Itron, Inc. (NASDAQ:ITRI) Q4 2023 Earnings Call Transcript
Itron, Inc. (NASDAQ:ITRI) Q4 2023 Earnings Call Transcript February 26, 2024
Itron, Inc. beats earnings expectations. Reported EPS is $1.23, expectations were $0.75. Itron, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and thank you for standing by. Welcome to Itron's Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] 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 Investor Relations. Please go ahead.
Paul Vincent: Good morning, and welcome to Itron's fourth quarter 2023 earnings conference call. Tom Deitrich, Itron's President and Chief Executive Officer; and Joan Hooper, Senior Vice President and Chief Financial Officer will review Itron's fourth 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 be open for questions using the process the operator described.
Before Tom begins, a reminder that our earnings release and financial presentation includes 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 Factors section of our Form 10-K and other reports and filings with the Securities and Exchange Commission.
All company comments, estimates or forward-looking statements are made in a good faith attempt to provide appropriate insight to our current and future operating and financial environment. Materials discussed today, February 26, 2024, may materially change, and we do not undertake any duty to update any of our forward-looking statements. Now please turn to Page 4 of our presentation as our CEO, Tom Deitrich, begins his remarks.
Tom Deitrich: Thank you, Paul. Good morning to everyone and thank you for joining our call. During the fourth quarter, strong operational execution, improved supply chain balance and robust customer demand supported financial results ahead of our expectations, including single quarter record revenue for our Network Solutions and Outcomes segments. The performance highlights for the fourth quarter were year-over-year revenue growth of 23% to $577 million, adjusted EBITDA of $68 million, an increase of 99% year-over-year. Non-GAAP earnings per share of $1.23, an increase of 73% and free cash flow of $39 million, which increased $57 million year-over-year. Turning to Slide 5, bookings for the fourth quarter of $839 million equated to a book-to-bill ratio of 1.45.
This brought cumulative 2023 bookings to $2.16 billion and our total backlog at year-end was $4.5 billion. Our customers faced pressure due to increased resource demand, climate and sustainability-related challenges, and the need to improve consumer experience. Itron's platform approach to provide Grid Edge Intelligence has a proven track record in addressing these customer concerns. The magnitude and diversity of bookings during the fourth quarter also reflects the breadth of unmet needs of utilities around the world. Our largest booking was an award from Eversource Energy, who contracted for an advanced endpoint and network rollout in their Massachusetts territory covering 1.3 million consumers. The program includes deployment services, 10 years of software and associated managed services, and Grid Edge technology with Itron's distributed intelligence.
This is another large multi-application award for Itron, and we look forward to supporting Eversource to add value across their territory.
TECO: Further, Itron will be working with Tulsa, Oklahoma based ONE Gas, a provider of natural gas services, to more than 2.3 million consumers. ONE Gas will enhance the intelligence of their network through the deployment of the next generation of communication modules. This project will help ONE Gas increase reliability, accuracy and safety for their consumers. Our market demand outlook for 2024 remains constructive and customer interest in new technology continues to accelerate. We anticipate 2024 bookings will result in a book-to-bill ratio of at least one to one. We are observing customers actively exploring projects that could benefit from IIJA funding programs, and although too early to accurately quantify, we do anticipate 2024 bookings will include some contributions from various government infrastructure investment programs, including IIJA with the benefits of these programs flowing through in subsequent years.
Slide 6 provides insights on the operational environment. We continue to see a strong and stable pipeline of customer opportunities with accelerating interest in new technologies. Our customers are facing growing pressure to adapt to a rapidly changing world and digitize critical infrastructure, requirements to become more efficient and more agile through visibility gathered by Itron's Grid Edge Intelligence solutions will improve asset management, enhance consumer experience and reduce inefficiencies. Component supply has improved and has become more predictable. This has allowed Itron to fulfill a meaningful portion of previously constrained revenue and build inventory of certain critical components in light of a more uncertain and potentially volatile global landscape.
During 2023, efforts to improve our price cost ratio gained traction and we were pleased with the results. Moving forward, we will continue to align our business needs for increased pricing flexibility with the predictability needs of our regulated customers. Exiting 2023, approximately 70% of our $4.5 billion backlog has been repriced or indexed to help address margin compression in the event of continued inflationary cost volatility. Much of the remaining 30% of backlog is expected to be fulfilled during 2024, which does gate margins primarily in the Network Solutions segment. I will now ask Joan to provide details about our fourth quarter and full year results, as well as our outlook for 2024.
TECO: Further, Itron will be working with Tulsa, Oklahoma based ONE Gas, a provider of natural gas services, to more than 2.3 million consumers. ONE Gas will enhance the intelligence of their network through the deployment of the next generation of communication modules. This project will help ONE Gas increase reliability, accuracy and safety for their consumers. Our market demand outlook for 2024 remains constructive and customer interest in new technology continues to accelerate. We anticipate 2024 bookings will result in a book-to-bill ratio of at least one to one. We are observing customers actively exploring projects that could benefit from IIJA funding programs, and although too early to accurately quantify, we do anticipate 2024 bookings will include some contributions from various government infrastructure investment programs, including IIJA with the benefits of these programs flowing through in subsequent years.
Slide 6 provides insights on the operational environment. We continue to see a strong and stable pipeline of customer opportunities with accelerating interest in new technologies. Our customers are facing growing pressure to adapt to a rapidly changing world and digitize critical infrastructure, requirements to become more efficient and more agile through visibility gathered by Itron's Grid Edge Intelligence solutions will improve asset management, enhance consumer experience and reduce inefficiencies. Component supply has improved and has become more predictable. This has allowed Itron to fulfill a meaningful portion of previously constrained revenue and build inventory of certain critical components in light of a more uncertain and potentially volatile global landscape.
During 2023, efforts to improve our price cost ratio gained traction and we were pleased with the results. Moving forward, we will continue to align our business needs for increased pricing flexibility with the predictability needs of our regulated customers. Exiting 2023, approximately 70% of our $4.5 billion backlog has been repriced or indexed to help address margin compression in the event of continued inflationary cost volatility. Much of the remaining 30% of backlog is expected to be fulfilled during 2024, which does gate margins primarily in the Network Solutions segment. I will now ask Joan to provide details about our fourth quarter and full year results, as well as our outlook for 2024.
Joan Hooper: Thank you, Tom. I'll review Itron's fourth quarter and full year 2023 results before discussing our financial guidance for the full year 2024 and our outlook for the first quarter. Please turn to Slide 7 for a summary of consolidated GAAP results. Fourth quarter revenue of $577 million increased 23% versus last year. Revenue growth was supported by strong operational execution and increased component availability, which allowed us to continue to catch-up on previously supply constrained revenue. Gross margin of 34% was 390 basis points higher than last year, primarily due to favorable product mix and operational efficiencies related to increased volumes. This was Itron's highest gross margin since 2017. GAAP net income of $44 million or $0.96 per diluted share compares to $22 million or $0.49 per diluted share in the prior year.
The improvement was driven by higher operating income partially offset by higher tax expense. Regarding non-GAAP metrics on Slide 8, non-GAAP operating income of $61 million increased $36 million year-over-year. Adjusted EBITDA of $68 million nearly doubled from the prior year. Non-GAAP net income for the quarter was $57 million or $1.23 per diluted share versus $0.71 a year ago. This quarter was an all-time high for non-GAAP EPS. Free cash flow was $39 million in Q4 versus negative $18 million a year ago. The improvement reflects significant year-over-year earnings growth. Year-over-year revenue comparisons by business segment are on Slide 9. Device solutions revenue of $114 million increased $9 million, or 9% on a constant currency basis, driven by growth in water meter and communication module sales in our EMEA region.
Network Solutions revenue of $391 million increased 30% year-over-year. Growth was enabled by improved supply chain conditions, which allowed us to continue to catch-up on previously constrained revenue. Outcomes revenue of $73 million increased $6 million or 9% in constant currency, primarily due to an increase in recurring and one-time services. Moving to the non-GAAP year-over-year EPS bridge on Slide 10, our Q4 non-GAAP EPS increased $0.52 year-over-year to $1.23 per diluted share. Pretax operating performance contributed a $0.78 per share increase driven by the fall through of higher gross profit partially offset by higher operating expenses. Higher tax expense had a negative year-over-year impact of $0.27 per share. Turning to Slides 11 through 13, I'll review Q4 segment results compared with the prior year.
Device Solutions revenue was $114 million, gross margin was 26.9%, and operating margin was 17.5%. Gross margin was up over 15 points year-over-year and operating margin was up nearly 15 points, reflecting a higher value product mix and operational efficiencies. This was the device segment's highest quarterly gross margin since Q3 of 2016. Network Solutions revenue of $391 million established a new quarterly record and gross margin was 35%. Gross margin increased 220 basis points year-over-year and operating margin was up 290 basis points due to favorable product mix and improved operational efficiencies. Outcomes revenue of $73 million was also a quarterly record and gross margin was 39.8%. Gross margin decreased 670 basis points year-over-year and operating margin was down 650 basis points due to a lower mix of software licensing activity.
As we have previously discussed, the relative size of software licensing activity in a quarter can create variability from period to period. For a recap of full year 2023 results, please turn to Slide 14. Revenue of $2.17 billion grew 21% versus 2022, supported by a substantial conversion of previously constrained revenue as supply availability improved faster than expected. We estimate approximately $275 million of revenue that had been constrained by supply limitations at the end of 2022 was converted to revenue during 2023. In addition, we were pleased with increased customer adoption of our Grid Edge Intelligence technology. Our Networks and Outcomes segments both delivered record revenue in 2023. Gross margin of 32.8% increased by 370 basis points year-over-year due to favorable product mix and operational efficiencies.
Adjusted EBITDA was $226 million or 10.4% of revenue compared with $95 million or 5.3% in 2022. Non-GAAP earnings per diluted share was $3.36 versus $1.13 in 2022. Free cash flow of $98 million compares to $5 million in the prior year. The year-over-year increase was due to higher earnings partially offset by growth in working capital and increased cash taxes paid. Turning to Slide 15, I'll review liquidity and debt at the end of the fourth quarter, total debt was $416 million and net debt was $158 million. Net leverage was 0.7 times at the end of Q4 and cash and equivalents were $302 million. Please turn to Slide 16 for our full year 2024 financial guidance. We anticipate 2024 revenue to fall within a range of $2.275 to $2.375 billion. At the midpoint this represents approximately 7% year-over-year growth.
An important factor to consider when looking at the projected revenue growth rate is the timing impact of the catch-up of previously supply constrained revenue. You may recall that we entered 2023 with approximately $400 million of revenue we were unable to deliver due to component supply constraints. We knew the revenue was not lost and we would be able to convert it as supply availability improved. As I just mentioned, we estimate approximately $275 million of that catch-up occurred in 2023, and we anticipate the remaining $125 million will occur primarily in the first half of 2024. If you normalize for the impact of 2023 and expected 2024 catch-up of constrained revenue, the 7% year-over-year growth rate would be approximately 16%. We anticipate full year 2024 non-GAAP earnings per share to fall within a range of $3.40 to $3.80 per diluted share.
The EPS guidance assumes an effective tax rate of 25% for the full year. Quarterly rates could fluctuate based on the jurisdictional mix and the timing and amount of tax settlements. At the midpoint of this EPS range, and normalizing the tax rate to 25% for both years, we expect 2024 year-over-year earnings growth of approximately 14%. Now please turn to Slide 17 for our first quarter outlook. We anticipate Q1 revenue to be within a range of $575 million to $585 million, a 17% year-over-year increase at the midpoint. We anticipate first quarter non-GAAP earnings per share to be within a range of $0.80 to $0.90 per diluted share, which at the midpoint is approximately 68% year-over-year growth after normalizing for the tax rate. Our 2023 financial results reflected strong operational execution.
We reacted quickly to better than expected component supply, ramped manufacturing output and shipments to customers, enabling us to convert a greater than expected amount of supply constrained demand. Our teams pivoted to growth and improved profitability. We're very pleased with our 2023 performance and we begin 2024 with considerable momentum and strategic flexibility. Now I'll turn the call back to Tom.
Tom Deitrich: Thank you, Joan. The modern grid is undoubtedly the largest machine on the planet and possibly the most complex, with the least readily available visibility into its operational conditions. Not only does it need to be modernized, but this needs to happen in years, not decades, as demand and complexity continues to rapidly increase. Itron's robust connectivity and Grid Edge Intelligence at scale is providing critical solutions to our customers in timeframes that match these needs.
EcoStruxure: With the support of Microsoft, Itron is integrating Microsoft Azure OpenAI into our portfolio of Outcomes solutions. This enables secure natural language processing of utility data to speed access to business intelligence needed in a rapidly changing world. No longer is data science or automation of business intelligence limited to IT and engineering specialists. With this collaboration, actionable information will be more quickly available to all business managers for critical decisions.
GE Vernova's: Grid edge intelligence unlocks visibility as well as the ability to control and operationalize distributed energy resources inside and outside the home. Fully optimizing the distribution grid requires cooperation from the ADMS system to the edge and the ability to securely access cloud based data for processing with the latest machine learning and AI capabilities. Itron believes collaboration between industry leaders is required to accelerate grid modernization essential to economic and social prosperity. We will discuss these arrangements and more in our upcoming Investor Day on the 12th of March at NASDAQ MarketSite in New York City. We expect our program will be helpful for investors seeking to understand our business and why we believe we are positioned at the intersection of a multiyear market trend of wide scale customer demand for technology with an innovative portfolio of solutions that supports our growth expectations.
We look forward to visiting with everyone attending in person, and we'll also be broadcasting the event via webcast through itron.com. For those interested in participating, please contact our IR team for registration details. To recap today's call, Itron had a strong fourth quarter and full year 2023. Our teams executed at a high level across the organization and delivered significantly improved results. Our Network Solutions and Outcomes segments set annual revenue records. We drove margin expansion through the year while continuing to earn high quality customer awards that maintain our backlog at near record levels. While there may be continued volatility in the world ahead, we have assembled a strong and capable team that has proven itself and is poised to continue to perform in 2024.
Thank you for joining today. Operator, please open the line for some questions.
GridOS: Grid edge intelligence unlocks visibility as well as the ability to control and operationalize distributed energy resources inside and outside the home. Fully optimizing the distribution grid requires cooperation from the ADMS system to the edge and the ability to securely access cloud based data for processing with the latest machine learning and AI capabilities. Itron believes collaboration between industry leaders is required to accelerate grid modernization essential to economic and social prosperity. We will discuss these arrangements and more in our upcoming Investor Day on the 12th of March at NASDAQ MarketSite in New York City. We expect our program will be helpful for investors seeking to understand our business and why we believe we are positioned at the intersection of a multiyear market trend of wide scale customer demand for technology with an innovative portfolio of solutions that supports our growth expectations.
We look forward to visiting with everyone attending in person, and we'll also be broadcasting the event via webcast through itron.com. For those interested in participating, please contact our IR team for registration details. To recap today's call, Itron had a strong fourth quarter and full year 2023. Our teams executed at a high level across the organization and delivered significantly improved results. Our Network Solutions and Outcomes segments set annual revenue records. We drove margin expansion through the year while continuing to earn high quality customer awards that maintain our backlog at near record levels. While there may be continued volatility in the world ahead, we have assembled a strong and capable team that has proven itself and is poised to continue to perform in 2024.
Thank you for joining today. Operator, please open the line for some questions.
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