one of the faster-growing segments.

Right. Follow-up on outcomes as well. In the context of the kind of AI euphoria, a lot of headlines recently about virtual power plants. Can you talk about the role that ITRON is playing in virtual power plant development, which I guess would be within outcomes?

Correct. There are a lot of assets that are out at the edge of the grid, whether it is a battery that's in your garage, or whether it is a rooftop solar, or adding load control capabilities to existing assets, maybe something as simple as a pool pump. So outcomes really has a lot of the software capability housed within it to be able to contribute to that. And control those assets for the good of the grid and the optimization of what is going on. So a DI app to be able to pull charge out of the battery to be able to supply to the house and pull out some of the load of that house off the grid is a perfect example of a VPP, virtual power plant kind of application that's going on in the outcome segment. Several quarters ago, we announced something called Grid Edge Optimizer, which is really all about being able to utilize those edge assets to be able to balance supply and demand out at the edge. And those are very ripe and growing opportunities for us as more and more local hotspots and constraints are showing up in our customers' grids, whether it is because of EV growth, or whether it is just more data centers in the area, you got to figure out a way to balance supply and demand when you don't quite have everything that you need and you can't afford to upsize everything. You got to make the assets you have in the field a bit more agile, which is exactly where outcomes comes to the scene and can help our customers.

Got it, thanks very much.

Thank

you. Thank you. And our next question coming from the line of Asim Muller with Canada Questionary, you know, and it's now open.

Hi, good morning. Congrats on the quarter. Just my first question here, given the water demand needed for data centers, do you expect the increase in demand for electricity meters on the grid to mirror water meters due to the data center demand for coolant?

I think that electricity probably outpaces water growth on a global level. Water will continue to grow as an entire segment for us in the years ahead, but I think electricity outpaces that as there is a lot more that needs to be done on the electrical infrastructure side. So I think our growth aspirations are in both segments, but probably a bit more tilted towards electricity over water.

Okay, and just to follow up, how much of the non-inflation index inventory still remains? And did we get a significant reduction in that this quarter just in the reflection on the gross margin?

Yeah, our backlog today is a bit over 75% that is either repriced or indexed for the next quarter. The new environment we are operating in, that less than 25% ish that is still left to flow through as at the end of Q3, most of that remaining, call it 25%, it will flow through within the next 12 months. So we're almost through that period. As new backlog starts to come in, and certainly we noted that we expect Q4 to be a bit more of a heavy bookings quarter that'll add to the right side of that equation for the quarters ahead, but call it 75, 25 today.

Excellent, thank you for the details.

Thank you. And as a reminder to ask a question, please press star 11. Our next question coming from the line of Scott Graham with Seaport Research Partners, Elon is now open.

Hey, good morning, thanks for taking my questions. Joan, I kind of wanted to go back to your math on the, assumed or implied, I should say, CAGR for revenue between 24 and 27, two and a half to five. I come up with that same number, of course. What I'm wondering is, I thought I heard you say 25 down. Did you mean growth down or revenue down?

I didn't say either, I don't believe. So what I was relating to is, first comment would be 2027 targets are still appropriate. And that was a revenue range of 2.6 to 2.8 billion. And we had the EBITDA range of 15 to 17%. So at the time we did investor day, we anchored the charts off 23 actuals. So to get to the 23, from the 23 actuals to the 27 targets, it was a revenue CAGR of five to 7%. However, 24 is a lot stronger than 23. So if you take the updated annual guidance at the midpoint, you get the, call it two and a half to 5% is what's required going forward to get to the 27 targets. And again, all of your said is, we don't expect that to be a straight line. So at this point, it's premature to talk about 25. I would expect some growth, but again, I would caution people, you gotta do the growth off a normalized 24 and you gotta take 125 million out of our full year estimate, which was catch up one time in nature that won't recur.

Got it, yeah. Thank you for that clarification. Very much appreciated. The other question I wanted to ask was kind of more for both you and Tom. So when you provided your targets earlier this year, I believe this moving billion dollar pipeline was only kind of thought of as let's say a couple, maybe several hundred million. And that has graduated greatly to this billion dollar number. So it would suggest that your guidance did not contemplate that. Could you comment on that?

Yeah, I don't think that's the case. So what we're talking about with the billion is a delay in getting it through the funnel to call it a booking. It's not saying it's a billion higher than what we would have expected. So I don't think we see any change in terms of the market demand that would get us to the 27 targets that we laid out. The billion is a timing issue in terms of regulatory approvals.

Yeah. We started the year saying, yeah, book the bill of one to one or greater, that's still our belief today. But we know that, okay, the first three quarters of this year were whatever, 0.8, 0.9, something like that, well below one to one, which means that there is a bit of a catch up on the booking side in Q4, which is what Joan referenced. So it's more timing within the year on the bookings themselves rather than some fundamental shift or change in the marketplace.

Understood. Thank you for that clarification. If I could just sneak this one more in. Joan, the non-GAAP incremental operating margin has been fairly steady in the last six quarters in this 32, 35, last quarter 41 range, just in this five to 10% range. Are you comfortable with that on a go-forward basis, call it in the low 30s type thing?

Yeah, again, not in the position to talk 25 guidance. What I would anchor you to is the 27 targets that we gave, which again, weren't operating income, but you can figure that out, even a percentage of revenue of 15 to 17%. So from quarter to quarter, you're gonna get some variability. As an example, OpEx for us will tend to go up in Q4. We just did our customer event, we have a lot of marketing spend, a lot of travel, outside services. So it'll vary quarter to quarter, but I think the targets we laid out for 27 are still appropriate.

Understood, thank you.

Thank you. And again, as a reminder, if you'd like to ask a question, please press star one, one. Now our next question coming from the line of Chip Moore with WOD Capital Partners, Yulon Ismail.

Good morning, hey, thanks for taking the question. I guess I just wanted to do a clarification. I think you referenced, Joan, some pull forward with some of that coming from 25, which would be a incremental headwind. I think we understand the growth dynamics there, but maybe just expand on that.

Yeah, I mean, if you look at the revenue range we provided for Q3, at the midpoint, it was about 595 million, so we ended up 20 million higher than that. We did not try to lowball our guidance when we gave you that number. So obviously we work with customers in terms of when they want the shipments and some shipments that we would have expected to be Q4 or early 25 actually occurred in Q3. So that's all we were trying to point out.

Yeah, the dynamic there is as projects start to move, generally they can accelerate a little bit once the installation crews really hit their stride and things go a little faster. And that's kind of what you saw in Q3. It was nothing particularly overt. It was just the market moving in the right direction for us.

Perfect, yes, and not particularly material. And maybe just by follow-up on the outlook for Q4, I think that implies maybe that margins step down a bit. Anything on product mix, or I think you just referenced some of the year-end op-ex, maybe Joan, but anything there to keep in mind. And then margin trajectory, I guess, next year with some of the growth dynamics with what you're seeing in backlog. Thanks.

Yeah, so if I start on the top line, I would say, again, the midpoint of our range is slightly down from Q3, call it 10 million or so. Most of that is really strong Q3 performance for devices. So as Tom mentioned, we typically think about devices as, well, maybe a little over 100 million a quarter. They were 123 million in Q3, so really quite high. On an EPS standpoint, you've got, obviously, to factor in the tax benefit that was booked in Q3, so that's not gonna recur in Q4. That's gotta be 30 cents or so, just right there and then higher op-ex. From a gross margin perspective, maybe flat to slightly down. We don't typically guide the gross margin, but nothing in particular there. It is the last quarter that we're in the process of closing our two factories. You typically get a little bit of lack of productivity as you're ramping from one factory to another, and we

factor that in as well. Perfect, very helpful, appreciate it.

Thank you. And I'm showing no further questions in the Q&A queue at this time. I will now turn the call back over to Mr. Tom Dietrich for any closing remarks.

Thank you, Lydia. We are pleased with our progress and certainly the performance of the team. You're starting to see the proof points and the strategy play out, and we are excited about the future and where the market is heading. So look forward to updating everyone next quarter. Thank you for joining today.

Ladies and gentlemen, that's all for our conference for today. Thank you for your participation. You may now disconnect.