Itron, Inc.

Welcome to ITRON's first quarter 2025 earnings conference call. At this time, all participants are on a 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 automated 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, congratulations. Please go ahead.

Good morning, and welcome to ITRON's first quarter 2025 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 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. 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 1st, 2025, 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, and thank you for joining our call. ITRON performed well during the first quarter. A favorable product mix and continued strong execution supported margin expansion and earnings growth ahead of expectations. The team is focused on the execution of our strategy, and the results from the past quarter further demonstrate its effectiveness. Financial highlights for the first quarter are detailed on slide four and include revenue of $607 million, adjusted EBITDA of $88 million, non-GAAP earnings per share of $1.52, free cash flow of $67 million. Turning to slide five, the record gross margin and strong earnings growth were driven by our disciplined manufacturing and the ability to meet our customers' core needs for robust solutions for their mission-critical operating challenges. Customer demand for our solutions is driven by the breadth of our offerings, particularly customer adoption of ITRON's great edge intelligence platform. Our customers are benefiting from increased distribution capacity, improved infrastructure agility, and enhanced reliability of successful scale deployment. Turning to slide six, bookings in the first quarter of $530 million were in line with our expectations and equate to a book-to-bill of 0.9 to 1 for the quarter. This is an increase of $169 million when compared to last year, and as a result, our $4.7 billion backlog at quarter end remained near record levels. The network solutions and outcomes segments continue to dominate our bookings. representing over 95% of our total backlog. Deployment of distributed intelligence solutions also continued during the quarter, and by quarter end, we have shipped 14.4 million distributed intelligence-capable endpoints with another 10-plus million in backlog. Some of the key bookings for the quarter include a major project with longtime customer First Energy, which will expand infrastructure to detect and locate outages more quickly and enhance data management solutions. These improvements will provide consumers with more detailed information, enabling them to better understand and control their energy usage. ITRON will support a grid modernization project for Public Service Company of New Mexico, the state's largest electricity provider. This project will deliver several benefits, including distributed intelligence capabilities to enhance efficiency, reliability, resilience, and security of PNMs operation. It will also enable real-time energy usage information for consumers and improve the integration of distributed energy resources. Before I turn the call over to Joan to cover the financials, I want to briefly discuss the tariff landscape from both a demand and bottom line perspective. For demand, we have not seen a change in customer behavior to this point. While we are mindful that prolonged uncertainty could ultimately impact demand, our customers currently remain focused on addressing the critical needs in the management of energy and water. With respect to the bottom line, our regional supply strategy is serving us well. A great majority of our global manufacturing is done regionally, for instance, in South Carolina for the United States. However, we do import components from global sources, with Mexico being the largest country of origin for components used in U.S. products. Our Mexico imports are generally USMCA compliant and currently not subject to tariffs. The EBITDA impact for the year under the current tariff protocol is estimated to be approximately $15 million net of mitigation measures, such as alternate sourcing and pricing adjustments. It is important to note that the tariff environment is extremely dynamic, and the current estimate may change. Despite this fluid environment, we remain balanced and well positioned to drive our business forward. Now, Joan will provide details for our first quarter and our outlook for the second quarter.

Thank you, Tom. Please turn to slide seven for a summary of consolidated GAAP results. First quarter revenue of $607 million increased 1% year over year. Recall that Q1 of 2024 included a significant amount of previously supply-constrained revenue. Gross margin of 35.8% was a quarterly record and was 180 basis points higher than last year due to a favorable product mix and operational efficiencies. GAAP net income of $65 million or $1.42 per diluted share compared to $52 million or $1.12 per share in the prior year. The improvement was driven by higher levels of operating and interest income, partially offset by higher tax expense. Regarding non-GAAP metrics on slide 8, non-GAAP operating income of $80 million increased 19% year-over-year. Adjusted EBITDA of $88 million increased 15%, and our EBITDA margin of 14.5% was a company record. Non-GAAP net income for the quarter was $70 million or $1.52 per diluted share versus $1.24 a year ago. Free cash flow was $67 million in Q1 versus $34 million a year ago. This improvement reflects strong year-over-year operational earnings growth, increased interest income, and improved working capital. Year-over-year revenue growth by business segment is on slide nine. Device Solutions revenue was down 1% year-over-year, but up 2% on a constant currency basis. Network Solutions revenue decreased 1% year-over-year, primarily due to a higher-than-normal Q1 2024 level, which included the catch-up of previously constrained revenue. Outcomes revenue grew 14% year-over-year, driven by increased recurring revenue and software licenses. Moving to the non-GAAP year-over-year EPS bridge on slide 10, Our Q1 non-GAAP EPS of $1.52 per diluted share increased $0.28 year-over-year. Pre-tax operating performance contributed a $0.40 per share increase, primarily driven by the false rule of higher gross profit. Higher tax expense had a negative year-over-year impact of $0.11 per share, and FX and share count had a negative impact of $0.01 per share. Turning to slides 11 through 13, I'll review Q1 segment results compared with the prior year. Device Solutions revenue was $126 million. This segment's product portfolio continues to shift away from legacy electric products towards smart water sales, which helped drive gross margin of 30% and operating margin of 24.2%, which are both segment records. Gross margin increased 630 basis points year-over-year, and operating margin was up 710 basis points due to favorable product mix and lower operating expenses. Network Solutions revenue is $403 million with gross margin of 36.9% and operating margin of 28.8%. Gross margin decreased 20 basis points year-over-year due to product mix, but operating margin increased 20 basis points due to lower operating expenses. Outcomes revenue was 79 million, gross margin was 39.2%, and operating margin was 18.2%. Gross margin increased 410 basis points year on year, and operating margin was up 510 basis points due to a higher margin revenue mix and operating leverage. Turning to slide 14, I'll review liquidity and debt at the end of the first quarter. Total debt was 1.265 billion, and net debt was 142 million. As of March 31st, net leverage was 0.4 times, and cash and equivalents were $1.1 billion. Now please turn to slide 15 for our second quarter outlook. We anticipate Q2 revenue to be within a range of $605 to $615 million, which at the midpoint is flat versus last year. We anticipate second quarter non-GAAP earnings per share to be within a range of $1.30 to $1.40 per diluted share, which at the midpoint is approximately 12% year-over-year growth. Now I'll turn the call back to Tom.

Thank you, Joan. Although macroeconomic and trade policy uncertainty has increased over the past quarter, iTron is well-positioned to navigate near-term uncertainty. Our results over the past two-plus years clearly demonstrate that our strategic focus and operational execution aligns with the needs of our customers. Our portfolio provides clear value to utilities and cities facing numerous environmental, operational, and consumer challenges. Periods of uncertainty and disruption favor the well-prepared. Our multi-year efforts to optimize our factory footprint and portfolio, strengthen our supply chain resilience, and grow recurring revenue have positioned us to capitalize on future opportunities. We expect to strengthen our industry leadership through continued deployment of innovative solutions, ensuring that ITRON remains a partner of choice for utilities and cities well into the future. Thank you for joining our call today. Operator, please open the line for some questions.

Thank you. Ladies and gentlemen, 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 retry a question, simply press star 11 again. Please stand by while we compile the Q&A roster. And our first question coming from the line of Noah Kay with Oppenheimer. Your line is now open.

Hey, good morning. Thanks for taking the questions. It's obviously the topic in focus this earnings season, so we do have to start with tariffs. Tom, I appreciate you dimensioning the expected EBITDA impact on the tariffs for this year. If my math is right, I kind of call that maybe 25 cents impact at the bottom line. I know you don't typically update full-year guidance until Q, but just given the strength of 1Q and what you're expecting for 2Q, You know, are you messaging here that despite sort of these net impacts of the tariffs, you still feel comfortable with the full year guide? You're already, you know, going to be over halfway to meeting the midpoint as we get through 2Q.

Thanks, Noah. I would say that it's probably premature to update our full year guidance. Our normal practice is to do it after we announce second quarter earnings. I would put it in context, though, and say that first quarter ahead of expectations on the bottom line, and so is the second. We are cognizant that tariffs are out there, and I suppose they could change from what we see today, but it's all in the mix of where we are. So I would say it's a little premature to update the full year at this point.

Yeah, the only thing I would add is if you look at where the EPS consensus sat prior to the us announcing today and then look at our Q2 guidance. For the first half of the year, the EPS for Q1 plus the midpoint of the guidance we just gave for Q2 is up 10% versus where the consensus had been. So there's puts and takes, obviously, as we go through the year.

Thanks. Thank you both. Maybe I could ask about devices. I I think you called out, Joan, that those record margins, you know, for the segment and, you know, certainly mixed shift is a factor. We're now, I think, meaningfully above kind of the long-term gross margin target for this segment. How should we think about kind of the right level for segment margins going forward?

Yeah, I mean, again, it's a little premature to update the targets we had for 27, but we are very pleased. They are absolutely ahead of where we expected them to be and have done a great job kind of pruning the portfolio and shifting the mix. So, you know, premature to say, is it always going to be 30? You're still going to get variability from quarter to quarter. We have a heat and allocation business that tends to have its highest seasonal quarter in Q1 that has better margins than average. So, It's going to bump around a little bit, but I would say, yes, we're very pleased with the progress in the devices business.

All right. Thank you. I'll turn it over.

Thank you. Our next question, coming from the line of Ben Kellum with RWBIRD, Yolanda Snellopin.

Hey, good morning, guys. My first question was just on the 12-month backlog that you took out of there. Is there anything to read into, or how should we think about coverage for the next four quarters or the rest of the year, however you want to frame it?

Yeah, I wouldn't read anything into it at all. We took it out of the investor presentation as we didn't think it was adding all that much. It was probably confusing people more often than not because it does bounce around quite a bit. More broadly, though, getting to your real question, The outlook that we have in front of us still looks good. The demand environment has not changed over the last 90 days. Opportunities are still there, and we feel good about the track that we're on. Our customers are very much focused on dealing with the urgency of the issues that are in front of them. caveat I would put on that is I suppose the macro environment could drag things down later on in the year, and that's the uncertainty that we and probably every other company faces. But I like the zip code we're in, and the trajectory looks good.

Great. My follow-up, and I get this question a lot, is just on the regulatory environment, state by state in the United States, allowing software to be capitalized. or putting the rate-based, and just anything you could talk about that or other ways that utilities are moving forward with buying software from you guys. Because in the past, it seemed like that was the harder sell as opposed to the network. So anything you could talk about if it's region-specific, that would be helpful as well. Thank you.

Sure. So outcomes growth for us was up 14% year-over-year. That's, I think, our fourth quarter in a row of double-digit year-over-year growth, probably seven out of the last eight quarters double-digit. So it's absolutely happening, and we're obviously anxious to keep that trajectory going, if not accelerate it. When it comes to the regulatory environment, we've got to structure the deals in the right way to make sure that it works for our customers' business plan as well as ours. There are ways to have those purchases be included in rate bases most of the time, and indeed that's what you see flowing through our P&L. There's different mechanisms. It depends on the state and that the plumbing that they've got to work through on their side. Oftentimes, it is in the form of term licenses over a certain period of time, a certain capability is available. It could be performance-based rates where I think we're creeping up on 40 states out of the 50 now allow some sort of performance-based rate. So, again, the mechanism can vary state to state or customer to customer, but the trajectory that we've seen over the last couple of years has been good. The regulatory environment remains constructive for our customers, and we'll look to continue to support them as they advance on their needs.

Thanks, guys. Nice quarter.

Thank you.

Thank you. Our next question, coming from the lineup, Jeff Osborne with TD Cohen. Your line is now open.

Great, thank you. Good morning. Just maybe two quick ones on the tariff environment. Again, what you said was very helpful, but just to be clear, Tom, the $15 million, is that incorporating just the current 10% tariff, or does that contemplate any potential changes in July 9 to the reciprocal environment?

That $15 million net of mitigation measures includes... What we do in terms of changing our country of origin on sourcing, it includes what we do on pricing. But when it comes to the tariff protocol itself, it is what is in effect today is what's assumed in that. So it does include the USMCA exemption, meaning you don't pay on that. The 10% baseline tariffs contribute. And then the China tariffs that are pretty high. on a percentage basis, not that our imports from China are huge, but it doesn't take a lot to have that contribute to the cost basis itself. So it is the Section 301, Section 232, and the IEPA emergency power tariffs that are in effect today.

Maybe just one follow-up. I think years ago you used to make your own printed circuit board assemblies in South Carolina and then move that to Mexico. I know you're not updating guidance, but is there, you know, with the mitigation measures, is there any increase in CapEx that we should be contemplating?

No, no, I wouldn't expect any difference. Our CapEx load is pretty stable, and it'll ride along based on new product introductions and things of that sort, but I wouldn't look for any material change.

Got it. And then you alluded to price in terms of one of the mitigation factors. Is that something that you, on a state-by-state basis, have to appeal to regulators for or utility does on your behalf? Maybe just walk us through the mechanics there and the risks to that.

The pricing that we have in place is really where we have flexibility and some of those tough lessons that we learned back during COVID are in terms of how to increase the amount of flexibility we have in terms of the pricing changes we can make along the way. So no change in terms of how we have been operating for the last couple of years, but obviously as the macro environment changes, we'll make some pricing adjustments accordingly. I'm not aware of any time that customers are going back to their regulators based on that in terms of what has happened to date. Got it. That's all I have. Thank you. Appreciate it.

Thanks, Jeff.

Thank you. Our next question, coming from the lineup, Hillary Culley with Guggenheim. Yolanda's now open.

Hey, it's actually Joe. Can you hear me okay?

We can. Morning, Joe.

Hey, good morning. I don't sound like Hillary. Two questions. First, looking at this Revenue push up that you had last year. I'm trying to recall how much of that was in Q2 and whether you might be able to help us understand what an organic year on your comp might look like adjusting for that. And then the second question, I have a really impressive outcome here. in terms of the gross and the operating margin for your outcome segment. Obviously, some of that's trimming the portfolio and so forth, but how should we think about revenue fall through in that part of the business going forward? Thank you.

So let me start with, I think the first question was, how did the constrained revenue flow through in 2024? We had about $85 million in Q1 and about $40 million in Q2, and then essentially we were caught up by the first half. In terms of, you mentioned portfolio trimming, so that would have been devices more than outcomes. So just to clarify which one you're looking at. But on devices, again, as I mentioned, we're really ahead of where we expected to be. Really can't promise that we're going to be at 30% gross margins every quarter, but I think certainly high 20s is our expectation. And it flows through nicely because they've been trimming their OPEX as well. From an outcome standpoint, we're still looking for that segment to be in kind of the mid-40s gross margin. So we're not quite there, and as we've talked about quarter to quarter, you'll get some variability in that based on the software mix in the quarter.

Sure, but if I may, and thank you for clarifying on the year-on-year comps, the, you know, if you look at your whole year numbers, they don't quite imply that you're going to be at that mid-40s gross margins on the outcome segment, and you've just posted a very impressive result. So I guess my question is, can we can we expect to see this level of improvement in the margins going forward? Or I guess I should rephrase this, this level of revenue fall through going forward, which would imply, in fact, that you could be at the mid-40s gross margin in outcomes by the end of this year.

Yeah, again, we don't really guide by segment, but certainly the year-over-year improvement this year was heavily driven also by how low last year was. So we were You know, we were in the 40s or so this quarter, but we were like mid-30s last quarter. So you get that software mix that distorts things. So certainly we're looking for the outcome segment to continue to grow margins year on year, and I think they will continue to do that.

All right. Thanks. That's your point. Thank you, Jeff.

Thank you. Our next question coming from the line of Mark Charles with J.P. Morgan. Your line is now open.

Yes, good morning. Thank you for taking our questions. Why don't you go back to the tariffs? Can you just talk about kind of the timing of some of your mitigation efforts, whether that's price increases or kind of moving around component sources? Just trying to get a feel for, I mean, obviously tariffs could change this afternoon, but to the extent that the current tariffs remain in place indefinitely, just trying to get a sense of how we can think about annualizing that figure going forward. Thank you.

Sure. So the 15 million net number that we talked about, if I were building a model for the three quarters ahead of us for this year, I would put most of that in the back half of the year from a cost perspective. And that's really based on when various pricing mechanisms kick in, when various country of origin changes are made on the sourcing side. and the amount of inventory on hand. Remember, a certain amount of inventory was already in our hands when the protocol started. Your point about, yes, it could change immediately, but there's usually a little bit of a lag effect before the costs start to come in. So we didn't see much in Q1. There's a bit in Q2, but more of it is in the back half of the year.

Thank you.

Thank you. Our next question coming from the lineup, Chip Moore with Rod Capital Partners. Yolanda is now open.

Hey, everybody. Thanks for taking the question. Maybe just a high-level one. I was in Europe earlier this week, and there was obviously a pretty high-profile blackout, and I'm sure there'll be a lot of postmortem to come on that. But, Tom, I'd be curious to maybe get your perspectives on if you think that's the type of thing that can help shine a light on the need for some of these grid-edge solutions.

Well, certainly, I think that changing the topology of the grid to try to give you better resiliency and reliability is an important part of the value proposition we give to our customers. It takes more than just our piece of it, but we certainly can help give you visibility and control out at the edge of the grid, and that is helpful. So segmentation of the grid, microgrid solutions, virtual power plants, peak shaving, demand response, energy efficiency, all of these things are what's wrapped up inside of the platform that we provide. And it's very helpful when it comes to those kinds of situations. That said, I don't know that I've got perfect insight or nor does anyone at this moment as to exactly what happened in Spain and Portugal that appeared to be much more transmission related rather than distribution related. But even in those particular cases, you can certainly limit the amount of damage and get it back online faster when and if something like that should happen by further deployment of grid edge intelligence technologies.

Thanks. I appreciate that. And maybe one more for you. Joan, you know, on the balance sheet at this rate, it looks like you're going to be in a net cash position in the not-too-distant future. So, maybe an update on M&A funnel and just capital deployment more broadly and buyback, et cetera. Thanks.

Yeah, I would say the priority for us is still finding that right acquisition that helps us get more software content and help drive the outcomes growth. There's a lot of activity going on. I would say, you know, the PEs in particular, a lot of them are sitting on assets that are now four or five years. Some of the valuations, I think, have come down. There's some that don't necessarily want to accept a down valuation from maybe the peak from several years ago. There's some medium-sized assets out there as well. So we continue to be very active, and that would be our first priority from a capital allocation standpoint.

Thank you.

Thank you. Our next question coming from the lineup, Austin Muller with Canaccord. Your line is now open.

Hi, good morning. Are you able to talk about the mix between setup and engineering revenues within outcomes at customer sites versus the recurring subscription licensing revenue that you indicated was substantial in the quarter?

Yeah, if I look at it on a year-over-year basis, in Q1 last year compared to this year, we had a lot more, I will say, the better kind of revenue where margins were substantially higher. Amount of recurring revenue on a quarterly basis bounces around a little bit depending on the exact mix of business, but we were right around 70% recurring revenue in Q1, which that's maybe on the lower side of where we want to be ultimately is probably closer to 80% is the ultimate trajectory. But again, it will bounce around a little bit quarter to quarter.

Okay. And can you talk about how your grid edge intelligence solutions and networked endpoints products could assist in a blackout situation like we saw in Spain and Portugal?

Yeah. Again, the Spain and Portugal situation, I don't know that I would want to try to comment too directly on what exactly happened there until the details are out. But I A pretty clear example is some of the things that we do already today with allows utilities to reroute power through distribution automation. So, if you do have a particular transformer that gets struck by lightning and that the power goes out, You can reroute power using the mechanisms that we provide and when we work with partners to be able to do that. So you're minimizing the area, if you will, that's out. The same could be true in a wildfire mitigation kind of scenario. So rather than turning off all of Marin County when the wind kicks up, you can target that quite a bit more closely by having that fine-tooth control out at the edge of the grid. Those are the types of solutions that we offer our customers at the distribution edge.

Great. That's very helpful. Thank you.

Thank you. And as a reminder, to ask a question, please press star 1-1 on your touch-tone telephone. Our next question, coming from the line of Scott Graham with Seaport Research Partners. He's on his phone.

Yeah, hi. Good morning. Thanks for taking the question. Is there any way you could tell us a little bit more about the $15 million? I mean, I know that's a net number, but is it sort of like 30-15 mitigation? Is it 50-35 mitigation? Can you just give us an idea of maybe closer to what the gross is?

Oh, again, the mix of our product portfolio will change, and that probably means that any number that I would hazard a guess on today would be wrong by tomorrow. So it'll ebb and flow a little bit depending on how the mix changes and what deliveries on individuals look like. So I think that the right way to think about it is the net number, and that's what would be the impact from a gross margin standpoint.

Okay, thank you. Then the other question I had was on networking. The organic there, I know really set back by last year's catch-ups. Was the gross margin down because of the comp, the catch-up comp, or was that something else?

It was really just mix, and it was not down materially. I think it was down you know, maybe 20 basis points. So that's noise in the scheme of things. It's just mixed.

Okay. Mixed. Very good. Thank you. That's all I had. Appreciate it.

Thank you. 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.

Very good. Thank you all for joining our call today. We look forward to updating you again in another three months.

This concludes today's conference call. Thank you for your participation, and you may now disconnect.