All right, good afternoon, everyone. Thanks for joining us on the first day of Oppenheimer's 25th Annual Technology Internet and Communications Conference. We're really happy to have back to the conference the management team of Itron, welcoming in President, CEO Tom Deitrich, and CFO Joan Hooper. Thanks so much for being here. It's great to see you both.
Absolutely. Thank you, Noah.
I think we've got a bunch of questions to get to, but what I'd like to do is turn it over to Tom for some opening remarks, and then we're going to get into a pretty great discussion. Tom, please take it away.
Sure. I'll be super brief and try to make this as interactive as we can. For those who may not be familiar, a quick overview of Itron as a company. We are a roughly $5.5 billion, $6 billion market cap company, revenue about $2.5 billion annually. What we do is technology and solutions services for utilities and cities all around the globe. Electricity utilities, gas utilities, water utilities, that is what we do. We are fortunate enough to call about 8,000 customers around the globe our friends, as we deploy new technology to them. Our latest generation of technology is kind of the equivalent of a smartphone, where you can download applications into that endpoint that's out in the field and be able to use that application to look for different signals to take actions in the field to really help the utilities solve the real-world problems.
The next slide then, David, is a little bit about the type of problems that utilities face and that we endeavor to solve. Infrastructure is getting older. It's changing in terms of the need to integrate more wind and solar into the generation side of things. That is great, except it creates some instability in terms of what the generation capacity looks like when the sun isn't shining, for example. You've got to have a lot more complexity to how you manage the system in that kind of an environment. There are more floods and fires and storms all around the globe. Environmental pressures are increasing, and being able to provide resilient and reliable services is an important part of the mandate of the utility.
Finally, the things that we as consumers find interesting when we interact with other services, how do we get that same level of service interaction with what customers are doing as they interact with their utilities? These are things that utilities are up against, and we can help them solve overall. How do we do that? Which is indeed the next picture. It is the notion of a grid edge intelligence platform. It is a highly robust and secure Internet of Things network that goes out into a particular territory, whatever the territory of the utility would be. You connect up all those endpoints. You have sensors and actuators out at the edge of the grid, and you can be able to solve those problems earlier on.
Whether we're looking for a simple use case of reading the meter to understand how many kilowatt hours you used this month, all the way to understanding where you have vegetation rubbing up against a wire, you can proactively roll a truck to fix it before the wind blows and wires are damaged overall. Those are some of the types of use cases. Think of this as a multipurpose network that you build once, and you'll be able to use it to solve a lot of problems that are out in the field with the customers. The next slide then gets to the results that we announced recently and more of the outlook for where we stand today. I know we'll talk about this a little bit more, but we revised up the profitability about 13% at the midpoint, a year-over-year kind of number.
At the same time, revenue, we brought it down a couple of percent to be cautious around what the outlook looks like for us overall. A really strong and growing profitability story for us. We know there's going to be a tremendous amount of investment in the grid and utility systems at large. That creates a long-term growth vector for our customers and clearly us as a main player in the industry to grow with or above the market rate in the years ahead. I think the last slide is just the annual outlook that we had, which, again, I won't go through all the numbers and mention some of the key statistics and would rather save the time that we're together to get into a dialogue. I'll pause there and pass over Noah. Maybe you want to take us through.
Thanks, Tom. I mean, I think it's a great place to pick it up. It's always interesting times whenever we meet at our conference with you. The reaction we saw in the stock last week was really largely around that reduced revenue outlook and some of the commentary on bookings timings. There are a lot of positives to talk about here, but I want to address those points first. Maybe starting with 2025 revenue, you talked about customer project timing and labor constraints pushing that roughly $75 million of backlog revenue conversion out of the year. Just give us some more context on what's causing those dynamics. I think what investors would like to understand is, does the trend of extending backlog conversion seem likely to continue looking into 2026? Perhaps we could see a revenue catch-up next year. How should we think about that?
Sure. The way we work with customers, maybe I start at that level, and then we can zoom into the numbers overall. We work with customers to basically solve a particular problem. We're doing a project where the customer is spending $100 million with us, and then we go and put that $100 million project into backlog, and then that backlog flows through the P&L. The $4.5 billion of backlog we have today is generally about a three to four-year kind of visibility as that backlog would flow through the P&L. Three to four years is great visibility of what we have, but it's three to four for a very specific reason. Sometimes projects ebb and flow while you're in the midst of a project.
Typically, what we see with projects is once you get going, you get some normal startup pains, and everybody's finding their sea legs with the project. Once you get it up and running, generally, schedules tend to accelerate overall. This year, we have not really seen that typical acceleration on projects. If not, there are constraints here and there that are in the system. The constraints tend to come in a lot of different reasons, but they're all point reasons within a particular customer. A capital constraint here, a labor constraint there, just finishing an IT project before they start the next phase of something that will be unrelated overall. What that all puts together is the utilities are really struggling to keep up with the pace at which they are trying to move.
The utility industry has been kind of flat, if you will, for a long period of time. If you look at it through the lens of an electricity grid, bulk load has been flat for 20 years. It's now a case that it's got to grow 2% or 3% or 4% or 5% or 6% or 7%, depending on where in the country you are, per year, every year for the next 20 -3 0 years. That's a very different environment. Utilities are accelerating. They're trying to meet that need, but they're struggling to be able to keep up. That's kind of what you're seeing in terms of what is happening now. Nothing was lost in backlog here at all. There are no projects that are getting canceled or anything of the sort. It's coming.
It's just a matter of picking which quarter it's flowing through, more that range of motion that you saw as we were outlooking overall. Yes, we did bring down the midpoint about 3% or $75 million. That certainly is coming into future periods. How much growth will we see from 2024 to 2025 is maybe the second half of your question. That has to do with when that revenue flows through, but it'll also have to do with new bookings coming in in the back half of this year. As we exit the year, we'll set guidance for 2026 based on the bookings we see for the back half of this year, and that'll inform the growth rate into 2026. It's clearly going to grow. It's just a question of how much. We'll let time run here and watch what the bookings trajectory looks like before we set the 2026 numbers overall.
You talked about these utility challenges. Just to think about bookings and pipeline, have customer demand signals changed? How are customers prioritizing smart distribution and non-wireless alternatives that you sell versus other CapEx buckets like transmission and generation projects?
Right, right. The pipeline of opportunities for us has never been bigger in my time with the company. I think I'm coming up on a decade now. The total pipeline of the things that customers are looking at has never been bigger. CapEx budgets overall are getting larger. If you look at utility CapEx as a total number, it's larger this year than it was last year, and it'll be larger again in 2026. If you look at the portion of that that goes to distribution, which is the part of the bucket that we operate in, compared to generation or transmission, all three are increasing, but the percentage inside of that total number for distribution is increasing at a faster rate. Distribution CapEx has typically been around 40%. If you look in the past years, it's probably somewhere 42% today.
It probably goes towards 43%, 44% of the total budget in the years ahead. I just use EEI data as the example there. Customers are absolutely increasing spend everywhere and increasing faster as a percentage on the distribution side of things. It's really a question of how much can you do at once before you bump into an order of operations. You don't put new wiper blades on a broken windshield. You fix the windshield before you replace the wiper blades. That's the type of prioritization that happens inside of individual projects overall. I feel very good about the trajectory of the market over a longer period of time. It's just a question of quarter-to-quarter variation, which is not meaningful in a utility scale. It is meaningful when you look at it from an investor point of view.
The difference between June 30 and July 1 for a booking matters a lot to us as one's second quarter and one's third in the utility scale of over a 10-year period. What does a day change mean for when a particular meeting would happen to approve a project? It's that type of jitter that you see playing through the picture overall.
Right. It just ties back into the previous question that none of the backlog is getting canceled. The customers all want to move forward with these projects. I'm paraphrasing here, but you're seeing those utilities with these challenges run into these labor constraints or have to do an IT project or something like that. I mean, you're somebody who's followed and been in the industry for a long time. You see these shifts and these challenges. Do you think this is sort of a new normal and we're just going to see more, I don't know, shift in and around project timelines versus the past? You can say yes or no, but just how is that something that the company thinks about dealing with from a planning perspective?
Yeah, I would say that this dynamic has always been present in the industry. It's a little bit higher variation today than it was in years gone by, but there's just a lot more going on at any one moment in time. There's more pressure on utility commissions not to allow rates to increase. They're asking some more questions. They're approving projects, but they're asking some more questions, which sometimes translates into delay. There's a lot more IT spending as more and more of the utility infrastructure is being digitized. Sometimes those projects run on a different timescale. I think the project timing volatility has always been there, which leads to some of the historical lumpiness in our bookings, for example. That probably continues on. I don't think that this is going away, but I also don't think it is somehow so much different than the past. It's just kind of normal utility world stuff.
I think this was a topic addressed last week, but I just would love to wrap my head around it a little bit, at least the way you see it. You know, the regulatory environment in response to these rising utility costs and infrastructure investments, are rate cases taking materially longer to approve? Can you maybe just for Itron specifically quantify whether they're greater than normal backlog dollars that are pending approval right now?
Sure, sure. Understand that utility commissions are state by state. There are 50 of these guys that are out there for the 50 states just within the U.S. We could talk globally, which is a different scenario in many cases. It varies a lot location to location. That said, rate cases are clearly becoming more complex. It's no longer a world where, hey, let me buy a fixed capability and put it in the ground and amortize it over 10 years and just do the straight math as to what goes into everybody's utility bill at the end of the month. Today, as technology has increased to solve a different set of problems, the number of options and the number of flexible approaches that are employed are definitely more complicated. At the same time, inflation has run up, and utility commissions are primarily charged with being economic regulators.
They want to make sure that all of us as rate payers are getting a fair deal in our territory. It's their job to scrutinize and ask questions. You get a combination of the two. It does take a little bit longer to get rate cases through in some cases. You have some more, OK, something is started, and maybe it gets punted to the next month because of questions that are answered. The next time the commission meets, you would approve it. Rate cases are being approved. The average return on approved cases, I think, this year is about 9.8%. Higher interest rates and a higher CapEx budget hasn't stopped it from happening. It just means you want to do the proper diligence, and everybody is doing their job overall.
I still see the regulatory environment as very constructive, just everybody has a job to do, and they're doing their jobs well. Coming to your question on the bookings front, important clarification for us as a company is we don't put something into bookings until it has been selected, and we've signed the contract with the customer, of course, but until a regulatory commission has approved the deal to the extent that it's applicable on a lot of the deals that we do. When that rate case is approved is important in terms of the timing of when we would recognize bookings. At any moment in time, there's typically a couple hundred million dollars of things that have been awarded that are in that approval cycle, if you will. That number does vary up and down.
We're a little bit above normal just now, but not if you compare and contrast. As we were approaching the end of third quarter last year, we were well over $1 billion that was in that pending approval bucket. We're nowhere close to that at this point. Maybe slightly above trend line, but not outside the wild variations that you see in a normal year.
Very helpful, Tom. I think another factor investors are curious about is some of these federal policy shifts with the change in administration. Maybe just how material are any of those impacts, any of the impacts for those shifts, whether it's IIJA funding, Big Beautiful Bill, tariffs, how have they impacted the business outlook? Maybe you can sort of force-rank them if that's the easiest way to do it.
Yeah, I would say that all of them tend to be more or less second-order effects for us. Utilities still have to do what they need to do. Our market kind of powers on, and these things tend to come, and you take advantage of them when they're there. For example, where we have maybe the largest amount of interaction is IIJA, that bipartisan infrastructure law, where there's a fair amount of grid resiliency, reliability, project money that's inside of that. That money is still flowing. It moves slowly. It's got to go from award allocated to awarded through the state commission, through a rate case if relevant, because it's not 100% paid by the federal government. It tends to flow to the customer, and then eventually flows back to us. There's a long train there of events that need to happen. That money is making its way through.
We've had one-off discussions with customers. If that money were to go away, what would you do? By and large, they would say we're still going to do the project. Maybe we need to spread it over a longer period of time. I don't think that it should be something strange happen. We don't lose the backlog. Maybe the timing is adjusted a bit. In the projects we work in and those programs, we have not even seen money being pulled back. If not, it's still flowing. It's tending to be a little bit more towards different types of projects, so maybe less renewables and more legacy types of projects, but the money is still flowing.
Yeah, I mean, to be clear, I just want to make sure everyone understands that it has no bearing on the change in the revenue outlook. That's right for you.
Yeah, immaterial.
OK. If we tie this all together, you obviously have 2027 growth targets out there. Maybe talk to us a little bit about the confidence level in achieving some of the long-term top-line growth targets in these current market conditions.
Sure. We feel really good about those targets for 2027. If you look at where we are now, we're probably a bit ahead in some of the areas that are in those individual areas. Getting towards that top-line number for 2027 still looks very reasonable based on the backlog profile we have. Even with some pushes and pulls and timing of individual projects, margin trajectory is on track. The devices business is even a bit ahead of those targets already today. Based on what is in backlog today for networks and outcomes, you can see it flow through to hitting those targets. That nice three, four-year backlog lets you see what kind of pricing and structure you would have. We are on track to be able to do that.
A lot of the self-help work that we have done to change the portfolio, exit markets where we were not getting the right returns, closing down factories, changing pricing structures to be more adaptive to a market where inflation can come and go, a lot of that is now playing through. You can see it in the financial results. We know it's in the backlog for the years ahead. Free cash flow generation is ahead of the target already today. We will look to be able to maintain that. Those targets by segment look to be very achievable in the years ahead.
Margins and free cash flow definitely tracking ahead of, I think, where we in the industry expected. We'll get to that and want to make sure you get credit for that. I think if we drill down a bit more into the segments, the 2027 targets do imply considerable growth in Outcomes off the current run rate. You've talked with us in the past about Outcomes organically being able to grow sustainably at double digits. Maybe just take us inside what's driving the growth in the segment and how big a portion Outcomes could be as a total portion of revenue for the company over the coming decade.
Sure, sure. The Outcomes segment over the last two-plus years has been right around double-digit growth year- over- year, quarter -to -quarter kind of numbers. I think if you look out over there, there's a couple of quarters where it was only 9%, but other quarters that it was 13%, 14%, 15% year -over -year growth. That looks to continue. What's inside of that is the customers taking advantage of that latest generation of product where you get a lot more data coming through the network. You want to put that data to work to be able to solve those problems we had talked about earlier. For example, the number of downloadable licenses that we have, applications that we've licensed, that's up 140% year -over -year if I compare Q2 of this year to Q2 of last year. That number is growing.
The backlog that we see for Outcomes is at a record level right now. We don't break it out, but it is at the highest level that's ever been. You can see the table is set for these things tending to flow. What are customers really trying to do? It comes down to getting visibility out at the edge of their network. Utility networks were generally designed to be a one-way push, just sort of a fire and forget. I have unlimited generation, and I just push enough out there to make sure when everybody flips the light switch, the lights come on. That's a really expensive way to solve the problem, especially as there's a lot more variability and complexity out there.
Step one in being able to deal with that is get some visibility out there and be able to use all of the endpoints we have to create that visibility. When you've got the visibility, you begin to control it. Turn this on when the sun is shining on this roof, for example, or a roller truck when you see this vegetation signal. You can start to solve different problems and improve resiliency and reliability and cost efficiency of the overall system. That's what customers are doing, and that's what fuels that use of data and what is the fundamental premise of our Outcomes strategy overall. Size of the puzzle here, I certainly want to continue to grow Outcomes at that double-digit year-over-year rate well past 2027. You can start to see what the accruing would be in terms of what it means from a margin standpoint.
As a portion of the company, I don't see a limit on that, at least inside of the next decade. There's just a lot more we can do and make use of all of the data that we have on our hands. We haven't set targets longer than 2027, but I would say what's out there now, don't think of that as a terminal value. It's more of a way station along the way, and we'll update those targets with some new ones here in the next year or so.
In the next year. All right. I was going to ask. We're looking forward to that. Yeah, I mean, to unpack this a little bit further, I think services revenue per endpoint has been increasing pretty steadily over the past six quarters. I guess how you think about how much of the target in Outcomes is kind of driven by increasing revenue per endpoint versus just having more of the DI-capable endpoints in the field. Do you need both to get to the double digits? Are we still really sort of in the stage where just merely getting more of those endpoints out into the field will help drive it?
Yeah, I mean, ultimately, we want to have both, of course. In the shorter run, you can do it with the existing base. We're very underpenetrated. If we have 15 million DI-capable endpoints that are out there, honestly, quite a large number of those are not yet running downloadable applications. They're just doing the very basic types of things. We have plenty of harvesting we can still do on the existing stuff. Meanwhile, we're continuing to deploy more every quarter. I would say that it's important for us to continue to increase the portion of the installed base and grow that installed base over the long-term trajectory. For now, again, we're not limited. If hardware would slow down for a quarter, for example, I wouldn't read that into as somehow something catastrophic from an outcomes point of view. We've got the total set where both will happen, but there's more we can do with the existing field hardware.
We're kind of going from this era of big data to the era of AI. I'm just curious how you think about the role of AI in creating use cases for outcomes.
Yeah, I think that we very much see it as something that needs to happen in the cloud side of what we do, but also out at the edge of the network and have the ability to understand anomalies out at the edge of the grid and be able to, in real time, separate the wheat from the chaff as what was something that really is an event that the back office needs to know about. That's a safety issue. That's a reliability issue versus that's just something that happened. Being able to separate that so you can prioritize your resources is something that real-time data access and anomaly detection out at the edge of the grid is an important future use case. It's something that we're piloting and testing with a couple of customers today. I see that as a new revenue stream in the years ahead.
Meanwhile, cloud side of things, just being able to put the AI capabilities to work on all of the data that's inside of the utility network is also something that's very underexplored. Utilities tend to not use most of the data they have their hands on. To the extent that you can open up and make it easier to do that, where you don't have to have an army of IT people or engineers to be able to write custom reports, you can now speak to the computer in natural language to be able to pull out different types of data and understand what you can do with it. Both sides of that equation are areas we're actively developing in partnership sometimes with Microsoft or in collaboration with NVIDIA.
Sometimes it's just using the machine learning and AI capability within the side of our operation to be able to advance the science.
Very interesting. I think just last question on Outcomes on the growth side. I mean, obviously, M&A for Outcomes remains your top priority. I think you commented in May on a pretty strong funnel. We're constantly asked what the company might buy. Just talk a little bit more about your process for identifying M&A targets and how, if at all, your view on the M&A opportunities evolved over the past few years.
Certainly, we want to be able to accelerate that Outcomes segment growth. We think there's so much untapped potential in the marketplace there that that's really, as you pointed out, that's where we are shopping, if you will. The pipeline is active. There are companies that are out there. We're looking to really make sure we have something that's outcomes forward, something that's scalable, and we can take it across a large swath of customers. We really want something which allows us to put our hands on different types of data to be able to combine what we do today with something that is coming from an acquisition. One plus one is more than two, if you will, in terms of how you can put that data to work to solve problems for customers.
Higher conviction on being able to find something that really can advance the portfolio and solve a greater set of problems for our customers. The valuations for software-oriented assets are high. Clearly, those are in-demand assets overall. We want to make sure that we do have something that makes sense from a financial point of view. Sometimes maybe that's where the pressure is in the system, where some of those multiples have contracted in recent years, and folks still want to hang on to what the memory was from a couple of years ago. Count on us to be disciplined and not overpay. Those are the types of things we're looking for. I'm sure it's out there. We're blessed with a balance sheet that's well prepared to allow us to move quickly when the right asset is identified.
Sure. Part of that is because of the growth in margins and the growth in earnings. Maybe just walk through raising the profitability outlook for 2025 despite the lower revenue range, and just how much of the uplift has really come from better mix versus better productivity from some of the self-help initiatives.
Yeah, it's obviously some of both. If you look in the rearview mirror, we closed down a bunch of factories and consolidated. That's behind us now. We had about a $10 million year-over-year, meaning from last year to this year. $10 million of a margin improvement this year is shedding those factories and getting better utilization out of our existing assets. We've worked hard on pricing to index pricing and really collect value from the portfolio itself. We worked hard on portfolio pruning, which shows up as better mix today. The devices business is getting a higher mix of water-oriented content today, which tends to carry a slightly higher margin associated with it. Networks and Outcomes are more tilted towards the latest generation, this downloadable application generation, which carries a little bit better margin, which shows up in the mix itself. That has contributed.
We've seen customers transition to those new generations of products faster than we had anticipated. Maybe they were slower in project completion than we originally anticipated. What they're deploying tends to be towards the better end of the portfolio from a margin standpoint. Feeling very good about the margin trajectory of the company and the guidance that we just updated a few weeks ago.
I think you talked about some of the different drivers by segment, right? How much additional margin headroom do each of those factors sort of provide if you think about water mix and devices, the rolloff of legacy pricing in networks, and then maybe sort of the software-led growth and Outcomes?
Yeah, I think that the water side for devices, clearly, we will continue to prioritize that. The water market has been above our expectations several quarters in a row, if not the last 18 months overall, specifically in Europe. I certainly think that is likely to continue through the back half of this year. There are some government programs that are pushing digitalization of water assets, which is benefiting overall. I think that continues. A lot of the pre-pandemic pricing where the margin was compressed because of inflation and fixed pricing, that has rolled through, and it's no longer in backlog today. We're 90% through all of that stuff. That's no longer a headwind. Factory closures are done. It's more just continuing to gain value out of utilizing the data and continuing to ramp and expand that grid edge intelligence platform on the hardware side of things. That's where the juice is left to be squeezed out of the lemon, and there's plenty of it there.
You know, 2025, at least by our estimates, is already tracking to achieve mid-teens EBITDA margins and to guide over $6 in EPS. You'd have already met the low end of your 2027 targets two years early. You said you'll update them sometime in the next year, but just how investors should think about bias on specifically margins and cash generation versus those targets?
Yeah, I would say that you've got to look at it segment by segment, which is probably the right way to break it apart. The fact that the devices business is above the margin target, I wouldn't look for it to ease back. You'd probably stay in that, let's call it 28% - 30% gross margin level, depending on the individual mix. We do have some room to continue to grow on the margins, first margins that is, for the networks and the Outcomes segment. The table is set for us to be able to continue to move towards those 2027 targets. That's where there's still growth yet to come. I would say that cash flow generation being above the target probably stays that way as well, based on what we see ahead.
Where we want to make sure we've got good visibility and provide the right outlook is exactly what the shape of the revenue profile looks like quarter -to -quarter, based on our very early discussion on project EBIT flow. The destination isn't a question. It's just what does it look like quarter -to -quarter is the part that's a little harder to call.
Can you, and possibly Joan as well, comment on what's driving the stronger free cash flow conversion? I know that the business has become more capital light. There are perhaps now some tailwinds around depreciation. Maybe just help us unpack how to think about the free cash flow conversion profile.
Yeah, again, the targets we originally established for 2027 were somewhere around 10% - 12% of revenue. I think last quarter was closer to 14% - 15%. As Tom said, we're ahead on that. I think part of it is, frankly, sitting out $1.2 billion of cash and earning 4% interest income, which isn't a problem to have if you can't utilize the cash. I think some of the benefits from the tax legislation will continue to accrue to us. We expect to pay less cash taxes than we would have otherwise in terms of the new legislation that was signed. At this point, there are very little capital expenditures. We're down to three big factories, and we don't typically spend that much. We used to say 2% of revenue or 2.5% was CapEx. It's now probably more like 1% - 1.5%. We feel really good about our ability to flow through the growth and earnings straight to cash flow.
Very helpful. I think that's a good place to leave it. I do want to, of course, point out that the company remains very open and accessible through the IR, Paul and David. Of course, you can come to us as well if you have any questions on the company. Tom and Joan, I really want to thank you for the time and the thoughtful discussion today. There's a lot of momentum here. You're positioned in a market going through a period of unprecedented low growth and challenges. We look forward to seeing the company benefit from that.
Thanks for the opportunity. Thank you so much for having us.