Q4 2023 Itron Inc Earnings Call
Participants
Paul Vincent; VP, IR; Itron Inc
Tom Deitrich; President, CEO, & Director; Itron Inc
Joan Hooper; CFO & SVP; Itron Inc
Noah Kaye; Analyst; Oppenheimer & Co.
Martin Malloy; Analyst; Johnson Rice & Company
Jeff Osborne; Analyst; TD Cowen
Kashy Harrison; Analyst; Piper Sandler Companies
Chip Moore; Analyst; Roth MKM
Tommy Moll; Analyst; Stephens, Inc.
Benjamin Kallo; Analyst; Robert W. Baird
Pavel Molchanov; Analyst; Raymond James Financial, Inc.
Scott Graham; Analyst; Seaport Research Partners
Austin Moeller; Analyst; Canaccord Genuity
Presentation
Operator
Good day, and thank you for standing by, and welcome to Itron's Fourth Quarter 2023 earnings conference call. (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.
Paul Vincent
Yes, 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 our strong 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, 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 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 26th, 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 Networked 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, equating 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 face pressure due to increased resource demand, climate and sustainability related challenges and the need to improve consumer experience. Icon'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 ICON's distributed intelligence. This is another large multi application award for ICON, and we look forward to supporting Eversource to add value across their territories.
Moving to the southeastern U.S. Tampa Electric or Tego and Nitro and have agreed to work together to migrate TOO's existing DI. and capable endpoint and network lighting controllers from a prior generation of Whiterock networks to the latest, a multi-service canopy network platform, which will simplify and future-proof solution for new grid edge intelligence use cases. Tego continues to adopt grid edge intelligence and is increasing the use and scale of distributed intelligence applications, most recently through the deployment of location awareness at scale by leveraging the consolidated Diatron network and embracing distributed intelligence, Sika will be able to introduce more value and service resilience to their consumers. Further, Nitro 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 wind gas increase reliability, accuracy and safety for their consumers. Our market demand outlook for 2020 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 IGA 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 IGA 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 ICON's grid edge intelligence solutions will improve asset management, enhance consumer experience and reduce inefficiencies. Component supply is has improved and has become more predictable. This has allowed a trial and 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 gain 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 Joe 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 our trends 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 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 a trend 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 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 onetime 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 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 billion. 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 and 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 and 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 $460 million in 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 billion 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 converted 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 80 to $0.9 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 began 2024 with considerable momentum and strategic flexibility. Now I'll turn the call back to Tom.
Tom Deitrich
Thank you, Joe. 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. I Troms, robust connectivity and grid edge intelligence at scale is providing critical solutions to our customers in timeframes that match these needs to accelerate and broaden the adoption of new technologies. We recently announced co-innovation work with three industry leading partners that have cutting edge technology HR and will integrate our grid edge intelligence solutions with Schneider Electric's EcoStruxure platform. The combined solution will give utilities greater visibility and control over energy distribution and resource management, which in turn enables an increase in grid capacity while optimizing capital investments in physical equipment collaboration is designed to simplify management against an increasingly challenging landscape. This initial step would digitize both the supply and demand sides of the energy value chain for distributed energy resource management with the support of Microsoft. I is integrating Microsoft Azure OpenEye into our portfolio of outcome 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.
Additionally, we recently announced plans to integrate our grid edge intelligence solutions with GE. for Nova's grid, OBS orchestration software to collaborate and build a unified data model to ease the integration and utilization of data from the grid edge to the utility control room by connecting the two for real-time data insights for grid operators, combining grid edge data with operations data will close visibility gaps that previously prevented utilities from identifying and resolving grid issues quickly and efficiently 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. I truly believe 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 progress 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 Iceland.com. For those interested in participating, please contact our IR team for registration details.
To recap today's call, I just 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 is poised to continue to perform in 2024.
Thank you for joining today. Operator, please open the line for some questions.
Question and Answer Session
Operator
(Operator Instructions) Noah Kaye, Oppenheimer.
Noah Kaye
Morning. Thanks for taking the questions. Great quarter. Maybe we could start with the guide actually I think the the first question would be how to think about the growth across the segments that's embedded in the guide is sort of a flattish devices and high single digit and outcomes are networks that kind of the right way to think about it? Or how would you nuance that?
Joan Hooper
Yes, this is Joan. I would say the devices is relatively flat and down from the standpoint of time year over year growth, you would expect a little bit again in devices, but it's kind of low double digit growth in networks and outcomes would be more like high-single digits, if you are, if you think about networks, and that's where the continuation of the catch-up of the constrained revenue primarily affects the Networks segment right.
Noah Kaye
And I think you have most of that catch-up is happening in the first half. That implies that we're kind of back to underlying growth in the back half of the year from a revenue run rate perspective?
Joan Hooper
Correct. So again, you're correct that most of the remaining cash of $125 million, we should be in the first.
Noah Kaye
And so that plays into how to unpack margin trends a little bit because you mentioned there's a couple of things going on. You've got some of the old backlog that still is maybe mix disadvantaged right rolling through revenue this year. But then you have kind of the catch-up on our networks backlog and so that should be mix accretive. So just kind of help us understand how to think about the trajectory of margins over the course of the year and what kind of a cleaner margin trajectory might look like once we get past some of these different items?
Joan Hooper
Yes. So I would say that the first comment would be about Q1. I would expect Q1 to be sequentially lower than Q4. Q4 was a very, very strong margin quarter. But if I think about the overall guidance for the year, you know, it implies slightly higher than the 23 in aggregate. And to your point, I would expect the kind of first half margins to be a little bit below second half margins.
Noah Kaye
Tom, you mentioned in the prepared remarks, but just help us understand where are we in the cycle for fund flow from IAJ. and IRA., it looks like the DoD only just opened applications for the GRIP program in November. So are you starting to see quoting activity related to specific programs?
Tom Deitrich
Good question. You are correct that a lot of the proposals to obtain grants from the government are going in now that the first round of awardees happened in that in the fourth quarter. That's an award. That doesn't mean the cash is flowing just yet. So I would expect that we will see a lot of activities for proposals and for projects that to work. And we are working with our customers on during 2024, what that means in terms of flowing it through to our P&L is that there will be bookings in 2024, but I don't expect a material amount of revenue in 2024 the revenue probably comes in 25 and beyond in terms of.
Yes, the timing itself.
Noah Kaye
Terrific. I'll turn it over
Operator
Martin Malloy, Johnson Rice & Company.
Martin Malloy
Yes, good morning. Congratulations on the strong quarter. Mike, my first question revolved around the pickup that you saw beginning last year in terms of Network Solutions revenues and deploying more endpoints and how should we think about it that impacting the timing of it of related increase in now comms revenues and solutions?
Joan Hooper
I can start and then counsel freedom to catch up. So typically you'll see anywhere from a 12 to 18-month lag in terms of outcomes kind of applications after the endpoints are deployed. So you're correct. We started to see a lot of this constrained revenue really was networks, and that has started to come to ourselves thinking about 12 to 18 months beyond that.
The other thing I would just caution though, is outcomes is a mix of different types of businesses. We have managed services and there we have license revenue. And then of course, we have the applications on distributed end point. So it's really all three of those. So I don't think you're going to see a complete correlation in terms of the ability to model it that way. But we would expect that that would pick up anywhere from 12 to 18 months after end points are deployed. I don't know, Tom, if you've got anything else.
Tom Deitrich
No. Well stated.
Martin Malloy
Okay. My second question is you've announced several partnerships here that they look like they're in collaborations that look like they're important. Could you maybe give us a little more color in terms of the timing of when we might see these partnerships impact your results?
Tom Deitrich
Sure, happy to do so. So let me take a step back and trying to put the collaborations in context and then come to the meat of your question, we think fundamentally, it is extremely important to connect up and create full visibility across the distribution grid from the ADMS system, meaning things that are happening higher up in the grid from where we normally play all the way down to the last mile to the endpoint itself. You can't solve the full grid problem without that notion of connecting those two parts of it. So that the work that we announced with both Schneider Electric and with GE IEnova is really around that fundamental collaboration. Additionally, that the Microsoft collaboration has to do with bringing the power of generative AI. two to utility data today, only about a third of utilities are really doing something with that with AI and there's a substantial productivity gain that can be possible when you do use that capability in a responsible way.
So how do we enable that in a secure and responsible way is with the collaboration with SAP and Microsoft is really all about those collaborations themselves. We're working with the first customers in each of those right now. You'll hear some things and I think we even with the GE. for Nova mentioned Florida Power & Light in the in the press release that went out in the past couple of days, but those collaborations, initial customer activities are going on now. And I would expect, Jeff, our product releases to be happening during the year and flow through the results in that in 2025 and beyond.
Martin Malloy
Thank you. I'll turn it back.
Operator
Jeff Osborne, Cowen.
Jeff Osborne
So thank you.
Tom Deitrich
Good morning.
Jeff Osborne
Just a couple of questions from my side. I was wondering, I think Joe mentioned the 16% normalized growth rate without the catch-up on the semiconductor side. I was just wondering is there anything one-time as it relates to 2024, would you have a similar growth rate given the robust backlog as we look out into 2025?
Joan Hooper
I wouldn't know Secretary excuse me, be Andrea, let me let me just clarify what that 16% represents. So what we did to get the 16% as we took the 23, our book to revenue reduced it by the $275 million of catch-up and then compare that to the 2024 midpoint guidance I just provided and reduce that by $125 million of catch-up. So there's catch-up in both years. So we took we normalize both years, and that's how we got to 16% Got it. I apologize.
Jeff Osborne
I'm losing my voice here, but and then on the telco, do you think about the migration from 2.0 to 1 point or 1.0 to 2.0 solutions. Hypothetically, if you had spent $100 million bucks, a 1.0 solution a decade ago are getting $0.6 on the dollar with the upgrades, how do we think about the legacy customers, PMO, CenterPoint, et cetera?
Tom Deitrich
Right, right. Well, I'll give you a moment to clear your throat. I think I got the question, Jeff, as the telco upgrade just to set the record, there is not really a 1.0 to 2.0. Think of it as a 1.0 I'm sorry, think of it as a 2.0 to 2.0, but there was two different underlying technologies that were part of 2.0. And really what's going on is migrating everything to the latest and greatest version to allow that capability to scale much more efficiently across different applications. So it's not a one to two, which I think it's really a two to two in terms of the headline capability, but the underlying protocols are little little bit cleaner in terms of where they're going.
That said to your question in a 1.0, am I just to make it really simple an application you the return you were getting on that as an operator was probably a 6%, 4%, 5% somewhere in that range. Typically mileage varies a bit, so you could have some a little bit higher than that, but that was more typical in a 2.0. The return that you get is much, much bigger. You get the more applications you pile on to a common set of infrastructure, the more the benefits accrue. And so it's far and away a better investment to go to a 2.0 generation and the cash register really accrues so that the benefits as you add more applications, we find incremental applications are substantially higher than that and then the single digit percentages that we saw in initial just automation of the meter to cash cycle.
Jeff Osborne
Great. Thank you.
Operator
Kashy Harrison, Piper Sandler.
Kashy Harrison
So good morning, everyone, and thanks for taking a thanks for taking my questions. So my first one, just wanted to go back to the backlog, I think you flagged 70% being re-priced index and then obviously implying that there's 30% on the other side. Can you give us a sense of what proportion of 4Q results were tied to the lower backlog? And then maybe just generally, how should we think about the margin drag on the margin drag from the lower price backlog on 2024 guidance?
Tom Deitrich
Yes, I don't know that I could give a perfect answer for Q4. I would say that there was a mix of pre pandemic pricing as well as the more recent stuff in Q4, certainly it was less than the 70 30 split, meaning we had more of the older stuff flowing through in Q4. The overall margins that we have in there. Clearly, we've had a substantial run-up in costs on the components. Those component costs have not started to materially ease back to us the pre-pandemic levels at this point, just yet. So difficult to to give you the on off the cuff answer on the precise numbers, Tom, but I do think that margins in the Network segment are probably most effective affected. The other segments are a little bit more of free in terms of that margin compression dynamic from pre pandemic backlog.
Kashy Harrison
Got it. Okay. Fair enough. And then my I might my follow-up question. You highlighted the integration of Gener of AI to your portfolio of outcome solutions. So clearly, the outcomes business will the services will improve due to the use of AI, but can you maybe speak to the financial impact specifically, are you expecting margin expansion in the Outcomes segment? Are you do you expect to win more business or higher revenue and then when do you expect OpenEye to be fully integrated across the board to all your customers within the Outcomes segment?
Tom Deitrich
Really three different parts of the equation there. Certainly, I think that the inclusion of more and better refined machine learning capabilities as well as AI capabilities into it, the data suite that we provide will help both revenue as well as margin. What we definitely believe the collaboration with with Microsoft, where you can do it in a secure way, really isn't thinking about it as a copilot is the right way to do it in the utility space. So I think it is accelerating business, which results in revenue and margin accretion, timing wise, it's going to depend on customer adoption in terms of how it flows through the P&L. We're going to enable it for anything that is hosted in Azure as it is a first off, for example, the faster we migrate customers to a cloud-based environment, I think the faster they will be able to consume it. There's a lot of power in being able to do this instead of running down the the office hallway to the IT or the engineering department to say, write a report for something why not speaking natural language and have the computer do the work to pull data out? So you can get better insights and make decisions much faster. That's really what the power would be. But I think it's a 2025 story in terms of revenue is where you'll start to see the initial results, and I appreciate the color there.
Kashy Harrison
And then maybe my final question. Your bookings, you saw a nice recovery in Q4 and then you're highlighting one to one at least one one bookings guidance for 2024. Can you help us think through what that one to one bookings guidance would imply for the year end 12 months backlog?
Tom Deitrich
Yes, I think that one is probably going to depend on customer deployment more so than the booking itself. Recall, when we do a booking, we require a signed customer contract and award, of course, but also regulatory approval in approval to be able to put it into backlog once it's there, then the deployment schedule gets defined that 12 month backlog number is oftentimes based on deployment schedules more so than the schedule. So I expect that to demand is likely to remain stable and strong, which is a very good thing throughout 2024. And we would expect that 12-month backlog to reflect that strong and stable demand environment.
Kashy Harrison
Got it. I appreciate the commentary. I'll pass on. Thanks.
Operator
Chip Moore, Roth MKM.
Chip Moore
Good morning, everybody. I wanted to ask about recurring software and service attach rates. We've heard numbers as high as I think 30% for percent contracts out there is is there a way to think about how those attach rates have been trending and how those are in backlog.
Tom Deitrich
I think our software and services revenue is somewhere right around 17% to 20% of our total revenue.
Today, attach rates continue to drive that up over time. So the vast majority of new bookings include not only some hardware, but the software and services associated with it. The exact portion that is software and services varies a lot deal to deal and probably it's not a good bellwether to think about a single number there. It's very dependent on the on the individual deal itself. What we do know is once we have a network deployed, the amount of follow-on business that we get in the in the software and services area is substantially higher portion of it detach. That then is in the initial deal itself. And that just is good for the customers. They are exercising the assets they bought in multiple ways to to help their communities, but it's also good for us as well. It adds to that software and services activity for the Company itself.
Chip Moore
Got it. That's helpful color, Tom, appreciate it. And as a follow up, maybe on the component side, I think, Tony, you mentioned that you've been able to stockpile some critical components. Guess just your confidence if we do get some volatility, have you been able to engineer out some of the more challenging stuff? Or do you think you have enough on hand you have good comfort if we get some volatility? Thanks.
Joan Hooper
Yes, I'll start. And then, Tom, please, please chime in. So yes, we have made a decision to strategically invest in inventory. And if you look over the past year with our inventory has gone up quite a bit. And that is to really make sure we built some supply chain resiliency. And so we feel good about the projections we're providing for 24. Obviously, we continue to work on initiatives to make their supply chain more robust, including dual sources and things like that. But at this point, not overly concerned with what's supply chain shortages on components.
Chip Moore
Great. Thank you.
Operator
Tommy Moll, Stephens, Inc.
Tommy Moll
Morning and thank you for taking my questions. And I wanted to start with a follow-up on the point you made about having repriced or indexed about 70% of the year end backlog. And really, my question is to trying to understand of the philosophy that underlies those negotiations with your customers, is the idea to hold the gross margin percentage constant in a changing environment, gross profit dollars hold those constant or what is the underlying mutually beneficial arrangement you're trying to get to there. Thank you.
Tom Deitrich
And certainly, when we have a discussion with the with customers, we're trying to make sure we are selling the value of the solution that we provide. That's fundamentally how we have the discussion. It's good for the customer, and it's good for us and good for our shareholders. And we do that. We've got a better mousetrap than competition in our minds because our customers are largely regulated utilities. They're looking for price certainty so they can put it into a rate case and they can go to their commission to develop the right rate structure for their communities. That's the world that they live in. If we live in a world with a lot of volatility on the cost side, how can we make those two worlds coincide and indexing is largely the way we we tend to work with customers most often where if we do have a certain inflation rate we can take the benefit of it is largely a it tends to go up in cases where we had done fixed price contracts where we were not able to to renegotiate. That's the the remaining 30% ish that we referenced in our pre prepared remarks about that when when it comes to how do you have that negotiation with customers to rework those existing deals. Again, we look for ways that we can drive to provide incremental value so that we can help the customer solve new and interesting problems. Is there a way to do that, but still live within the construct that they have for their business. So we tried to make it as much as possible a win-win for both sides.
Tommy Moll
That's helpful. Thank you. And as a follow-up, I wanted to ask a question on the EPS outlook you've provided. If we just take the first quarter midpoint and the full year midpoint for 2024. It's just shy of 25% earnings contribution from the first quarter. And while it's difficult to know what a quote-unquote normal contribution looks like I think if we look historically that that skews a little bit rich, which might imply some conservatism embedded in the 2Q 3Q, 4Q outlook. So any color you could provide there would be helpful.
Joan Hooper
Yes. The only thing I would comment is what I said earlier, which is a normal progression of what a first half second half would look like it's going to be a little bit skewed in 2024 as a result of that catch-up of $125 million of revenue occurring primarily in the first half. So if you think about that, you're going to have kind of more normal normal revenue without the catch-up in the second half. And as a result, you end up with something that looks more more flattish than it would normally look from first half to second half.
Tommy Moll
That makes sense. Thank you, Joan, and I'll turn it back.
Joan Hooper
Thank you.
Operator
Benjamin Kallo, Baird.
Benjamin Kallo
Hey, good morning, guys. Congrats, Tom and Joan and team. Just quickly, I guess, Tom, your outcomes for the studio does the oil and congrats on the partnerships? And does that the partnerships change your your strategy around build builds, home, acquire or or partner? Or I guess what I'm asking is that you talked about acquisitions in the past and how do you think about that for outcomes for the other parts of the business?
Tom Deitrich
Thanks, Ben. No, I don't see that these partnerships change our strategy for the technology, we would look to add into our portfolio. It at all, we weren't looking to get into the high end ADMS market. Now that's better served by others, and it's appropriate to partner there. The same with large language models. It's better to partner with with the firm there to be able to do that.
Let's make sure that we can extract value for our customers when we do that. That's how we can think about those those partnerships overall, when it comes to acquisitions itself, we're very focused on edge intelligence capability, adding technology that we can scale across multiple customers, primarily outcomes related to solutions is where you should look for us to continue to discover that market overall.
Benjamin Kallo
And when we think about just the booking, the very good bookings in Q4, Bob, I assume you are I think you have visibility for that. What do you think you can book for the year. How does that mix play out between networking and outcomes on a deal this quarter than in the past a Q4?
Tom Deitrich
And then looking at it in two ways to look at it to the $839 million of bookings we had in Q4. The vast majority of that is is networks and outcomes of the that will be true again in 2024. And the actual split between networks and outcomes inside of the number varies a bit quarter to quarter. Q4 happened to be a little bit heavier on the outcomes side, we'll see what 2024 it looks like. The exact split comes down to how we work with customers for the contracts themselves in that.
Benjamin Kallo
I know you guys have been on a long journey of rightsizing costs and your manufacturing footprint on the right size could be. Could you just update us where you are there that if there's any benefit 25 from anything, it won't happen until covered, I guess like a year-over-year benefit from 24 from just from cost savings or rightsizing manufacturing? Thank you.
Joan Hooper
Well, yes, I was going to say so we have in the plan we announced about a year ago, we have two factories closing and they won't close to the tail end of 24, early 25. So the answer is yes, there will be some benefit in 25 versus 24 once those two factories close. And it's just as you mentioned, a continuation of the strategy we've been on to rightsize the manufacturing footprint. So that is why, as we've mentioned a couple of times, 24 margins are a little bit muted from a standpoint of the unpriced backlog as well as the fact that the factories are closed yet. So I will be in a position when we do Investor Day in a couple of weeks to talk about our view of 2027, actually group.
Benjamin Kallo
Thank you very much.
Operator
Pavel Molchanov, Raymond James.
Pavel Molchanov
Yes, thanks for taking the question. Can you talk about them geographic sales mix of them 2023, what you are thinking of this year, particularly what you're seeing in the European markets?
Joan Hooper
Yes, I can start. And then, Tom, if you want to add in, I would say or given that our Networks business is come and outcomes for that matter is heavily North America. The vast majority of our revenue continues to be from North America, and we do have a primarily our devices business that has a good amount of revenue in Europe and devices was much stronger than we expected in 23 on the backs of really strength in the water meter and water communication modules, modules business. So we're seeing a lot of good water strength in Europe right now.
Tom Deitrich
And if I just fast forward and add one more comment there, I agree fully with Joan's commentary that there is a push on the part of local governments, specifically in Western Europe around the water market. That's certainly helping the market overall. And we've seen pretty robust signals. That business tends to be a little bit shorter cycle. Almost a good portion of it is turns business, meaning a book and ship within the quarter. And that's one that we will continue to watch through throughout the year. But Joan is right that the water market in 2023 was stronger than we had expected coming into the year, and we'll continue to watch that through 2022.
Pavel Molchanov
Got it. And that since my M&A question was was already answered, I thought I would kind of frame slightly different around the free cash flow. You are building cash and the only debt on the balance sheet is a convert that you have two years on. So what's the kind of priority ranking on how you're thinking about that increase in cash balance?
Joan Hooper
M&A, that is the priority. We've been very active. We continue to be active and we feel very good about our position now given our cash balance and our ability if need be for the right acquisition to actually take on more debt given where our leverage is. So that is by far the number one priority is to find something that enhances our Outcomes segment.
Tom Deitrich
Very clear. Thanks very much.
Operator
Scott Graham, Seaport Research and development.
Scott Graham
Good morning. Thanks for taking my questions and congratulations on your quarter.
I hope you can answer this question and I hope I'm not overly complicating. It probably will be when you reprice. Does that get you because I know you threw around the word in there. And actually, Tom, does that get you to price cost, you know, however you want to call it price inflation neutrality or are you still price cost negative even after that.
Tom Deitrich
Well, it depends on the timeframe that you're talking about. So an index just to add to really put a fine point on it could be something like APPI. or CPI. for that specific market that you're dealing with, that's what you could use to price to index pricing on a go forward basis. And then it will depend very much on your internal productivity compared to to that. But overall, very visible, very trackable metric between you and the customer to make it clear. So whether you win on price cost depends on your productivity against that particular metric. And generally it's in a go forward sense is how that indexing tends to work. So if you started behind or you started ahead, then you know where you are relative to that index on a on a on a time evolution basis. I hope that helps put clarity behind it.
Scott Graham
I'll probably have to read the transcript again on that one for your answer, but it does have a little bit of the I guess my follow-up question would be kind of the same question asked a little bit differently, just for and numbers sake, the big jump in gross margin in the fourth quarter was that, let's assume that let's assume that we get to or closer to price cost parity. So was that like enriched mix? Was that volume or was it productivity? You can say yes to all three, but then maybe rank them.
Joan Hooper
I would say yes, to all three. And I would say our mix was probably the biggest.
Tom Deitrich
Right on.
Scott Graham
Okay. And then how does that look for 24 gross margin?
Joan Hooper
Well, I think I commented earlier in the full year guidance that we provided, the assumption is the gross margin is a little bit better than full year 23. And so part of that is and this headwind of 30% on not non-indexed backlog coming in and that primarily affects networks. But in aggregate, we think the overall gross margin will be slightly higher than it was in 23 and annual 23, not Q4?
Scott Graham
Yes, ad Joan, does that headwind, I assume that headwind reduces significantly in 25?
Joan Hooper
Yes, correct. Plus you have the benefit of the two factories going offline, which will help margin as well. But yes, that the in the 30% or so of the backlog that is not price protected we would expect the majority of that to come into 24.
Scott Graham
Thank you.
Operator
Austin Moeller, Canaccord.
Austin Moeller
Hi, good morning and nice quarter. So I have a two-part question here. Where do you view yourself in the sales cycle with the utilities right now? And do you expect further demand recovery as interest rates declined just given the sensitivity of utilities to interest rates.
Tom Deitrich
So I can take that $1 billion. I think that we generally see utilities looking to them to solve the real problems that are on their hands today that they've got to figure out how to balance supply and demand with more renewables on the generation side and more distributed energy resources at the edge of the network. How do they do that? They do it with grid edge intelligence. They've got more environmental pressures with floods and fires and storms or ice storms or droughts, what have you depending on where in the country you may be and they've got to make their infrastructure more resilient and they've got rising consumer demands. Consumers want to understand how they are buying that service a much finer detail than the traditional utility model allowed. Those are the pressures that to drive our customers towards new technology. We see customers actively looking at new technology to address those those questions. We haven't seen a shift in buying behavior from our customers. So with interest rates rising over the last couple of years, so indeed, the demand picture has been it has been pretty steady and strong. Looking at these new technologies, rate cases are being approved. They're working through the regulatory process and the return that they're getting on those rate cases is also pretty steady as interest rates come down, perhaps rate cases change a little bit or maybe demand goes up, the time will tell as to how that plays out. But independent of interest rates, we do expect the demand environment to continue to be stable and strong.
Austin Moeller
Excellent, Thanks for all the detail.
Operator
Thank you and I will now turn the call back over to Mr. Tom Deitrich for any closing remarks.
Tom Deitrich
I thank everyone for joining today, and we look forward to updating everyone at our March investor event, and until next time, thank you for joining.
Operator
Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.
