Ladies and gentlemen, good morning, welcome to Itron Investor Day. Could you please silence your cell phones for the duration of the program? Thank you. Please welcome to the stage Itron's Vice President of Investor Relations, Ken Gianella.
Thank you. Thank you. First, I'd like to welcome everybody who's on the webcast and everyone here who's in the audience. On behalf of the board of directors of Itron and the executive team, we'd like to welcome our investors, our customers, and our employees who are joining us here today and online. To begin, our journey was started over 40 years ago with a simple premise of taking technology and solving problems to make the world more efficient and more reliable. Today, we continue that journey as the leader of industrial IoT, serving the utility and the smart city space. Before we begin our journey, we're going to talk to you more about where we're going to. It's always important that you start that journey with a legal disclaimer. We are going to be sharing forward-looking statements today.
We just want to make sure that if anyone has any questions, please look on the website or in our filings that we've done with the SEC. We have a really great program for you all today. To start with, we're going to start with an overview from our CEO, Philip Mezey. He's going to come up, he's going to discuss the strategy and our priorities of what we're looking for. We're very excited to have a special guest with us today, Mr. Tom Kuhn. He's the President of Edison Electric Institute. He's going to come and give you guys some insight into the dynamic changes that are going on within the utility industry today. After that, we'll take a brief break. For those of you who are here in the room, we have a demo station set outside.
Our vice presidents who run the business units are all here. Please go up and meet and introduce yourself to them. For those who are on the webcast, we're going to have a streaming video of demonstrations that you can stay online and watch while you're there. When we come back from the break, we're going to bring up our COO, Mr. Tom Deitrich. Tom will come up and discuss the outlook for both the market segments as well as our supply chain and operational strategy. Followed by that, we'll introduce Sharelynn Moore. Sharelynn is the Senior Vice President of our Network Solutions. She's going to come up and give an overview of the technology roadmap of where Itron is going.
That will be followed by Philip and Tom coming back on and giving a deeper dive into our new segmentation that we rolled out this past October. We'll follow up, again, with lunch. We come back. We've saved the best for last. Our CFO, Ms. Joan Hooper, will come up and discuss the financials with you all, to which we'll then go into a Q&A. For the Q&A, for those in the room, we'll have mics. You can come up and ask questions. For those on the webcast, we encourage you to go to investors@itron.com. Submit your questions in, and we'll put them together, and when we do Q&A, we'll make sure that those get answered for you. Without further ado, I would like to get started.
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Ladies and gentlemen, please welcome to the stage Itron's President and Chief Executive Officer, Philip Mezey.
Thank you. Good morning, everyone. It is a genuine pleasure to be here. Thank you for taking the time to join us today. We want to make sure this time is as valuable as it can be for you, I want to echo Ken's comments. We very much encourage you to submit your questions and to participate in the demonstrations and meet the executives that we've brought together today. Our goal is to give you a very clear picture about our priorities moving forward and the opportunities that we see in the industries whom we serve. The way we do that is with an executive team that is represented here, that is really a mixture. This has been a journey over the past six or seven years.
A mixture of talents of people from within the industry, very deeply steeped in utility and smart city spaces, a mixture of different skills that we've added, whether it was Tom Deitrich coming out of Freescale and Flextronics, the high tech, sensing and communications, and networking industry, that helped bring us better ideas about contract manufacturing. With Joan Hooper, who came from a long career at Dell and then an aerospace company who understand large, complex global deals. Sharelynn, a long time collaborator of mine and ours, with tremendous industry background and expertise. Mark de Vere White, also with tremendous expertise, but in customer service and selling. Mark's here heading up our commercial and customer enablement function. Carl Porter, heading up our Device Solutions group. A long-term, utility gas executive, very deep industry expertise. I'm so happy to have Don Reeves sitting up here.
Don came to us through the acquisition of Silver Spring Networks. Along with Ken Gianella and Marina Donovan, who heads up our corporate marketing and communications function, this team, as a part of the acquisition, has really enriched the overall talent in the room. We're also joined by Rob Farrow in the back, who's our treasurer, a broad range of financial expertise in operating in a global environment. Sarah Hlavinka is here, our corporate general counsel, and has brought a great deal of experience dealing with our global business operations. I'm sorry, Aravind Yarlagadda, who heads up our outcomes group. Aravind came to us through Schneider Electric.
One of the things when we're talking about outcomes is all the industrial companies that many of you have covered over the years are thinking about how the increasing technology component of their business, how it is that they are going to continue to morph their business model. We've put together the very strongest team to meet the challenges that we see in the industry moving forward over the next three to five years. You heard in the video, this defining mission statement that we have, that the way we manage energy and water is going to shape the 21st century. Why do we think that?
Well, with over half of the world's population currently living in urban areas, that number is going to go up to over 70% in the next couple of decades, the challenges that we're going to face for the increasing needs across electricity, gas, and water in our urban environments are tremendous. We have opportunities today, though. 3%-7% of electricity is lost in the distribution system. 1%-3% of gas is lost in the distribution system, and over 30% of water. The systems that we are deploying today can help improve the outcomes that our customer utilities have in running their operations more efficiently and engaging with their customers more successfully.
When that idea is brought together for our employees, that every day when they come to work, they not only are working in a very healthy work environment in which we treat one another with respect and are excited about the work we're doing, but that everybody feels that they are a part of a greater mission of making the world a better place and building a more resourceful world in which we are careful with the resources that we use and are looking at ways internally about how we can run our business more efficiently. You're going to hear from Tom Deitrich, who's going to talk about our operational improvement initiatives.
The company, we are excited about the opportunity that we have and really enjoy working together. You're going to see this picture several times during the course of the day, and this has been a natural evolution for our business. Meters started out being cash registers for the utility, had a very simple function, but as these devices became smarter and we added additional sensors, we have the requirement to provide ever more powerful networks to bring all of this data back that these meters and sensors are generating out in the field. It requires us to really focus on that networking layer and strengthen that element of our business to build a broad canopy in order to connect ever more devices. Those devices are generating more and more data. These powerful networks are bringing back vast amounts of information.
When we think about outcomes, it's how do we take this big data and turn it into specific insights about how to more effectively manage assets in the field, operate businesses more effectively, engage with consumers, and build a more resourceful world? When we do that properly, we think about using open standards and a secure architecture and think in terms of platforms, it makes it possible to use this technology investment that we've made and strong customer base, particularly in the utility space, to be able to address an ever broader market. Moving from the tens of millions of things in the utility space to hundreds of millions of connected devices that we see possible in smarter communities, and ultimately, billions of devices in the industrial Internet of Things.
These devices are going to, we feel, be connected under the networked canopies that we have built and will be administered, and the data will be managed through the functions that we have inside of our outcomes group. I want to make our priorities very simple for you today so that you can carry this idea away, which is we are extremely well competitively placed to continue to expand our market share in the markets in which we already participate, primarily electric, gas, and water utilities, and increasingly in the city space. Once we are in those accounts, whether or not we start with metering or not, we have the opportunity to increase the breadth of our offerings through additional devices that can be connected underneath our networks or additional software and services that we can provide to those customers.
That may express itself as a managed service offering in which we operate that system on our customer's behalf, or a new value proposition of using the network to generate some new insight. As we both take share and expand the value proposition we offer to our customers, we have the opportunity to look at adjacent markets and actually broaden our offering. The smart cities and communities space, which I've mentioned, is really right up against the utility space in that we have utilities and cities collaborating together in order to build more sustainable and economically viable communities. We are looking at that adjacent opportunity of smart cities and communities, and down the path, see the opportunity to address other vertical markets. There is a long-term expansion opportunity for us there.
When we do that properly, it really allows us to improve our operating leverage, makes builds more efficient business, which you're going to see has the potential to generate significantly more cash flow, and take the technology leadership investments that we are making today and allowing us to address a broader economic opportunity with our existing customers. I'd like to just pause and really think about what's driving this underlying business. What is this opportunity? Then I'm going to invite Tom Kuhn up to speak about that from a position of much more knowledge about the overall industry. Today, we address primarily electric, gas, and water utilities and smart communities, smart city movement. What are the underlying drivers that are accelerating the market growth? This is not a story about smart metering.
This is a story that is our utility customers are facing some very significant challenges of aging infrastructure, of cleaning up the generation mix, particularly acute in the electric utility space, of building more efficient water utilities. Remember I said 30% of water is lost in the distribution system. There are tremendous efficiency opportunities that are out there. There are both challenges and opportunities. The electrification of transportation is a massive opportunity in the electric space, but it brings with it a couple of interesting technology challenges. How do we connect those charging stations? How do we understand customers' needs? How do we balance the grid? As we're cleaning up the energy mix, we're introducing more intermittency into the grid. How do we balance supply and demand?
How do we connect the system in a way that we have an active and smart system that can say, Sorry, can't charge that vehicle right now because we have a higher air conditioning load on the system. How do we build a more aware system? We have significant infrastructure issues. Up at the grid level, we face big reliability issues, some of which have to do with this aging infrastructure challenge that we face. Across electricity, gas, and water, we are facing weather disruptions, fire, all kinds of disasters. You've read about natural gas explosions from aging piping and infrastructure that we need to be able to isolate, prevent, and remediate as quickly as possible.
On the environmental side, we're really thinking about how to use resources more wisely, but how to have the situational awareness that allows our customers to really anticipate where disruptions are going to occur and be able to respond to those much more quickly. Then on the social side, all of us, as customers, live in a smartphone world in which we summon up the things we need on a digital device. Probably lacking from your smartphone is an application for your local utility that tells you how and when you're using electricity, gas, and water, what programs they're currently running, when disruptions or outages are going to be scheduled to occur, that sort of thing.
The utility industry is facing a challenge of an ever more competitive space in which the bar is rising in terms of consumer expectation, that all of you have as well, about how they interact with the utility and how we interact with our use of these very valuable resources. There are challenges in how the utilities are trying to digitize their relationship with all of us as their ultimate customers, and a tremendous investment that's being made there. In order to just take a pause on the Itron part here, I'd like to introduce our guest speaker. The Edison Electric Institute is an association that represents all of the U.S. investor-owned electric companies. EEI's members provide electricity for 220 million Americans and operate in all 50 states and the District of Columbia, and directly employ more than 500,000 workers.
In addition, EEI has 70 international electric companies as international members and represents over 270 suppliers and related organizations as associate members. Tom Kuhn joined the institute in 1985 and has been President of the institute since 1990. A graduate of Yale and The George Washington University, he completed the Stanford University Graduate School of Business Senior Executive Program in 1989. Tom served as a naval officer and was the White House liaison officer to the Secretary of the Navy. Tom has had a distinguished career in both the public and private sector. He's currently Chairman Emeritus of the National Multiple Sclerosis Society, on the board of the U.S. Navy Memorial Foundation, Chairman Emeritus of the Committee of the 100 of the U.S. Chamber of Commerce, Chairman Emeritus of the American Society of Association Executives, and past chairman of the Alliance to Save Energy.
Tom has received several accolades over his career, including the Bess Goltman Humanitarian Award, Trade Association CEO of the Year, and most recently, the United States Energy Association's 2018 Energy Award for unparalleled contribution and leadership in the energy sector. Please join me in welcoming Tom Kuhn to the stage.
Perfect. Philip, thank you very much. That was a heck of an introduction. You just get some of those awards by staying around long enough. Number one, it's a great pleasure to be up here with you. I appreciate very much, Philip, you inviting me up here to give an overview of the industry, and I think you gave most of my speech. I also say it's always fun for somebody like me to get out of Washington, which I call 20 sq mi , surrounded on all four sides by reality. It is a situation. EEI, as Philip mentioned, is the trade association for the entire electric utility industry, and we represent all the companies in the United States, but we also represent companies in 90 countries from around the world. Many of the technology companies, like Itron, that are so very vital to our mission.
In fact, we just had our annual convention, Philip chaired a panel of CEOs with respect to the smart grid. I really think that video, if you paid attention to it a lot, shows the dynamic changes that are going on in our industry. I'm very proud to represent this industry. I think that we're doing a whole lot of things, we represent a pretty big industry. We represent 5% of GDP. I want you to think about that, because I always say it's the first 5% of GDP. If you don't have electricity, you can probably forget a lot of the rest of the GDP. We are spending more than $100 billion a year in capital expenditures, and that supports one in every 20 jobs in this country. It's a fairly large enterprise.
In the beginning of my career, one part of my career you didn't mention, maybe I kind of blanked it out. I was a financial analyst. An energy analyst. The utility sector was not exactly known as an incredibly exciting place to be. We produced electricity, we transmitted it, and we delivered it into people's homes. It was a one-way street. A lot of engineers, a lot of great people, it was pretty steady business. Not a lot of dynamic things going on. What I say right now is I think we are in the most exciting time for our industry since Thomas Edison started it. It's because of all the tremendous technological innovation that's going in. The fact that it's not a one-way delivery system.
It's a two-way system, it's a situation in which we're delivering a whole lot more technologies to our customers. Very interesting time. Again, the mission of the industry has always been reliable. People want it. They don't want it interrupted. Affordable, got to keep it affordable for everybody. Our mission has always been to move it to increasingly clean. About 10 years ago, there was a lot of people that were coming out and saying, the industry was going through a major transformation and might end up in a death spiral. That's not a pretty place to be. You don't want to do that. Incidentally, all industries go through major disruption and changes these days, primarily because of technologies, because of changes in public policy, and because of changes in customers or markets and people's expectations.
I said, We all don't want to be in this death spiral. We think that we're doing great things. Incidentally, since that time, utilities have outperformed every market index. We've done pretty well. I said, We've got this mission. What do we think is the vision of the industry? I brought together the board and said, of all the CEOs, Where do you want your companies to be? Not next quarter, not next year, but let's pick a date, 2030. What do you see as the difference with respect to the companies and where are you going to move it to? It was amazing. For an industry as diverse as ours, we got really unanimous consensus on the idea that we wanted to really have a much cleaner electricity business, much cleaner than we were before.
Over the last several decades, we have been reducing the traditional pollutants of sulfur, nitrogen, mercury, et cetera, by 80%-90% while electricity has grown. That's a pretty good feat since the time that I've been with the industry and at EEI. The big issue of the day is carbon and climate change, you're seeing that play out in the climate debates, et cetera, the presidential debates. Much cleaner, much more modernized, digitalized grid, and advanced customer solutions. I'm going to go through each of those and talk a little bit about what progress we're making on them. On the cleaner side of the equation, again, the regular pollutants have been reduced a great deal.
The industry got on an early start on climate by voluntarily saying we were going to reduce emissions, we set up programs to do it rather than taking a just say no approach. When the Obama administration came in, there was a situation where we worked on the Clean Power Plan, the Clean Power Plan followed the Paris Agreement. You've heard a lot of debate about all those things. Clean Power Plan was actually tougher than the Paris Agreement. The goal of the Clean Power Plan was to have us reduce carbon emissions by 32% by the year 2030. 32% by the year 2030. Anybody want to guess where we are right now? We can probably find it up there somewhere, 27%. 27% and we're a long way away from 2030.
There's nobody out there that doubts that we are going to blow right through that target, even though there are changes right now in the Clean Power Plan that are being made by the administration. We're going to continue to do what we're doing, which is to get much cleaner. Our companies are talking about maybe 50% by the year 2030, they're talking about 80% by the year 2050. Just picture a much cleaner energy future for this country. How are we doing that? We're obviously closing down some of the older, dirtier coal plants, substituting in natural gas, which is half the carbon emissions of coal. We've also, 2/3 of the new generation over the last several years have been renewables, solar and wind.
There's still a lot of nuclear plants out there, too, which is the bulk of our zero carbon generation, which is very positive as well. The price of solar and wind have come down greatly. The price of natural gas, with the fracking situation, is attractive as well. We're making this transition while still keeping rates affordable. It's a major transformation, I think that's, again, exciting. When you're bringing on all these new resources, you need the smart grids to be able to manage all that, particularly with the intermittent technologies like wind and solar, because you've got to manage everything together. That's where we're headed. That's one direction where we're headed. This is a number that you will see regularly, we are the most capital-intensive industry in the country.
I think the only people that are spending more money in CapEx than we are is the Department of Defense. I think that the idea is we are moving toward a much smarter grid. We're employing new technologies in the system. Rather than just producing, delivering, distributing electricity, we're partnering with technology partners who can bring a lot to the table, and really modernize our grid and digitalizing the grid. Another public policy story, when the Obama administration came in, the economy was in the tank. They were talking about doing the stimulus package, which was controversial.
The administration came to us and said, What do you think is the biggest technology that can jumpstart the economy, and particularly in the energy sector? We said, Smart grids. They put $4 billion into the stimulus package, and one of the main reasons why we had to do that was because regulators, et cetera, were questioning the value of the smart grids. It was going to be expensive, but what were the benefits? People all looked at the benefits from the standpoint of, well, customers and the customer efficiency and managing the electric system. They were going to do a bunch of pilots around the country, and we did them. It turned out, just like the internet, the benefits were far beyond the ones we imagined.
A lot of the benefits were actually running the system and managing the system and putting the new technologies onto the system. There were tremendous benefits on the customer side. The benefits on the operating side were incredibly, again, to manage the new technologies and the intermittent technologies we were putting in to respond to outages. We used to have trucks rolling around to try and figure out where we had to go to restore power. Well, now we know if your power is out before you call us, before you tell us, and we figure out how to do it. The efficiencies in how to manage this system are just so much greater. When we have these major storms and things of that nature, it's the smart grids that are helping us to do everything much better. Philip mentioned data.
That intelligence and that data is just helping us to do so many more things for the customer, to enable us to move to smart cities, to smart communities, to smart appliances and to, again, I think if you can think of 2030 about what this city is going to be like it's going to be a whole lot different. Hopefully much more electrified and much more managed by data and the kinds of things. This is really a movement that is growing terrifically. If you talk to the mayors around the country, overseas, et cetera, people are moving to the idea of smart cities and smart communities and how we can make people's lives electrified and a whole lot better. Again, it's all about the smart energy infrastructure, to, again, I think move things a lot better in the future.
It is all about the customer, too. Again, I think the idea of delivering electricity in the past was the customer has it, he needs it, he wants it, not a complicated situation. As electricity becomes more and more important in people's lives, they become much more demanding. They want much more control over their electricity. You're focused a whole lot more in this industry with respect to what are the different ways we can serve customers. What are the different customers? Customers are different. How do we transform the system to be able to serve customers individually? You can take our large customers, like the military. They want resilience. That's the major thing that they want, that if you have a situation where something comes down for a while, they can't afford to be down, so you need to do that.
For a data center, which is a huge electricity consumer, they need 24/7 reliability. They've got to make sure it's there. For many companies now, it's clean. They want clean. They want to be able to say they're using cleaner energy, they think that's a marketing advantage. For residential customers, it can be apps that you might use that can notify you of outages or problems, or how long it's going to take to restore your electricity, to help you pay your bills, to talk about how to manage your electricity. These are all things that are helping us to serve the customers a whole lot better and get closer to the customer. For our industry, this is an incredibly important thing. What is the next really big exciting things? When I talked about climate change. Us getting cleaner.
People are saying, Really, if we're going to solve this climate change issue, you can't just do it in one sector. You just can't do it in the utility sector. You got the rest of the economy. You got the transportation side. Let me show you a little bit of a situation in terms of where we are right now. You notice that the electricity sector was way above the transportation sector, for example, in our CO2 emissions. That has flipped and continues to flip. The lines continue to go even though cars are getting a whole lot more efficient, right? There's a lot more cars on the road, too. This is true internationally. I don't know how many of you have traveled recently to India or China or Athens. You got people that are just wearing masks for regular pollutants, not just CO2.
We've got to deal with Every major study that's now being done about the climate issue says you've got to deal with it by moving into other sectors. The cleaner and cleaner that electricity gets, the more we are the solution for the other sectors. Sometimes in audiences like this, I ask how many people have electric vehicles. I'm not going to ask it here because I know you're from New York, and you probably don't have any cars at all. That's probably the way that the world is going to go in the future, with ride sharing and autonomous vehicles and everything like that, but they're going to be electric. People are buying electric vehicles, not to save the planet. You don't go out and make an expenditure like that to save the planet because you're thinking about yourself.
They're going out and buying them because they're great cars. The car I have right now, 0 to 60 in under three seconds, quiet. Almost zero maintenance on it. Every major automobile manufacturer is moving into electric vehicles right now. Every one of them, all around the world. We have over 1 million cars in the U.S. that are electric, several million overseas, and the growth rate is incredible. These are just some studies and predictions that in the U.S., you're going to go to 18 million in the future. The infrastructure is being built out to do that. You're doing a lot of charging at home. Question was with one of the chairman of a committee yesterday that talked about, well, you're going to have to build a whole lot more power plants.
Well, I'm not so sure because we're getting more and more efficiency in the economy, number one. Secondly, you can do a lot of charging with time of use rates using smart grids, et cetera, to manage the system. You can set a time when you want to charge, maybe between 12:00 A.M. and 6:00 A.M. or something like that and do it overnight. This is coming. This is changing. When you talk about the year 2030, you want to clean up cities, you want to have a future that's much more electrified. Now, electrification is happening in a lot of other parts of our society, in the manufacturing side too, which is the third segment. Agriculture, et cetera. I could go through a lot of industries that are moving more and more toward electrification and direct electrification.
Does that mean we're not using natural gas in the future? That's not true. We are now the biggest customer of natural gas, where you're burning natural gas to make electricity, about 1/3 of that. Basically, again, the efficiency of moving through electricity is One of the threats that we have out there to our business, storms, increasing storms. Some people will say it's because of the climate change. Some people will say it's other reason. Whatever the reason, there are a whole lot more storms. They're a whole lot more devastating. They are a whole lot more expensive. I'm very proud of our industry, too. We have a situation where we run at EEI, the Mutual Assistance Program. I don't know of any other industry that does this, where companies within an industry come and help each other in an emergency. Just think about it.
Do you see any other business where that's really happening? Probably not. We've done that for years. When Hurricane Sandy was coming up the coast here and heading up toward New York, I said, We've done this, and our operations guys are good at it, but we always have politicians second-guessing whether or not we're doing it fast enough or well enough. I called the Secretary of Energy, and I said, We're going to need your help on this one. This is bigger than anything that we've ever done before. Anyway, I said, I'm going to have a phone call every night with the CEOs of our industry. I'm going to ask them for a whole lot more help. I'd like you to be on the phone call. Well, he was on the phone call that night, Saturday night again.
Monday night, the President came on the call and said, Restoring electricity is a top priority. It is a first responder status. We need to get people back to their homes and get their electricity on, get their communities working again. We established a partnership then with the federal government where we were dealing with storms, and this has been a terrific thing where we work together. Nobody's second-guessing each other. We're working together. We're getting the job done. We're communicating with people. I got to tell you, this works a lot because of the smart grids that we have. Because we have the technologies we're employing and the things like the drones that are feeding information into stuff, and the kinds of things where we bring Florence and Michael, 60,000 people from all over the country and Canada to come to restore power.
Puerto Rico, we've sent people on boats down to Puerto Rico to restore power there. It just, again, shows the importance of electricity. Again, we've got to employ all the new technologies to really get this job done. When we had a follow-up meeting with the President, we said, Hey, there's this other issue, cybersecurity, that is an increasing threat to our country, and established, again, this Electricity Subsector Coordinating Council, focused a lot on the cybersecurity area. What are we doing together? We have high-level meetings between the secretaries and our CEOs regularly throughout the year, scheduled once a quarter. We share technologies. We get government technologies. They're called the Cybersecurity Risk Information Sharing Program. Basically, they're detection technologies. Nobody's really invented the perfect prevention technology to prevent people from getting in, but they're detection technologies that help you.
Company A see the same kind of malware on company B and to say, Hey, we've got to work with the government to do that there. We use information sharing technologies that help us get machine to machine speed information so we can respond to things. We do regular exercises and drills with the government, to help us respond, because resilience is an incredibly important part of the how fast can you respond, how fast can you get power back on. Anyway, it's been a great thing. My weekend last weekend was ruined a little bit by the Department of Homeland Security, where Chris Krebs, he called me and said that we have a situation where the Iranians may do a cyberattack on us. We're increasing activity because of the thing we recently have done on their rocket launchers, et cetera.
We have the entire industry that the alert went out on the same day. All our chief security officers, and chief information officers are on the alert or working. We're working with our information sharing and analysis center to make sure we protect the grid. Because if the grid goes down, you have major problems out there in society. We take this incredibly seriously. Philip mentioned wildfires, a new, well, not new necessarily, but certainly a larger threat than we've had before. We've seen the devastating effects of the wildfires in California, but you're having them right now in Europe right now, because of very, very high temperatures. Out west, we're worried about all the CEOs out there are very much concerned about this. Again, we want to be on the offense.
We're working with the Department of the Interior and Department of Energy and others and got a bunch of CEOs flying in another few weeks to talk about how we can get greater access. The President's put out an executive order to enable us to get more access on federal lands and on forests, et cetera, to get in there and do vegetation management, that we can do so that you don't have tinder boxes sitting under power lines. I think we're putting, again, deploying a whole lot of new technologies. Again, it's sensors and cameras and early detection devices and better forecasting, et cetera, so that we can work with fire departments, we can work with governmental officials to say, How can we prevent these? How can we detect them early?
How can we deal with them faster? These things, when they get going, you're talking about almost a football field a second. They move fast. They jump over roads, et cetera. It's a very big threat to us. It's another thing that we're taking seriously. What does this all amount to? It amounts to a whole lot of priorities. We have a whole lot of challenges. It is also an incredibly exciting time to be in this industry. As Philip indicated, we are transforming the world. We are making the world a different and better place for people in the future. We're doing it with a lot of technologies. We're doing it with a lot of information. It's a very dynamic place to be.
One of the things that I really love recently, we got together with our chief human resource officers from all our companies The industry they said, You know, it's an amazing transformation that's happening with respect to young people and millennials, like many of you out there in the room, that are finding that this is an exciting industry to work for. They're coming to work here because not only are the jobs good and the pay is good, because they've got a mission. They've got a mission. When you have people in a company like an Itron that feel that they've got a mission besides just appealing to shareholders, which I think is a pretty high priority mission to make sure you can do it, people really love being in that kind of business.
We're seeing a lot of people being attracted to our business, which I think is very, very exciting. In any case, we like Thomas Edison quotes, what can I say? That's one of them. What you are will show in what you do. Another one I love is, If we all did the things we are capable of doing, we would truly amaze ourselves. I think we're doing some pretty amazing things in our business, and it's because, again, the industry is getting outside of itself and partnering with technology companies, making things happen, moving smart grids, moving the Internet of Things and data and other stuff to make things happen. I am very, very optimistic that we will be delivering very successfully America's energy future with the help of companies like Itron. Thank you.
Thank you.
Thank you very much.
Thank you. Before we let Tom go, we do have some time for questions for those in the audience. We have Angela and Rebecca have a microphone. Please raise your hand if you'd like to know anything else from Tom before we let him go. Tom, while we're waiting for the audience to come up with a good question, I have one for you. As you look at the tremendous change that's going on, what do you think technology can do to help speed up the success of the utility industry?
Well, I think it already is speeding up the success on all those fronts that I mentioned. I think to move technologies, I talked about technologies, public policy, and customers. Technologies are the biggest driver of the three of them. Again, when you look at the energy business as a whole and the technologies that have made major changes, the fracking technology. We have companies overseas that are so jealous about our natural gas and low-cost natural gas we have. That changed the dynamics, and not a whole lot of people saw that coming.
Right.
Not a whole lot of people saw the tremendous drop in the prices of renewables and what they're doing right now. Energy storage is a technology I didn't mention that's making a major difference. Again, you need the smart grids to be able to manage all these things. I just think that, again, smart cities, we partner up. Partnerships are the key word, in my opinion. We partner with mayors and cities and governors and communities. We can advance the pace of technologies and make people's lives better. I think that's the key to it.
That's great.
Yeah.
That's great. I think we have a question in back.
Hi, Ken. Joe Osha.
Hey, Joe.
Question on charging infrastructure, the slide you had there. I was on a panel with some people from some California utilities a while ago talking about high-energy fast chargers. They were saying that the path we're on is basically unsustainable if we continue to add 50 kW chargers that people are all going to hit at the same time late in the afternoon, at least in California, that's not a sustainable path. I'm curious about your thoughts about how we're going to integrate fast chargers into the grid, given the path we're on.
Yeah. Well, we're doing a lot of work on that, at EPRI and the federal government, et cetera. One of the things I think you have to look at, too, is the technologies that have increased the efficiency. I serve on a board of an organization called the Alliance to Save Energy, and it's pushed energy efficiency, and I'm very, very proud of our industry. I used to get questions from reporters, Well, why are you pushing energy efficiency? You're encouraging people to use less of your product. I said, Because if they see greater value in it, they're going to use more of it for different things. The first computers used tens of thousands more electricity. Light bulbs now and the efficiency of appliances and motors and all the things that are happening in there. You're having that balance. Electricity really has not grown since 2007.
Electricity companies have still been a great investment even at that, because the investments we're making and also because efficiency helps keep people's bills lower, too. Even if their rates go up a little bit, their overall total bill stays relatively the same. We put right now about a half a million cars on the road in California, for example. It hasn't really affected the electricity numbers a whole lot at all. Not a bit. The fast chargers are major advances in charging, how fast chargers will be able to not only charge you a whole lot faster, but if you're on a highway, you're not going to have to stop for an hour. You're going to have to stop five minutes or something like that. The advances are coming terrifically. Yes, they're going to use a lot more electricity, and we're prepared for it.
We've gone through a situation in our country, and you have it in other countries, too, where electricity growth was at a 7%, 8% clip a year, and we handle it. I am totally confident that we can handle it here, too. Take California as an example again. Again, we're encouraging people to use electricity at night. If you've got solar during the day, and you've got a lot of excess solar, quite frankly, probably more than you're going to need, and that's your power source, not only is it super clean, but you've got an abundance of it. We've got a lot of smart engineers, a lot smarter people than I am, that are working on making sure they figure that out. I'm confident we're going to be able to do it.
That's where distribution automation comes into play, too.
Right.
Having the technology in play on the grid gives you the ability to balance the sources and loads where they're coming from in real time.
Right.
Using that technology allows you to balance between the clean energy coming on.
Right
from the power plant side, because as it gets dark and solar goes down, you have to ramp up that generation.
Right.
Having technology like Itron there at the edge helps people understand their usage better in real time, so they can manage the load of the grid more safely and reliably. I saw one other question. A couple other questions.
Yeah.
Russ?
Yeah. Two questions. The first one is, do you believe the existing legislative and regulatory regime will allow the structural investments you need in the grid, and transmission in particular, to transform the system as a whole? Do you think we're going to have a crisis where there will have to be new legislation and new bodies to drive that? I'm just speaking specifically about the FERC and the ability to get some of these transmission investments through. That's my first question.
Well, I think great question on the regulatory side of things. You've got the FERC, the Federal Energy Regulatory Commission. You've got state commissions as well. Really, about 80% of our revenues come from the state side of the equation. Transmission is really key if we want more renewables in this country, wind. Some people say, Hey, well, renewables, utilities aren't doing renewables. I get this question. We're essentially doing 100% of the wind in the country, and 70% of the solar. Universal solar is half the cost of a private solar on your roof, and we're happy to be the backup for that, too. We are getting tremendous support because our investments, we are still able to keep the rates less than the rate of inflation, while we're making that $100 billion a year CapEx.
As long as we can keep doing that and showing that what we're doing is really great for the customer and transforming the future, I think we're getting support everywhere for it right now. This is good.
Do you have any view of the rate of progress on the energy storage side, or whether you think we're going to see a significant breakthrough there in the next five years?
Storage is a Some people think of storage, well, I've got storage in my home or my residence. Storage is an adaptable technology for our system as a generation technology, as a transmission technology, and as a distribution technology, as well as maybe a residential technology. I see the growth of storage being exponential over the next five, 10 years. I think it's going to really transform a lot of things. The cost of storage is coming-
That's an example of another device going onto the grid that you have to manage somehow.
Another thing that If you want to use it all optimally and efficiently, what Ken was saying is absolutely right on target. That's a plug for Itron.
You got to remember who my shill is.
I know.
Next.
Thanks for taking the question. Pavel from Raymond James. Another kind of policy one. We hear from Washington relentlessly about the need for modernizing grid infrastructure. It stays in the realm of rhetoric, and it doesn't feel like, at least since the days of the stimulus, that the Feds have actually provided any direct funding for modernization of anywhere in the food chain. I'm curious from your conversations on the Hill, what level of awareness is there that the industry really is looking for some additional policy support from Congress? Is this something that's lost on people, or is there awareness of it?
I think that a great question. I don't know whether anybody has a feeling that sometimes not much gets done in Washington other than arguing with each other. Infrastructure is a prime example. Bipartisan consensus on infrastructure, that we've got to repair roads and bridges and highways, et cetera. That's kind of the nuts and bolts of infrastructure. The question always comes back, well, how do you pay for it? Do you have a higher gas tax? What are the pay-fors in terms of doing it? There's the other part of the infrastructure that we're emphasizing, which is, hey, what about the things that are really going to transform people's lives, like smart grids and smart cities and smart appliances and smart lighting and 5G and those kinds of things.
What we're also saying is, as our industry is, we do a whole lot of capital expenditures. We're not asking for a lot of government money. I think if they wanted to give because we have a fairly low cost of capital, we can raise the money to do a lot of the things we're doing, again, if we are doing our job right and keeping the rates affordable. I think that the issue is, if I wanted to see some money going in there, I would say that I'd like to see it for maybe more charging infrastructure, to help mayors, et cetera, to move smart cities along, much like we did with the smart grid program, and to be able to do some of the things other than making sure all the potholes are filled.
It is a challenge to get things done in Washington. There's no question about it. We are talking to people on both sides of the aisle, they like our messages, but it's hard when Donald Trump gets together with Nancy Pelosi and Chuck Schumer, sometimes things don't always happen.
Any more questions? Anyone else? Okay. I thank you very much for your time.
Thank you.
Appreciate it.
Thank you.
Everyone-
Thank you very much.
Tom Kuhn.
Pleasure.
Thank you. What we'd like to do now is just take a quick 15-minute break. We'll come back and we'll start the program up. We're going to have demos going on outside. Please go visit the demo center. Heads of our product business units will be out there also. Please feel free to hit them up. We will start sharp back here at quarter to the hour. Okay? Thank you all very much. Thank you.
Welcome, everybody. This is the Itron experience. What we're doing is a little bit different than we've normally have done in a booth. We're very excited about it. We're able to demonstrate our products in a way that's a little more interactive and exciting and shows you use cases where they belong. I'm Kevin, and this is Tom. Hand it to you, Tom. Tell me more.
Thank you, Kevin. Welcome, everyone. Glad to have you here today. Quick show of hands, how many people here are aware that Itron manufactures meters? Everybody, right? I suspect you all are aware that Itron makes meter reading systems as well. What we're showcasing here is the power of a network platform. This platform that we make is incredibly powerful. It does all sorts of things beyond just basic meter reading and billing. What we want to do is showcase some of that. One of the really important takeaways is this is one network, it's one platform, it's one common security model that's used for all of these use cases, both now and in the future as you have new needs.
That's right. We've got a scoreboard here. It's the back office view of the information that's coming in from the various zones. We've got some sensors that are sending back data. We're also going to be creating some alarms. You can track that as we move along. Sounds like the traffic is picking up, Tom.
Uh-oh.
Let's go downtown.
All right, let's head downtown. This is our downtown zone, and you can see we've got our apartment buildings here on the side, and we're measuring the flow of water into the home, and we've got gas flow into the home. We see our streetlight right here and give it one second here. There we go. Saw the streetlight just turned on brightly. What's going on there? I've got a motion sensor mounted to the pole, and so we aim it away so it doesn't go off when we don't expect it. I wave my hand in front of it, and it sensed my presence, and you'll notice the streetlight turned on fully bright. That photocell on the top has our network card inside it, and so it's the one that made the decision.
While it was at it, not only did it turn that light on, it told this light to turn on fully bright as well. This is an example of distributed intelligence. There wasn't some command sent to the back office. There wasn't some person making a decision. The devices themselves made the decision to turn the lights on fully bright. This is something we're doing today in Copenhagen. They're really concerned about ambient light pollution in certain neighborhoods. People don't like having these bright lights shining into their bedroom windows at night. What they do is they keep the lights down fairly dim at night, but when a car or a bicycle or something like that comes up to the intersection, they bring the lights on fully bright for public safety reasons. I need a volunteer for this next part.
Anyone want to help me out? Want to give me a hand?
Yeah, come in.
No? No. Okay, we'll get someone else. Sir, you want to give me a hand?
Yeah, he'll do it.
All right, great. This isn't going to hurt much. Don't worry about it. Okay, I have you stand here in front of the meter, all I want you to do is give the meter a little bit of a shake and tell me what you see on the display.
It said ouch.
That's right. The meter said ouch. What's going on there is we've got a vibration sensor that's built into the meter, and it sensed the fact that it was vibrating. Now, this might not be anything terribly important. It might be something like a semi-truck driving down the street, right? Maybe we don't need to take any action. What might it mean if all of the meters sense vibration at the same time? It might be an earthquake. Exactly right. What we're going to do next is we're actually going to simulate an earthquake, and we're going to see how a smart city might respond to that kind of an event. I need two more volunteers. Sir, you were knowledgeable about the earthquake, so I'm going to drag you up.
Here?
Yep. Over here. Ma'am, you want to give me a hand? Terrific. If I can get each of you to just stand in front of the meter. Now, you'll notice when the first meter was shaken, nothing happened. It's very important that all three of you shake the meters at the same time. Okay? When I say go, give them all a pretty good shake. Okay. Ready? Oh, nope, not yet. Okay, ready? Go. Okay. Did you all see ouch on the meter?
Yeah.
What did we see? Well, you'll notice that the gas flow has been preemptively shut off to avoid the possibility of fire. You see that the water flow has also been shut off. Now you're hearing a series of clicks, and what we're doing is we're deciding where it's safe and where it's not safe to keep the power on after this natural disaster. Finally, you'll notice that the exit sign has been illuminated so that people can evacuate safely to get back to where they need to go. This is an example of a way that an intelligent community can respond in the event of a natural disaster. Now, one final point about this, I just want to point out the streetlights, typically, they're like 30 ft up in the air. They have line of sight connectivity with each other. Streetlights are everywhere.
If you roll out a streetlight network, you've got an incredibly robust network canopy that's covering your entire metropolitan area. As new use cases come up in the future, you just put your devices out there, and they join the network that's already in place. Thank you, folks. Appreciate your participation. Kevin, over to you.
All right, here in suburbia, there are no earthquakes in the forecast. It's a little bit safer. We've got the dogs barking in the background and the kids playing outside. Over here, at this home, there's a few college students that are living here and rubbing their pennies together every month to pay rent. They're also on a prepay plan with their utility, and that just works best for them. Now, it happens to be a Saturday, where the home team is playing a big game against the rivals. They've invited all of their friends over. Well, Tom, can you help me out?
I can.
I want to start my event. Oh.
Sorry.
All right.
There we go.
Now their balance is decreasing, that balance is decreasing because they're using energy. We're of course accelerating this for demo purposes, but the idea is that they're distracted with the fun that they're having. They're having all their friends over, of course, and they're ignoring the text messages and the emails that the utility's sending them, warning them about the impeding balance of zero they're about to experience. As this drain circles, the amount hits zero, we're going to have to then go through the back office and do the financial calculation to send a message now to the meter, that we need to disconnect it. There we go. Power's off, and everybody's looking at each other. What just happened? Wait, wait. Whose turn was it this month? Is anybody a parent of a college student?
Anybody know what's going on, lived this once or twice? Sir, you may or may not be a parent, but would you like to be my volunteer?
Sure.
All right, come on up. We're logged into the customer portal here, and we've got a couple of dollar amounts that we can choose from to add a balance back in. Go ahead. Feel free to choose whatever amount you like from $10-$100. $50. Oh, that's pretty generous. I like that. That's higher than average, I'll say that. All right. Thank you very much. You can return back there. We've got more money now in the account, we're going to be able to then reopen the switch in the meter and set them as an active account. As soon as that happens, we'll see the lights pop on, and the party can continue. I'm going to go ahead and walk down here to this home while we wait for that to occur. There we go.
Power's back on, we can watch the second quarter of the game. Here, a different breed of customer lives. They've done something quite strange to their meter socket. There's some strange wires hanging down. I'm going to go and connect that because what they've done is they've rigged a wiring system here that bypasses their meter. They got clever. They looked on the internet. They found a little diagram about how to do this. They felt like, Hey, I'm a handy guy. I can get away with this. They really could in most areas of the country because unless you see this with your eyes, you're not going to know it's happening. Unfortunately for them, though, these meters all are equipped with our application platform that's on every device, and there's an app running here called Theft Detection.
Its job is to find people that are doing things like this. As you can see, we've already got the pin prick on the map in the back office. We now know exactly which home is stealing power. We know exactly when they're doing it because when we stop stealing power, the event ends, and we clear it. We can predict and create patterns of theft as well. They didn't like to pay their power bill. They also didn't like to pay their rent. They've been evicted now, and a new family's moved in, and they have this bright, shiny sports car, this electric vehicle. It's charging in the garage, and we can see it symbolized by the green light underneath. It's currently plugged in and charging. They've also enrolled in their demand response program with their utility because they want to make a difference however they can.
Right now, with that car charging and the various loads on the street, we're operating at about 63% of the capacity of our transformer. How do we know that value? It's actually being calculated by the meters themselves because another app that's running on these meters is our Transformer Load Management app. This app, its job is to look at the individual loads on the different meters and aggregate themselves, keeping a running total of total usage under the transformer. They also know that they're all under the same transformer because of a secondary app called Location Awareness. Location Awareness provides the ability, using our PLC coupler and some other logic, to be able to determine that we are under the same transformer in the same phase of power. Those two things combined, we're able to calculate we're under 63% of our transformer.
That's a sweet spot. No problem there. What happens when this person comes home from work and a little early on a hot, sunny afternoon, and it's too hot in the house with the normal program? They want to set the air down. Any polar bears in the audience who likes to keep it real cold? Come on up. Let's be a volunteer again. Yes, ma'am. How low do you like to keep it? How low does it go?
62.
62. Wow. My goodness.
That is cold.
That's a new record. I like it. All right. Where are you from when you're-
Coeur d'Alene, Idaho.
Idaho, 62 degrees. Well, it's normally 63 degrees, it's not that much energy, is it?
Yeah.
All right. Thank you very much. All right, 62 degrees. We've set the temperature on the thermometer there. The condenser kicks in, the fan starts turning, and the lights are there to help you appreciate that. The meters are measuring this change in load, right? This is an additional load on the street, and they now have realized that they're running at 104% capacity of the transformer. This is a real problem in a lot of areas of the country where we have loads that weren't sized for when they put the transformers in. A 30-year life cycle on a transformer might not be sized for streets where we have multiple EVs. This is a real use case. I've distracted you, unfortunately. We just saw that the lights have been turned off under the car because we disconnected it from charging.
As the meters appreciated that reduction, we got back under 100%, and now we're at 80, and that's protecting the transformer from any loss of life. Scale that out to many options of things that we can control, like hot water heaters, heat pumps, cars, and AC units, and we can really make a difference. Well, we're done here. Let's head to rural. Tom's already here meeting us. The crows are cawing, the bugs are chirping, and we have a lovely evening out by the cooling tower. All right. We've got this radiation emitter, and it's for our next demo. Wait a second. It says, Caution radioactive material. You know what? I feel better It's your turn, I think, Tom. Why don't you take this one?
No.
Oh, you can handle it.
He plays with toy cars. He gives me radiation to handle. Thank you, Kevin. I really appreciate that.
I care about you.
All right. What we've got going on here is this is a radiation detector, and it's on the perimeter fence of the nuclear power plant. What it's doing is it's continuously monitoring the background radiation level. Once a minute, it reports the background level that it sees, and it does that reporting using our communication technology, which is embedded into the device. That lets people who are concerned about that sort of stuff know what's going on. Now, what do we see? We see we've just had an alarm, an excessive radiation alarm. We've put an external notification out there that so that folks know what's going on. We've notified the plant operator that there's a real problem that they need to go investigate. Not just the plant operator, but municipalities downstream would probably be interested in that kind of information.
Kevin, back to you.
That's right. Speaking of sensors, we have our water tower here. It's got real water inside, and it's also got a real sensor that's measuring the water level. That's being presented here on the TV. That's the back office's view of the data. Now, I'm going to go ahead and start draining some water from this tank. What happens at the halftime in the Super Bowl? We just went through this. Everyone gets up, and they all go to the restroom, and they flush those toilets together. That's what we're doing here. We're draining our tank pretty fast. As we see that go down, we're tracking it in real time on the TV there with the data that's being sent over. This is all being enabled on our platform.
This really enables a water SCADA operator in ways that they haven't had data in before to be able to manage the assets. Back to you.
Okay, thanks. For our last demo, we're going to change to our rural environment here. We see our utility poles here, and we've got the conductors running overhead. I want to draw your attention to that little gray box up there on the wire. That's a device called a Faulted Circuit Indicator. What that does is it measures continuously things like conductor temperature and current flow. Okay. Well, as we can see, everything looks fine. The lights are on at our farmhouse. We're not having any problems. Oh, boy, what happened? Looks like the wind picked up, and our tree arced across the power lines. Well, as we can see, the power's now out at the house. We've got our blinking indicator light up there to indicate that there's a problem.
Because we know the location of that device, we can immediately dispatch a truck to go fix the problem. Rather than having to do triage, having repair crews driving all over the place trying to figure out where the problem is, we can go fix that problem immediately. As we see, the lights are now back on in the house, the indicator light has stopped blinking, and the grid has now fixed itself. This is a real-world example of distribution automa-
Ladies and gentlemen, please welcome to the stage Itron's Chief Operating Officer, Tom Deitrich.
Good morning, everybody. We're really glad that you're spending the time with us here today, and even more grateful that you came back from break. You're now treated to listening to me for the next few minutes, and really what I want to do is build on top of what Philip and Tom started earlier. Philip laid out our priorities and talked a little bit about the market. Tom outlined an awful lot about industry trends and some of the challenges that the industry has. What I'd like to do, really, is step through how we seize that opportunity. What can Itron do to help customers, but how does that benefit us, and how do we see the market growing? Certainly, it's about revenue growth and margin expansion from our side. What does the financial model look like?
Where is the market growth, are some things that I want to touch on. Then finally finish up, right before I introduce Sharelynn to the stage to talk about the thing that really fuels our entire company, and that is the products and services that we provide to our customers. Let me jump in. This is a picture that Philip promised you would get to see several times. I'll go one step further. You're going to see it many times during the day. We think it's a really good visual way to express how we see the market itself. The foundation really is some type of device. Let's say a valve that can turn something on or off, or a sensor that can provide data or a meter.
Once you have those things in the field, you want to connect them up in a robust way to make sure that it works in the real world through storms. You want to make sure that you can get data or send commands to that device in a very secure and robust way. That's what the network solutions group really takes care of. When you get all of that data, let's suppose you're sitting on a terabyte of data a month, if you're a large utility, how do you sort through all of that, make sense of it, and determine what actions you should take based on it? That's where the outcomes piece comes into the picture. We think about the market in this way because there are different dynamics that are associated with it. Don't forget, there is a virtuous cycle that you get.
Once you have access to all of this data, you can draw insights from it, and you think about, Hey, I could do more if I knew this extra piece of information. That informs you about what feature you want to build into your next device or meter into the bottom, the foundation of the pyramid. Goes the virtuous cycle. It just strengthens when you can string together all three of these pieces and grow on top of it. There is another piece of this if I look at it from a financial point of view, that has to do with what does the market look like. We have those arrows that go up the side of the pyramid, that is talking about higher revenue growth and higher margin opportunities.
When you get towards the top of the pyramid, it tends to be more recurring revenue, more SaaS-like types of business on our side, as well as managed services, which again, gives us stickiness with our customers. It helps us add extra value to the customers themselves. Let me take a step back and think about it from an internal point of view. We are now finishing up our third quarter organized this way. You've seen two sets of financial results, fourth quarter last year, first quarter this year, where we were organized in this way. We'll take you through a deeper dive in a later section as to what you should expect from each one of these businesses. I do want to lay out how we charge each one of the businesses.
Conversations with Carl Porter's Device Solutions team tends to be an awful lot about high quality. Let's think about how we can improve the profitability of this portion of our business. We are absolutely willing to exit geographies or end-of-life products in the interest of improving the margin profile associated with this business. Carl's measurements absolutely tend to be more about quality, about portfolio optimization, and about the bottom line of his business. Moving on to Sharelynn's Networked Solutions business, it's about making sure we have a land and expand type of an approach. Let's establish the network canopy. Let's add more value into it by having more sensors and devices hooked up underneath the canopy itself and expand our business footprint. There's lots of things you can do once you have the network in place to expand the business.
It really is about the coverage that we have. It is about the expansion that you get, and the incremental cost of adding one more application into a network itself is relatively small when you have the canopy built, and this adds great economies of scale and value the more devices we hook up to the network itself. Finally, Aravind's business in the Outcomes space. It really is about rapid growth. You'll see in the next slide or two how we see the market moving over the next several years in terms of size. There's tremendous growth potential here. Again, from our standpoint, it is real value we add to our customers with long-term agreements, 10-year managed service agreements, long-term software as a service types of arrangements, and we can expand our value we provide and, of course, get some financial benefit when we do that.
These three things do work together. Absolutely. Think about the device absolutely is the smartphone stuck on the side of the house, and you don't have to know exactly what applications you want to put into your smartphone when you bought it. You see what is your need today as a user of a smartphone. The same model can apply from a utility. They may not know exactly everything they want to do, but we're providing that flexibility so that we do have that virtuous cycle that I referenced earlier. We're very much organized in this way inside. Three different profit and loss statements, three different businesses with very different value creation levers and different ways of thinking about how they want to come to market is how we run that portion of our business. We haven't forgot about the needs of the customer.
We do go to market with a unified go-to-market organization under Mark de Vere White. Our customer enablement and commercial organization, the CCE organization, as we know it internally, is run by Mark, and he faces the customer with our full offering, devices, Network Solutions, and carries with it the legacy of the long amount of domain expertise that we have in electricity or gas or water or dealing with smart city types of projects, so we can speak the language of the customer and bring the full offering to market. That's the organizational model, and that's one that we think is an absolutely winning combination as we step forward in time. Let's talk about driving revenue and margin expansion.
I want to break this down into three different pieces. It has to do with what does the market look like and where are the opportunities. Then we can talk about some of the things that we're doing on the supply chain and technology side of things. Lots of numbers on the screen behind me, but the total market opportunity in 2018 types of numbers is about a $20 billion market as we see it. All in total available market for utilities, municipalities, smart cities, the industrial IoT type of space. It grows at, let's call it a 5%-6% compounded annual growth rate in the 2018 to 2021 type of timeline. Good amount of growth over the period. The green circle highlights where the growth really is.
The devices portion, the foundation, from a market perspective, is growing a little bit slower than the market average. When you get to the network side and the outcome side, much more growth. When you think about the way traditionally we have looked at the market, and many of others do, they think about it in a geographic sense, or maybe they think about it in a vertical electricity, gas, or water sense. You kind of miss the nuance of how these things are moving in different ways, and the needs are very different, hence our desire to segment the market and look at it this way. It is indeed true, of course, that the world is not flat. Electricity is slightly different than gas and water, of course, but the Americas, EMEA, and APAC have different rhythms as well.
When we look at it from a go-to-market strategy, we tend to have slightly different offerings built onto the same way of utilizing the technology, but how we would emphasize it to make sure we're meeting the needs of the customers is different. In the Americas, which is the largest portion of our business today, it is about going to market with a full offering, a full solution, a device, a network, and an outcome. We will solve the utility or the city's problem with a full offering of all three layers of that pyramid.
Certainly look to add as many different applications into a network deployment as we possibly can and make sure that we are mining that data, monetizing it, drawing insights from it, and providing either the ability for the utility to take action on those things or provide managed services for us to perform the actions as well. In the EMEA space, the larger economies in Western Europe, think Germany and France, the U.K. perhaps, those markets tend to work slightly differently. We play in those markets on more of a scale basis so that we have products that are more component-level or device-level solutions to enter the market when there is a good business case to be there. Lots of different countries in the EMEA region. It's more than 100 countries, so it would be unfair to paint with a single brush there and think they're all the same.
We need to target the individual markets where there are places for us to apply a broader set of solutions. A place that bears particular fruit for us happens to be in the smart city space, where we have done well with streetlight type of applications in cities like Paris or London or Copenhagen, where you can establish a network canopy and then begin to think about other things you could provide underneath that canopy as we go forward in time. Outcomes space, you wouldn't necessarily need a network to be able to provide an outcome. You could do it just with the data management side, and oftentimes we do provide meter data management solutions, as an example, even when we don't have the network. That's another nice piece of business opportunity for us in the European space.
Again, APAC, lots of countries, lots of different ways to attack the market, but the recipe tends largely to be the same. Let's target markets where we can sell our full solution, otherwise be relatively selective to make sure we're thinking about it from meeting the needs of the customer and also having a good financial return by being present in the market itself. The U.S. clearly is our biggest market. There's no doubt about it. Tom Kuhn did a wonderful job of outlining what that market actually looks like. The data that you see on the screen behind me is precisely the same. I think we shamelessly stole EEI data for the CapEx spending that we have here. Yes, it's referenced on the bottom of the page as such. Sarah was worried about my use of the word steal.
Jokes aside, there is large capital spending going on here. We see spending towards resiliency, robustness in the electricity grid. We see AMI deals, so automatic meter reading, still going on in many places. The early movers in that space are starting to refresh their networks. That's another piece of business opportunity in the market. An increasing desire to do something interesting with the data, whether that would be to improve the robustness and reliability of the grid or to work on safety applications with methane detection, find leaky pipes, water type of application. Those are all nice areas for us to expand our outcomes business. Traditionally, and Tom talked about this, even the CapEx numbers on the screen tend to hint at this, the utility space has worked very much on a CapEx basis.
CapEx spend gets baked into rate plans, that's how you would receive regulatory approval as a regulated utility. That business model is still present, of course. We do see some fundamental shifts in what is allowable, if I call it that way, from a regulatory basis. The map from a state basis here, the darker the green space, the more aggressive things are moving towards a SaaS-based implementation that would be allowable from a CapEx and a regulated model. This is only another regulatory-based tailwind on top of the market forces, on top of the customer needs and the consumer demands, which pulls business towards this model that we're talking about, where there's more growth towards the top of the pyramid, which creates a good business model and one that we are driving actively to bring to the marketplace.
Switching from an operational point of view, what have we been up to? We've been on a journey for the last few years. I've been with the company a little over three years now, I'll just use that timeframe. We've been working on optimizing our manufacturing footprint. Before I would jump into numbers and details, let me take a step back, why are we really doing that? What's underneath that? The fundamental tenets of our operational strategy are just a few, I think they're relatively simple. The first one that I would point out is we very much want to be in a place where we can have high-quality products, we can produce them in a cost-efficient manner, we want to be able to be agile in terms of ebbs and flows in the demand.
A demand profile will go up and down, we need to make sure that we have a good ability to manage our manufacturing costs in those periods, where the demand goes up and down. What that means is we want to transition more of our manufacturing cost footprint to a more variable cost model. We will outsource a portion of the manufacturing. We want to make sure that we have fewer manufacturing sites, larger manufacturing sites, so that you can consolidate management, again, you would have a labor force that allows you to be a bit more flexible in terms of which products you're building, as demand naturally varies in the marketplace. It gives you better utilization of your manufacturing assets, which means at the end of the day, a better cost structure.
The path that we have been on over the last several years has been to do exactly that: outsource a portion of our manufacturing that is readily outsourceable. That doesn't mean every product, the ones that can be built by a competent contract manufacturing partner, make sure they're doing that in a high-quality way, we get a variable cost model at the end of the day and consolidate the footprint. The numbers on the screen here are part of the restructuring plans that you know about already if you've been following the company. We did a plan in 2016 and 2018. These are exactly those plans, just embodied in a different way perhaps than what you've seen before.
Thinking about it from a number of production sites coming down in the three regions themselves, but also in the bar graph, you can see the changes in the cost mix, where in 2017, we were predominantly internal in relatively high-cost regions, and by 2021, we are more than 50% from an outside point of view, an external, more variable cost type of model. That's the transition, and that's the flow. In terms of the 2018 restructuring plan, I would say we're roughly halfway through, which should finish up by the time we reach the end of 2020. Joan will get into some of the numbers themselves. We're stepping through that in a relatively logical way as we work to solve the problems that are out there. Supply chain optimization, of course, is more than factory footprints and outsourcing.
That is a cornerstone of it, and that's why I put it on this slide. If that's all you do, you're certainly not thinking through the problem in a holistic way. We have centralized our procurement organization so that we can think about spend in a more holistic way, so that we can work with our suppliers in a more strategic way and provide longer-term visibility and roadmaps in terms of technology development, which accelerates the product development process, but also gives us the ability to design lower cost and negotiate lower costs when we work that way. Our products do have a long life cycle. We put a product into production, it stays there for 10 or perhaps 15 years, maybe even more in some cases.
Value engineering is an important part of the recipe, having a group of engineers that will work to steadily reduce the cost of a product through multi-sourcing components from a supply security standpoint, but also from a cost point of view, and design out cost with our sustaining engineering resources. The last point that I want to make, which is one that's often missed in these types of discussions on supply chain optimization, has to do with platforms and how you put things together from a design point of view. How well your supply chain is going to run is defined way up in the process when you're designing the product itself.
We try very hard, and you'll see this in some of the slides later on, specifically in our device business is very visible, that we want to have global platforms, think Lego blocks, that you can arrange the blocks in different ways to use the same fundamental technology to apply to different market spaces as we go forward, but global platform investment so that we can make sure we are designing products that have the right cost, quality, and supply assurance as we go forward in time. Maybe slightly off a more strategic and longer-term view from an investor day point of view, but I suspect some of the questions that we would get later on would be covered on this slide, so I'll preempt some of them. It has to do with the health of the supply chain.
We went through some rough waters over the last, let's say, year and a half ago, where components were pretty tight across the industry. The metric that we have been using on the last couple of earnings calls was the number of components with a lead time greater than six months. Back at sort of the middle of last year, we had almost 600 components that were in that category. A good portion of what we were trying to buy had very long lead times. As we had discussed in the first quarter earnings call, consistent with the view that we provided that time, that the market is definitely improving. It's following exactly the trend that we talked about when we did our first quarter earnings call.
The outlook here is the same. Just to give you some insight, we're down about 50%, 47% from October of last year in terms of components that fall into that category. Digging one level deeper, the components that still do have a touch of shortage to them tends to be more in the discretes type of areas. Some of the capacitors, maybe an occasional discrete transistor tends to have some allocation still left in the system, meaning it's constrained at the supply base more broadly. The ice is thawing here as well as we have said before. The rest of the normal commodities that we tend to work with are improving as well. The one caution I would give where there is a bit of instability that's still out there, or at least uncertainty has to do with where tariffs are in play.
Tariffs do create uncertainty in terms of the global supply chain. It's very difficult to know exactly what the policy and how the negotiations that are ongoing at a much higher level will turn out. It's something that we watch and we make sure that we are aware of, and we'll do our very best to mitigate as we go forward. From an overall perspective, I would say very consistent and steady to what we said before. Again, generally an improving trend as we had noted in the past is where we stand. Before I bring Sharelynn up to the stage, I do want to recap. We organized in terms of our way of thinking about the market to target where the growth would be and where we have truly fantastic offerings and a differentiated product set. We'll measure our internal organization in that way.
We will make sure we are meeting our customers with a broad product offering in a unified way so that we can speak their language, whether it would be electricity or gas or water or something else with a unified sales force drive to improve the financials according to the model, that pyramid kind of shape. We'll give you more details as the day goes on. What fuels all of that is the technology, the products and services that we provide. Let me introduce Sharelynn Moore, the Senior Vice President of our Network Solutions business unit to the stage to give you the view of the technology. Sharelynn.
Thanks, boss. All right, well, good morning. We're still in morning, getting closer to afternoon. I am thrilled to be able to talk to you a little bit, not about business results or financials, but I get to talk about, I think, the really cool stuff, and it's the technology, and it's a little bit of where we're going. I think you heard from Tom Kuhn, from Philip, as well as Tom Deitrich, a bit of the excitement going on in this industry. I have been in this industry for many years, too many years for me to want to admit anymore. At no other time have I seen so much creativity and innovation, not from those of us in the technology area, but with our utility customers and with cities.
Innovations in their business model, innovation in their creative thinking of what they want to deploy, how they want to engage customers, and how they're going to use technology to do what they do better. It really is a great time to be here, to be able to bring new technologies and start to see it actually make an incredible difference. I'll go ahead and dive in. Maybe what I'll do before I talk too much about the technology is put a bit of a grounding of the place that we're starting from. I'll talk a little bit about some of the new technology we've been working on and where we're going. Where we're starting from is already a really solid base of innovation and expertise and competencies that we've built over many years. Think about this. We talk about IoT.
Itron has 220 million smart communicating devices. We've learned how to do IoT out in the field. We've done this both from the battery-powered perspective, which is a lot harder. How do you get a device to be an IoT device and stay out in the field for 10-20 years? We've perfected that, as well as the innovations of what we can do in a mains-powered or an electrically powered environment for IoT. We've got that competency and that base to build off of. We've taken an early lead in distribution automation, we'll talk a little bit about what that means and specifically what that means when Itron talks about distribution automation.
As well as smart connected streetlights, which are going to be an incredibly important part of where we see that synergy of communities coming together with their utility and the municipality, and we bring smart cities. These are a few of the areas I think that will really help us, propel us into our new innovations moving forward. First, we'll talk a little bit about the investments we've been making in R&D. This is an organization where we make an incredible amount of investment, north of $200 million a year. We've been focusing that investment by putting centers of excellence together in key areas. Networking center of excellence, no surprise, it's in San Jose. We have battery IoT expertise that we're driving out of Washington State.
We've had long software expertise that we provide out of Raleigh, North Carolina, and we continue to invest in that next generation engineering talent. We're doing more and more complicated firmware and more software, but we're pivoting to make sure that we are gearing ourselves up with the right talent, because this is incredibly important as we stay ahead of these technologies and innovations. We are also making sure that we are pivoting a bit of the investment into our growing networks business, as well as our outcomes-based business. That has also required a bit of thinking about the kind of talent and ensuring that we have the right centers of excellence in which we can recruit people into the right area. Looking a little bit, if we go back in time, let's think of January 5th, 2018.
Itron made a pretty big announcement in the finalization of our acquisition of Silver Spring Networks. From a synergy perspective, a talent perspective, there's a lot I could talk about, but I'll focus it a bit on the technology. We'd been going head-to-head with this company, to try to win many of the same logos and many of the same large deals. Going into this, and we were not able to really talk until this day, we thought we had a lot of overlap. There were a lot of things that we thought that we did very much the same. One of the great things that we ended up finding out when we really got into the technology is that we'd made really big investments in slightly different ways.
The ability for us then to take those two different types of innovations and investments and bring them together are incredibly powerful. I'll say just a little bit more about that. On the Silver Spring area, they had spent a lot of time in maturing and make very robust their field area network technology. Resilient, very secure, high bandwidth, and also they've been spending a lot of time in building out an ecosystem. Partners in distribution automation, partners in smart connected street lighting. Couple that on Itron's side. We saw a vision where we can take assets out in the field, meters, smart meters, if you will, and actually create meters as a sensor.
We spent a lot of time thinking about what that next generation of smart grid meters as a sensor, what you put at the edge of the grid, and how we create innovation in delivering more value than the first generation of smart metering. We'll talk a bit more about that, but that's distributed intelligence. We'd spent a lot of time there, but we'd also really perfected battery devices, gas and water, where we have a leading share. That wasn't an area that some of our competitors are as strong. The ability for us then to be expert, both in the device and technology, but in the content, the understanding the problem statements in electricity, gas, and water. The ability for us then to bring the technologies and those innovations together as Itron on one platform, it really is putting us in an excellent position moving forward.
We are able to deliver a platform that brings distributed intelligence, brings capabilities across electricity, gas, and water needs, as well as distribution automation, smart connected streetlights, and a great inroad to broader smart city opportunities. When we think about the platform, we talk about this network, this canopy. We are essentially talking about how we take disparate things out in the field and connect them in a really elegant way that is not only highly cost-effective, robust and secure, reliable, but it's also in a way that we can actually create peer-to-peer communications or making it active. One of the things that's increasingly important as we think about how we add intelligence out on the edge is having these devices, through machine-to-machine learning, be able to talk to one another and triangulate what is actually going on.
In the case of an outage, in the case of looking at distributed energy resources like EVs we've talked about coming onto a neighborhood, what is going on in that condition, and how does the grid heal itself? How does the grid manage these conditions? How do we think about voltage? What about high impedance situations, which really create flickering and potential safety issues? These are the kind of capabilities we think about in solving real problems, not just connecting devices. The platform needs to be open because we have to bring on partners. We have to have options and choice. It has to be secure, but it also needs to have this concept of being active and providing that peer-to-peer communications. In addition, this distributed intelligence that I've already hit on a little bit is also something that we spent years in the making.
The notion that we can not only take a meter, which measures, and communications, which allow it to, in real-time, communicate back and forth, but include, in addition to that, the memory and the processing power to be able to basically put the brain on the meter. Allow the meter to understand and recognize what's going on in near real time. It has memory, it has processing power, it has the ability to run applications. Not just native code, but true applications. It also has that ability to communicate peer-to-peer, as well as understand what's going on on the line, what's actually going on on that electric grid. Who am I connected to? What phase am I on? Which transformer am I part of?
Utilities today are actually having to track how their grid is all connected, some of which they do it statically, and then they need to go out and manually audit and update. This kind of capability allows those assets, these meters, to be able to say, Here's who I'm connected to. Here's what phase, here's which transformer, which is incredibly valuable. In addition, in more instantaneous real-time, it is understanding what's going on as far as that usage inside the home, which is increasingly valuable if you think about how do we engage our customers. When we better understand the loads that are going on inside that home, what kind of programs can we offer? What can we do to provide more value-added services to these customers? How do we think ahead? This is very much what utilities are really creatively thinking about right now.
How do I change the game? How do I do more than just have a customer pay a monthly bill? This technology really does provide a whole area of new value, in what utilities can start thinking about and put in their business cases, as well as it's a great opportunity for us to partner and bring other innovative companies in to think about what app should be built that is able to run on this device. Itron, at the same time, is able to be responsive in real-time, create this app store, and help create some of these applications ourselves. We're probably three to four years into this. The great news is we're not alone. Real recently, we see some of the other players in the market talking about this concept, recognizing its value, and following suit. We see that as very much credentialing.
This is where the industry is going to go, this is what utilities will value, and it is where we can add increasing value to any sort of smart grid or grid digitization investment. Now I'll spend just a little bit of time talking about how all of this comes together in maybe a quasi real-life scenario. Maybe it's an ideal scenario, but it's common. It could be Chicago, it could be New York. What's happened is Itron's been a long incumbent provider of basic automated meter reading. We've provided their meters, we've provided their systems. They know us. We have the relationship. They come out to tender, they look for broader advanced metering infrastructure investments. As you know, we've been doing this for quite some time, we've digitized many of these cities and these communities.
What we've done in this case is we've essentially overlaid a canopy across this area. Now we have meters connected, we have two-way communications, we have a network in place. From this base, we talked about the incremental cost to add more devices or to add new applications is now less. We have the base in place. We have the network. We have the canopy, as we say, what more can we do? A typical deployment scenario is I've invested, I've put in my electricity meters, now I need to automate my gas. In many cases, that's the phase two of a very large deployment for us. They start with electricity. Now we add on gas. Now we're adding very smart, connected gas meters. In the case of gas for us, I encourage you to go look at our show and tell.
We are bringing really creative solutions in gas IoT, where we have meters that have embedded communications, shut-off valves, and the ability to sense danger situations and can react in near real-time, much like what I talked about on electricity meters. These investments in gas and water. In water, a lot of times it means, this is great, maybe I could go to a bunch of the small water municipalities around my service territory and offer them my network as a service. Utilities are coming to us saying, How can we create a business model around that? Itron's in a position to help guide them and participate in how they can go work with smaller municipalities in their region. That's another common scenario. We've done gas, we've done water, we have the network. Next up, distributed intelligence. We start adding applications.
In our demonstration area, if you haven't already seen it, we're showing you how a real-life theft condition, running a theft application on our meter, is able to be responded to in near real-time, and you understand with certainty, is somebody stealing or not? The way utilities figure that out today is trial and error. They run a list, and they have to really maybe a meter reader saw something in the field. Maybe there's been a clue that something doesn't look right, that usage has gone down, but it's a fairly manual process, there is lost electricity in the grid. Just this one application can help resolve a lot of lost, stolen electricity. Another way to add capability is through distribution automation. I'll just take a moment. What is that?
There are a lot of other assets on the grid above the meter, but between the meter and the substation. There's relays, there's capacitors, there's fault control indicators. They want to be able to automate, utilities, in order to run a more resilient, reliable grid, to storm harden, as we talked about. How can I automate those devices in the most cost-effective way? Clearly, if you can add those devices through communications and connectivity to the very same network you've already invested in, that incremental investment is lower. In this scenario, you've started with AMI, and we've added up and added on DA. That isn't always the case. I could have painted the picture where I started with this distribution automation canopy.
They've had a business case where hardening that grid made more sense first, and then they go in and they add AMI to that very same network. So either way, there's different entry points, but I'm taking you through what could be a very likely scenario. In most cases, AMI is maybe ahead of the curve. All right? Next, it's a streetlight canopy. Half of the streetlights in the U.S. are owned by the investor-owned utility. There's an incredible amount of streetlights that utilities are saying, Well, why don't I add those to my network? Or, Why don't I automate my smart connected streetlights, and I'll use that as my playground and platform to add value-added services and partnering in my local communities? The streetlight is really a Trojan horse for how you put in a smart city network.
You have that perfect height if you think about where your streetlights are. Once you overlay those streetlights and have them meshing and communicating, it's very simple to add value-added sensors and applications. You'll see a few. We have air quality, we have gunshot detection, earthquake detection that you can add to the streetlight canopy. If you're an investor-owned utility, you may say, Well, I'm going to run a streetlight network that's very compatible with my AMI and DA network, but maybe I'll even have that network separate, so that can be my smart city playground. For a municipality, now you have a double business case value if you have your streetlights and you have water AMI. How can I use those two tools together? By the way, all of this strengthens your mesh as you add more devices to that.
Now, how I, as a municipality, how do I control my destiny and create smart city opportunities? What else can I do with my AMI and my streetlight network connected? It's a great piece of how our technology builds on itself, more from an application and value standpoint, but also from the technical standpoint. Every time we add these devices and overlay more of what you can see, this mesh is just strengthening, and the network is improving and becoming more robust. It is a virtual cycle of goodness all the way around. Ultimately, in order to run these systems, in order to derive the value out of the vast amount of data that's being generated by this technology, there's a great opportunity for our outcomes-based business that Aravind runs, that we've talked about earlier. In many cases, utilities want Itron to help them run the network.
They're looking for analytics. They want a variety of distributed intelligence applications that they can run on these devices. Itron's been investing in a lot of different solutions to be able to help them in their journey along the way. It unlocks a lot of opportunity for us there as well. In order to make all of this work, it is really important that we have a really broad and wide network of ecosystem partners. We are in a good position with all of the canopy that we already have. Many of the industry players, they want to work with us. We have no problem getting new people in the market with their latest innovation. They want to work with Itron. They want to be able to run on our network. We already have seven of the top 10 metro areas covered, more likely coming.
We're the company that people want to work with, so they'll embed our communications inside their device. We also have software companies saying, Hey, I've got a great application, but if I could run an application on the edge, it only strengthens my proposition in the category that I want to compete in consumer engagement technology, for example. We're getting ecosystem partners that want to work with us on the software and the application side, as well as devices that run on the network. This is important, we think, for a few reasons. It is what utilities are going to value over time. This is a great area of sustainable competitive advantage in that once these companies have invested in us, meaning they've done the integration, they're somewhat wanting to make sure that we are working together in the market as well.
Utilities want to be able to have these options. One of the things that we've done is we've made a very conscious decision to invest in making this ecosystem work easy. It's hardware developer kits. It's software developer kits. It's an Itron application store that helps manage the application as well as the developer portals, so that these innovative companies have an easy way to get access to what they need in documentation and tools, as well as Itron expertise to help them and support them. Getting good at an ecosystem level of work is a big focus area, and we're putting a lot of time and energy into that. In summary, we are on a really great track. We are making a lot of progress. The industry is very much giving us the recognition of where we are as far as innovation.
We are winning a lot of the industry awards, some of the most prestigious awards out there. What's most exciting and most valuable for us is the work we're doing with cities and utilities and starting to see all of it come to reality. It's been a blast. With that, I am done.
Please welcome back to the stage Philip Mezey and Tom Deitrich.
Thank you.
Thank you, Sharelynn.
Yeah.
During this next segment of the session today, Philip and I would like to dig into the segments themselves, how we are organized, what are some of the characteristics, how do we see the market dynamics associated with it. As promised, third time you're seeing the same picture.
Here it is.
But-
We're going to click down, though, one level on each of these segments now.
Yeah. Let's start out with devices. Maybe, Philip, you want to take this one?
Yeah. I'll start out here because I was here for the acquisition of Schlumberger electric metering, the move from analog electric meters to solid-state meters with embedded communications. Ultimately, we made a large international acquisition and had a very complex portfolio. We've seen a transition both in technology and in portfolio. Actually, Mark de Vere White was running our electric business, in which we had a very focused effort some years ago to prune and simplify that portfolio and focus it. Tom, maybe you want to talk about what's going on in the gas and the water side along those similar lines.
Exactly. The same recipe that Mark used back in the electricity space, we apply to gas and water today. It is a large portfolio of different types of products that we think about what is the most responsible way from a customer point of view, but also from our side, to bring it down into a global platform. Carl's device team today is very focused on what we know as the Intelis platform for gas and for water.
Global platforms that show up in a variety of different sizes, but static metering platforms, first and foremost, to allow better accuracy, improves the capability for us to manufacture them in a very efficient way using an insource and outsource kind of model, value-added features like shut-off valves built into the Intelis meter, smaller form factor from a customer point of view, embedded communications as well to enable the whole pyramid type of strategy that we have overall. You see that on the gas side. On the water side as well, we have a static metering platform that we've been selling internationally for quite some time. We're now beginning pilots for that to enter the North American market as well.
The combination of those efforts in terms of pruning the portfolio, moving towards global platforms from a financial point of view, how it will express itself is revenue trend over the next few years. These are 2018 to 2021 estimate of revenue is coming down a little bit as we would be selective about which geographies we are playing in. You see a nice improvement on the margin line, which flows through the entire business model, which Joan will get into later. Maybe from a market perspective, I think the interesting position that we are in as being a number one or number two provider from a metering standpoint on a global basis really gives us the right platform to make sure we're moving the market along and we're bringing more value into the space overall.
A number of people have asked about penetration rates and opportunities. This is a slide we've had in the deck for a long time. There are a couple of things that are going on here. The first is, of course, there is yet a significant unaddressed market, even here in North America, where penetration rates are higher. We are really excited to put out a press release this morning about Liberty Utilities, which is a holding company that has 40 underlying utilities, and its parent company, Algonquin, has been an active acquirer. They've made the decision to standardize on Itron technology across their whole portfolio, across electricity, gas, and water. It's in excess of 800,000 endpoints. It's an example of a strategy for how we continue to penetrate that unaddressed part of the market. By the way, the Liberty deal also includes elements of managed services, consulting, implementation.
It's a broad range of products across the whole pyramid that you've been seeing today. We not only continue to penetrate that market, but we are also seeing the replenishment of the parts of the bars here, particularly in North America, where first-generation systems are already coming back to market. We're actively replacing automated meter reading systems and actually coming to the first of the advanced metering systems in order to replace them. One of the ways we're able to do that is by providing more value in the area of distributed automation or other applications. The platform that Sharelynn talked about, the ability to embed more intelligence, or in the case of the Intelis, in gas and water, adding more sensors onto the device creates a richer value proposition that allows us to go back and win that market.
We've added a fourth element here, though, very importantly, in the area of streetlights, a large opportunity in which we've got leadership in North America, but still have only penetrated a small part of the market, and that's a really desirable canopy, and we'll talk about that in a bit in a second. Then, of course, globally, tremendous opportunity here in the number of total endpoints. Mark and the team have really focused on the strategy here of selectively addressing markets where we've got an opportunity. On top of metering, let's talk about some of the other opportunities.
I think Sharelynn did a masterful job of describing how distribution and automation would actually work, whether it's the first thing a utility did or whether it's an add-on after they already have a network, an AMI network, in place. Really what it's doing is adding resiliency and robustness to the network. It can automatically reroute power to deal with a localized outage. It absolutely has tremendous potential to continue to grow. We have, pardon me, a number one position today with about 40% of the endpoints have been distributed or under our network. There's still plenty to go, as Philip mentioned. This is an area that's largely been served through a very expensive method to get to some of the same functionality, we can do it certainly at a lower cost, but still providing a robust business platform from our side.
The serviceable actionable market, the SAM, if you will, is just a touch under $1 billion today, it grows very, very rapidly up to about $1.5 billion over the time period that we're talking about here. A number one position in a very large growing segment of the market is pretty interesting. The same can be true, Philip talked about what the penetration rate looks like, take a step back from streetlights overall. There's 300 million of them around the globe today. You can see the geographic spread. It is 30 ft off the ground, it's a wonderful environment from an RF perspective to get up above the clutter and be able to connect up an awful lot of devices.
In the graphic that's up there, it's really talking about what are some of the additional applications that you could provide in a smart city type of environment. Streetlights, okay, you're moving from a traditional lighting device to an LED lighting device. You've got the guy on the truck changing out the bulb, if you will. Why not add the network component to it that sits on top? You have the ability to understand where your day burners are, which LEDs are out. In the event you have a problem with that, you can dim them, you can automatically turn them up and down, depending on events in your city. You have a network canopy that you can enable many other things, methane detection or parking or different ways you can manage the overall flow and traffic within a city.
A fantastic opportunity and a wonderful use case for the network itself.
Yeah. I mean, this was one of the really pleasant surprises that the Silver Spring Networks acquisition was thinking that street lighting was about street lighting, which is an interesting application, by the way, but again, this notion that the streetlight is a canopy that resides over the city as a whole. While this market, we're focused on increasing share in this connected, controllable lighting space, again, this is extending the canopy across a very desirable area. Tom mentioned some of these applications. 30% of traffic in metropolitan areas is caused by people looking for parking places. Air quality is directly affected because of the level of traffic in downtown cities, and this is something that's being looked at.
Being in a position to address these sorts of issues, and cost effectively, as Sharelynn pointed out, picking up water and other utilities underneath this canopy network, really provides some great follow-on opportunities for us.
Number one position in distribution automation, and in streetlights, as well as networked endpoints. It's a rich and fertile ground of which we have a strong position in the market today. If you look at the growth rates within the networking space overall, you see that the traditional business of AMI and AMR types of applications, one-way reads and two-way read types of things, still a growing portion of the marketplace overall, but the larger growth segments are in distribution automation and smart city applications like a streetlight. A great platform for us to continue to pursue in the marketplace. We've got the wind at our backs, if you will, from a market growth perspective. How does that express itself from a financial point of view?
Nice growth in the Network Solutions segment over the period here, it really is something that allows us to have network coverage and that canopy, which enables what you can do from an outcome standpoint going forward. The term outcomes, of course, can be a little bit confusing. What do we really mean by that? Let me take a step back, and at the risk of being slightly pedantic, but what is it that we're really talking about? Once you have that network and those meters and sensors are providing all of that data, I talked about it earlier, if it's a terabyte a month for a large utility, that data is a meter consumption set. What do you do with it?
You could start with information management, just organizing it and doing something as simple as sending you the bill at the end of the month that said you used $70 worth of electricity. A very basic use case, but an area that we obviously provide a large base with our meter data management products and solutions that we have today. Now that you have that data, you can start to look at trends. You can look at differences in it. You can start to make decisions about ways to use it to improve the efficiency of your utility. Okay, you can find out who's stealing electricity in one of the demos. You can find out which pipe is leaking, so you know where to dig to find a leak. You can find out where you may have a gas leak with methane detection.
That's the next level from an operational efficiency point of view. Finally, engage with the consumer. If you know what time the car is arriving in front of your house with the Uber app to see when you're off to the airport, you certainly should be able to find out how much energy you've used, how much water you've used, what other types of information is available. It's a way for our customer to engage with the consumer. We've built this as a continuous flow of different things you can do with the data. We can offer it as licensed software. We can offer it as managed service, or we can actually offer it as an outcome, as a service, working with a utility to provide the actual solution to whatever the problem would be. They don't necessarily have to build in this direction.
You can mix and match, once you have that rich set of data, it opens up a world of possibilities. Maybe a couple of examples, Philip.
Sure. Tom Kuhn talked about this revolution in electric transportation. Well, one of the great examples of this is beneath this great city, the subway. It's got a few reliability issues, and we actually provided the system to Consolidated Edison that's allowed them to build a wireless network under all of the Metropolitan Transportation Authority's stations, which has allowed them to isolate where problems are occurring with the subway, helping to improve the reliability of the subway. Another Consolidated Edison example, actually, we're in the process of deploying a methane sensor here in the boroughs to proactively be able to determine that a leak has occurred before it gets to explosive levels. This is an example of a battery-powered technology sensor that is communicating via the network that's being put out. So a new use for the network for this methane sensing.
Very importantly, this water leak, we talked about these high levels of leak that we have, an acoustic leak detection capability that we have in addition to metering and just collecting usage information, the ability to put detectors out in the field that allow for triangulation, not only to find leaks under normal circumstances, but in this example, in which the Hurricane Irma actually really created some significant damage to the system and allowed the water utility to isolate problems much more rapidly. These are just a couple of examples of the kinds of outcomes that our customers are looking for.
You can see the value in just those stories, but the value, obviously, also to the customers is visible in the market growth. The fastest-growing portion of the market that you saw earlier, and if you look at it inside of the different things we talked about, engaging with consumers, information management, and making utilities more efficient, information management and the efficiency space, that robustness, reliability, improving the operations of the utility, tremendous growth potential, which fuels the outcomes-based business for us. A strong growth path for us going forward. As we scale that business, only better margins as we step forward in time. Nice margin accretion, as well as top-line growth for the business.
The question, why Itron in this space? It's going to be a competitive space. We have been very strong in the information management space in terms of providing the software that's used to read these systems and store and organize this information. Of Itron's 8,000 utility customers, 1,400 of them now purchase managed service from us. We're managing the system on their behalf. That on daily relationship that we have with them to aggregate this information and support their billing cycle is a natural platform for us to ask the next set of questions or answer the next set of questions. Would you like to know who's stealing from you? Where the leaks are in your system? What assets are underperforming?
Our ability to offer bite-sized pieces of additional value through an existing channel and relationship gives us, we think, a very strong position in order to add more value and build more success stories in order to grow in this space.
Number four. Again, we're just bringing it to a close. We've given you a quick snapshot of the different segments that we have and what we expect from a business strategy and a financial overview. We're very excited about thinking about the market in this way and pursuing the opportunities in the way that we have already described. With that, I think, Ken, back to you.
Thank you, guys. We're right on time. We're going to break for an hour. We're going to come back quarter till the hour. If you all can be back here at 12:45, we will finish up with Joan and the financials, we will go to a Q&A. Again, for those who did not see the demos, we'll have demos going on outside. Those of you online in the webcast, we'll play some more videos with some more informational demonstrations that we've done. Also, our executive team will be available for those of you here in the audience here in New York to talk with and ask questions to during the break. Please thank you all very much, and we'll see you back here in an hour. Thank you.
Exelon really sees the future grid as providing the connective tissue for cities and communities to help with climate change goals, economic development, and quality of life. Building on that connectivity, foundational to that is a communications platform. I think the Itron experience, and especially the downtown demonstration, really shows that connective tissue between both fundamental utility services, but also city services. I was really impressed by it. I think it was really exciting to see a very coherent platform for different types of environments to help address some of the core challenges that our cities and communities are dealing with. It was a really well thought-out demonstration. My favorite was the downtown earthquake demonstration.
I think the coordination between the three smart meters with the shutoff of both the water and gas, plus the exit signs coming on in the parking structure, I think, was a really cool, seamless edge platform. That one was definitely my favorite. The connectivity that the Itron experience describes and highlights is really a key part of what we're also trying to explore as a utility. With the vision of connected communities, we're staging our investments over time to explore not only foundational utility goals like modernization for reliability and enhancement of resiliency and security, but also including electrification, including decarbonization, and then ending with convergence of infrastructure to provide new solutions and services to our consumers. The Itron experience, in particular, I think hits all of those different topics. Modernized for reliability, you have the example with the earthquake. With decarbonization, heavy focus on electric vehicles.
It's neat to see a demonstration of something that really links all of those different aspects of both grid services and customer value together in a way that addresses some of the questions that we're starting to really deeply think about as a utility as well. With our vision of connected communities, it's really about providing not just value for the electric system, but really focusing on climate change targets, economic development, and fundamentally quality of life for not only our customers, but just citizens and communities in general, and thinking around what these different assets can bring to the table. You talk about smart street lighting, that's something that really provides safety to people. The air quality sensors are about health.
When we consider what it means to upgrade our networks and to provide new types of infrastructure, it's technologies like these that we think will be foundational to help achieve some of these goals. I think what Itron's done is provide a really fantastic, seamless, and relatively immersive experience to see how their technologies and how their partners' technologies fit together in a package and really help achieve multiple different goals for both utilities and cities.
We were very proud as the water utility for Providenciales to get the water back stable within four days. It meant that the most critical utility was back to normal. Unfortunately, we were visited by Hurricane Irma in September 2017. We had a very rough 24 hours initially. During the worst four hours of that storm, we saw winds in excess of 170 mi an hour in Providenciales, and some weather stations recorded gusts of over 200 mi an hour. Independent reports after the storm said that 90% of properties suffered some form of damage from the storm. We were so fortunate that there was not a single death in Turks and Caicos from Hurricane Irma, so we were grateful for that small mercy. Immediately following the storm, we reviewed our water storage levels, and to our horror, we saw that over 50% of our stored water had been lost.
This wasn't due to damage to the water storage tanks. This was actually due to flows, catastrophic flows, at a number of properties that we served across the island, as they'd been damaged. We really had to work out, well, how are we going to stabilize the system to be able to repressurize the whole network? We made the tough decision that we would need to basically cut off the water system for a period to allow us to just regroup and understand how we were going to methodically go about restoring the system. Also, the secondary benefit for us was that it would give us some data through the AMI system to start to understand where the flow rates were across the island.
It was a blessing that we had AMI in place, because what it enabled us to do was be very focused about where we put our resources to actually switch off these damaged properties. You can imagine with the amount of damage, felled electrical poles, trees, property damage, you only really want staff to go where it makes sense to go. You didn't want them to have to do 100% review of the island, which would've taken weeks and weeks, and often in areas that would've been dangerous for them to do so. It enabled us to focus our staff, go into properties to make sure that we were switching off those catastrophic leaks, and build the pressure back up.
It was amazing to think that within four days of being impacted by Irma, we'd managed to fully repressurize the system and have all of our customers back online.
There's a Gartner report that says by 2040, over 50% of the world's electricity is going to be powered by solar and wind. That's going to require a lot of changes to the grid. There's a lot of changes happening in the utilities space. They're on this journey of digital transformation, I think the fundamental change that they have is the bidirectional power flow. The integration of DERs, so distributed energy resources such as solar and wind, are impacting the grid. Utilities are looking for a way to overcome these both technical and business challenges. All of our investment in our infrastructure, the number of regions with all of our data centers, our networking, and our IoT gives utilities a platform to tackle all of these challenges. We're focused on security.
It's a core tenet of Azure. We actually spend over $1 billion on security. There's a whole building of people just working on security. We're also working with compliance and regulators around the world. This includes at a global level, regional country level. We also work with NERC and FERC to make sure we're addressing some of the challenges as utilities are trying to adopt cloud. Some of the biggest financial institutions and government entities, they are starting to put data in the cloud. They've realized that Microsoft has a lot of security expertise that they can just leverage. You don't have to manage all of the data within the data centers. You don't need personnel for that data. You're actually just using that technology to make sure your day-to-day operations get better and more efficient.
Itron's really leveraging Microsoft's cloud platform to bring all of their 80+ applications into a smaller set of applications. They're able to leverage all of our data centers, which are located around the world, our wide area network, and our platform components. They're able to also bring in their own expertise. We see a lot of potential for this, where utilities can leverage these technologies as part of their digital transformation. A large utility in Norway is able to leverage Microsoft's cloud platform to solve some of their challenges that they're facing in their grid with respect to integration of renewable resources. They have two main goals. One is to minimize the cost, and number two is maximize flexibility.
They want to be able to figure out which is the optimum resource to use depending on the time of the day and the load. I think we're evolving from the point where we're just collecting data to really doing more solution-based outcomes, like proactively doing maintenance. Predictive maintenance is a key focus for utilities now, and management of energy usage. Giving more information to end customers so they're able to proactively manage their own energy usage. Microsoft's mission is to empower every person on the planet to do more, and Itron's is to create a more resourceful world. I feel like these two really align well together to make sure we're delivering the right solutions for these utilities as part of their digital transformation.
Our industry is changing, our customers are changing, and they are demanding from us very different things. It is a must today to have the tools so as to be able to give them what they want to receive. We are providing service of water supply, water distribution, production, recollection, and sewage water treatment for about 2.5 million people in the fourth and fifth region in Chile. We are developing network management that is supplying intelligence to all the network and to all our operations in a project that is based in five layers, which are absolutely different and that has to be developed one by one. In the first layer, we have to develop the infrastructure. We have sensing and controlling, which is the second layer. Communication is the third layer. We gather all the data so as to be analyzed. That's the fourth layer.
The fifth layer is the intelligence that we have to apply to match all those data and make them affordable to take good decisions. For that fifth layer, which is the last part of the project that is going to bring us the most important added value to our operation.
This program is very important for the company, but it's necessary advance step by step. We define different kind of goals. For example, reduce the water losses, energy savings, automation the operation, and optimization the CapEx. It's important for our company and the most important for our clients. The benefit our network to the clients is because I can give different kind of information.
In as far we believe the most important change we're doing today in this step in the company is create value for the customer and give this information. When the customer have this information, can be reduced loss, save the money. When we give the information for the customer, we create this engagement for the customer and higher the level of the satisfaction. In this pilot, Itron provide the technology, the knowledge, the experience, is the most important partner with development this pilot for the customer.
What we are doing, we are doing a pyramid in which we have in the base the operational items. Of course, they are very important, but on top of that, we have the functional and the emotional relationship with the customer. When we apply the intelligent management of the network, is to let the client take decisions about, for example, their consumption. We are very focused in efficiency, so we know perfectly what we have to do, and it is kind of easy to understand how I can apply all those tools to efficiency. Complicated thing is to think how to increase client satisfaction at the same time that I have efficiencies in my company. We have to change the culture of the industry from a infrastructure manager to a service provider manager.
Non-revenue water had been identified as a growing cost base for our water utility. We looked at the technology to see what we could put in place to be able to more readily identify where non-revenue water growth was occurring. We were starting to get NRW rates of between 15%-20%, which I'm sure a number of water utilities in the world would be very happy with. Those have got fresh water sources, whereas we are using reverse osmosis, which is very costly. Anytime that a gallon is wasted, we know that we're paying for power to produce that gallon. We wanted to get that down to a much lower level. We went out to look at a number of vendors. In fact, we looked at the Gartner study about MDM, and we saw that Itron was one of the market leaders.
We're impressed with the analytics program that we saw. In the current Itron solutions that we're using in Provo Water, we're using the fixed network product, which has given us hourly reads on every service meter and district meter on the island. That is being linked in with Itron Analytics that's allowing us to look at the non-revenue water patterns in our districts across the island at the same time. We're also using the MC3 product, which is for any missing reads, we can then do drive-bys to collect that missing data just so we've got integrity of our analytics data. We're using those on a daily basis and really have become an integral part of how we operate as a water utility. Our network has approximately 130-140 districts. We're getting very good granular detail with the non-revenue water across the various districts.
We've been very pleased with the coverage that we have. When we were looking at Itron's products, we knew that we could either host it internally or use it through hosted services on the cloud. Obviously, in an area that's affected by hurricanes, knowing that we could be physically impacted on island, having the cloud service offered to us, it was really an easy decision to decide to have it hosted on the cloud. What we now have with the implementation of AMI is if a customer has a query regarding their bill, we can provide them through analytics, looking through a customer service portal, we can start to give them not only their daily data, but also the hourly data of their consumption pattern.
Very powerful from a customer service perspective to be able to notify the customer when that leak commenced and when it stopped, or when that flow commenced and stopped. I use the analogy to people that have never had this before, that it felt like we went from watching a black-and-white television to suddenly we had a 4K HD TV. It really was a case of receiving NRW reports that were three weeks after a month end, and really not having any idea as to what the level of NRW would be, to the point that at 8:00 A.M. the following day, you knew exactly what your NRW position was for the previous 24 hours.
To have this real-time information at our hands has enabled us to very much focus on where new leaks are occurring and make sure that our staff are being deployed to the most efficient and effective manner. We managed within six months to reduce our NRW by over a third and close to 50% for certain months. Our long-term aim is to get NRW down to 5%, which is really a world-class level for NRW. As a water utility, you're obviously looking at long-term horizons. You're not looking at one to two-year gains. Because you're the sole provider of water, you're looking at longer horizons. It really has transformed the way that we understand not only our customer demand patterns and our flow rates, but it's also providing us with critical data in terms of long-term infrastructure planning.
Con Edison is the first company in the world to have a 10% lower explosive limit methane detection device that is AMI-enabled with Itron. Con Edison has about $5.5 million electric and gas meters combined. We're using a variety of Itron products in our AMI deployment. We're using the access points on the overhead poles. We're also using socket access points in the socket of electric meters in order to cover our Manhattan territories and other regions. We're also using AMI-enabled smart meters as well as gas modules. Finally, we're using the Milli 5 product for our AMI-enabled natural gas detectors. The vision of Milli-enabled devices is to promote cost savings, safety, and other initiatives, both in our territory and as many other territories as we can impact. The possibilities with Milli are basically across all commodities.
We can use things for electric, gas, and our steam commodities in Con Edison territory. We can create new sensors, new technology, new safety enhancements, and new data collection opportunities. The natural gas detector project is putting AMI natural gas detectors in about 9,000 locations for our pilot in the fourth quarter of 2018 and the first quarter of 2019, and then potentially expanding it to the whole population of indoor gas meters, which is about 300,000. The main business driver in our company is safety, both public and responder safety. We wanted to take a proactive approach to make sure that both the consumers of our natural gas and the responders to incidents are safe and aware of what they're getting into and what's going on.
The goals of our program are to be aware of atmospheric concentrations before they become explosive and get an emergency responder there as quickly as possible. We have a Public Service Commission mandate to respond to about 85% of our gas leaks within 30 minutes. Instead of waiting for a customer to call, or they may never call at all because they weren't in that space, we're able to notify our gas emergency response center in advance and take that proactive approach to safety. Because the gas alarms actually generate a ticket with no human intervention to our gas emergency response center, we'll be able to generate tickets to our operators and have them send a crew out. The project will change some processes that we have with the fire department. We already talk to the fire department when we get a gas leak.
However, now we actually are able to tell them where the leak is and send them to a confirmed address. We are creating new response protocols with our local fire departments, both in New York City as well as Westchester County. The benefits of AMI-enabled methane detector is basically a proactive approach to the location. We will know where these devices are installed. We're going to be able to install them as efficiently and as cost-effectively as possible. Then we can send the people to the right place at the right time. It's important for Con Edison and generally the utility industry to have insight into methane detection as early as possible so that we can avoid atmospheric readings that can lead to tragic events and have a proactive approach to safety and response.
Ladies and gentlemen, please welcome to the stage Itron's Chief Financial Officer, Joan Hooper.
Good afternoon. Happy to be here today. I get the good part of the agenda, to show you what all the great work that was covered by Philip and Tom and Sharelynn is going to yield in terms of financial results. I would like to start with just recapping some of the key messages that I hope you took away from those presentations. Philip started with a great summary of the strategic framework. Exciting industry. A lot of evolution going on in it. Tom Kuhn did the same thing, which is there's a lot going on in our space. We talked about our priorities of expanding our footprint, expanding our reach, expanding our ability to serve and add value to our customers. Sharelynn did a great job talking about our technology and our leadership position.
You'll see in the financials, we're continuing to invest in ensuring that we maintain that leadership position. If you go forward, again, the first thing I would ask you to take away is we are actively increasing our value proposition and our reach with our customers, and this is going to yield substantial financial benefits for Itron and for you as investors. Tom came up and talked about some of the operational things we're doing. He talked about the rotation of the segments and how we're going to grow in the higher-growing segments, and they have higher margins, and how we will capitalize from that part of the industry. He also talked about where we are on our ongoing transformation initiatives.
We'll show you some of the benefits of those results, I'll also show you at the end that we're not satisfied with what we've got underway, we know there is more that we can do. The second key point is we know there's a lot of operating leverage and a lot of free cash flow generation in our model. I'm going to show you some significant improvements from a 2018 base to 2021 estimates. There's more to do, of course, when you improve the operating leverage, on the tail end, you'll see, I'll give you some details of our restructuring cash outflows. Once you're through that, we have significant ability to generate a lot of free cash flow, strengthen our balance sheet, de-lever to where we want to be, essentially create a stronger balance sheet.
Let me start with the rotation. Tom and Philip did a really good job talking through each of the segments. Let me orient you to the chart. On the left-hand side of the chart is revenue, I'm going to start with the 2018 numbers then show you what the 2021 estimates are in that range. 2018, we had about $2.4 billion of revenue, what you see is the relative contribution of each of our three segments of Outcomes and Networked Solutions and Device Solutions. If you look forward to 2021, you'll see that our estimated growth rate is between 3%-5%. Take the midpoint, roughly 4% CAGR, look closely, you'll see the increasing participation from Networked Solutions and Outcomes because we're growing in the fast-growing parts of the marketplace. In fact, we're growing at or above the market growth rates.
Tom talked about the priority to improve profitability in devices, and you see that here. The device business is actually shrinking a slight bit, but if you look to the right-hand side of the chart, which I'll cover in a second, the gross margins are not, and the gross margins are improving. On the right-hand side of the chart is gross margin. We were about 30.7% in 2018. This is shown in gross profit dollars. The range of growth that we're talking about on a midpoint basis is 8% compounded rate. 4% compounded rate revenue growth, 8% or double on the gross margin line. Significant demonstration of the operating leverage of our business. What does that do to the full year 2021 estimates? Again, revenue in a range of $2.6 billion-$2.75 billion, 3%-5% growth.
Gross margins in a range of 33%-35%. We're at that mid-teens EBITDA that we've been talking about for a year or so. In the 13%-15% EBITDA range. And free cash flow as a percentage of revenue. This is a new metric we haven't talked about a lot. If you look at 2018, it was about 2% of revenue. The estimate for 2021 is 6%-8%, and we'll go through free cash flow in a little bit more detail. I mentioned this earlier, but one of the dynamics that has been going on in our business really since 2014, there was a restructuring, but particularly 2016 and 2018 restructuring plans, and then the acquisition of Silver Spring, was a lot of cash generation has been used to fund those restructuring programs.
I'm going to give you more detail on that, make sure you know where we are in that journey and what's left to come. We have been talking about $140 million of annualized savings for the past year and a half or so. And you can see on the slide what that represents. It's $40 million of savings from a 2016 restructuring plan, $50 million of annualized savings from a 2018 restructuring plan, and $50 million of acquisition-related synergies associated with Silver Spring Networks. We have been giving on our quarterly calls the status of where we are on those. Through 2018, we have achieved roughly half of that amount on an annualized basis. There's another $70 million to come, split half and half, roughly between 2019 and 2020. About 75% of what is remaining affects the OpEx line, 25% affects the gross margin line.
By the end of 2020, we expect to have all of the $140 million in our annualized run rate of savings. The right-hand side of the chart is the profile of cash outflows. The total estimated cash outflow is $250 million-$260 million. Through last year, we had spent $110 million of that. There's a remaining $140 million-$150 million, of which about 60% will happen in 2019, another 25% in 2020, and the remaining piece in 2021. Based on the announced restructuring plans, our cash outflows associated with these plans will be over by 2021. With that in mind, our estimates for free cash flow show healthy growth. I mentioned free cash flow as a percentage of revenue going from 2% to a range of 6%-8%. That's roughly $50 million going to $200 million between 2018 and 2021.
You can also look at that as a percentage of EBITDA, roughly 21% to a midpoint of about 50% of EBITDA. Significant cash flow generation. Remember, 2021 still has some restructuring outflows built into that. We also are using our excess cash to delever. From the very day we announced the Silver Spring acquisition in September 2017, we said we would target getting to about 2x leverage by the end of 2020. We are on track to do that, and our estimate right now is we will be roughly 2x leverage at the end of 2020, and we will be under 2x leverage in 2021. From a capital allocation strategy, really no change. It's what we've been saying now for almost two years, which is we are going to take our excess cash and we're going to delever.
We have done a small stock buyback earlier this year, $25 million, which is what we are allowed to do under our debt covenants. We found that the market conditions were attractive for that. The price point at which we bought the $25 million back was $47 and change. It turned out to be, I think, very good timing for us. In addition, we have obviously not been active in the M&A market, and we don't intend to be until we hit the target leverage ratio. What does it do in terms of the overall 2021 numbers I just showed you? It's really the same theme. You are seeing operational leverage, and I think we're still in the early to mid innings of what this company can do. You're seeing us go to revenue growth in the segments that are growing and that have higher margin.
You're seeing us deliver a double-digit CAGR growth versus revenue on the gross margin line, hitting mid-teens EBITDA, generating a lot of cash, allowing us to delever. By the time you're in 2021, not only are we below 2x leverage, if you just think about the strategic flexibility that we've built up in a very strong balance sheet. All the while, continuing to invest in R&D to ensure that the technology leadership Sharelynn described, we're able to maintain and grow on that. I would tell you, I'm satisfied with where we are in 2021, but certainly we are not content. What we're trying to do in this next chart is give you a flavor for what we are committed to continue to work on. The left-hand side of the chart shows some levers for us to continue to improve our operating leverage.
I'll go through each of these in detail. On the revenue line, by the way, the right-hand side of the chart is a little bit of a barometer of where we think we'll be in 2021. If it says more, that means we have more opportunity to improve. If it says less, we have less. It's a little counterintuitive, but this is what it means. On revenue, if you look at where the Outcomes business is, it's a pretty small percentage of our revenue right now, yet we're growing at or above market rates. We're going to continue to do that. Aravind has a goal to be 80% recurring revenue. Having that kind of a recurring revenue stream is going to give us a lot of leverage. We're going to continue this rotation from Devices to Networks to Outcomes.
With that growth and those parts of the market growing faster, we're going to get a natural uplift in our margins. In addition, we talked about the regulatory environment being more favorable for SaaS-type offerings. We're continuing to look for ways to grow that business. Supply chain, we are in the very early innings. I had a couple people asking this at break. Think about that as product rationalization, value engineering, tearing down our products and understanding how we can make the total cost of ownership for customers more competitive. It's consolidating suppliers, making sure you're getting the best possible prices for the purchasing leverage and things like that. We have a lot more we can do that, including, as Tom alluded to, more movement towards strategic outsourcing where it makes sense.
On the operational leverage side, think about that in terms of how do we leverage the fixed cost infrastructure we have. Tom spent time showing you a factory blueprint of now to 2021. We're going to continue looking at that. If it makes sense for us to continue to shrink that footprint, we'll look at those as options. Obviously, you have to do a business case and those kinds of things, but we know we have to continue to look at our footprint in order to be competitive. Likewise, we have in the Outcomes and service and delivery organization, a really robust set of folks under Don, and we know that when Aravind continues to grow the Outcomes business, we can scale that business, and we can improve those margins of the Outcomes business well beyond what you saw on the charts that end at 2021.
OpEx efficiencies, I would say we have less to do. We have done a lot of it. If you think about G&A, almost all of our synergies last year from Silver Spring, which was $25 million, was in the G&A category, but we're not going to be satisfied. We're going to continue to work. Mark's organization is a worldwide sales organization, is giving us an opportunity to make sales not only more effective but more efficient, and so there's work to do. All four of those lead to improved operating leverage, improved earnings power of the company, and of course, that means increased cash flow for the company. The things I'd like you to leave you with. We believe we are a compelling investment opportunity. We are in the beginning stages of improving operational leverage, improving free cash flow in a really exciting industry.
You heard about how the industry is evolving and how important technology is to this industry. There's a lot of market opportunity in front of us. We're well positioned. We're the market leader. We have initiatives underway to continue to be the market leader from an R&D and a technology standpoint, and we've got not only plans in place, but lots of ideas for how we improve the operating leverage of the company and improve the free cash flow. With that, again, we have a much stronger balance sheet and a lot of strategic flexibility to determine what we do with our excess cash once we've de-levered. With that, I would like to ask Philip to come up and do some closing comments, and then we'll open it up for questions.
Joan, thank you. It is hard to create a summary after those wonderful remarks. I want to close by summarizing what you've heard from us today. I will comment at the end about my plans and succession planning, and then we will go to questions and answers. Starting at the very beginning, this is a company with a strong mission and vision about what our opportunity is in the marketplace. Where we began in just delivering basic operational efficiency to our customers has now blossomed into a much wider opportunity for us to make our customers more successful and to build a much more sustainable society. In order to achieve that vision, you need to build a strong team.
Over the past five years, we've both cultivated the talent we've had within the company, but also looked outside the company, both hiring from industries that had the experience that we needed in order to get to the next level, and acquiring expertise along the way in order to build what we feel is the strongest team inside our industry. We've set our standards at a different level. Years ago, we used to compare our performance to prior years. We'd compare our performance to our competitors. The plan that Joan has talked about is benchmarked against the best in not just our industry, but within peer groups, in which we're not satisfied. We continue to drive for a higher level of operational effectiveness and growth within our markets. In order to do that, we've had to undertake some very heavy restructuring, which we are well through, although it's a continuous process.
We will continue to look for opportunities to drive efficiency in our business. It's taken a new way of thinking about how we operate the business in terms of captive manufacturing, fixed cost versus variable cost, in which we have undergone a significant change in really supply chain optimization. One of the points on one of Joan's slides mentioned that we've centralized a number of functions that used to be done globally in a very disparate fashion across the company. This is the kind of inside baseball that may not be that interesting to you, but in order to continue to drive efficiency, we need consistency not only in the talent we have inside the company, but the processes we use in order to do all of our basic business.
We've done some very heavy lifting inside the company in terms of centralizing our sales function, centralizing demand planning, fulfillment, delivery. All of these functions have been brought together in a way that gives us better consistency in how we face our customers, and it gives us a much more efficient way to deliver our products and services to the market. In order to realize the vision, we need technology leadership. We need to be not just to continue to invest in our portfolio, but to have a bold vision about where the opportunities lie and the ability to execute on that vision. Both through organic investment in R&D and through acquisition, we've positioned our portfolio in a way that we think gives us a strong technical advantage. We are not only integrating across electricity, gas, and water, we're addressing the adjacent market of smart cities and smart communities.
We're building strong, secure networks that are based upon open standards and have a strong ecosystem of partners. Sharelynn talked about this, the way I like to think about those partnerships is we are unlocking innovation. I hope you had the chance in the demonstrations to go out and look at some of the samples that we have, the opportunities in front of us are really boundless in terms of providing a platform that allow creative minds to come and add more hardware and more software, more ways to look at data and drive value. We're excited about those possibilities. That technology infrastructure and investment that we've made will continue to give us a strong platform for leadership in the markets that we address.
I really hope that you've gotten a sense from some of the opening remarks, particularly Tom Kuhn's remarks, that this is a really interesting time in the energy and water business in terms of the level of investment that is being placed in modernizing the industry. You probably don't go to that many utility conferences, but you typically hear people say, If Thomas Edison were alive today, he'd look at the grid and recognize it. Was the kind of thing that people used to say for many, many years. What you heard Tom Kuhn say is that is no longer the case. We are moving from an analog to a digital world. That transformation has come to the utility space.
Significant investments are being made in digitizing infrastructure and adding more sensors and more capability in order to improve operational performance, also to engage with customers in an ever more competitive world. The opportunity there for us is that we are providing basic infrastructure, indispensable infrastructure to our utility customers because we are the conduit for their cash register. On top of that capability, we now are able to provide unparalleled insight in how electricity and gas, water are being distributed and how customers are using it, which gives us another whole set of value propositions.
In order to capitalize on those value propositions, we felt that organizing the company in this picture you've now seen four times of devices, networks, and outcomes best expressed how we can build upon the solid platform we have of hundreds of millions of deployed devices that are now connected through powerful networks, generating vast amounts of data that give us the opportunity to analyze and make recommendations to our customers. We see that starting in the confidence that our customers are expressing in us by having us operate the system on their behalf. We are very excited about opportunities like the announcement that we had at our last conference call, in which across the Exelon utilities that we had been selected to provide their analytic platform.
This kind of confidence that utilities have in Itron of actually providing them with analytic insights, we think is going to be a tremendous growth engine for our business going forward in the future. In order to thrive, not only in the short term and the long term, we need to pursue the priorities that I opened with. We need to continue to compete and win market share every day. We're excited about the Liberty Utilities announcement today because it demonstrates endorsement of our technology architecture across an acquisitive holding company that represents 40 utilities as an example of us continuing to drive market share. We see exciting signs of being able to compete in markets where we have already sold an automated meter reading system or have an outstanding relationship with the customer to continue to deliver new technologies to those customers.
We will fight and we will continue to win and capture market share in our core businesses. You have heard discussions about distribution automation. Many of those examples have been about electricity. On the gas side, the gas business is very concerned about safety in their systems, about giving us the ability to deliver on the gas side, pressure sensing, corrosion detection, shut off. There are a range of value propositions that are available on gas and in water, a tremendous opportunity, again, because of these very significant water losses. In the U.S., 30%, but in developing parts of the world, those percentages are significantly higher.
There is an outstanding need for us to build more efficient and reliable distribution infrastructure and work with communities, not only to light them safely, but to build communication canopies over them that will then enable some really interesting innovation to make cities safer and more environmentally friendly. The future for our business has never looked brighter. Tom Kuhn said that there's never been a more exciting time in the utility industry. We have so many opportunities to thrive and compete in our core markets as we look at the opportunities to even extend beyond our traditional areas of strength in the electric, gas, and water utilities, again, looking at smart cities and smart communities. Value propositions of additional endpoints and devices underneath our networks added on to the software and services capabilities and the outcomes that we can generate for our customers.
Our opportunities for growth are very strong, our opportunity to improve our operational leverage and performance, I think we have demonstrated over the past several years, we are on a very solid trajectory. With that, at the beginning of the year, I announced my intention to retire this year. The board formed a search committee and has identified candidates. The process is well on schedule, we expect shortly to be announcing what our plans are as we complete the process. I have to say, I hope that you can tell, that this is a bittersweet moment for me because this is not only an industry that I've loved, but a company that I've loved, working with people whom I deeply respect.
Among the people that I respect are many of you in the room, our investors over the years and analysts who have spent the time to get to know us, who have really supported the company and wanted to understand our story at a time when our results were not always what we wanted them to be. Many of you have really displayed faith and support for our ability to work on the programs that I've discussed in order to continue to drive performance in our business. We are very confident about our ability to continue to operationally improve and aggressively pursue growth in the markets that we serve. We did not spend time today talking about our Corporate Social Responsibility Report that has been launched on our website. I encourage you to go out and take a look at that.
There's a summary of it in the appendix of the deck. This is an ongoing commitment, of course, for our company to report on our progress in this area. Again, just to tie back to our original thought and mission here, is that we are committed to both internally and externally building a more resourceful world. That report talks about the progress that we're making, and there is a lot more to go. With that, I want to thank all of you for spending your time with us, and now we want to open up the floor to questions. I'll invite Tom and Joan to join us on the stage.
That's perfect. Thank you.
Great.
I'm going to invite Marina Donovan up here, too, our head of marketing and corporate communications. She's been gathering the online questions, but we probably have a few we're going to start with. We also have Rebecca and Angela, who will be in the audience. Just put your hand up, and we will be more than happy to get you guys
Perhaps get one
in there. Maybe why don't you start with some of the online questions?
Okay. First question is for Joan. Today, you provided estimates for 2021. Can you give us an idea for 2020? Are you updating your 2019 guidance?
No and no. Yeah. We are not updating our 2019 guidance today. As we normally do, we will update our guidance on our Q2 call, which will be early August. We also didn't provide 2020 estimates. We thought it was more important to go out a couple of years. What you saw today was 2021 estimates. That's not to say it's a linear line between here and there. I would say the one thing that I will give some color on is our trajectory of revenue is heavily dependent on the deployments of large customers. You've seen this in the past at Itron, where revenue can go up and down based on one customer finishing and another ramping.
Based on what we currently see in our pipeline, in our backlog, I would expect the revenue growth to be higher in 2021/2020 than it will be in 2020/2019. That's about the only color that I can provide at this point about 2020. Next question is for Tom. You have a higher number of factories in Europe. Do you have a plan to exit them?
The numbers that you saw are based on the restructuring programs that we undertook in 2016 and 2018, and that gets us to the number of sites that you saw in the 2021 timeframe that we had. As Joan alluded to in one of her final wrap-up slides, the little barometer slide, there's more things that we will look at in terms of improving the financial performance of the company. Certainly, one would be to look at continued ways to improve the efficiency of the manufacturing footprint. No decisions have been made on this, but the comment I would make is to assure everyone that it's something that continues to be very much on our mind and something we think about are ways to make ongoing improvements. The world doesn't end in 2021, and we would continue to look to improve the financial performance of the company.
Thank you, Tom.
Some questions in the audience?
Couple questions.
There you go.
I'm loud enough. All right. Yeah, a couple questions about leverage, first of all. Obviously, I think you suggested that you're out of the market for M&A, continue to delever a little to, I believe you said, by 2021. What about niche or bolt-on acquisitions? What's your strategy there? Because presumably, based on the market over the next two to three years, there could be some very interesting breakthroughs or technologies or white spaces that you might need. As a follow-up, in terms of ring-fencing some of these revenue deployments and the financial stress that you might put on from a timing standpoint, how do we think about ring-fencing the risk of a slower respective plan?
Let me start with the leverage and the M&A question. What I described today is that we're on track for our commitment to be close to two times leverage by the end of 2020. That is the one number we gave for 2020. It actually said under two in 2021. If you looked at the capital allocation slide closely, it said, we'll consider small opportunistic M&A, and it would be exactly what you described, a bolt-on, typically in the outcome space, something that we could bolt on, wouldn't be too expensive, and that we could do. Again, our primary focus right now is to delever down to the roughly two times. Ring-fencing deployments, I'm not sure if I should give that to Sharelynn. Sharelynn, why don't you take a shot?
Yeah, reframe the question.
You might need a mic.
Okay. Would you mind reframing the question so I answer it?
Sure. Yeah. In terms of the revenue deployments, obviously there's a lot of timing in association with revenue deployments, but obviously they could cause certainly margin pressure and certainly financial distress that could inhibit your de-leveraging. Just how do you assess that risk?
Not risk.
Is it not a risk? You know.
Let me take that one. Sorry, I didn't interpret your question right. I don't think the timing of customer deployments are going to impact our ability to delever. What you just saw is factoring in everything we know about both existing wins and the backlog and projected wins. Your issue around can you kind of ring-fence, the fact is we're here to serve our customers, and so we work with our customers very closely, and if deployments move in or out a quarter or two, in the end, it really doesn't matter.
Right. Maybe I would add where I thought Sharelynn was going to go with the answer. Joan gave the financial half, maybe the operational half is, when we put something into our backlog, it generally has regulatory approval. The biggest risk, if you will, once a selection is made, has to do with that piece of it. CapEx budgets tend to be planned over a long period of time, and that tends to be reasonably resilient. When projects go well, they can be accelerated. Sometimes things can be push and pull, but it's measured in, I don't know, a quarter or two, just to put a number out there, not something that's substantial. In general, once it's in backlog with regulatory approval, it's reasonably stable.
He asked my question.
Pavel had one.
It's kind of a big picture question and then a classic CFO housekeeping question as well. Big picture question is, you talk about software recurring revenue, managed services. Right now, it's about 10% of the business. Hypothetically, and this is probably beyond 2021, how high can that percentage get in a kind of realistic sense? And then, housekeeping question on the deleveraging. Correct me if I'm wrong, previously you were talking about two times debt to EBITDA by the end of 2019?
No, 2020.
That has not changed.
That's not changed since September of 2017 when we announced the Silver Spring acquisition.
Easy enough. Just the recurring revenue.
On the bigger picture question, I can start, maybe Philip wants to add something to it. We very much believe in all three layers of the pyramid. I don't want anyone to take away the notion that because we're aggressively moving to scale the outcomes portion of the business, we plan to leave the foundation. We think having a full solution in front of the customer makes sense. We get great value by having all three layers of the pyramid, if you will. Having a better meter or sensor gives you better data up at the top, and better data gives you insights for the bottom, it tends to be a virtuous circle.
That said, 10% for outcomes is substantially below what we would like it to be, and I'd like it to be a bit more balanced between the device side of our business and the outcome side of the business. Networks for the foreseeable future clearly will be the anchor point, if you will, in terms of the scale of the business.
I'd say just very quickly on that one of the reasons that Tom showed the map on one of the slides about the adoption of regulatory support for software-as-a-service, is that all of us are moving towards a subscription economy of on-demand services. The utility industry has a heavy preference for asset ownership because of the way its regulatory structure works. As that starts to change, as acquiring things as a service fits under their regulatory structure, we would expect to see acceleration in how they view the kinds of investments in our recurring business. We are proving out and building a solid platform, with the projections that we're giving you for our outcomes business. As the preference moves away from such a heavy emphasis on capital, I would fully expect that the recurring revenue aspect of our business would accelerate.
Hi. With respect to the returns on your invested capital, when you look at the Silver Spring acquisition, you've done a lot today about explaining the strategic benefits of the acquisition. How do you measure the shareholder value creation or the returns on that invested capital, inclusive of the restructuring costs that you've had to incur on top of the purchase price that you paid initially?
Well, I'll take a stab. When we did our business case with our board for the Silver Spring acquisition, we had a pretty conservative case. We counted the synergies, which we've been talking about, which we are actually ahead of schedule on delivering. We did not count the revenue synergies, we are certainly starting to see a lot of revenue synergies. In fact, as Philip alluded to, kind of the street light business was a bit of a surprise for us, which is turning out to be a very nice surprise. We had a business case that made economic sense when we went to our board and when we went out and raised debt to fund the acquisition. If anything, we're ahead of the business case, and the returns are even better than we expected.
Which are?
We haven't really quoted those to begin with, but I would say the business case is very good.
Noah Kaye from Oppenheimer. First, thank you so much for hosting the day and providing these presentations. I think we've heard clearly that you plan to protect and maintain your profit dollars in the Device Solutions segment, through some margin enhancement initiatives. Maybe you could give us some color on what's happening with some of the markets that you've strategically decided to exit, whether it's regulatory shifts, market shifts, technology shifts. I think what we really want to understand for the rest of the business is to what degree you see this as contained to the devices that causes you to have confidence in being able to grow Networked Solutions and maintain the attractive margins you're talking about.
Again, I'll start. Philip may want to add on to it. The electricity business that Mark ran a couple of years ago undertook a similar scenario, where we really looked at all of the products, all of the markets, and looked at it on sort of an incremental cost and a cost to serve basis. The markets and products that didn't make sense, we sort of pulled those off the list. I think, Mark, you took out probably $70 million or thereabouts of revenue in the interest of improving the bottom line pretty substantially for the electricity business. You could see that happen.
That same play, if you will, is exactly what Carl is in the midst of now on the device side, where we look at it from a what's the profitability on a product level, what's the profitability within the country or the geography that you're looking at, and then how do you best make sure you're not underloading a fixed cost if you were to withdraw from that particular market. We also look at, in concert between Mark and Carl, if you will, on the cost to serve. Is it better to use a distribution-type sale rather than a direct sales force in some geographies? That's sort of what the playbook tends to look like, and you saw that the device business moves from, I think the number was roughly 930 down to 840 over the next couple of years.
That number is what we see as certainly good opportunity and ripe to do it. It's not really driven by regulatory changes, to your question. That wasn't what was driving it. It was much more based on profitability and cost to serve and us optimizing the portfolio. Where the vast majority of our networking business is today tends to be in markets where the regulatory model is only, I'll say, pushing us up the pyramid, and dragging us forward in that respect. It's not something that's necessarily pulling us back. The portfolio optimization piece very much is contained within the device business today.
One of the, I think, benefits of us moving to the new segmentation is there's that much more focus on that device business and the lower margins. That business existed before, but it was a piece in electric and a piece in gas and a piece in water, and now you have one management team led by Carl, who's charged with looking at that and figuring out how to optimize the portfolio.
If I can squeeze one more in. I think you've talked in some new ways today about this becoming a higher free cash flow conversion business, both because of the improving margins, but then also the reducing capital intensity of the business. I don't believe it's one of the metrics, free cash flow generation, free cash flow growth, that the management is currently compensated on. As you start to think about-
how to align management incentives, where would you consider that to be a potential-
It is, actually. Beginning this year, our company-wide bonus plan has an element for free cash flow. This is the first year we added it.
Good point, though.
Okay.
we-
Thank you.
Joe Osha from JMP. Following on the earlier question about M&A and thinking about bolt-on acquisitions, how do you think about that strategically? Are you looking to push into utility head offices, or are you thinking about the edge of the grid and what FirstFuel and Tendril are doing, or DERMS companies? If I could understand how you're thinking about where you might want to go, that would be helpful.
Yeah. Let's dial it back one. The first way we think about it is that where we are a logical channel to the customer. Our platform is engaged. We prioritize things that run across our network, so involve as many layers of capability from our company. The first question is it relevant to us, is going to really focus on, is it leveraging the strength of the network? Is it leveraging the strength of our relationship with the customer? Are they more logically going to buy from us than they would from a small technology provider? Directionally, in the case of the utility, are we heading towards the grid or heading towards the customer? I would say that we would absolutely consider both.
the customer side is a very competitive side in which we have to really evaluate the role of cable telecoms, in-home automation providers, and other things. I think it's important for you to understand that we're disciplined and have a good understanding about where our special value add would be there. We would be cautious there are absolutely opportunities, Comverge being an example of being able to, again, balance supply and demand is a long-term theme here that we would certainly take a strong look at. I would say flexible as to what the opportunity was.
Thank you.
Marina, do you want to get another one from online?
Yes. This just came in. What is the tax rate assumption for the free cash flow guidance in 2021?
That's pretty specific. Our cash tax rate now is actually really low. It's about 10% today, and that's because we've benefited from both R&D credits and the NOLs that we acquired from Silver Spring. Over time, we think that'll go up. In the timeframe we're talking about, it might go up from 10% to roughly 15%. When we basically get through all the NOLs and R&D tax credits, the normalized rate's probably 20, but that's probably 22 or 23. I would say somewhere between 10% and 15% from now to 2021.
Anything else from online or
I've got a couple, we can-
Why don't we take the one in the back real quick?
Yeah.
Thanks, Ken. It's Jeff Osborne from Cowen. Just two quick ones. One is on PG&E's network that Silver Spring built. Is there any opportunity to leverage the network for any of the fire remediation or protection equipment that they're putting in?
Yeah. The question is specific to PG&E, but let's just broaden it to the ability of smart networks to detect things that are associated with fires, generally speaking. Out in the demo area, there was a line sensor that's a device that hangs on the wire that actually has an accelerometer built into it that can transmit the fact that it's moving. One of the issues at PG&E was, in fact, that high winds were causing lines to arc because they were getting too close to each other. The network is up and built, if were that customer to make an election to add more of these kind of accelerometer-type sensors onto the lines, then it'd be possible to sense line motion. There are advanced voltage sensors that can detect voltage fluctuations, which might be an indication that vegetation is intruding on the line.
There is the ability for the endpoint to sense that it's heating up, which might be an indication of an early fault. There are a variety of potentials there that piggyback on a fully deployed network, and in some cases, the actual endpoints themselves.
Makes sense. The last question I had was just on Europe. A lot of the discussion today was on North America and cross-selling software, but can you just talk about what you're seeing in terms of France, the SMETS2 process in the U.K., and any other bright spots in Europe for the markets that you are focused on?
Yeah. Mark, you want to take that one?
Sure. Thank you. In France, obviously, we're continuing to execute with Linky. We're spending a lot of time, though, with Enedis and EDF, talking about how do we move up the grid to distribution automation and some of our outcomes and offerings. SMETS doesn't move as fast as any of us would've liked for many years, but we see an uptick in SMETS2 being ratified. Then we're seeing a lot of activity that we want to compete for in the Nordics, and then with Sharelynn's business in smart cities. It's a growth area for us outside of our traditional device business.
There's no other questions?
Yeah, I've got one more.
Okay
tags onto the last one.
You're right.
This is about, I'm going to start with Tom. Can you talk more about your go-to-market strategy in Asia? Maybe so.
Right. Maybe I'll start, and Mark, I'll phone a friend, you can add in some details beyond it. From a go-to-market standpoint, we very much don't target every country in Asia. It is targeted very much where we see good opportunities to have a truly differentiated offering. We target markets that are looking for a full system solution, meaning a device, a network, and an outcome, and we're working with customers in Thailand, for example, already today in that manner, where we're selling a full system solution, the network, all the way up through managed services on top of that. There are plenty of device opportunities that are out there it's a bit nuanced, making sure that back to the discussion we had earlier, I think it was on Noah's question on product portfolio.
Let's look at it on a market-by-market basis and make sure we do have specific opportunities to be profitable for devices. Moving on to smart cities, maybe the third piece of this. Great opportunities using a streetlight canopy type of solution, if you will, in places like Singapore is a great example of someplace that sees true value in automating that further. It is a market-specific, offering specific, and a match between the two. I don't know if you want to add something, Mark.
Yeah, you answered it really well, and I was dying to answer Noah's question earlier. As we're exiting, quote unquote, device opportunities, we're seeing critical mass in large places, Singapore, Taiwan, Australia, the Philippines, all which have active smart metering, smart grid, and Smart Cities initiatives. Indonesia, reading their top 20 cities in Indonesia are looking at Smart Cities initiatives. We see the solution business, for us and our competitors, obviously, to be huge in these select markets, and we're just trying to be, what is our cost to serve? What's the total return? How can we provide value? How do we stay out of commodity pricing? That's the playbook, I think, to work across devices, networks, and outcomes. I'm thrilled. I spend a lot of time in Asia, and I'm looking forward to spending more there.
Great. Any other questions from the audience?
Pavel's coming.
One second. We'll get it for the people online. Just one second. Thank you, Pavel.
Actually wanted to touch on a topic that came up in the morning's discussion about the industry backdrop, but I don't think you guys talked about it very much specifically, and that's cybersecurity.
Yeah.
As we hear about from kind of the NSA on down, more cyber threats against power plants, what particular solutions do you or your partner ecosystem offer? How needle-moving can that be, I suppose, within the outcome segment?
Well, first of all, cybersecurity is a top-level concern for all of our customers, and we have a depth and defense strategy in which we have advanced security at the hardware and every layer of processing beyond that through the network back to the central collection point. That is supported by work that we've done with the Department of Defense labs, with penetration testing, and a number of outside parties. I would say, in a certain way, that we're advantaged that we're providing some of the latest technology to our customers at scale, and so have benefited from very advanced security capabilities that come from the industry. So we're in a very strong position from a cyber point of view. Maybe Don, if you wanted to make any other comments about that.
Yeah, I'd say in general, I'll echo Philip's point that it is one of the first conversations we tend to have with any new prospect, and it's a continuing conversation we have with every customer under management. We're in a very strong position. We've had our solutions out there for years, have been tested by third parties. We go through our own white hat hacks to assess the strengths of our system. We like our competitive positioning, and we do believe that there are clear service offerings that can be built on top of what we do today.
Okay, great. Any other questions before we end for the day? Well, with that, I would like to thank everybody who's here in person, everyone who joined us within the webcast today. Thank you all for taking time out of your busy days to spend and learn more about Itron and what we're doing here. Thank you all very much. If you have any questions, please forward your questions to investors@itron.com, and then myself and Rebecca Hussey will be more than happy to get back in touch with you as soon as possible. Thank you all very much, and have a great day.