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Edited Transcript of ITRI earnings conference call or presentation 6-Aug-18 9:00pm GMT

Q2 2018 Itron Inc Earnings Call

LIBERTY LAKE Aug 18, 2018 (Thomson StreetEvents) -- Edited Transcript of Itron Inc earnings conference call or presentation Monday, August 6, 2018 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Barbara Doyle

* Joan S. Hooper

Itron, Inc. - Senior VP & CFO

* Philip C. Mezey

Itron, Inc. - President, CEO & Director

* Thomas L. Deitrich

Itron, Inc. - Executive VP & COO

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Conference Call Participants

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* David Francis Katter

Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst

* Joseph Amil Osha

JMP Securities LLC, Research Division - MD & Senior Research Analyst

* Noah Duke Kaye

Oppenheimer & Co. Inc., Research Division - Executive Director and Senior Analyst

* Pavel S. Molchanov

Raymond James & Associates, Inc., Research Division - Energy Analyst

* Sophie Ksenia Karp

Guggenheim Securities, LLC, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Good day, everyone, and welcome to the Itron, Inc., Q2 2018 Earnings Conference Call. Please note that today's conference is being recorded.

For opening remarks, I'd like to turn the call over to Ms. Barbara Doyle. Please go ahead.

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Barbara Doyle, [2]

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Thank you, John. Good afternoon, and welcome to Itron's Second Quarter 2018 Earnings Conference Call. We issued a press release earlier today announcing our results. The press release includes replay information about today's call. A presentation to accompany our remarks on this call is also available through the webcast and on our corporate website under the Investor Relations tab. On the call today, we have Philip Mezey, Itron President and Chief Executive Officer; Joan Hooper, Senior Vice President and Chief Financial Officer; Tom Deitrich, Executive Vice President and Chief Operating Officer; and Ken Gianella, who is Itron's new Vice President of Investor Relations officially as of tomorrow. Ken and I have been working closely together for several weeks now ensuring that we have a very smooth transition for our investors. Following our prepared remarks, we will open up the call to take questions using the process the operator described. Before I turn the call over to Philip, please let me remind you of our non-GAAP financial presentation and our safe harbor statement.

Our earnings release and financial presentation include non-GAAP financial information that we believe enhances the overall understanding of our current and future performance. Reconciliations of differences between GAAP and non-GAAP financial measures are available in our earnings release and on our Investor Relations website. We will be making statements during this call that are forward-looking. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially from these expectations because of factors discussed in today's earnings release and the comments made during this conference call and in the Risk Factors section of our Form 10-K and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statements.

Now please turn to Page 4 in the presentation, and I'll turn the call over to our CEO, Philip Mezey.

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Philip C. Mezey, Itron, Inc. - President, CEO & Director [3]

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Thank you, Barbara. Our second quarter results reflect solid customer demand and a stabilizing supply chain. We continue to be very pleased with advancements in our product portfolio and strong progress on the integration of Silver Spring Networks. The revenue outlook is strong, and supply chain visibility has improved.

Let me begin with an update on supply chain issues that we identified on last quarter's call. While we were disappointed with gross margin in the quarter, we made considerable progress in the supply chain. We've focused on securing materials and commodity supplies needed to keep customer projects largely on track.

Over the past several weeks, supply chain conditions have begun to stabilize. Component lead times and pricing appear to have plateaued, and we believe we have secured the needed materials for customer demand we see through year-end.

We are experiencing elevated costs, however. We're estimating approximately $70 million of total impact from supply chain costs and internal production inefficiencies for the full year of 2018 compared with our original outlook. About half of this is attributable to supplier cost increases.

We have taken aggressive measures that are partially mitigating these headwinds in 2018, and that will also drive longer-term sustainable cost improvement. As Joan will discuss, we've captured the incremental supply chain cost in our EPS guidance update.

As always, our focus on our customers remains a priority at Itron. Our efforts are paying off, resulting in solid revenue production in the second quarter and forecasted for the full year. In fact, we're raising our revenue guidance for the full year of 2018.

Now I'll cover bookings and backlog, turning to Slide 5 in the presentation. Customer activity continues to be very healthy. The book-to-bill ratio in the quarter was approximately 1:1. Total backlog at the end of the quarter was $3.1 billion, and 12-month backlog was $1.4 billion. The 12-month backlog increased nearly 5% sequentially from the first quarter as several large customer projects continue to ramp up.

Notable deals in the quarter include contracts for approximately 1.3 million OpenWay Riva endpoints with Tampa Electric Company and Nova Scotia Power. The utilities are part of a consortium that we've previously announced had selected OpenWay Riva for their grid modernization and customer engagement initiatives. In the Samoan Islands, we'll be deploying our OpenWay Riva IoT solution, smart meters and our new prepayment management platform for 40,000 customers of Electric Power Corporation.

We're also pleased to announce that Enedis has selected Itron for 4.2 million meters for the next phase of the Linky smart grid program. Including this award, Itron will surpass more than 12 million meters on the successful and innovative project in France. This new business will be included in our third quarter bookings.

Distributed Energy Management wins in the quarter include Eversource, where Itron is deploying a demand response program targeting the utility's small business customers. At Georgia Power, we signed a contract to manage field services for the utilities demand response program. Georgia Power already utilizes Itron's Intelis source demand response software and load control devices. This is a great example of selling new outcome services into a key account.

Water bookings in the quarter included new business with the cities of Pearland and Waco in Texas and [Halaco] Group in Hanoi, Vietnam. Water continued a strong backlog trend with book-to-bill rates greater than 1:1 in 7 of the last 8 quarters.

Itron continues to lead the industry in delivering innovation for our customers. In June, we launched new static metering technology for gas and water customers under our Intelis brand. The gas product is a significant advancement in the metering space with integrated safety features that are critical to gas utilities.

We also introduced a new static water metering platform. While we have been a leader in the water communication space in North America for many years, adding a meter to our portfolio opens a new $800 million per year market opportunity to Itron.

Interest in our new gas and water platforms has been phenomenal. Customers are eager to get the products, and we expect shipments to begin in the fourth quarter.

On the Networks side, product convergence activity is progressing and is increasing our visibility for revenue synergies in 2019 and beyond. We've started previewing the road maps with key customers, and the response has been very positive. Our road map provides a clear convergence path that protects customers' assets, whether they are on OpenWay Riva or the former Silver Spring Network [Gen X] platform.

Today, we are actively enabling Itron's electric meters on the Gen X networks and maintaining open choice to customers on meters. We have a backlog of third-party meters in qualification and continue to grow the ecosystems of connected devices across Itron's network solutions.

We are also enabling Itron's battery-powered endpoint solution on the Gen X network as a part of the convergence plans. Think of this as our industry-leading gas and water (inaudible) under Gen X , adding a compelling choice of proven devices for customers. Sales of Itron electric gas and water device endpoints under the Gen X network will begin in 2019.

In addition, we've enabled the Gen X distribution automation and streetlight vision solutions on our OpenWay Riva network. These solutions are available today and are adding new-customer opportunities in our pipeline.

We are also pursuing new Gen X platform opportunities in EMEA, leveraging Itron's robust sales channel. And plans for a new converged network platform that protects customers assets and extends our leadership in the industry are on track.

We're very pleased with continued smooth progress on the Silver Spring Networks integration. Integration of our financial and operational processes and systems is on track. Our R&D and product management teams are actively collaborating on product road maps. The integration of the sales team is well underway, and cross-selling opportunities from our converged portfolio of solutions are adding to our pipeline. The financial results for the Network's business in the first half of the year were better than the expectations we had for the acquisition, and we are ahead of plan for projected synergies.

Now let me turn the call over to Joan to discuss our financials and updated guidance.

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Joan S. Hooper, Itron, Inc. - Senior VP & CFO [4]

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Thank you, Philip. I will review Q2 results then provide our updated financial guidance for fiscal 2018. A summary of consolidated GAAP results is shown on Slide 6 and non-GAAP results are shown on Slide 7.

Revenues of $586 million increased 16% versus last year. Q2 gross margin of 30% was down from 35% last year due to product mix, supply chain inefficiencies, material cost increases and an insurance recovery in the prior year.

In Q2, we saw the continuation of industry-wide cost pressure with higher prices on electronic components and commodities. While the component pricing environment has stabilized, we expect these current levels to persist into the second half of 2018.

The benefits from previously announced transformation initiatives, discretionary spending controls, a reduction in variable compensation and selective pricing actions with customers are helping to mitigate a portion of the increase in material costs. We are on track with our long-term initiatives to improve our operational performance through factory optimization and continued utilization of contract manufacturing, improving our supply chain reliability and mix of suppliers, and by value engineering to reduce product costs.

Besides helping mitigate the headwinds in 2018, these initiatives will create long-term sustainable benefits, building resiliency in both our supply chain and long-term operating model. As Philip discussed, we will continue to aggressively pursue all efforts to improve our gross margin while ensuring our customer deployments are carried out as planned.

Moving on to EPS. Our second quarter GAAP net income was $3 million or $0.07 per diluted share compared with net income of $14 million or $0.36 per share last year. The decrease in net income is primarily due to higher costs from acquired operations and approximately $10 million increase in interest expense related to acquisition financing.

Regarding non-GAAP metrics and cash flow. Adjusted EBITDA of $57 million or 9.7% of revenue was down approximately 200 basis points year-over-year, driven by lower gross margins and added expenses for acquired operations.

Non-GAAP net income for the quarter was $20 million or $0.51 per diluted share compared with $28 million or $0.71 per share in 2017. Cash and equivalents at the end of the second quarter totaled $163 million, up from $144 million at the end of Q1. Free cash flow of $29 million was up $12 million year-over-year, driven by improved working capital.

Now turning to the second quarter year-over-year revenue bridge on Slide 8. Total company revenue grew by 16% or 14% on a constant-currency basis. Electricity revenue was flat as reported and down 2% in constant currency compared with last year. Growth in outcomes revenue and strong demand for smart solutions in North America and EMEA partially offset lower standard volumes.

Gas revenue decreased 3% in constant currency primarily due to lower regulator and meter shipments in North America. However, we are ramping both smart deployments in EMEA and Riva deliveries in North America.

Water revenue increased 5% in constant currency, driven by new Riva projects in North America and Australia. In addition, demand continues to increase in Latin America. Revenue for the Network segment, which is the acquired Silver Spring Networks business, was $74 million in the quarter, reflecting strong North American network and outcomes solutions.

The non-GAAP year-over-year EPS bridge is on Slide 9. The lower gross profit reflects product mix, elevated cost due to supply chain inefficiencies, and higher component and commodity prices. In addition, we had an $8 million insurance recovery in Q2 2017 that benefited non-GAAP EPS by $0.12 per share.

Non-GAAP operating expenses increased due to the addition of the departmental expenses for the acquired businesses. If you exclude the acquisitions, OpEx declined year-over-year due to reduced headcount, disciplined discretionary spending and lower variable compensation.

Increased interest expense lowered EPS by $0.17 year-over-year with the addition of the incremental debt used to fund the acquisition. The decline in the non-GAAP tax rate in the quarter increased EPS by $0.06 compared with last year. The lower rate was driven by benefits of U.S. tax reform, partially offset by the mix of jurisdictional income. The net result was non-GAAP EPS of $0.51 per diluted share compared with $0.71 in the prior year.

Slides 10 through 13 show results by business segment for the second quarter. Itron's electricity business delivered revenue of $251 million, gross margin of 30.7% and non-GAAP operating margin of 12.2%. Electricity's operating margin improved versus last year with restructuring, savings and lower operating expenses more than offsetting gross margin reductions from product mix and higher parts costs.

Gas gross margin of 29.6% and non-GAAP operating margin of 10.4% were both down compared with last year, driven by a higher mix of meters versus communication modules, a higher mix of European business, higher input cost and elevated cost associated with manufacturing transitions, which concluded in the second quarter of this year.

Gross margin in the Water segment was 30.4% and non-GAAP operating margin was 6.3%. The $8 million insurance recovery added approximately 700 basis points to Water gross margin in the second quarter of 2017, which exacerbates a tough year-over-year compare. Margins were also significantly impacted by product mix and higher commodity and component pricing.

The Networks segment gross margin of 28.8% and non-GAAP operating margin was negative 3.9%. As Philip said, we are pleased with the progress in the integration, including synergy execution and the segment's contribution to Itron's overall results.

Now moving on to updated guidance on Slide 14. For the full year 2018, we anticipate revenues will be between $2.425 billion to $2.475 billion. This range is higher than the previous guidance we provided based on solid customer demand we see across all segments.

Our updated non-GAAP EPS guidance is between $2.75 and $2.90 per share. At the midpoint, this is a decrease of approximately $0.33 from prior guidance.

Slide 15 provides an estimated breakdown of this decrease by major driver. While we have shown point estimates for simplicity, there are ranges of potential impacts associated with each driver.

We anticipate external component and commodity cost increases to reduce full year EPS by approximately $0.63 per share versus our initial guidance. A projected increase in our non-GAAP effective tax rate would reduce EPS by approximately $0.08 per share. The higher tax rate is due to an expected shift in the jurisdictional mix of income versus our original assumptions. And higher interest costs are expected to reduce EPS by $0.05 per share.

We have been able to offset more than half of these negative impacts through improved operational performance and an acceleration of the synergies from the Silver Spring Networks acquisition. We are ahead of plan on realizing synergies, and that should contribute approximately $0.13 additional EPS versus our initial guidance.

We are projecting an estimated $0.30 per share improvement based on better operational performance. The improved performance is driven by higher revenue; decreased spending, including a reduction in variable compensation, which more than offset elevated costs due to supply chain inefficiencies.

Overall, our updated guidance implies strong second half performance and margin improvement from the first half levels. We expect higher revenue and a stabilization of the supply chain in the second half. We also expect a greater mix of higher-margin products, which when coupled with the ongoing operational initiatives, should lead to higher gross margins in the second half. While we are monitoring a fluid tariff situation, the impact in 2018 should be manageable within this guidance.

Our updated guidance includes the following assumptions: a euro to U.S. dollar exchange rate of 1.18 in the second half of the year, 40 million shares outstanding, an annual average effective tax rate of approximately 30% and annual interest expense of approximately $52 million.

In conclusion, we have taken aggressive actions to stabilize and partially mitigate the supply chain headwinds. We're successfully executing on previously announced restructuring and supply chain transformation projects, and we're delivering accelerated acquisition synergies. We anticipate benefits from these efforts, both in the second half and beyond.

Now I'll turn the call back to Philip.

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Philip C. Mezey, Itron, Inc. - President, CEO & Director [5]

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Thank you, Joan. We're pleased to be making real progress on our operational initiatives. The primary global supply chain transitions and related site consolidations involved in the 2016 restructuring plan are now completed, and we are in the optimization phase in the new sites.

The 2018 restructuring efforts are underway and proceeding to plan. This progress on our transformation journey makes us a more resilient and strong company. We continue to drive aggressively to our mid-teens EBITDA goal.

While external factors may defer the timing a few quarters, there are no structural impediments to achieving this goal. Improving execution in our supply chain, accelerating cost synergies from the acquisition and continuing to deliver innovative new customer solutions are the keys to achieving this goal. Strong progress on these initiatives gives us confidence in our forecast for higher profitability in second half of 2018 and for further improvements in 2019.

Lastly, I'd like to take a moment to thank Barbara Doyle. This will be her last call leading Investor Relations at Itron. Barbara has done this job beautifully for 7 years. Barbara has worked to build our relationships with our analysts and investors around transparency and integrity.

We will continue her work as Ken Gianella takes over. Ken comes to us from Silver Spring Networks, where he was the Senior Vice President of Finance and Treasurer. We welcome Ken as we wish Barbara the very best in her next endeavor. Thank you.

And now let's open the call to take some questions.

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Questions and Answers

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Operator [1]

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Our first question comes from Joseph Osha from JMP Securities.

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Joseph Amil Osha, JMP Securities LLC, Research Division - MD & Senior Research Analyst [2]

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Barbara, congratulations on your very successful tenure. You will be missed. I wanted to drill down on 2 things. First, this question of accelerating savings. Does that mean perhaps that we should think about a slower pace of improvement in 2019? And Philip, you talked broadly about sort of a dollar number that you intended to take out of Silver Spring. Is that sort of dollar cost reduction still the same number?

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Joan S. Hooper, Itron, Inc. - Senior VP & CFO [3]

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Yes, this is Joan. So if you recall, we talked about $50 million of annualized savings by 2020, which is still our plan. Initially, we expected to be on about a $20 million run rate exiting '18 but only get the benefit of about $10 million in the in-year P&L. We now think that's closer to $15 million to $20 million in the in-year. So the run rate might be a little bit higher, but it's essentially within the quarters of 2018 we're achieving those synergies faster than we anticipated.

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Joseph Amil Osha, JMP Securities LLC, Research Division - MD & Senior Research Analyst [4]

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Okay. And so there's still another $30 million in incremental benefits to be realized in 2019 and 2020?

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Joan S. Hooper, Itron, Inc. - Senior VP & CFO [5]

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That's correct.

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Joseph Amil Osha, JMP Securities LLC, Research Division - MD & Senior Research Analyst [6]

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Okay. And then the second question. Obviously, lots of people struggling with supply chain tightness and so forth. When you think about it over the course of the next 2 years, do you think that eventually, we can return these businesses -- the existing metering businesses to the margins that they were realizing at the gross margin level prior to when this all got so difficult halfway through 2017? That's it from me.

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Thomas L. Deitrich, Itron, Inc. - Executive VP & COO [7]

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Yes. Joe, Tom Deitrich here. I'll try to field that one. So fundamentally, as Philip commented on the script, we don't see anything that is structurally different about the longer-term view on the business. Yes, okay, supply is tight right now, and that leads to some inflationary pressures in the supply chain in certain commodities. But I wouldn't say that it leads to anything longer term that is fundamentally different than what we've seen before. So structurally, very much the same, maybe timing varies a bit based on near-term supply constraints.

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Operator [8]

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And our next question comes from David Katter from Baird.

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David Francis Katter, Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst [9]

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Can you talk a little bit about your project backlog and how that might give you guys confidence in sequential expansion in gross margin in the second half? Any details that can help us get a little more confident in the ability to achieve that.

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Philip C. Mezey, Itron, Inc. - President, CEO & Director [10]

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Sure. So David, I mean, the first comment was that the 12-month backlog is up sequentially 5%. And if you look at that trend, the 12 month backlog is actually up significantly as a result of the acquisition of Silver Spring Networks in the first quarter of this year. So our visibility in both total backlog and 12-month backlog has improved significantly. As we've commented before, we have kind of 2 different parts to our business, a purchase order, replacement business and a large project-driven business. The backlog represents that project-driven business, and the overall gross margin of that project business tends to be quite strong. It involves more advanced technology and differentiated technology. So it allows us to have forward visibility and a view to a generally very attractive business of these advanced meters and systems and communication systems.

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David Francis Katter, Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst [11]

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Got it. And then on the operating expenses front, is Q2 kind of indicative of a starting point? I know you guys brought that down in the legacy business and we're seeing some of the acquired business flow through. How do you expect operating expenses to flow over the course of the year?

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Joan S. Hooper, Itron, Inc. - Senior VP & CFO [12]

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Yes. Well, without giving specific line-by-line guidance, I would say Q2 is unusually low because we had, as we mentioned in the script, lower variable compensation, so we have a first half and second half of essentially a bonus plan based on performance. And we didn't hit our performance in the first half, so I would expect variable comp to go back up in the second half.

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David Francis Katter, Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst [13]

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Got it. And then lastly from me. Can -- any update on Comverge and the contribution that business had made in Q2 and your expectations for the rest of the year?

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Philip C. Mezey, Itron, Inc. - President, CEO & Director [14]

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Yes. I mean, we made -- in the backlog, talked about a couple of the contracts that we've won. The integration has gone very well, and we have now essentially put it into the kit of our overall sales team and so have a broader opportunity to sell that demand response and distributed energy management offering across our global sales team. And we have very positive growth in our overall services number. Part of that is driven by the contribution of Comverge and its -- and the underlying growth in that business.

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Operator [15]

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And our next question comes from Noah Kaye from Oppenheimer.

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Noah Duke Kaye, Oppenheimer & Co. Inc., Research Division - Executive Director and Senior Analyst [16]

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And really appreciate the visibility into the bridge for the back half of the year and calling out that cost impact. I guess -- I'm not sure what you're assuming for 2019 around component costs trends, but I'd like to ask about your ability to get price of the different parts of your business to reflect elevated input costs. You have, as you mentioned, Philip, purchase order business and then the project business. Can you talk a little bit about what kind of lag we might expect to see on any sort of upward pricing adjustments to reflect this elevated cost input?

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Thomas L. Deitrich, Itron, Inc. - Executive VP & COO [17]

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Yes. Tom Deitrich here. I can take a shot at responding. The way I would think about it is the backlog position that we have certainly is a blessing in terms of visibility, but a lot of that backlog is, indeed, priced, and it would be extremely difficult to modify pricing in that portion of the business. The other part of the business that Philip described that you referenced more of the turns-based business or PO-based. There, you do have some flexibility in pricing. You're still living in a very competitive world, so you want to make sure that you're staying in line with the competition. But nonetheless, there is a bit more flexibility there. How long do these things take to roll through? I think it is very, very market dependent. The fastest things tend to move through is probably a 3-month kind of lag, and sometimes it could be a 6- or 7-month lag in terms of how it really roll through. So that's how I would think about it overall. But lots of things that we can do and we do every day in terms of improving the gross margin profile beyond pricing itself, multiple sourcing kinds of activities where we approve second suppliers or third suppliers; value engineering, where we reduce the bill of materials or the complexity of the product itself; the restructuring activities that we've had ongoing, all of those things are activities that we undertake as well as pricing to make sure we're doing our very best to optimize gross margin.

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Noah Duke Kaye, Oppenheimer & Co. Inc., Research Division - Executive Director and Senior Analyst [18]

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Okay. That's helpful. And then want to ask about something you mentioned during the comment in the open commentary. You talked about the technology road map for the convergence of Silver Spring-Itron needing to protect assets no matter what, and that makes a lot of sense. We've certainly been seeing a lot of news flow lately around cybersecurity for the grid. And I'm just wondering whether you're seeing from your customers any elevated attention being paid to this if that requires any sort of additional work around security for the integration of the legacy network and also what it might mean for Itron's value proposition for customers.

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Philip C. Mezey, Itron, Inc. - President, CEO & Director [19]

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Sure, Noah. I'd say that it's a standard -- I mean, it's a topic that comes up, as you would imagine, extremely frequently. And I think on -- in prior discussions, I've mentioned the fact that very frequently we're in the envious position of using some of the most advanced technology on the marketplace. The endpoints that we're putting out in the field are literally embedding in Silver Spring, and its materials was very clear about this military grade security. And one of the benefits that we've gotten through the acquisition is a -- on a joint basis now have a tremendously strong security team and have embedded this kind of security thinking deeply into the architecture that we're using. So one never wants to be overconfident about security, but I feel that both the technology base that we're starting with, the capabilities and the team that we have at this point put us in a very strong position. And to your point about our value proposition, I think, are in a good position to deliver the kinds of strong, secure and private systems that our customers are looking for.

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Operator [20]

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Our next question comes from Pavel Molchanov from Raymond James.

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Pavel S. Molchanov, Raymond James & Associates, Inc., Research Division - Energy Analyst [21]

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I know you don't typically spell out revenue guidance by category. But in terms of the increase versus the original 2018 revenue, can you talk directionally what segments and perhaps what geographies it's coming from?

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Joan S. Hooper, Itron, Inc. - Senior VP & CFO [22]

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I would say that the strength we're seeing is across all segments and virtually all geographies as well. So it's pretty across the board.

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Pavel S. Molchanov, Raymond James & Associates, Inc., Research Division - Energy Analyst [23]

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Okay. And having had Silver Spring for about 6 months, I remember one of the original intentions was to see if you can use the software platform to perhaps upsell to legacy Itron relationships from a SaaS perspective. What's the latest on that front?

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Philip C. Mezey, Itron, Inc. - President, CEO & Director [24]

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We -- that we have actively enabled our sales with -- for the purposes of this discussion called in the legacy Itron sales force, particularly with products like it's -- was called operations optimizer and analysis product and a number of others that we are working to cross-sell into the -- into that environment, I would -- to the former Itron customers along with distribution automation and streetlight vision. And conversely, we've got the opportunity of selling distributed energy management solutions to the legacy Silver Spring customers. So we're actively working on that building pipeline, and we expect to see, again, greater of these cross-selling results beginning in 2019.

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Operator [25]

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Our next question comes from Sophie Karp from Guggenheim Securities.

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Sophie Ksenia Karp, Guggenheim Securities, LLC, Research Division - Senior Analyst [26]

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I wanted to ask you about the components headwinds. Is this something that is largely temporary and transitory? Is it fair to infer that about $0.60 headwind today could turn into a $0.60 tailwind tomorrow, potential upside? Or is that something that's more or less permanent?

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Joan S. Hooper, Itron, Inc. - Senior VP & CFO [27]

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I'll start with just with the prepared comments, and I'll let Tom extend beyond that. So clearly, in the prepared comments, we are assuming that the costs stay at the same level. So don't continue to go up but don't go down in the second half of the year, and I'll let Tom comment about the longer term.

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Thomas L. Deitrich, Itron, Inc. - Executive VP & COO [28]

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Yes. So I think that the pricing trends on a go-forward basis change a little bit depending on the commodity or the material type that we're talking about. Okay, metals are metals, and they'll sort of ride up and down a bit based on what the commodity would be. On the electronic side of things, what you tend to see is when the supply chain gets very tight, the suppliers end up going into an allocation kind of situation. Lead times stretch out. Prices escalate for a period of time. You end up with double ordering in the industry as everyone is pushing hard to get their portion of the supply. At some point, these things plateau, and that's what we've reached right now, which is lead times are no longer escalating. We haven't seen lead times start to contract just yet. When lead times start to contract, pricing generally can follow that. I think that's the trend that you typically see in the industry. It doesn't go up or down as necessarily a step function, but it takes a little bit of time for these things to work their way through the system overall.

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Philip C. Mezey, Itron, Inc. - President, CEO & Director [29]

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But I would add -- Sophie, I mean, I would add, we're not just waiting for parts prices to change. As Tom has discussed, we're value engineering, qualifying alternate sources, rotating to higher-margin products. I mean, there is a lot going on here to not just ride the tide of pricing. There's quite a lot that we are working on and actually, as in Joan's comments, have offset some of these price changes.

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Sophie Ksenia Karp, Guggenheim Securities, LLC, Research Division - Senior Analyst [30]

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Great, great. And you provided the breakdown of product versus [service] revenues this quarter. I'm curious how should we look at this and kind of think about the growth rates of these 2 different revenue streams over a longer term? Should one grow faster than the other? And what's the right way of thinking about this?

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Joan S. Hooper, Itron, Inc. - Senior VP & CFO [31]

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Yes, so we actually started in Q4 of last year. So you're required, once they hit 10% of the revenue, to do the split, so we started in Q4 of last year. And I'd say we had some quarters, products run a little faster than services and vice versa. But in general, I would expect services to grow faster than the product.

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Philip C. Mezey, Itron, Inc. - President, CEO & Director [32]

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And Sophie, on the website, for some time in our Investor deck, we have shown third-party data that basically breaks down growth rates in the categories of sort of basic meters and sensing category versus networking as opposed to this more outcome-based or software and services area. And the third-party data absolutely supports longer-term faster growth rates in that category, and that is one of the areas we're really focusing on.

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Joan S. Hooper, Itron, Inc. - Senior VP & CFO [33]

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And nearly, one of things we've highlighted in the past that continues is on nearly every Riva sale that we make, that also comes with some services now. So it's -- managed services is a big part of our solution today.

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Operator [34]

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Our next question comes from Noah Kaye of Oppenheimer.

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Noah Duke Kaye, Oppenheimer & Co. Inc., Research Division - Executive Director and Senior Analyst [35]

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I just wanted to follow up on your commentary earlier about the Silver Spring synergies perhaps going a bit faster than expected. Any color on why that was? Was it supply chain efficiencies? More favorable mix? Just be helpful to understand kind of what surprised you positively and what that implies for where we go from here.

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Joan S. Hooper, Itron, Inc. - Senior VP & CFO [36]

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Yes. I would say it's primarily all OpEx, not supply chain or not cost, and it really has to do with the timing of when employees left the payroll. So for example, we might have built the plan that said we need x amount of people to stay for 6 months, and then we'll have transitioned to work. Well, sometimes when they know their job's going away, they leave a little bit earlier. So I would say in general, it was on the OpEx side, and it's from -- in the G&A side in particular for people leaving the business earlier than we would have planned.

Any other questions, John? Hello. John, any other questions All right, I think this might conclude our call. Philip, are there any closing comments you'd like to make?

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Philip C. Mezey, Itron, Inc. - President, CEO & Director [37]

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I mean, I just want to reiterate once again, while we faced a challenging supply chain environment, I think that the team has done the strongest job possible of pursuing revenue opportunities of bringing the acquisition along extremely well. Execution and progress there has been very strong, both organizationally and in terms of our product and portfolio and the work that we are doing with customers. And then what you have heard is that, as you've heard, restructuring and the other work we're doing internally is coming apace, and we're -- continue to see the benefits of that works, so it's an exciting time, and we very much look forward to talking to you again next quarter. Thank you.

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Barbara Doyle, [38]

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Thanks, everyone.