Itron - Q3 2024

Transcript

Operator (participant)

Good day, thank you for standing by. Welcome to Itron's third quarter 2024 earnings release conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automatic message advising your hand is raised. Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, Paul Vincent, Vice President of Investor Relations. Please go ahead.

Paul Vincent (VP of Investor Relations)

Good morning and welcome to Itron's third quarter 2024 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 third quarter results and provide a general business update and outlook. Earlier today, the company issued a press release announcing its results. This release also includes details related to the conference call and webcast replay information. Accompanying today's call is a presentation that is available through the webcast and on our corporate website under the Investor Relations tab. Following prepared remarks, the call will open for questions using the process the operator described. Before Tom begins, a reminder that our earnings release and financial presentation include non-GAAP financial information that we believe enhances the overall understanding of our current and future performance.

Reconciliations of differences between GAAP and non-GAAP financial measures are available in our earnings release and on our Investor Relations website. We will be making statements during this call that are forward-looking. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially from these expectations because of factors that were presented in today's earnings release and comments made during this conference call, as well as those presented in the risk 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, October 31st, 2024, may materially change, and we do not undertake any duty to update any of our forward-looking statements.

Now, please turn to page four of our presentation as our CEO, Tom Deitrich, begins his remarks.

Tom Deitrich (President and CEO)

Thank you, Paul. Good morning to everyone, and thank you for joining our call. Itron's third quarter results were ahead of our expectations and reflect another quarter of solid execution delivered by our team. The continued market demand, fueled by growth in energy and water needs, supports our substantial pipeline of opportunities for the future. Financial highlights for the third quarter are shown on slide five and include revenue of $615 million, Adjusted EBITDA of $89 million, non-GAAP earnings per share of $1.84, and free cash flow of $59 million. Turning to slide six, our backlog at the end of third quarter was $4 billion, and bookings during the quarter were $487 million. Noteworthy bookings in the third quarter include Arkansas Valley Electric Cooperative selected Itron's GenX technology platform through our distribution partner, NRTC.

Arkansas Valley was one of the first Department of Energy Smart Grid Program awardees to complete negotiations with the DOE, receiving a grant for their grid intelligence and distribution automation project. Additionally, CenterPoint Energy is working with Itron to offer the additional safety features of Intelis Gas endpoints to commercial and industrial users. The enhanced safety capabilities include an integrated shutoff valve and pressure sensing with edge intelligence. This expansion further demonstrates CenterPoint's commitment to the safety of their users. Finally, we have expanded our support of Duke Energy to include our latest grid edge and distributed intelligence capabilities for Durham's control. In our prior quarterly call, we commented that regulatory and funding processes can extend the time from project award to booking recognition due to our disciplined approach to register an award as backlog.

This can increase the quarter-to-quarter variability in bookings for any given period, and calendar 2024 is no exception. We are pleased with the pace of the various regulatory and funding processes within the first month of this quarter, fourth quarter 2024. As a result, we maintain conviction for a book-to-bill ratio of one to one or greater for the full year. Now, Joan will provide details of our third quarter results and our fourth quarter outlook.

Joan Hooper (SVP and CFO)

Thank you, Tom. Please turn to slide seven for a summary of consolidated GAAP results. Third quarter revenue of $615 million increased 10% year-over-year and was stronger than expected. The higher revenue is driven by solid operational performance, as well as shipments of customer orders initially anticipated in the fourth quarter and early 2025. Gross margin of 34.1% was 70 basis points higher than last year due to operational efficiencies. GAAP net income of $78 million, or $1.70 per diluted share, compares to $40 million, or $0.87 per diluted share in the prior year. The improvement was driven by higher levels of operating and interest income and less tax expense. Both our GAAP and non-GAAP net income and earnings per share benefited from a favorable resolution of a foreign tax audit. This resulted in an increase in net income of approximately $14 million, or $0.30 per share.

Regarding non-GAAP metrics on slide eight, non-GAAP operating income of $79 million increased 34% year-over-year. Adjusted EBITDA of $89 million was a record and increased 29% year-over-year. Non-GAAP net income for the quarter was $84 million, or $1.84 per diluted share versus $0.98 a year ago. Free cash flow was $59 million in Q3 versus $28 million a year ago. The improvement reflects strong year-over-year earnings growth. Year-over-year revenue growth by business segment is on slide nine. Device Solutions revenue increased 10% on a constant currency basis, primarily driven by growth in smart water sales and electric demand. Network Solutions revenue grew 8% year-over-year, driven by increased volume associated with new projects and ongoing deployments. Outcomes revenue increased 16% on a constant currency basis, primarily due to higher recurring revenue, services, and software.

Moving to the non-GAAP year-over-year EPS bridge on slide 10, our Q3 non-GAAP earnings per share of $1.84 per diluted share was an all-time quarterly record and increased $0.86 year-over-year. Pre-tax operating performance contributed $0.61 per share year-over-year improvement, driven by the flow-through of higher revenue and gross profit, partially offset by higher operating expenses. Third quarter tax expense was reduced by $14 million due to a favorable resolution of a foreign tax audit, resulting in higher net income and a $0.30 earnings per share increase. Turning to slides 11 through 13, I'll review Q3 segment results compared with the prior year. Device Solutions revenue was $123 million, gross margin was 27.2%, and operating margin was a record 21.6%. Gross margin was up 290 basis points year-over-year, and operating margin was up 560 basis points, reflecting volume and operational efficiencies and effective cost management.

Network Solutions revenue was $417 million, with gross margin of 35.9% and operating margin of 27.7%. This quarter was another record level of revenue for this segment. Gross margin increased 80 basis points year-over-year, and operating margin was up 110 basis points, driven by volume and operational efficiencies. Outcomes revenue was $76 million, with gross margin of 35% and operating margin of 14.7%. Gross margin decreased 360 basis points year-over-year, and operating margin was down 110 basis points due to a lower margin revenue mix and increased services cost. Turning to slide 14, I'll review liquidity and debt at the end of the third quarter. Total debt was $1.265 billion, and net debt was $282 million. As of September 30th, net leverage was 0.9 times, and cash and equivalents were $983 million. Now, please turn to slide 15 for our fourth quarter outlook.

We anticipate fourth quarter revenue to be between $600 million-$610 million. The midpoint of this range represents growth of $28 million, or 5% year-over-year. For non-GAAP earnings per share, we expect a range of $1-$1.10 per diluted share, which assumes an effective tax rate of approximately 25%. At the midpoint, this implies a decrease of $0.18 versus Q4 of last year. But Q4 of 2023 had an effective tax rate of just 8%. When normalizing Q4 of last year to a 25% effective tax rate, this Q4 2024 outlook is an increase of $0.06, or 6% year-over-year. Now, please turn to slide 16 for an update to our annual 2024 outlook incorporating this Q4 update. We now anticipate 2024 full year revenue to be within a range of $2.428 billion-$2.438 billion.

At the midpoint, this represents an increase of 12% versus 2023 and 1% from our prior 2024 annual guidance. Contingent customer demand, strong operational execution, and the timing of customer shipments is driving our higher 2024 revenue expectations. Earnings will also be positively impacted by the fall through of higher revenue. Our non-GAAP earnings per share full year outlook range is $5.28-$5.38 per diluted share. At the midpoint, the updated non-GAAP EPS estimate is up 59% versus 2023 and 17% versus prior guidance. Although we are not ready to provide formal 2025 financial guidance at this time, the combination of 2024 performance being consistently ahead of expectations, a normalizing operating environment, and very back-end loaded 2024 bookings make it reasonable to assume a lower revenue growth profile for 2025. We remain committed to the 2027 financial targets provided at this year's March Investor Day.

Now, I'll turn the call back to Tom.

Tom Deitrich (President and CEO)

Thank you, Joan. Operational momentum and efficiency gains continued to accrue during the third quarter, and while we expect growth rates to normalize in the coming quarters, the larger trends are clear. Customer demand is growing. Our broad portfolio of innovative products and services gives us confidence that our strategic direction is well placed and the 2027 financial targets remain appropriate. Before opening the line for Q&A, there are a few non-financial highlights of note. We recently held Itron's annual Inspire Customer Event, where the power of data and grid edge intelligence was on full display. It is clear from the depth of interaction with utility executives, ecosystem partners, and other influential industry leaders that we have the necessary motivation and thought leadership across our industry to resolve the most complex and pressing energy and water resource challenges facing us today.

Significantly, the nature of the discussions has shifted from what to do to how to get it done. This is encouraging and will serve to accelerate the pace of the industry. During the conference, we announced our Grid Edge Essentials offering. Grid Edge Essentials solution dramatically simplifies the process for our utility customers to adopt new advanced technologies, accelerating the time to value. Also, in conjunction with Inspire, we released our Resourcefulness Report, which explored artificial intelligence and machine learning trends within the utility industry. The key findings of the research include that 82% of utility executives report active AI projects. AI and ML are already helping utilities optimize asset utilization, advancing sustainability progress, and enhancing consumer engagement. And perhaps unsurprisingly, reflective of broader considerations related to AI adoption, 43% of utilities cited the lack of expertise as a current barrier to greater AI adoption.

AI and ML are focus areas for the utility industry, which places even greater value on thoughtful approaches to data capture, analytics, and agile infrastructure. The report is available for download at Itron.com, and I encourage everyone to review the findings. Thank you for joining our call today. Operator, please open the line for some questions.

Operator (participant)

Thank you. Ladies and gentlemen, to ask a question, you'll need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, simply press star one one again. Please stand by while we compile the Q&A roster. Our first question coming from the line of Ben Kallo with Baird is now open.

Ben Kallo (Senior Research Analyst)

Hey, guys. Congratulations on the quarter. Joan, I just want to clarify when you talked about growth next year, there will be growth next year. It's just not the same level of growth.

Joan Hooper (SVP and CFO)

Yeah. Well, we're obviously not in a position to give 2025 guidance yet, but I wanted to make sure people remembered a couple of things. One is we had $125 million of catch-up revenue in 2024, so be careful that you grow on a normalized 2024. And the fact that the bookings are so back-end loaded is another factor. So really no different than what I've said on previous calls. If you look at the compounding growth from the current 2024 estimates to get to the 2027 targets, it's only 2.5%-5% growth because 2024 was so much higher than we expected. So just be careful with the growth rates. We never expected a linear from 2023 to 2027.

Ben Kallo (Senior Research Analyst)

Thank you for that. Then the next question is just kind of behind the bookings that you expected in this quarter. Could you just talk about the state of the market and deals out there to continue kind of the strength that you guys have had going on for the last couple of quarters or years? Thank you.

Tom Deitrich (President and CEO)

Thanks, Ben. Tom here. The market remains extremely constructive. The needs of utilities to deal with things like climate disruption or increasing demand or doing a better job managing water, gas safety, all of those trends are alive and well. And I think we're well positioned to be able to take advantage of that. We are definitely seeing progress on the regulatory and funding front. Last quarter, I referenced something like $1 billion of pending awards that were in process. We definitely have seen progress. I would say well over 50%, probably closer to 75% of that regulatory process is now behind us. And that's really what is underlying the one-to-one for the full year on a book-to-bill basis that I referenced in the prepared remarks. So feeling good about the overall market.

On a global level, the commentary I just gave was largely around the Americas, but Europe has, at least through Q3, continued to perform a little bit ahead of the expectations, and you saw that in our third quarter results.

Ben Kallo (Senior Research Analyst)

Thank you, guys.

Operator (participant)

Thank you. Our next question coming from the line of Jeff Osborne with TD Cowen. Your line is now open.

Jeff Osborne (Managing Director and Senior Research Analyst)

Thank you. Maybe just to follow up on that last point, Tom, if I heard you right, you mentioned bookings were strong in October, and then you said 50%-75% of the billion came in after the quarter. Is that the way you're trying to couch that for fourth quarter?

Tom Deitrich (President and CEO)

Not quite. Not quite. You're close. But of the $1 billion that I referenced last time, we've seen progress on the regulatory front. That doesn't mean it's quite to the point that we registered it as a booking yet, but certainly we expect to achieve the one-to-one for the year on a book-to-bill ratio. Feeling good about the progress. I wanted to give that color just to give people a little bit of context as to what we see behind the curtain and why we remain pretty excited about the market opportunity ahead.

Jeff Osborne (Managing Director and Senior Research Analyst)

Got it. And just to be clear, is the regulatory front you're referring to both federal and state if it requires both, just given that there were some federal awards from the GRIP program?

Tom Deitrich (President and CEO)

Yes. Yeah. It's the combination of the two. And again, those bookings are primarily the Americas, but there's some international things that have government funding activities associated with it, and it's lumped into the commentary we gave.

Jeff Osborne (Managing Director and Senior Research Analyst)

Perfect. And then just two other quick ones. How in retrospect would you frame the strength in water all year, and do you expect that to continue next year for the Devices segment? And then what's the M&A pipeline in light of the recent debt offering that you've done, and how has that evolved in the past few months?

Tom Deitrich (President and CEO)

Let me start with water. Water has certainly been performing above our expectations thus far in the year. The turns have been really good. We set expectations for maybe $100 million-$100 million+ on the Devices run rate, and you can look at the last three quarters. We're kind of running a bit above that. I don't know that I would expect it to continue at that level as we get into the fourth quarter and for next year. What we see is lead times are starting to normalize again after some extended period of constraints in supply chains on a global basis. As lead times start to reduce across the industry, that means that the amount of inventory that our customers are holding tends to pull back a little bit.

So I do think the turns rate probably slows down over the coming quarters. But that doesn't mean the market is any way going backwards. It's more just the accordion effect that you get in the supply chain itself. On the M&A front, I would say that very similar commentary to what we have mentioned in the past. We're pleased with the position of our balance sheet. That puts us in a good place to move when those opportunities present themselves. We're very active in the market looking for those opportunities. What we are really seeking is something that will accelerate our outcomes growth rate. It's growing a bit faster than some of the other segments in the company, but we're really looking for ways to accelerate that even more. And that's where a lot of that acquisition attention is placed on our side.

We want something that will add to our Grid Edge Intelligence platform and something that really would be scalable across many, many customers. That's what we are looking for, and as those opportunities present themselves, we'll obviously be sharing it with the market.

Jeff Osborne (Managing Director and Senior Research Analyst)

Perfect. That's all I have. Thank you.

Tom Deitrich (President and CEO)

Thanks, Jeff.

Operator (participant)

Thank you. Our next question coming from the line of Noah Kaye with Oppenheimer. Your line is now open.

Noah Kaye (Senior Research Analyst)

All right. Thanks very much for taking the questions. Tom, you mentioned the launch of Grid Edge Essentials, really a bundled solution for managing a range of outcomes for these utilities. We understand that that is not actually kind of commercially available broadly until December. But can you just talk at an early stage about the adoption of whether it's this solution or just more usage of the DI network that is now kind of growing pretty rapidly? And what does that mean for how the mix within outcomes in terms of revenue composition should evolve over, let's say, the next 12-18 months? Are we going to see more recurring revenue, higher margin? And just what is your visibility to that inflection?

Tom Deitrich (President and CEO)

So three different concepts that I think are important to pull out of the question that you ask. First and foremost, Grid Edge Intelligence as an offering. That is a very full-featured platform that allows you as a utility to have a lot of agility in your infrastructure. When you buy something, you put it in the ground, you can use it as you need and perform a lot of different grid efficiency or consumer engagement kinds of applications through things like distributed intelligence. At this point, we've got more than 12 million grid edge or DI-capable endpoints that are in the field, millions more in backlog, millions of applications that are out there running for things like safety or things like distributed energy resource management out of the edge. That said, a lot of that fielded equipment and much of what's in backlog is for larger utilities.

Think large IOUs where they have a pretty robust capability inside to be able to take advantage of that. As we broaden that grid edge intelligence capability and take it towards more mid-sized or muni co-op kinds of customers, the ability to say DI in a box is what Grid Edge Essentials is really all about. It packages up the endpoints, the network, the head-end software, the analytics, the DI capability, and really makes it easy for a utility that doesn't have perhaps a massive IT department to be able to integrate into that overall offering, so it broadens out the opportunity for us as we think about serving more customers with this important capability, so that's what Grid Edge Essentials is really all about. Relative to market adoption, again, we're super excited about what we see our customers doing. The pace of innovation is there.

The idea of the spark in someone's eye about what they might be able to do to being able to prototype and put some applications out in the field is something measured in months rather than in quarters or years, which is the typical innovation cycle if you look in the years past for utilities. Pace of innovation grows, and this becomes something that is a very robust part of our business in the years ahead. I hope that sort of unpacks and pulls together the three threads that you mentioned in your question.

Noah Kaye (Senior Research Analyst)

It does, Tom, but the follow-up was really around the implications for mix, right, and the growth of recurring revenues within the Outcomes segment. How should we think about that trend over the next few months?

Tom Deitrich (President and CEO)

Indeed. Sorry, I missed that one. Outcomes certainly last quarter, and what you saw even in second quarter was revenue that was a bit more tilted towards services and one-time services. We definitely think that Outcomes will bounce back, and those targets we laid out for 2027 to put the gross margin into the 40s kind of range is what we would expect to see. I still think it'll be a little bit lumpy quarter to quarter depending on the mix until the business gets a little bit more scale to it and a little bit more heft. But certainly, we see it swinging back more towards some of that SaaS and licensee types of revenue in the quarters ahead.

Noah Kaye (Senior Research Analyst)

Great. Just one quick follow-up for Joan. Tax is, again, a good guy this quarter. Not sure if that relates to more release of valuation allowances, but can you help us frame out what should sort of be the normalized tax rate for the business going forward?

Joan Hooper (SVP and CFO)

Yeah. I would say probably about 25% would be a normalized rate. So yeah, this quarter, the $14 million or the $0.30 per share I alluded to was the favorable, basically a settlement of the foreign tax audit that pertained to many, many years ago, 2014 to 2017. So yeah, we had some reserves on our books, and once we settled the audit, we were able to release those. So that was really an anomaly. But if you ignore discretes, which are hard to predict, I would say about 25%.

Noah Kaye (Senior Research Analyst)

Great. Thanks very much.

Operator (participant)

Thank you. And our next question coming from the line of Joseph Osha with Guggenheim Partners. Your line is now open.

Joseph Osha (Senior Managing Director of Equity Research)

Thank you. Good morning. Following on Noah's question a little bit, I'm wondering if you can try and give us a sense as to how this quarter's bookings and this sort of bolus of an additional $1 billion coming in at the end of the year, what the mix for that round of bookings looks like relative to the revenue that you're realizing now?

Tom Deitrich (President and CEO)

The bookings themselves will be very heavily skewed towards networks and outcomes. To be honest, that's similar to our backlog position as it is today. So that $4 billion of existing backlog is 90%+ networks and outcomes, and I would suspect that fourth quarter bookings looks a lot like that in terms of the mix. The outcomes portion of that portfolio is growing a little bit faster than networks in terms of third quarter revenue as an example, but that's also true in the bookings themselves. So bookings rate for outcomes is quite a bit higher today than it was a year or two ago within the mix itself. What's underneath that? It's all the Grid Edge Intelligence platform and the associated software and services that go along with that. So it all flows from the types of offering discussion that I outlined earlier.

Joseph Osha (Senior Managing Director of Equity Research)

Now, with that in mind, is it possible as we actually get to 2026 and 2027 that there's some kind of shorter-term book and ship business in Devices? Obviously, you can tell what I'm trying to figure out here in terms of what the revenue mix looks like. Or should we think of that backlog as being representative more of what the actual revenue mix might look like in 2026?

Tom Deitrich (President and CEO)

Yeah. I think that our Devices business, probably that $100 million to a bit above that on a run rate basis is the right zip code to be in, whereas the networks and the outcome side probably continues to grow more like the rates that we've talked about in our prepared remarks. So I think that that would be a good way to think about the business itself. Devices tends to be a bit more turns-based than the other portions of our business. So a lot of that doesn't truly flow through the long-term backlog trends that we're talking about.

Joan Hooper (SVP and CFO)

Yeah. And I would say if you look at the segment-level targets that we provided for 2027 and Investor Day, those are still appropriate.

Joseph Osha (Senior Managing Director of Equity Research)

Okay. And then just quickly as a follow-up, given you've spoken, Joan, very clearly about the fact that stuff hitting bookings now is not going to show up in 2025 revenue. What would you say is the window for bookings showing up in 2026 revenue? Can we think about perhaps anything that shows up by the first half of 2025, maybe making it into 2026 revenue? I'm just trying to understand a little bit how to roll this booking strength forward into 2026 and 2027.

Joan Hooper (SVP and CFO)

Yeah. I mean, obviously, each deal is a little bit different, but I think what we've been assuming is sort of a 9-12-month lag from the time you close a booking to when revenue starts to flow.

Joseph Osha (Senior Managing Director of Equity Research)

Okay. Thank you.

Operator (participant)

Thank you. Our next question coming from the line of Pavel Molchanov with Raymond James. Your line is now open.

Pavel Molchanov (Managing Director)

Yeah. Thanks for taking the question. If we look at outcomes, year-over-year growth past two quarters is double digits, which is meaningfully higher than probably the last kind of two straight years. Are these one-offs, or is there some kind of structural change in that segment that explains the double-digit growth all of a sudden?

Tom Deitrich (President and CEO)

I think there's a number of factors inside of there. Remember that a lot of the Outcomes revenue tends to be tilted towards recurring revenue. So it takes a little bit of time to show up, and every time we do a booking, it adds a small slice on top of that. So as we've mentioned on previous calls, when Networks started to catch up on some of that constrained revenue due to component shortages in years gone by, the Outcomes revenue was going to follow. It's usually a bit of time for customers to get the network up and running, and then some of that Outcomes revenue starts to flow in on top of it. And it's just following that normal trend that we've seen. So it's maybe that 12-month lag between Networks growing, which yielded the Outcomes growth.

That's what you see showing through in terms of Outcomes. But it is largely tilted towards recurring revenue, and we are excited about the quarters ahead in terms of where we can continue to grow that business, which is why in our 27 targets, we've outlined it as one of the faster-growing segments.

Pavel Molchanov (Managing Director)

Right. Follow-up on Outcomes as well. In the context of the kind of AI euphoria, a lot of headlines recently about virtual power plants. Can you talk about the role that Itron is playing in virtual power plant development, which I guess would be within outcomes?

Tom Deitrich (President and CEO)

Correct. There are a lot of assets that are out at the edge of the grid, whether it is a battery that's in your garage or whether it is a rooftop solar or adding load control capabilities to existing assets, maybe something as simple as a pool pump. So Outcomes really has a lot of the software capability housed within it to be able to control those assets for the good of the grid and the optimization of what is going on. So a DI app to be able to pull charge out of the battery to be able to supply to the house and pull some of the load of that house off the grid is a perfect example of a VPP virtual power plant kind of application that's going on in the Outcomes segment.

Several quarters ago, we announced something called Grid Edge Optimizer, which is really all about being able to utilize those edge assets to be able to balance supply and demand out at the edge. Those are very ripe and growing opportunities for us as more and more local hotspots and constraints are showing up in our customers' grids, whether it is because of EV growth or whether it is just more data centers in the area. You got to figure out a way to balance supply and demand when you don't quite have everything that you need and you can't afford to upsize everything. You got to make the assets you have in the field a bit more agile, which is exactly where Outcomes comes to the scene and can help our customers.

Pavel Molchanov (Managing Director)

Got it. Thanks very much.

Tom Deitrich (President and CEO)

Thank you.

Operator (participant)

Thank you. And our next question coming from the line of Austin Moeller with Canaccord Genuity. Your line is now open.

Austin Moeller (Director of Equity Research)

Hi. Good morning. Congrats on the quarter. Just my first question here. Given the water demand needed for data centers, do you expect the increase in demand for electricity meters on the grid to mirror water meters due to the data center demand for coolant?

Tom Deitrich (President and CEO)

I think that electricity probably outpaces water growth on a global level. Water will continue to grow as an entire segment for us in the years ahead, but I think electricity outpaces that as there is a lot more that needs to be done on the electrical infrastructure side, so I think our growth aspirations are in both segments, but probably a bit more tilted towards electricity over water.

Austin Moeller (Director of Equity Research)

Okay. And just to follow up, how much of the non-inflation index inventory still remains, and did we get a significant reduction in that this quarter just in the reflection on the gross margin?

Tom Deitrich (President and CEO)

Yeah. Our backlog today is a bit over 75%. That is either repriced or indexed for the new environment we are operating in. That less than 25%-ish that is still left to flow through as of the end of Q3. Most of that remaining, call it 25%, will flow through within the next 12 months. So we're almost through that period. As new backlog starts to come in, and certainly, we noted that we expect Q4 to be a bit more of a heavy bookings quarter, that'll add to the right side of that equation for the quarters ahead. But call it 75/25 today.

Austin Moeller (Director of Equity Research)

Excellent. Thank you for the details.

Operator (participant)

Thank you. And as a reminder to ask a question, please press star one one. Our next question comes from the line of Scott Graham with Seaport Research Partners. Your line is now open.

Scott Graham (Senior Equity Research Analyst)

Hey. Good morning. Thanks for taking my questions. Joan, I kind of wanted to go back to your math on the assumed or implied, I should say, CAGR for revenue between 2024 and 2027, 2.5%-5%. I come up with that same number, of course. What I'm wondering is I thought I heard you say 2025 down. Did you mean growth down or revenue down?

Joan Hooper (SVP and CFO)

I didn't say either, I don't believe. So what I was relating to is first comment would be 2027 targets are still appropriate, and that was a revenue range of $2.6 billion-$2.8 billion, and we had the EBITDA range of 15%-17%. So at the time we did Investor Day, we anchored the charts off 2023 actuals. So to get from the 2023 actuals to the 2027 targets, it was a revenue CAGR of 5%-7%. However, 2024 is a lot stronger than 2023. So if you take the updated annual guidance at the midpoint, you get the, call it 2.5%-5% is what's required going forward to get to the 2027 targets. And again, all we've said is we don't expect that to be a straight line. So at this point, it's premature to talk about 2025.

I would expect some growth, but again, I would caution people, you got to do the growth off a normalized 2024. You got to take $125 million out of our full year estimate, which was catch-up one-time in nature that won't recur.

Scott Graham (Senior Equity Research Analyst)

Got it. Yeah. Thank you for that clarification. Very much appreciated. The other question I wanted to ask was kind of more for both you and Tom. So when you provided your targets earlier this year, I believe this multi-billion-dollar pipeline was only kind of thought of as, let's say, a couple, maybe several hundred million, and that has grown greatly to this billion-dollar number. So it would suggest that your guidance did not contemplate that. Could you comment on that?

Joan Hooper (SVP and CFO)

Yeah. I don't think that's the case. So what we're talking about with the billion is a delay in getting it through the funnel to call it a booking. It's not saying it's a billion higher than what we would have expected. So I don't think we see any change in terms of the market demand that would get us to the 2027 targets that we laid out. The billion is a timing issue in terms of regulatory approvals.

Tom Deitrich (President and CEO)

Yeah. We started the year saying book-to-bill of one-to-one or greater. That's still our belief today. But we note that, okay, the first three quarters of this year were whatever, 0.8, 0.9, something like that, well below one-to-one, which means that there is a bit of a catch-up on the booking side in Q4, which is what Joan referenced. So it's more timing within the year on the bookings themselves rather than some fundamental shift or change in the marketplace.

Scott Graham (Senior Equity Research Analyst)

Understood. Thank you for that clarification. If I could just sneak this one more in. Joan, the non-GAAP incremental operating margin has been fairly steady in the last six quarters in this sort of 32, 35, last quarter 41 range, just in this sort of 5%-10% range.

Are you comfortable with that on a go-forward basis, call it in the low 30s type thing?

Joan Hooper (SVP and CFO)

Yeah. Again, not in a position to talk 2025 guidance. What I would anchor you to is the 2027 targets that we gave, which again, weren't operating income, but you can figure that out. EBITDA percentage of revenue of 15%-17%. So from quarter to quarter, you're going to get some variability. As an example, OpEx for us will tend to go up in Q4. We just did our customer event. We had a lot of marketing spend, a lot of travel, outside services. So it'll vary quarter to quarter, but I think the targets we laid out for 2027 are still appropriate.

Scott Graham (Senior Equity Research Analyst)

Understood. Thank you.

Operator (participant)

Thank you. And again, as a reminder, if you'd like to ask a question, please press star one one. And our next question coming from the line of Chip Moore with Roth Capital Partners. Your line is now open.

Chip Moore (Managing Director and Senior Research Analyst)

Good morning. Thanks for taking the question. I guess I just wanted to do a clarification. I think you referenced, Joan, some pull forward with some of that coming from 2025, which would be an incremental headwind. I think we understand the growth dynamics there, but maybe just expand on that.

Joan Hooper (SVP and CFO)

Yeah. I mean, if you look at the revenue range we provided for Q3, at the midpoint, it was about $595 million. So we ended up $20 million higher than that. We did not try to lowball our guidance when we gave you that number. So obviously, we work with customers in terms of when they want the shipments, and some shipments that we would have expected to be Q4 or early 2025 actually occurred in Q3. So that's all we were trying to point out.

Tom Deitrich (President and CEO)

Yeah. The dynamic there is as projects start to move, generally, they can accelerate a little bit once the installation crews really hit their stride and things go a little faster. And that's kind of what you saw in Q3. It was nothing particularly overt. It was just the market moving in the right direction for us.

Chip Moore (Managing Director and Senior Research Analyst)

Perfect. Yes. And not particularly material. And maybe just my follow-up on the outlook for Q4, I think that implies maybe that margins stepped down a bit. Anything on product mix? Or I think you just referenced some of the year-end OpEx, maybe, Joan, but anything there to keep in mind? And then margin trajectory, I guess, next year with some of the growth dynamics with what you're seeing in backlog. Thanks.

Joan Hooper (SVP and CFO)

Yeah. So if I start on the top line, I would say, again, the midpoint of our range is slightly down from Q3, call it $10 million or so. Most of that is really strong Q3 performance for devices. So as Tom mentioned, we typically think about devices as maybe a little over $100 million a quarter. They were $123 million in Q3, so really quite high. On an EPS standpoint, you've got obviously to factor in the tax benefit that was booked in Q3, so that's not going to recur in Q4. That's got to be $0.30 or so just right there and then higher OpEx. From a gross margin perspective, maybe flat to slightly down. We don't typically guide to gross margin, but nothing in particular there. It is the last quarter that we're in the process of closing our two factories.

So you typically get a little bit of lack of productivity as you're ramping from one factory to another, and we factor that in as well.

Chip Moore (Managing Director and Senior Research Analyst)

Perfect. Very helpful. Appreciate it.

Operator (participant)

Thank you. And I'm showing no further questions in the Q&A queue at this time. I will now turn the call back over to Mr. Tom Deitrich for any closing remarks.

Tom Deitrich (President and CEO)

Thank you, Olivia. We are pleased with our progress and certainly the performance of the team. You're starting to see the proof points and the strategy play out, and we are excited about the future and where the market is heading. So look forward to updating everyone next quarter. Thank you for joining today.

Operator (participant)

Ladies and gentlemen, that concludes our conference for today. Thank you for your participation. You may now disconnect.