Itron - Earnings Call - Q1 2019

Transcript

Speaker 0

Good day, everyone, and welcome to the Itron Incorporated Q1 twenty nineteen Earnings Conference Call. Today's call is being recorded. For opening remarks, I would like to turn the call over to Ken Gianella. Please go ahead.

Speaker 1

Thank you, operator. Good afternoon, and welcome to Itron's first quarter twenty nineteen 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 our webcast and on our corporate website under the Investor Relations tab.

On today's call, we have Philip Meesee, Itron's President and Chief Executive Officer Joan Hooper, Senior Vice President and Chief Financial Officer and Tom Dietrich, Executive Vice President and Chief Operating Officer. Following our prepared remarks, we will open 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, the comments made during this conference call and in the Risk Factors section of our Form 10 ks 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 four in the presentation, and I'll turn the call over to our CEO, Philip Meese.

Thank you, Ken. Good afternoon, and thanks for joining us. We are pleased to announce a strong and productive first quarter. With improved operating performance, combined with signs of a recovering supply chain environment and continued strong demand signals in the marketplace, we are well positioned as we exit our second full quarter under new operating segments of Device Solutions, Network Solutions and Outcomes. You will hear details from Joan in a moment, but to highlight our Q1 twenty nineteen performance, revenue was $615,000,000 adjusted EBITDA was $66,000,000 adjusted non GAAP EPS of $0.70 and free cash flow of $14,000,000 These results combined with a healthy cash position allowed us to continue to accelerate delevering and begin a $50,000,000 share repurchase plan in the first quarter.

Turning to our sales performance, we continue to see a robust customer demand and have a very strong pipeline. Traditionally, Q1 can be seasonally low for bookings and that trend continued in Q1 twenty nineteen with bookings of four seventy three million dollars However, we saw solid deal flow, submitted numerous large scale network solution and outcome project bids and remain on track to have a book to bill ratio of approximately one:one for 2019. Our total backlog at the end of the quarter was $3,000,000,000 and our twelve month backlog increased sequentially to $1,400,000,000 This past quarter, we continue to execute on our strategy. I'd like to provide brief examples where we are extending our leadership position. In Q1, our Outcomes segment reached an agreement with Exelon's utility analytics team to help them harness and analyze terabytes of data that is delivered monthly over their Itron network that supports their smart meter initiatives.

This project will enable Exelon utility analytics to move beyond customer usage analysis. By implementing Itron's advanced data analytic tools, Exelon will be able to create predictive models that will assist with the prevention of outages, recovering from storms faster and improving the overall grid reliability for every Exelon customer. Another example we're pleased to announce is a network solutions deal with Louisville Water Company to modernize its distribution system with Itron's OpenWay Riva IoT solution, including nearly 300,000 OpenWay Riva water communication modules. Louisville Water Company will utilize Itron's IoT solution to increase metering accuracy, improve customer service, and provide greater visibility into its operations. The utility will also use iTrend Analytics to detect water loss and make faster, more informed decisions.

These are just two brief examples of the market momentum we are seeing from our new segments that will deliver long term value for our customers and our investors. Next, I'd like to highlight the progress we're making with our supply chain. While some of our component costs and inventory remain at elevated levels, we continue to see an easing in supply chain lead times as expected. Last year, we reported over five fifty parts with lead times over six months, and that number is currently down over 25% from last year's high. Our supply chain optimization strategy is well underway, and we are seeing improvements in our book and ship performance, an increase of multi sourced component qualification and significant progress on our component replacement efforts.

Through these actions, we have improved delivering on our customer commitments and are starting to see gross margin improvements materialize. While this is going in the right direction, we still have a way to go and are not standing still on our long term gross margin improvement efforts. Finally, our commitment to executing on our restructuring and integration efforts are showing in our results, as evidenced by the year over year improvement. We continue to be laser focused on improving operating efficiency in 2019 and we remain committed to delivering the full $140,000,000 in cumulative savings from our projects by the end of twenty twenty. Overall, we are making steady progress on our strategy and look forward to the rest of the year.

I'll now hand the call off to Joan to discuss the full Q1 results.

Speaker 2

Thank you, Philip. As Philip mentioned, we are pleased with our first quarter results. Operationally, we performed better than our expectations due to the acceleration of customer projects from later quarters, improving execution on book and ship orders and some timing related underruns in OpEx spending. A summary of consolidated GAAP results is shown on Slide seven and non GAAP results are shown on Slide eight. Revenue of $615,000,000 increased 1% versus last year, driven by strong performance in the Networked Solutions and Outcomes segments.

First quarter gross margin of 30.5% improved 90 basis points versus last year, primarily due to favorable product mix, including the higher margin software revenue. Moving to earnings per share. The GAAP net loss was $2,000,000 or $05 per share compared with a net loss of $3.74 per share in the prior year. You may recall the net loss in Q1 twenty eighteen was driven by $151,000,000 in restructuring, acquisition and integration related charges. Regarding non GAAP metrics, adjusted EBITDA was $66,000,000 or 10.7% of revenue.

Non GAAP net income for the quarter was $28,000,000 or $0.70 per diluted share compared with $5,000,000 or $0.13 per share in 2018. Free cash flow was $14,000,000 in the first quarter, significantly higher than the prior year, primarily due to the higher earnings and lower restructuring acquisition and integration related cash outlays. Cash and equivalents at the end of the first quarter was $111,000,000 Turning to Slide nine. Total debt decreased to $1,020,000,000 as we paid down an additional $10,000,000 in debt. This helped reduce net leverage to 3.5 times.

Our strong cash position also enabled us to repurchase stock during the quarter. In March, our Board authorized a $50,000,000 share repurchase program over a twelve month period. We repurchased $8,000,000 of common stock during the first quarter. And subsequent to quarter end, we have completed the total $25,000,000 that we planned for 2019. Now turning to the first quarter year over year revenue bridge on Slide 10.

Total company revenue grew 1% or 5% on a constant currency basis. Device Solutions revenue was down 11% as reported and 5% in constant currency. The constant currency decline was primarily due to lower EMEA volumes, which was expected. This was partially offset by improved performance in our book and ship business, which allowed us to fulfill more intra quarter demand. Network Solutions revenue grew 13% in constant currency, driven by growing North America AMI deployments.

Outcomes revenue was up 4% in constant currency due to strength in North America, particularly recurring managed services offerings. The non GAAP year over year EPS bridge is on Slide 11. Q1 non GAAP EPS was $0.70 per diluted share compared with $0.13 in the prior year. Year over year net operating improvements added $0.24 per share. A lower non GAAP effective tax rate contributed $0.35 of year over year improvement.

You may recall that Q1 of twenty eighteen, the non GAAP effective tax rate was unusually high at 64%. The Q1 twenty nineteen non GAAP tax rate is 31%, which is in line with the full year tax guidance we provided on last quarter's call. Slides 12 through 14 show results by business segment for the first quarter compared with the prior year. Device Solutions revenue was $222,000,000 on gross margin of 18% and operating margin of 11.5%. While we are seeing the supply chain environment improve sequentially, Q1 margins are still impacted by higher component costs compared with last year.

Networked Solutions revenue was $336,000,000 on gross margin of 37.8%. The margin percentage was flat year over year with benefits from higher margin software sales offset by other less favorable product and service mix. Operating margin improved 190 basis points to 28.3%, driven by lower OpEx, including the benefits of integration synergies. Outcomes revenue was $56,000,000 on gross margin of 36%, up 14 percentage points year over year. The improvement was driven by favorable product mix and scale benefits from the integration of Silver Spring Networks.

Operating margin of 18.5 was up 20 percentage points, reflecting the significant contribution from synergies. Overall, we were very pleased with our first quarter performance. Results were better than our expectation with some pull in of revenue and EBITDA from the second half of twenty nineteen. While it is still early in the year, we remain confident in the full year guidance range. Given the Q1 overachievement and timing issues I mentioned, we expect Q2 could be sequentially flat to slightly down for both revenue and earnings.

From a gross margin perspective, we continue to expect second half improvement with the Q4 exit rate being approximately 150 basis points higher than the Q1 level. As is our normal practice, we intend to provide an official update to our annual guidance on our Q2 call in early August. Now I'll turn the call back to Philip.

Speaker 1

Thank you, Joan. Our Q1 results exceeded our expectations, and we are working hard to continue the momentum. The demand outlook for our industry is strong. Our pipeline is expanding and we are making progress on improving our supply chain execution and our new business segments are executing and performing as planned. Finally, just as a reminder, we invite you to join us for our Investor Day on the June 27 at the NASDAQ market site in New York City or via our live webcast on our Investor page.

We will delve deeper into our strategy, the market outlook, our new business segments and provide an update on our technology road map. Thank you. And operator, would you please open up the call to take some questions?

Speaker 0

Thank you very much. Yes. You would ask a question on today's call, please press star one on your telephone keypad. If you're using a speakerphone today, please pick up your handset before pressing the corresponding digits. We'll take our first question from Ben Kahlo with Baird.

Please go ahead.

Speaker 3

Hi. Good afternoon. Thanks for taking my question. Philip, you mentioned you had several bids on large projects out there. Could you just talk maybe maybe a little bit more color about what type of projects and if it's leading with the Silver Spring offering or your Itron offering.

Any color you can give there would be good. And then Mhmm. Can you talk, maybe more about the the exiting, gross margin there and and how much confidence you have, you know, from the from both the input side as well as the what you have in backlog and the mix there to be exiting with that 150 bps greater gross margin? Thank you.

Speaker 1

Sure, Ben. The bids, would characterize as large North American electric AMI related bids. To your question about distinguishing between the former Silver Spring technology offering versus Itron as it's a mix of technologies. I would remind everyone on the call that we have outlined and we'll talk more on Investor Day about our convergence plan such that customers who are taking this technology actually have a strong assurance about a unified platform moving forward. But we're very pleased with the progress we're making on this pipeline that we're pursuing.

On the gross margin, I'll pass to Tom to take that one.

Speaker 4

Thank you, Philip. Ben, the way I would characterize it is the supply chain environment is definitely improving. We've seen lead times start to normalize. We still have some inventory that we procured last year at some elevated levels, but we're starting to see the environment return to a much more normal kind of world. The way it will work is lead times start to retract back into a more normal range and then you start to have suppliers working for business.

So you get a bit more commercial leverage in terms of managing our way through it. We look closely at the back half of the year and that was part of how we guided for the year. We still feel very good about our progression throughout the year. Lots of work to go. We've got to keep moving along the path of component replacements and design cost reductions as we go through the balance of the year.

But from my point of view, we are very much on track for the year.

Speaker 2

Yes. The only other thing I would add to that is we've got our restructuring and integration plans that are continuing, and those affect both OpEx and cost of goods sold. So those will contribute as we go through the year as well.

Speaker 3

Thanks, Joan. Thanks, Tom.

Speaker 0

We'll take our next question from Joseph Osha with JMP Securities. Please go ahead.

Speaker 5

Hello, hello. A couple of questions. First, it's interesting that you're staying with the whole year guidance. And I'm just wondering, is this just kind of normal quarter to quarter puts and takes? Or is there some kind of perhaps seasonality emerging to this business?

Because again, comparing the way it acts to past years isn't necessarily valid. Could we be seeing a pattern where Q1 is strong and then things soften up a bit over the summer and then recover coming out of the year? And then I have a follow-up.

Speaker 2

Well, let me take the broader question first in terms of holding full year guidance. So our normal practice is to give the full year guidance at the end of Q4 on that call and then to update it two quarters later. So as I mentioned in the prepared remarks, we will do the same thing. We did indicate that, obviously, we're still comfortable with the range that we provided on last quarter's call. In terms of the quarter, I don't know that there's a new pattern emerging.

I did mention a couple of timing related things, a little bit of a pull in from revenue and EBITDA that we would have expected in later quarters related to the timing of customer deployments as well as some timing issues around OpEx spending. So that's why I gave a little bit additional color around Q2. But I would say I don't think there's a new pattern emerging in terms of any kind of seasonality. I mean a lot of our customer deployments can be quite large, there's an ebb and flow to those deployments, but I would say unrelated to calendar quarters.

Speaker 5

Okay. So it's just lumpiness. And then amplifying a bit on what Ben asked, looking more specifically at the backlog. I'm wondering if we can talk a bit about how the composition of that twelve month and total backlog is changing as your revenue mix changes.

Speaker 2

I mean, provided a little bit of color on the backlog last quarter, and I would say it really hasn't changed, which is I think it's about twothree of the backlog is kind of Network Solutions type backlog. And so that really hasn't changed. You don't see a lot of change in that from quarter to quarter.

Speaker 4

Right. I think that the backlog composition is very similar to what we've we've seen in the past, Joe. The the and the fact that there's a lesser amount of devices in there, you shouldn't read into that anything other than device business tends to be a bit more book and ship based type of revenue. But the backlog is similar to what you've seen in past quarters. Backlog for the next twelve months did go up between the start of the quarter and end of the quarter.

I think we're up just around $100,000,000 at around 1.4. So decent coverage, but obviously, still plenty of work to do.

Speaker 5

Yes. Before I ring off, it's less challenging you about the backlog number. I'm just trying to figure out whether it's obviously, because your business is changing, right? Whether those trends are becoming discernible in the composition of your backlog. That's all I'm asking and how we should think about that going forward.

Speaker 2

And again, I think as Tom mentioned this, the backlog is primarily North America based because a lot of the business the device business, in particular, in Europe is really more frame order, and we don't put that in backlog. But I don't think that's really changed. And I would say there's no new trend in the backlog. The one thing Philip mentioned was you do get a little seasonality in the actual bookings in the quarter. So there's a lot of sometimes based on customer budgets, of pull into q four type thing, but we still feel good about the book to bill for the full year.

Speaker 6

Relative to growth.

Speaker 0

And we'll take our next question from Noah Kaye with Oppenheimer. Please go ahead.

Speaker 7

Thanks very much. So just wanted to understand something a little bit. You know, you called out a couple of factors that would create a pull forward, but you also mentioned improving execution on book and ship. And that just, to me, and tell me if I'm hearing it wrong, that just sounds like your internal supply situation is improving, and so you're just able to fill orders. And presumably, you know, that would continue to be the case going forward.

Am I misunderstanding that?

Speaker 4

No. I think you're right. No. You haven't misunderstood at all. Clearly, we we were pleased with the amount of book and ship business that we could fulfill for the quarter.

That's maybe an output of the improving supply chain condition overall. So that I would say it's probably slightly better on the book and ship side of things than than what we came into the quarter with. But the real pull forward isn't book and ship. It was much more, customer project deployments and and the timing that goes along with that. That that was more the timing side.

So both of those factors definitely helped the revenue for the quarter, but, the pull forward comment was really much more around customer projects than book and ship. Mhmm.

Speaker 7

Yep. And then, you know, looking at devices specifically, know, sequentially, it was down, in revenues about 5,000,000. But your gross margins were a 110 bps higher sequentially. So, you know, I I don't know what pull forward of revenue you saw there, but the point is there's some there's some gross margin expansion going on that's pretty impressive sequentially. Can we just understand, you know, what drove that?

Because it's hard to think that that was just a timing issue.

Speaker 4

Yeah. We definitely saw supply chain health improving, which was really behind the book and ship fulfillment. But the revenue change I'm sorry, the gross margin change sequentially has probably more to do with the quality accrual that we took in the fourth quarter of last year where we had a pretty large special warranty accrual for a customer issue in in Europe that we took in q four. So that that's that's, I think, the the biggest factor that's in the the gross margin sequential improvement.

Speaker 7

Right. And then if I could sneak one more in. You know, congratulations on the, the Louisville Water Award. I I didn't quite get it. It sounded like a networks award.

Are are you, at this point, with the, you know, the Intelis water meter, are you starting to, submit RFP bids for that? Are you winning any business for that? Because clearly, you know, that's a market that you haven't played in for a while, and it's a pretty big How do we think about the timing there?

Speaker 4

Yeah. The the water meter samples with with customers is is really happening now where they're doing some long term testing. We are submitting it for for bids with with customers. But by and large, the the Louisville water deal specifically was did not include the Intellus water piece of this. This was a network and the analytics that go around the the network that is primarily the the basis for that award.

We still have some opportunities then for additional sales based on expanding the portfolio as we step forward in time.

Speaker 7

Okay. But but to be clear, I mean, you you're through, for the most part, qualification process, and and you are now bidding on RFPs with your water meters?

Speaker 4

Yes. In internal qualification. Customer qualification is is ongoing. Okay.

Speaker 7

Thank you very much.

Speaker 1

Thanks, Noah.

Speaker 0

And we'll take our next question from Jeff Osborne with Cowen and Company. Please go ahead.

Speaker 6

Hey. Good afternoon, guys.

Speaker 1

Good afternoon. Was there how do we

Speaker 6

think about the, the 25% proposed tariff impacting you guys, either on the component side or other costs?

Speaker 4

Yeah. If you know how to think about that one, probably you're a wiser man than I. To to be honest, we we we saw a lot of volatility in the the tariff system to what actually was included officially in in the policy from the government in the back half of last year. That kind of stabilized as we came into this year. I think there's still plenty of talk.

There's still plenty of negotiating positions and actual negotiation that's going on now that could pull that up or down. But thus far in the year, tariffs are running about where we expected they would be and the environment has been reasonably stable. We remain very focused on adapting as much as we can and and being ready should something change, but very, very difficult for us to predict exactly what will happen. That that that's how we're we're thinking about it overall.

Speaker 6

Got it. That's helpful, Tom. Maybe just two more here. One to follow-up on Noah's question, not to be a cynic, but when Silver Spring was a public company, maybe once out of every six quarters or so, they would blow away gross margins by having a big, software license revenue come in, you know, typically for Utility IQ ahead of a deployment. So I just wanna understand that in response to his question about the sequential change that there was no sort of onetime, you know, goodness in terms of mix, if you will, this quarter that this is more of a a normalized gross margin environment, post the warranty accrual last quarter?

Or or was you know, because I I would have thought if you had deployments accelerating that it wouldn't just kick in for one quarter, but you would get the ball rolling and then you would continue that pace of progress.

Speaker 2

So there is still lumpiness when you have a customer deployment in terms of some upfront software revenue recognition. So we mentioned that in terms of some of the pull forward of timing of customer projects and heavily software. I would say it's very different. The scale of Itron now with Silver Spring is part of it versus Silver Spring scale, it was much more obvious when they would have lumpiness just because our numbers are so much smaller. So there is still a little bit of lumpiness.

But and we indicated the if you looked at our guidance last quarter, we were assuming our margins would be relatively flat from Q4 to Q1. They were about 50 bps higher than that. So some of that is the software that was recognized. But I would say our view of gross margin for the year has not changed, which is why we still expect to see the exit rate roughly 150 bps higher than the current or get you to about 32%. So very similar gross

Speaker 0

discussion as last

Speaker 6

sense. And the last one for you, Joan, while I have you, is just the $70,000,000 I think you've talked about in the past of cost savings for 2019 and 2020. Can you just reaffirm that that's on track and remind us of what the split is by year? And then how much is in cost of goods versus OpEx between the two years? Yes.

Has anything

Speaker 2

It's still So still on track. So as we reported at the end of last quarter, we had $140,000,000 in total. We have about 50% of it complete. The remaining $70,000,000 is split roughly equally, maybe a little bit more in 2019, but roughly equally. And it's actually pretty equally split between COGS and OpEx as well.

Speaker 6

Okay.

Speaker 2

Now as you look still do. And I was gonna say, well, the one thing to be mindful of is we go through the year and we report quarter over quarter from the prior year. As you might imagine, you get the biggest benefit in q one of this year versus q one of last year, for example, on the Silver Spring synergies because we had very few synergies last year, that type of thing. But basically, it's split about fifty-fifty across the two years and fifty-fifty between gross margin and OpEx.

Speaker 6

Got it. And then maybe just very quickly, Philip, for you, you talked a lot about the kind of robust activity in North America. Any observations internationally that you can share?

Speaker 2

Well, we're looking at a

Speaker 1

couple of nice opportunities in in in Europe as well. So I I would say there there absolutely is regional activity across Latin America, Asia, and and Europe, that that are project based, that is not just extensions of ongoing book and ship business, but but project opportunities, that are of, you know, sort of the scale that we've seen in North America, and we'll be happy to comment on those as as they progress.

Speaker 6

Perfect. Great to hear. Thank you.

Speaker 1

Thanks, Jeff.

Speaker 0

We'll take our next question from Pavel Molchanov with Raymond James. On

Speaker 8

the buyback, it looks like you guys deliberately front end loaded it shortly after the announcement just a few months ago. Given the better than expected start to the year and across the board your metrics, would you consider upsizing the $50,000,000 buyback or at least perhaps completing the rest of it in 2019 rather than waiting until next year?

Speaker 2

Yes. Actually, our debt covenants would preclude us from doing that. So when we file our Q later this week, you'll see the details. But we're essentially capped at the $25,000,000 this year. So the Board authorization was for twelve months, we can complete the next 25 in the first quarter of next year.

And then later in 2020, we will have more flexibility, but we don't have a lot of we don't have any additional flexibility in 2019.

Speaker 8

Okay, understood. And then one more question on the component situation. The comments we're hearing from a lot of the semiconductor and consumer electronics companies throughout the last three, four months is that demand has softened markedly. And as a result, we obviously are seeing some softness on the component side as well. Is there any kind of bias to the upside perhaps on 150 basis point margin improvement targets?

I guess what I'm asking is from the comments that you made back in March, has anything changed perhaps higher or lower versus that original expectation?

Speaker 4

Pavel, Tom here. I would say that we are on track to deliver what we said for the year. To the extent we are going to update, it would be when we normally do a guidance update in the middle of the year itself. Think that what you see right now is us burning through some of the inventory that we procured last year and into the beginning of this year, which was at slightly higher prices probably than what we expect to see for the rest of the year. So we'll update the middle of the year to the extent we we do see a a tailwind there.

But for now, steady as she goes.

Speaker 8

Okay. Appreciate it.

Speaker 0

And as a reminder, that is star one. If you'd like to ask a question on today's call, we'll pause for just a moment. I'm seeing no further questions. I'd like to turn the call back over to Mr. Philip Measy for any additional or closing remarks.

Speaker 1

Thank you, everyone. I mean, we're very pleased. The quarter doesn't make the year, but this is a good start for us. As I said, I think good momentum in the marketplace and overall demand and overall good start. And we'll look forward to seeing all of you at our upcoming Investor Day.

Thanks very much. Bye bye.

Speaker 0

There will be an audio replay of today's conference available this afternoon. You can access the audio replay by dialing +1 (888) 203-1112 or +1 (719) 457-0820 with the passcode of five three four two four five six, or go to the company's website, www.itron.com. This concludes today's conference. We thank you for your participation. You may now disconnect your phone lines.