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Earnings call: Itron reports strong Q2 growth with focus on grid modernization

EditorAhmed Abdulazez Abdulkadir
Published 2024-08-04, 10:28 a/m
© Reuters.
ITRI
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Itron, Inc. (NASDAQ:ITRI), a technology company that provides solutions for energy and water resource management, has reported a robust second quarter with a 13% increase in revenue compared to the previous year. The company's CEO, Tom Deitrich, highlighted their strong execution and operational discipline, which resulted in record quarterly revenue in the Network Solutions and Outcomes segments. The company's backlog remains substantial at $4.1 billion, with bookings for the quarter at $447 million. Itron also emphasized its commitment to sustainability, grid modernization, and resilience in the face of extreme weather events.

Key Takeaways

  • Itron reported a 13% revenue growth in the second quarter, with record revenues in Network Solutions and Outcomes segments.
  • The company's backlog stands at $4.1 billion, with $447 million in bookings for the quarter.
  • CEO Tom Deitrich focused on the importance of grid hardening and modernization, especially due to extreme weather conditions.
  • The Grid Edge Intelligence platform is highlighted as a key technology for providing visibility and control at the edge of the grid.
  • Itron's Corporate Sustainability Report showcases a 50% reduction in greenhouse gas emissions and a commitment to a safe working environment.
  • Partnerships with GE, Vernova, and Schneider are strong, aiding in technology adaptation.
  • A $1 billion award pipeline is noted, with the Grid Edge Intelligence platform as the largest portion.
  • Incremental margin improvement in the Devices segment is due to pruning unprofitable product lines and a focus on margins over top-line growth.

Company Outlook

  • Bookings are expected to be skewed towards the second half of the year, with an annual book-to-bill ratio of one to one or better.
  • The company advises caution when comparing growth from 2024 to 2025 due to $125 million of catch-up revenue in 2024 that is expected to normalize.
  • Positive price-cost dynamics are anticipated in 2024.

Bearish Highlights

  • Regulatory hurdles and timing of project installations may cause pending bookings to be weighted towards the latter half of the year.
  • The Outcomes segment experienced a slight decline in margins due to a mix of different solutions.

Bullish Highlights

  • Strong pipeline of new opportunities aligned with infrastructure, environmental, and consumer macro trends.
  • The company's sustainability efforts are yielding significant reductions in greenhouse gas emissions.
  • Partnerships with major companies are aiding in technological advancements for utilities.

Misses

  • There were no specific misses reported in the earnings call.

Q&A Highlights

  • Deitrich addressed the growth and margin of the Outcomes segment and the company's ability to manage load growth and support utilities during natural disasters.
  • The CEO discussed the potential of the Grid Edge Intelligence Platform and customer interest in outage management and distributed intelligence services.
  • Questions about the lag time from booking to installation start were answered, with a typical range of six to twelve months.

Itron's second quarter has shown significant growth and a dedication to addressing the critical needs of grid modernization and resilience. With a strong financial position and strategic partnerships, the company is well-equipped to navigate the complexities of the energy sector and contribute to a sustainable future.

InvestingPro Insights

Itron, Inc. (ITRI) has demonstrated a strong financial performance in the recent quarter, and the data from InvestingPro further enriches the understanding of the company's current market position. With a market capitalization of $4.55 billion and a P/E ratio that has adjusted to 23.68 over the last twelve months as of Q2 2024, Itron is valuated at a level that reflects analysts' confidence in its profitability. The company's robust revenue growth of 22.16% over the same period underscores its ability to expand its operations effectively.

InvestingPro Tips indicate that analysts are optimistic about Itron's future, with six analysts having revised their earnings predictions upwards for the upcoming period. This consensus suggests that the company's strategic initiatives and market performance are likely to continue positively. Additionally, the fact that Itron's cash flows can sufficiently cover interest payments is a testament to its financial health, providing reassurance to investors about the company's ability to manage its debt obligations.

For readers interested in a deeper dive into Itron's financial metrics and future prospects, there are additional InvestingPro Tips available at https://www.investing.com/pro/ITRI, which can offer more nuanced insights into the company's performance and potential investment opportunities.

Full transcript - Itron Inc. (ITRI) Q2 2024:

Operator: Good day. Thank you for standing by. Welcome to Itron's Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions]. Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, Paul Vincent, Vice President of Investor Relations. Please go ahead.

Paul Vincent: Good morning and welcome to Itron's second 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 second-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, August 1st, 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 Dietrich begins his remarks.

Tom Deitrich: Thank you, Paul. Good morning to everyone and thank you for joining our call. Itron's second quarter results reflect strong execution and operational discipline by the team. Revenue growth of 13% over the second quarter of last year marks the seventh consecutive quarter of growth with record quarterly revenue in our Network Solutions and Outcomes segments, operating leverage supported by continued improvements in profitability and free cash flow against a backdrop of stable market demand. Financial highlights for the second quarter are shown on Slide 5 and include revenue of $609 million, adjusted EBITDA of $77 million, non-GAAP earnings per share of $1.21, free cash flow of $45 million. Turning to Slide 6, our backlog at the end of the second quarter was $4.1 billion. Bookings for the second quarter were $447 million. Although the second quarter book-to-bill is below our full-year target of one-to-one, we currently have more than $1 billion of customer awards that are working through the appropriate processes to support our bookings discipline. These processes are progressing at a measured pace resulting in larger pending bookings than typical. The timing of these bookings will likely be skewed to later in the second half of the year with our expectation for an annual book-to-bill ratio of one to one or better assuming progress on the regulatory and governmental funding processes. The pipeline of new opportunities continues to be strong, driven by our infrastructure, environmental, and consumer macro trends. Our global customers face challenges and increasing complexity in power generation and distribution, which is driving an all of the above approach when it comes to technology deployment use cases. Itron's great edge intelligence platform provides a forward-thinking, agile solution that addresses these critical needs. Examples of customer adoption of high-value technology are highlighted by notable additions to our backlog during the second quarter. Rochester Public Utilities in Minnesota is committed to upgrade from an existing drive-by system to our latest grid edge intelligence solution that will address numerous key challenges in their territory, including grid management for the increased adoption of renewable energy resources and electric vehicles, enhanced consumer service through real-time data access and personalized energy management tools, optimize grid operations and grid planning through edge compute for decision-making and asset management, enhance safety with automated remote disconnects and anomaly alerts, deployment of a scalable communication network to support future needs. In Ohio, we will be working with FirstEnergy (NYSE:FE) to support their expansion of advanced metering infrastructure and continued moves towards FirstEnergy's grid edge strategy for the deployment of more advanced use cases. Also, during the quarter, Spire (NYSE:SR) Energy committed to adding 100,000 intelligence endpoints to their active deployment of Itron ultrasonic technology. This adds to the more than 700,000 installed endpoints and continues the ongoing conversion to Itron technology. Now Joan will provide details of our second quarter and an update on our full-year guidance.

Joan Hooper: Thank you, Tom. Please turn to Slide 7 for a summary of consolidated GAAP results. Second quarter revenue of $609 million increased 13% year-over-year and reflects solid operational execution and the conversion of the remaining $40 million of previously supply-constrained revenue. Gross margin of 34.6% was 250 basis points higher than last year due to favorable product mix and operational efficiencies. GAAP net income of $51 million, or $1.10 per diluted share, compares to $24 million, or $0.53 per diluted share in the prior year. The improvement was driven by higher levels of operating and interest income, which were partially offset by higher tax expense. Regarding non-GAAP metrics on Slide 8, non-GAAP operating income of $69 million increased 67% year-over-year. Adjusted EBITDA of $77 million increased 56%. Non-GAAP net income for the quarter was $56 million, or $1.21 per diluted share versus $0.56 a year ago. Free cash flow was $45 million in Q2 versus $36 million a year ago. The improvement reflects year-over-year earnings growth. Year-over-year revenue growth by business segment is on Slide 9. Device Solutions revenue increased 6% on a constant currency basis, driven primarily by growth in EMEA smart water sales. Networked Solutions revenue grew 14% year over year, driven by the catch-up of previously constrained revenue and increased project deployments. Outcomes revenue increased 16% year over year, primarily due to higher recurring and services revenue. Moving to the non-GAAP year-over-year EPS bridge on Slide 10. Our Q2 non-GAAP EPS increased $0.56 year-over-year to $1.21 per diluted share. Pre-tax operating performance contributed $0.70 per share year-over-year improvement driven by the fall through of higher revenue and gross profit partially offset by higher operating expenses. Higher tax expense had a negative year-over-year impact of $0.11 per share and foreign currency and share count had a negative impact of $0.03 per share. Turning to Slides 11 through 13, I will review Q2 segment results compared with the prior year. Device Solutions revenue was $119 million, gross margin was 26.3% and operating margin was 20%. Gross margin was up 450 basis points year-over-year and operating margin was up 760 basis points, reflecting a higher value product mix and operating leverage. Networked Solutions revenue was $413 million with gross margin of 36.9% and operating margin of 28.5%. This quarter was a record revenue level for the Networked segment. Gross margin increased 310 basis points year-over-year and operating margin was up 400 basis points due to favorable product mix and operational efficiencies. Outcomes revenue was $78 million, a quarterly record for the segment with gross margin of 34.8% and operating margin of 13.7%. Gross margin decreased 600 basis points year over year and operating margin was down 520 basis points due to a lower margin revenue mix and increased services costs. Turning to Slide 14, I'll review liquidity and debt at the end of the second quarter. Total debt was $1.265 billion and net debt was $344 million. This includes our existing $460 million coupon convertible notes maturing in 2026 and the recently issued $805 million 183 coupon convertible notes maturing in 2030. This recent financing was a well-executed transaction that significantly improved our liquidity and strategic flexibility, particularly as it relates to M&A. As of June 30th, net leverage was 1.2 times, and cash and equivalents were $921 million. Now please turn to Slide 15 for our third quarter outlook. We anticipate third-quarter revenue to be between $590 million to $600 million. The midpoint of this range represents growth of $34 million or 6% year over year. For non-GAAP EPS, we expect a range of diluted share at the midpoint. This implies an increase of $0.17 versus Q3 of last year. Now please turn to Slide 16 for an update to our annual 2024 outlook. We now anticipate 2024 full-year revenue to be within a range of $2.385 billion to $2.415 billion versus the $2.275 billion to $2.375 billion range we provided in February. At the midpoint, this represents an increase of 10% versus 2023 and 3% from our prior 2024 Annual Guidance. Continued customer demand and strong operational execution is driving the higher revenue expectations. Earnings will also be positively impacted by the fall through of higher revenue. Our non-GAAP EPS full-year outlook range is $4.45 to $4.65 per diluted share versus the February guidance $3.04, $3.80.of share. At the midpoint, the updated non-GAAP EPS estimate is up 35% versus 2023 and 26% versus prior guidance. The revised full-year guidance assumes a 23% effective tax rate. The actual tax rate could fluctuate based on jurisdictional mix and the timing of tax settlements. The recent financing transaction we completed in mid-June will be accretive to our 2024 EPS given both the net interest income and the share buyback. We estimate the Q3 impact is approximately $0.11 per share and the full-year impact is approximately $0.22 per share. This benefit is reflected in the updated guidance. Our financial performance has accelerated meaningfully over the past year as supply availability recovered and our operations and utilization levels improved. Having realized significant operating leverage over this timeframe, we're now entering a more normal operating environment versus the catch-up environment of the past six quarters. Lastly, as Tom noted, 2024 bookings are expected to skew more to the latter part of this year, which will likely impact 2025 revenue as the projects will now start later than previously anticipated. Now I'll turn the call back to Tom.

Tom Deitrich: Thank you, Joan. The need for great hardening and modernization is clear to us, our customers, and increasingly the public. Extreme weather and climate disruptions continue to challenge our customers, most recently in Houston, Texas, Hurricane Barrel left millions without power. Barrel was an uncommonly early and strong start to the hurricane season. Unfortunately, these types of events are expected to increase in frequency, duration, and intensity. Itron's technology provides our customers with visibility into what is happening across their distribution assets in an accurate and timely fashion, while providing capabilities ranging from support of day-to-day operations to identifying the magnitude and location of customer outages, while also helping to reduce the impacts should these events occur. Digitization of the grid and software-driven approaches to problem-solving and asset management like Itron's Grid edge intelligence platform can provide critical support for utilities working to maintain access to energy and water during high-impact events. Visibility and control at the edge of the grid continues to be at the forefront of the most effective solutions to cope with the increasing challenges of our customers. At Itron, our commitment to supporting energy and water resource management extends to all stakeholders and we recently published our 2023 Corporate Sustainability Report, which details our efforts to be responsible stewards. The report covers Itron's commitment to create a more resourceful world by helping utilities and cities achieve their sustainability goals, improve their environmental footprint, and shares the company's progress on advancing its own sustainability initiatives. Key areas of progress include our technology-enabled itron's customers to avoid at least 6.8 million metric tons of greenhouse gas emissions while enhancing consumer engagement through the dynamic energy savings program such as demand response and time of use rates. During 2023, we achieved our initial greenhouse gas emissions goal of a 50% reduction in owned emissions by 2028, a full five years ahead of our target timeline. We enabled our customers to avoid 400 times more emissions than our own during 2023 alone. Last, but certainly not least, our focus on maintaining a safe working environment for our team resulted in the lowest recordable and time-lost rates in Itron's history. On behalf of Itron's management, I am grateful to our team for the demanding work that produced these results. In closing, our second quarter results were encouraging. We have much more to contribute and unfinished work to achieve our goals. We are excited for the future and eager to engage. Thank you again for joining our call today. Operator, please open the line for some questions.

Operator: Thank you. [Operator Instructions] And our first question coming from the line of Noah Kaye with Oppenheimer. Your line is open.

Noah Kaye: Well, good morning. Thanks for taking the questions. So we'll start with Outcomes, and I believe this is the first time the segment actually led growth percentage-wise amongst all the segments since the first quarter of 2022. So good to see the inflection there. Two parts to this. One, is there, I think, a pathway or setup for Outcomes to sustainably lead top line growth over the coming quarters as was sort of the vision from Investor Day? And then on the margins in the segment, I know we talked about this a bit last quarter on your earnings call, but still seeing a lower margin impacts, both on gross margin, operating income. When does that inflect more positively? And when do you start to see margins trending back towards the targets that you outlined?

Tom Deitrich: Very good. Thank you, Noah. Tom here. I can take that one. So we were very pleased with the revenue growth in Outcomes. It's a new record for us on the Outcomes revenue line. And really, what you're starting to see showing through there is the Outcomes portion of various projects accruing to the revenue line. We knew Networks was growing for the last couple of quarters given the catch-up on components and the strength of the portfolio there. And now it starts to roll into the Outcomes segment. That's what is underlying the growth and what is still ahead of us. What you saw on the margin line though was much more tilted towards the services side of things rather than the SaaS or software portion of the Outcomes portfolio. And in particular, it was more onetime services with integration of all of the back-office systems are really starting to show through, and that's what led to a little bit lower gross margin during the quarter. That said, there's nothing structural here that leads us to move off of the 2027 targets that we laid out in Investor Day. So that low-40s kind of gross margin is still the right ZIP code for the Outcomes segment overall. So this isn't structural. It really is much more about the mix of the types of things that we had. What does it take to sustainably get into that margin and growth pattern? It really is a bit more scale to the business itself. It's what we've been working towards. It's finally starting to happen. I would expect it to continue to be lumpy, a little bit longer for several more quarters. That said, the general trajectory is moving in the right direction, and we're pleased with the progress.

Noah Kaye: Okay. Thanks for that color, Tom. And since during the prepared remarks, there was a discussion of Hurricane Beryl, I want to follow up on that. I think for -- and by the way, we're aware that you have some great customers down there and ERCOT has always had some challenges. But I think it's pretty public that the response to the storm was broadly criticized. And I think people were without power for several weeks. So when you look at that event, what does it tell you about Itron's capabilities, Itron's evolution of those capabilities and ability to help with improved response to natural disasters? Where do you need to grow your capabilities? And where do your customers potentially benefit from using more of the services that you offer? In other words, to what extent is this an opportunity and to what extent is this a challenge for the company?

Tom Deitrich: Yeah. I definitely put it in the category of opportunity for us. We continue to invest in the Grid Edge Intelligence Platform, and you can put that capability to use on grid resiliency as well as outage management. You can figure out where you have an outage and get to the scene of the crime and be able to correct it faster. When an outage should occur, you can put that capability to use for things like vegetation management in a proactive sense. Here's where we've got some trees revving up against some critical infrastructure, and you could roll the truck to take care of that vegetation more fully. So we definitely like the direction of our portfolio, and we think that investment in resilience and reliability of utility infrastructure is absolutely essential in the new world that we're moving into. Those floods and fires and storms are sadly happening more often than not, but it is definitely in the category of opportunity for us overall and something we're eager to engage with our customers to go get deployed. That relates back to the question a moment ago, it's that type of revenue accrues in the Outcomes segment and part of the things that we're working with our customers to get deployed now.

Noah Kaye: Right. I guess that's what I'm getting at here, that more customers should be utilizing the Outage Management services, the Distributed Intelligence capabilities that are embedded in the portfolio. Have you seen that kind of uptick in interest broadly across the customer base over the last, call it, coming quarters and potentially even in response to what happened with Beryl?

Tom Deitrich: Absolutely. So we've seen a much broader interest in things like Wildfire Management, Vegetation Management for sure, in areas where that type of situation is very prevalent, meaning the West Coast in the U.S. clearly is an opportunity there. So again, the level of conversations with customers clearly has increased. Their interest is high. There's also government funding activities that are in this area as well to invest in resilience and reliability. And again, what gives us a lot of optimism about that portion of our portfolio for the years ahead.

Noah Kaye: Okay. Thank you, Tom. I'll turn it over.

Operator: Thank you. And our next question coming from the line of Jeff Osborne with TD (TSX:TD) Cowen. Your line is open.

Jeffrey Osborne: Yeah. Thank you. I just wanted to maybe follow up on the prior question around the Houston utility. Tom, aren't the bulk of those meters that have been installed back in like 2007 to 2010 not even IP-compliant? Would they even work with the existing software set or would the meters itself need to be upgraded? Or have some kind of migration path?

Tom Deitrich: Yeah. There's a migration path is probably the right terminology to use there. So clearly, if you want to deploy something like Distributed Intelligence, it would be a new set of hardware, but you could deploy that on a selective basis or an ongoing basis. It wouldn't necessarily need to be a full rip and replace kind of setup with a lot of our customers across the territories.

Jeffrey Osborne: Got it. And then maybe just in conversations with broader customers, I think prior a year or two ago and in the past, the narrative from you folks was much more around EV and renewable integration, but I'm just curious with the utilities reporting so far, the past two earnings call cycles, it's been much more around load growth. And so I'm just curious, what in particular DI can do to help manage load growth and squeeze sort of efficiencies and non-wires alternatives out of the grid in areas that maybe aren't as impacted by renewables and EVs, which seem to be the prior positioning of Itron at least to investors previously?

Tom Deitrich: Well, yeah. Certainly, the utilities are struggling with a number of different factors. We touched two of them already first in your prior question, resilience and reliability with storms and then changes in overall load growth, more onshoring of manufacturing, more data centers, but also changing load patterns, where you have more EVs or PVs or meters that -- or sorry, batteries that are behind the meter itself. So all of those types of things are happening, but it all goes to exactly the investments we've made in that Grid Edge Intelligence Platform. It allows you to use it almost like a Swiss Army Knife, what blade do you need to pull out to be able to solve the problem that we have today. And it comes down to the capabilities of that platform: number one is, connectivity, you know you can connect to assets that are out at the edge of the grid; two is, you've got visibility into what they are; three is, you can start to develop control of those assets; and four, you start to optimize them to have them work together. So you can apply that in a non-wires alternative. So you can coordinate assets, and say, "Hey, let's use the power from this battery. Let's start to develop virtual power plant capability using customer-controlled assets. Let's think about ways that we can use it for resiliency and reliability." So all capabilities that I'm talking about here, you can use in a different way and it absolutely helps the utilities deal with the range of complex problems that they're up against. That's why we think we absolutely have a better mouse trap than others in the industry.

Jeffrey Osborne: Perfect. If I could squeeze one last one in. Joan has mentioned that the bookings will be weighted towards the back end of the year. I just wanted -- a two-part question on that. What are some of the regulatory hurdles or scrutiny that the awards that you already have technically are going through? And is there any risk to that in your eyes? And then part two of the question is, if you could just remind us on what the typical lag is from regulatory approval to the start of installation? Is that a six, nine, 12-month process that you seem to -- or Joan seem to be implying that maybe it's a softer first half of the 2025, that's just follow up on the point that she was trying to make.

Tom Deitrich: Right, right. So our bookings discipline is the award to sign contract and regulatory approval. And the reason we do that, although it is probably somewhat conservative is it makes the bookings really, really sticky. Once it's booked, it really doesn't go away. It perhaps could shift in time. And -- but it's very, very sticky. The $1 billion of pending bookings that I talked about, that number is a lot larger than is normal overall. And I think there's two reasons that are underneath that. The first one is regulatory approvals tend to be a bit more complex these days given the challenges that utilities face as well as commissions. Generation, transmission, distribution are all in need of upgrade and expansion. Interest rates are a little higher, inflation is higher, consumers are struggling paying bills. So as the regulatory commission, how do you think through all of that? As a utility, how do you prioritize all of that? So it makes the rate case a bit more complicated at times. That's part of the answer. The bigger part in the case of some of those larger pending bookings for us has to do with the government funding side of things, example being IIJA funding. That's an extra step in the process where a portion of the total cost is covered by the federal government, and then the rest of it goes into the rate case. So you got to get one before you could do the other, so you can do the math across the board. And that extra step is taking a bit more time in the rate cases, which means that pending bookings category is a little bit larger than usual. I do think that given the pace that things are moving, just now, we should see those bookings more towards the second half of the year, as Joan mentioned, and then typical lag time from a bookings -- a booking until the project really starts to begin tends to be, I would say, usually in the six, nine, sometimes 12-month kind of range, but nine being sort of the center portion of that and then the project ramps from that point. So it does give you that profile or at least thoughts about what 2025 ought to look like. We're not trying to guide 2025 today. We just want to be transparent about timing and what that may look like.

Jeffrey Osborne: Perfect. That's all I had. Thank you.

Operator: Thank you. And our next question coming from the line of Ben Kallo with Baird. Your line is open.

Ben Kallo: Hi. Thanks for taking my question. Good morning, guys. Maybe just going back to Outcomes in the record quarter. And Tom, you mentioned that there were some services there. Maybe if you could just help us talk through what's in your backlog in terms of Outcomes? And then how we'll see that kind of margin shift to the higher-margin piece of the Outcomes business, whether that takes -- we'll see it next quarter or if it takes into 2025? And then I'll have a follow-up question.

Tom Deitrich: Sure. The backlog, we don't break it out by business unit or by segment overall, but know that 90%-plus is Networks and Outcomes. The typical profile would be get the network installed and then start to exercise it to do your first use case, maybe it's just doing a simple AMI use case and then start to layer on additional capabilities on top of that. When you start to layer on those additional capabilities, what tends to happen is you've got to get all of the back office systems wired together to be able to use the data, and that tends to be more services revenue to make that work, and then you start deploying the actual capability, which is more on the SaaS software side of the portfolio. So you get that general profile, married -- mileage varies a little bit project-to-project, but that profile is generally what happens, and that is what you saw in the Outcomes revenue for -- and margin for the second quarter. I do think given the size of that business, it's still a little bit under the scale that we're targeting, and we'll bounce around a little bit quarter-to-quarter, but I feel very good about the margins moving towards that 43%, 45% over the years ahead, exactly as we laid out in the recent Investor Day.

Ben Kallo: And then, just talking about the complexity of the utilities that you serve, load growth, has that changed your emphasis on M&A? Or has it kind of reduced the ability for you guys to do M&A because of valuations out there? Could you just maybe give us a little update on the environment on the M&A front? Thank you.

Tom Deitrich: Okay. So no change in our aspirations to expand our portfolio organically or inorganically. We wanted to build a flexible platform that allows our customers to put it to use to solve the problems we know they are up against, so no change there. Clearly, we want to grow that Outcomes portion of the portfolio faster than what we can do organically, which leads to the inorganic options on the M&A front, which are generally in the Outcomes space. I tend to think that valuations, if anything, probably have come down a bit from where they were, but valuations in the software area clearly are higher than for hardware just in a generalized sense. So no change in our aspiration. What we're looking for is something tilted towards Outcomes, something that's truly scalable and really allows us to expand the reach and breadth of that portfolio.

Ben Kallo: Thank you.

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

Joseph Osha: Thank you. Good morning. I just have one question, folks. Looking at the midpoint of where you've ended up this year with your guide, looking at some of the comments that you've made about these bookings showing up for next year. To the midpoint of your 2027 guide at this point, by my math, you're only looking at a 4% CAGR, which seems conservative to me. So I'm wondering, I suspect the answer is no, but I'm wondering if you might be willing to make a comment about implications that the numbers we're hearing today have for that 2027 range that you put out at the Analyst Meeting? Thank you.

Joan Hooper: Yeah. I would say no change to the 2027 numbers and the ranges that we put out there a couple of months ago. We never expected it to be a straight line from 2023, 2024 all the way to 2027. So we stand behind the targets that we provided for 2027. The commentary that we made, as Tom just described on bookings is just to be transparent with, if they end up at the end of 2024, the rollout of revenue is different than they would have been if they were in the beginning of 2024. So if you look at the current 2025 consensus numbers out there, you got to really make sure you normalize for the $125 million of catch-up that we had in 2024. And just doing that, the current consensus for 2025 is already 9% growth. So you're right that if you kind of take the midpoint of the updated 2024 guidance to 2027, it's more like 4% CAGR. But again, you got to be careful because of that catch-up effect in 2024.

Joseph Osha: Well, okay, but I'm going to drill down on that a bit because even if you run through that math, looking at 2026 and 2027 then, the midpoint of your guide implies that you fall off, assuming your comments about 2025 are correct to low single-digit growth, which doesn't seem to make sense to me. I mean, doesn't this business organically grow at 4% or 5% even off of that 2025 comp?

Joan Hooper: Well again, if you look at the market numbers based on kind of 2024, I think at the time of Investor Day, we were looking off 2023 at 5% to 7% kind of growth for the overall company. So again, if you anchor it off 2024, it's probably a bit lower than that. But certainly, that's organic. That's no M&A. And as we described the 2027 targets, we also did not put any stimulus. So hopefully, it's higher than that, but the numbers that we described back in March still stand.

Joseph Osha: Okay. Thank you.

Operator: Thank you. And our next question coming from the line of Martin Malloy with Johnson Rice and Company. Martin Malloy, your line is open. Please check your mute button.

Marty Malloy: No. Thank you. Sorry about that. Just one question for me this morning. I was wondering if you could maybe give us an update on the partnerships you've announced with GE, Vernova and Schneider and how those are going?

Tom Deitrich: Happy to. So those partnerships are alive and well and something that we're excited about. The underlying thesis behind it is absolutely playing out as we would hope. Our customers really struggle with keeping up in many cases with the speed of technology. So new ideas come at them faster than infrastructure changes, how can we help them cope with that by doing a lot more, I'll call it, pre-integration and making sure that our things work better together out of the box, and it saves the customer time later on. So a number of very fruitful discussions going on with those partners today. In some cases, targeting or in concert with very specific customers, pilot projects and technology demonstrations, which again, we hope will lead to revenue acceleration in the years ahead. So I would say alive and well and that bench of technology partners that we want to use that playbook with is growing by the quarter.

Marty Malloy: Great. Thank you. I'll turn it back.

Operator: Thank you. And our next question coming from the line of Pavel Molchanov with Raymond James. Your line is open.

Pavel Molchanov: Yes. Thanks for taking the question. Can you drill down on this kind of sneak preview of 2025 that you gave in the prepared remarks saying that revenue might shift kind of beyond 2025 based on certain utility contracting activity. Can you just explain what you meant by that?

Joan Hooper: Sure. So again, I'd say, first of all, it's too early for us to be giving 2025 guidance. But given that the profile of the 2024 bookings is more skewed to the latter part of the year, we thought it was prudent just to remind you that there is a natural time line between something being booked and when it converts into revenue and Tom just described that kind of six to 12-month time frame. The only other comment, again, that I just made in response to an earlier question is be careful when you look at growth, 2024 to 2025, don't forget to normalize for $125 million of catch-up revenue that existed in 2024. And so, that's kind of the commentary that we had on 2025.

Pavel Molchanov: Okay. Yeah, that's useful. And then also kind of looking ahead to 2025 from a margin perspective, what's the latest on the post-COVID pricing kind of flow through? I remember, you obviously had some kind of legacy contracts that are rolling off. How close are we to that roll-off finally?

Tom Deitrich: Sure. I would say that -- starting with the pricing side of your question, the pricing model moving to much more indexed pricing and being able to cope with changes in the marketplace is working out well and well deployed on the new projects that are going into bookings and roll it out. I would say price cost overall, it's generally on the positive side of the ledger thus far in 2024 and would certainly expect it to stay there based on what we see today. On the backlog itself, we're probably still in the same ZIP code of 70%-30%, meaning 30% that's still left to roll through in some of that prepriced backlog itself. Again, you got numerator and denominator change in that with new bookings coming in and revenue going out overall, but 70%-30% is still not a bad place to be. When we get to 2025, we will have the benefit of those factories that are closing in the second half of this year. So that's helpful overall and pricing is helpful for us. So I like the direction the business is moving and good the team is executing well.

Pavel Molchanov: All right, thanks very much.

Joan Hooper: Thanks, Pavel.

Operator: Thank you. And our next question coming from the line of Kashy Harrison with Piper Sandler. Your line is open.

Kashy Harrison: Good morning and thank you for taking my questions. So apologies if I missed this earlier, but I was wondering if you could just speak to the drivers of the increased revenue expectations this year. How much of that is just a pull forward or faster conversion of backlog versus increased demand?

Joan Hooper: Yes. I can start, and then Tom may want to add in. So if I look at the Devices segment, which has really outperformed our initial expectations, I would say. It's unexpected growth in -- particularly in Europe in water sales. So there's a lot of upgrades to new technology going on in Europe for our water customers, and that's a pretty big growth for us this year that we would not have planned on. So that's the first one. The second one is just some of the network deployments going a little bit faster than we would have expected now that we've caught up, Outcomes is probably about where we expected.

Tom Deitrich: I think, it's a good and accurate summary overall.

Kashy Harrison: Got it. I appreciate the added color. And then just my second one, I know this is a little bit fresh given that it just happened a couple of days ago, but PJM recently had a record auction for power just given the plant retirements and surge in demand. I was wondering if events like this factor into your discussions with customers and theoretically, how you think about the implications to demand within that area for your products, just if we continue to see events like this?

Tom Deitrich: Yeah. I think it's absolutely on the mind of all of our customers, no matter which part of the U.S. that they are in, if I isolate my comments to be U.S.-centric for the moment. So not only PJM territories, but more broadly. Load growth is very different over the next, I'll call it, 10 years or 20 years than it has been on the previous 10 years or 20 years where it was flat and now it's growing. Everyone can speculate about that rate of growth. But the fact that it was essentially zero, and now it's growing, it changes things. You could see it showing up in terms of private power purchases, where you've got a big mega-tech -- mega-cap tech companies just buying bulk power and taking it off of the grid, shall we say. And how would that cope with things, but it puts tremendous pressure on the overall system. And it really means that you've got to bring out a lot more efficiency out of your existing setup as well as hustle to improve generation and transmission. We clearly play on the distribution side and distribution upgrades to improve efficiency, but also when that bulk generation comes online, get it to where it needs to be. This is an area we've invested in for a number of years, and we're excited to have that investment pay off in the years ahead. So I would say that not unique to any portion of the country. Everybody's got some level of problems associated with it, and it's a tremendous opportunity for us to help our customers.

Kashy Harrison: Appreciate it. Thank you.

Operator: Thank you. Our next question coming from the line of Chip Moore with ROTH. Your line is open.

Chip Moore: Thanks for taking the question. Hey, everybody. I wanted to go back to the trajectory on 2027. I think you framed out dynamics for next year very well. And Tom, I think you mentioned government funding starting to play a role here in some of the approvals. Just maybe, how should we think about that potential benefit of stimulus if that's not embedded in the longer-term view yet?

Tom Deitrich: Yes. Very difficult for me to really try to handicap exactly what that looks like. We didn't try to put it into those 2027 targets knowing the uncertainty on timing and what it looks like. Clearly, the awards are starting to happen. If I use just a very small segment of IIJA funding with the GRIP Program, the first round awards came out. I think, it was in the fourth quarter of last year, the very first agreement between the grid deployment office that administers those funds was made with a customer and just became public just in the last month, I will say. So from the time the bill was announced in 2021 until the first round of awards and, call it, fourth quarter of 2023 to the first actual agreement getting signed off in the second quarter of 2022, you can see that the time lag that -- 2024 rather, second quarter, that you can see the time lag of that money flowing through. I'm hopeful now that maybe it will start to accelerate, but still very difficult to call what it looks like, that -- a lot of money is going to get spent, and it should flow through to our customers and eventually to us, but timing is difficult to call, and that's why we kept it out of the 2027 numbers. When it comes, it's only upside.

Chip Moore: Perfect. No, that's helpful. Appreciate it, Tom. And maybe just last one. Just in terms of your conversations, I guess, with sort of leaders and laggards in this space in terms of Edge Intelligence adoption. Just how are you seeing those conversations evolve? And how do you think, I guess, about that tail opportunity developing over time?

Tom Deitrich: The conversations only continue to accelerate. I can't think of nearly any customer in the electricity space that isn't thinking about how they could use this capability and why they need it. We see the same thing on the competitive side where our competitors are starting to create or at least talk about the things that they would do in this area. So I think we were absolutely ahead in the market and continue to be there today. Today, there's about 10 customers or thereabouts that are in active deployment or are already booked. And we have over 8,000 customers on a global scale. So you can see the runway that's still ahead in terms of being able to deploy this much beyond the early movers that are in the game today.

Chip Moore: Great. Appreciate it. Thank you.

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

Austin Moeller: Hi. Good morning. Nice quarter. Just my first question here. Are there any specific projects either with a specific utility or in terms of contract size that we should be thinking about driving more momentum in the backlog over the next year?

Tom Deitrich: Clearly, there are a number of them. It wouldn't be appropriate for me to call them out by name, but that $1 billion of pending bookings that I talked about, there's -- I don't know, roughly 10 or so before I stopped counting that are in that category. So a pretty broad range. It's not wildly dependent on a single customer.

Austin Moeller: Okay. That's helpful. And just another question, where are we at in terms of the old backlog that was not inflation indexed? Is that flowing out pretty evenly as of Q2? Or should we expect to be more back-end loaded, Q3 and Q4?

Tom Deitrich: I would say it's flowing out overall. It's some portions of it clearly are pushing ahead based on deployment time frame. So it's still roughly in that 70%-30% kind of range where we are today. The majority of that 30%, if you will, that's still out there flows through in the 2024, 2025 range. So not wildly different than what we've spoken about before, maybe a few things have slid a quarter or two, but overall tracking to our expectations.

Austin Moeller: Great. Thanks for all the details.

Operator: Thank you. [Operator Instructions] And our next question coming from the line of Scott Graham with Seaport Research Partners. Your line is open.

Scott Graham: Yes. Hi. Good morning, and nice quarter. I wanted to just maybe speak, Joan, just a second on the incremental margin, which seems to be creeping up each quarter even as your sales are just a little bit slower, obviously, because of the stack comparisons and all of that. And I'm just wondering, is it just the case here where you have that past due now behind you, and it's just sort of people are normalized in their seats or on your production lines is -- is that what we're seeing here in the incremental margin rise?

Joan Hooper: Well, again, I would look at it by our segments. So if you look at Devices, it's a significant improvement in Devices going back to the last couple of years, particularly compared to where they were. They were mid-teens a few years ago and now in the 20s last year and in the 20s this year. That's really a comp -- it's really primarily driven by pruning the portfolio. So we were a much bigger company in Devices several years ago. We've been very active getting out of unprofitable product lines and asking that business to focus not on top line growth but on margin improvement, and they've done a fabulous job doing that. In the case of Networks, they've had really strong margin in the last few quarters. I think it's a combination of product mix. So certain of our products are more margin rich than others. And then, of course, as you mentioned, as we've caught up on the previously constrained revenue that gives us more volume in the factories. And so from an absorption standpoint, you get a margin benefit. So think about that as both product mix and operational efficiencies associated with the volumes coming in. And Tom covered Outcomes. Outcomes actually is down a little bit, and that's really more of a function of the mix of the various solutions that are within the Outcomes segment.

Scott Graham: Okay. Thank you for that. I appreciate it. To you, Tom, just was hoping that that's a big number in the award pipeline there. And congratulations on that. I was hoping you would unbundle it for us a little bit though. Is it you guys are getting into and solving a lot of more -- you're more solutions oriented today than you've ever been. And I'm just -- maybe you can just share some of the bigger parts of those -- of that $1 billion?

Tom Deitrich: The biggest portion of it is the Grid Edge Intelligence Platform. It's this notion of putting out a networking capability that gives you connectivity to assets at the edge of the network and being able to get visibility and control of those assets out at the edge. Being able to grab much more -- much richer data to be able to make intelligent decisions around outage management or vegetation management or wildfires or being able to control edge assets would optimize usage out of the edge. So that bar none, the largest portion of that backlog or pending projects is that Grid Edge Intelligence Platform that you've heard us speak about quite often.

Scott Graham: Yes. So the endpoints there are probably going to jump up in 2025 then?

Joan Hooper: Yes.

Tom Deitrich: Absolutely. Yes, you'll see steady growth overall and every quarter. That's clearly what's in backlog today. And as we book new projects, it will still be growing that portion of it. So I do think the number of DI-enabled endpoints that we talk about, a little over 11 million, I think, today, that will continue to grow quarter-after-quarter.

Austin Moeller: Thanks a lot.

Tom Deitrich: Thank you.

Operator: Thank you. And I see no further questions in the queue at this time. I will now turn the call back over to Mr. Tom Deitrich for any closing remarks.

Tom Deitrich: Thank you all for joining the call today. We look forward to updating you again next quarter.

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

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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