Itron, Inc. (ITRI) Earnings Call Transcript

Good day, and thank you for standing by. Welcome to Itron's Third Quarter 2026 Earnings Conference Call. [Operator Instructions] Today's conference is being recorded. I will now hand the conference over to your speaker host, Paul Vincent, Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to Itron's Third Quarter 2026 Earnings Conference Call. Tom Dietrich, Itron's President and Chief Executive Officer; and Joan Hooper, Senior Vice President and Chief Financial Officer, will review Itron's third quarter results and provide a general business update and outlook. Earlier today, the company issued a press release announcing its results. This release also includes details related to the conference call and webcast replay information. Accompanying today's call is a presentation that is available through the webcast and on our corporate website under the Investor Relations tab. Following prepared remarks, the call will open for questions using the process the operator described. Before Tom begins, a reminder that our earnings release and financial presentation include non-GAAP financial information that we believe enhances the overall understanding of our current and future performance. Reconciliations of differences between GAAP and non-GAAP financial measures are available in our earnings release and on our Investor Relations website. We will be making statements during this call that are forward-looking. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially from these expectations because of factors that were presented in today's earnings release and comments made during this conference call as well as those presented in the Risk Factors section of our Form 10-K and other reports and filings with the Securities and Exchange Commission. All company comments, estimates or forward-looking statements are made in a good faith attempt to provide appropriate insight to our current and future operating and financial environment. Materials discussed today, October 27, 2026, may materially change, and we do not undertake any duty to update any of our forward-looking statements. Now please turn to Page 4 of our presentation as our CEO, Tom Dietrich begins his remarks.

Thank you, Paul. Good morning, everyone, and thank you for joining us today. Itron delivered a strong third quarter. Revenue returned to year-over-year growth at the top end of our outlook. Adjusted EBITDA set a new quarterly record and non-GAAP earnings per share were well ahead of our expectations. In July, I said Itron is a different company than in prior cycles. The third quarter proved it again. Last quarter, we delivered record gross margin on lower revenue. This quarter, growth returned with strong margins. Non-GAAP operating income grew 20% on 3% growth. That is structural. The product of several years of commercial and operational work not an industrial cycle. Not every quarter will set a record, but our performance now starts from a higher floor. We are delivering earnings leverage while continuing to invest in technology and capabilities our customers need. Turning to Slide 4 for the highlights. Revenue of $599 million, annual recurring revenue of $423 million, adjusted EBITDA of $115 million, non-GAAP earnings per share of $1.94 and free cash flow of $96 million. Turning to Slide 5. The operating environment remains dynamic and the long-term demand drivers are strengthening. Utilities must address load growth, aging infrastructure, reliability, resiliency and affordability, all at the same time. These pressures are not temporal. They are fundamental and the investment in technology and infrastructure they require is, in our view, inevitable. New generation and transmission are part of the answer that those assets take years to plan and build. In the meantime, utilities need more capacity and better performance from the infrastructure they already have. Intelligence is the fastest and least expensive capacity still available. This is exactly where Itron sits in the value chain. Our technology gives utilities greater visibility into the distribution system that enables them to operate existing assets more intelligently. We see the demand across our markets. In electricity, opportunities for non-wires alternatives, time to power and reliability solutions are expanding. The opportunity with gas distribution customers remains outsized relative to historic norms. The regulatory environment is complex, but constructive. Regulators are focused on the same affordability, reliability and resiliency priorities as the utilities they oversee. Grid Edge Intelligence is scaling. We have now shipped more than 19.4 million distributed intelligence enabled endpoints, expanding the installed base. Our applications software, analytics and services portfolio drove annual recurring revenue growth to approximately 25% year-over-year, accelerating from 21% last quarter. End points become platforms and platforms become recurring revenue. That is the model, and it is working with adoption continuing to broaden into the mid-market. Our supply chain remains steady across labor and most materials. Memory and selected component costs are rising, and we have kept pace with them as third quarter gross margin demonstrates. We continue to thoughtfully buffer materials, diversify our supply base and employ pricing mechanisms and other productivity actions to create earnings leverage. Integration of our resiliency solutions segment continues as planned, and we are beginning to see the benefits of the combined portfolio. A few of the awards I will mention in a moment came from that segment. Turning to Slide 6. Third quarter bookings were $482 million, up 27% year-over-year and in line with our expectations. And October bookings have given the fourth quarter a strong start. Total backlog was $4.3 billion at quarter end, with our Outcomes and Resiliency Solutions segments, our most software and services intensive segments together represent more than 25% of the total. Large customer awards will always be uneven quarter-to-quarter because they are tied to utility and regulatory processes. Regulatory calendars shape when programs move forward rarely, whether they move at all. What matters is the pipeline behind them and it is growing with strength in gas and Grid Edge Intelligence. Several wins during the quarter illustrate the breadth of demand. Pepco Holdings and Exelon company selected Itron to expand its distributed energy resource program, adding to the value of the multipurpose Itron network. The program will provide real-time operational data and significantly increase the flexible load Pepco can call on, capacity it can offer into the constrained PGM region and use to support the grid. Customers value our ability to move their installed base smoothly to more advanced solutions. Through our OpenWay Forward program, we continue to support a large utility in the Western U.S. as it moves towards next-generation use cases and distributed intelligence. Resiliency solutions gained momentum in the quarter, adding multiple new customers across our worker safety, damage prevention and digital construction management applications. A large Midwestern utility selected our worker safety application after seeing clear improvements in hazard recognition and field engagement. We also expanded worker safety and another utility from a single operating company to a 5-year enterprise agreement covering its operations in Pennsylvania, Kentucky and Rhode Island. And a diversified energy company broadened its use of Itron damage prevention adopting ticket and intervention management across multiple operating companies, asset types and states. Together, these wins show a repeatable pattern. Customers come to Itron to address a problem and stay for the portfolio. That demand and the way we are executing against it gives us the confidence to narrow our full year revenue range and raise our full year earnings outlook. With that, I will turn the call over to Joan to walk through the details.

Thank you, Tom. Please turn to Slide 7 for a summary of consolidated GAAP results. Third quarter revenue of $599 million was at the top end of our outlook range and increased 3% year-over-year driven by continued growth in outcomes and the contribution from resiliency solutions. Gross margin of 41% increased 320 basis points year-over-year due to favorable mix, operational efficiencies and continued cost discipline. GAAP net income of $71 million or $1.61 per diluted share compared to $66 million or $1.41 per share in the prior year. The increase was due to higher operating income. Moving to the non-GAAP metrics on Slide 8. Adjusted gross margin of 41.3% increased 350 basis points year-over-year. Non-GAAP operating income of $107 million increased 20% year-over-year. Adjusted EBITDA of $115 million or 19% of revenue are both new quarterly records for Itron. Non-GAAP net income for the quarter was $86 million or $1.94 per diluted share versus $72 million and $1.54 a year ago. Free cash flow was $96 million in Q3 versus $113 million a year ago. The decrease was primarily due to growth in working capital, higher tax payments and lower interest income. Year-over-year revenue growth by business segment is on Slide 9. Device Solutions and Network Solutions revenue both decreased 1% on a constant currency basis. Outcomes revenue increased by 9%, driven by higher services and resiliency solutions contributed $16 million of revenue in Q3. Moving to the non-GAAP year-over-year EPS bridge on Slide 10. Our Q3 non-GAAP EPS of $1.94 per diluted share increased $0.40 year-over-year. Operating income contributed an increase of $0.38 per share, which was partially offset by lower interest income of $0.14 per share. Taxes and share count had a positive impact of $0.16 per share versus last year. Turning to Slides 11 through 14. I'll review the Q3 segment results compared with the prior year. Device Solutions revenue was $102 million. Adjusted gross margin of 35% increased 450 basis points year-over-year and operating margin of 28% increased 440 basis points due to favorable mix and operational efficiencies. Network Solutions revenue was $390 million, adjusted gross margin of approximately 42% and operating margin and approximately 34%, both increased 250 basis points year-over-year, reflecting operational efficiencies and favorable mix. Outcomes revenue was $92 million, adjusted gross margin of 40% increased 110 basis points year-over-year due to operational efficiencies. Resiliency Solutions contributed $16 million of revenue with adjusted gross margin of 74% and operating margin of 26%. Turning to Slide 15, I'll review debt and liquidity at the end of the third quarter. Total debt was $1.6 billion, and our net leverage was 1.9x. Our liquidity position was approximately $1.6 billion at the end of Q3, comprised of cash and equivalents of $840 million and $722 million available for borrowing under our revolving line of credit. Now please turn to Slide 16 for our fourth quarter outlook. We anticipate Q4 revenue to be within the range of $621 million to $636 million, which, at the midpoint, is up 10% versus last year and 5% sequentially. This narrows the full year outlook range to $2.37 billion to $2.385 billion. We anticipate fourth quarter non-GAAP earnings per share to be within a range of $1.70 to $1.80 per diluted share. This raises the full year EPS outlook to a range of $6.72 to $6.82 per diluted share. We continue to position Itron to benefit from the long-term durable market opportunities to provide solutions for our customers as they modernize their infrastructure responsibly and affordably. Now I'll turn the call back to Tom.

Thank you, Joan. Before we open the line for questions, let me come back to the larger point. The need for intelligence, automation and operational visibility across utility networks continues to grow, and the environment continues to move towards Itron. We saw this directly last week at Itron Inspire, where more than 1,000 attendees representing hundreds of utilities joined us in Houston. The conversations focused on immediate operating priorities, improving outage awareness, preventing faults, increasing reliability, mitigating wildfire risk and extending the value of existing infrastructure. These are not theoretical use cases. They are operational and financial issues that our customers must solve. Wildfire risk is not abstract for us. This summer, the Spokane area, home to our headquarters and many of our employees experienced devastating wildfires that destroyed hundreds of homes and forced more than 60,000 people to evacuate. Our thoughts remain with the families and communities still recovering. Events like these are why we invest in helping utilities see and act on risk before it becomes an ignition. Earlier this month, we announced an expanded collaboration with PG&E to deploy thousands of Itron Grid Edge endpoints in high-risk areas. Using distributed intelligence and advanced waveform analytics, these devices will detect, classify and pinpoint fault indicators such as a down live conductor that could ignite vegetation so utilities can act before a fault becomes an outage or a fire. That example captures the broader Itron value proposition. Grid Edge Intelligence is not simply a single end product or application; it is a platform that gives utilities greater visibility into their systems and helps them solve a growing range of operational challenges all through a reusable investment. We entered the fourth quarter with market leadership, financial strength and a strong start to bookings. Our priorities are clear: execute for our customers, grow recurring revenue, protect backlog quality and deliver durable earnings and cash flow over time. The modernization of energy and water infrastructure is a long-term structural trend. Quarterly timing may move, the underlying need will not. Itron is the intelligence layer of those systems helping customers unlock capacity, improve reliability, enhance safety and get more from their infrastructure. The model is working and the need we serve is durable. Thank you for joining us today. Operator, please open the line for questions.

[Operator Instructions] Our first question coming from the line of Noah Kaye with Oppenheimer.

Congrats on the nice quarter. First, maybe just a quick housekeeping modeling one, OpEx was fairly low as a percentage of revenue. Was that just timing? And what should we be modeling for the full year?

Yes, it was somewhat timing, a little bit below our expectations as well. So obviously, we try to keep a lid on OpEx, but I certainly expect Q4 to be higher Q4 is typically a much higher quarter than Q3, which tends to be our low quarter. You have our customer event that just happened last week, which adds to it as well as we expect a higher bookings quarter. Typically, Q4 is our highest bookings quarter and therefore, you get sales comp and things of that nature. So going forward, I would expect the OpEx to tick back up to where it had been looking at.

Okay. Great. Joan, I can't resist since you just mentioned the bookings. We've got just a few months left. And as you mentioned, 4Q is usually the high water mark. Is there any way to maybe bracket expectations around those bookings and where we might end up on book-to-bill?

I'll start and I'll let Tom comment. I mean no, we're not going to guide specifically to book-to-bill. But if you look historically, Q4 is our strongest quarter. I don't know, Tom, if you get more.

Yes. bookings are lumpy by nature. So Q3 isn't a clear signal in terms of what it looked like. October is off to a really nice start for what we expect. It is the highest quarter as was already mentioned. We like the pipeline that is in front of us, we see the opportunities and are excited to work with the customers to close out on the available items.

Got it. Maybe just one more. I know you had some new deployments that got going here in the back half, supporting the sequential revenue increase. At this point, when you look at the programs that are going on and their expected duration, is the 4Q revenue run rate a good starting point to think about '27 any nuance you could put around that?

Yes. We're not going to get into guiding '27 today, and you'll get that in February. Fourth quarter, the outlook that we just put out is underpinned by the bookings, is underpinned by the ongoing deployments. We have some pretty nice deployments going on in that Caribbean, in the Southeast and in the Northeast that drive that sequential growth and year-over-year growth, which is really what we wanted to see.

Our next question in queue coming from the line of Ben Kallo with Baird.

Tom, in your prepared remarks, you talked about the Western utility and you mentioned that OpenWay Forward. Could you just give a little bit more detail what about the OpenWay Forward and what that entails? And I have a follow-up.

Sure. I normally characterize this as forward/backward compatibility, really, which is a way that a utility that has existing assets in the field, perhaps some of them are not fully depreciated. How do they move those forward seamlessly to have additional functionality and new functionality, meaning the coexistence of older technology and some of the newer, more advanced use cases and allow that to happen seamlessly? That's exactly what the OpenWay Forward program does for many utilities, some of the earlier adopters that were out there. The deal that was in my prepared remarks really is just another example of how we can allow that asset continuity and enable the utility to seamlessly add new capabilities where they need it and do it at the pace that is affordable to them. The current environment from a regulatory standpoint, I think is important to note -- okay, regulatory commissions are certainly asking the requisite questions that all of us expect as consumers and users that are on the systems themselves. And when we can enable the utility to work within that affordability concern of the regulator allow the new functionality that is needed to cope with the dynamic environment that's out there. It really is a win-win for everybody.

And just maybe an extension on the answer there -- a question. Just how does that change just in terms of the bookings -- does it -- is it a competitive advantage that allows you to keep your incumbency or does it lower the amount of bookings that you would get from a project because you're not replacing everything? Or how do you view that?

Yes. Certainly, it is a very strong moat that is out there if a customer really needed to rip and replace underappreciated capital, that is very difficult from a financial point of view. So enabling that smooth transition is very good feature from a customer perspective, and that obviously helps the incumbent, which we are to a great extent in the marketplace. On the bookings front, I think it tends to create a smoother bookings profile instead of the really big bang, if you will. So maybe the customer would do 10 or 11 $10-million deals rather than one $100 million deal, just as an example. Where you are buying under -- with the area under the curve being the same or greater and certainly probably greater from a margin perspective is really what it looks like, but it tends to make the bookings slightly less lumpy when customers go down the path of utilizing the capability we provide a forward/backward compatibility.