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Article Excerpt
PARTICIPANTS
. Deloris Duquette, Itron, Inc., VP, IR . Steven Helmbrecht, Itron, Inc., CFO . Malcolm Unsworth, Itron, Inc., President, COO . Philip Mezey, Itron, Inc., COO of Itron North America . Marcel Regnier, Itron, Inc., COO of Actaris . Leroy Nosbaum, Itron, Inc., Chairman, CEO . Steve Sanders, Stephens, Inc., Analyst . Preetesh Munshi, Piper Jaffray, Analyst . Stuart Bush, RBC Capital Markets, Analyst . John Quealy, Canaccord Adams, Analyst . Paul Coster, JPMorgan, Analyst . Carter Shoop, Deutsche Bank, Analyst . Ben Schuman, Pacific Crest Security, Analyst . Jason Feldman, UBS, Analyst . Ajit Pai, Thomas Weisel Partners, Analyst . Mark Rogers, Gagnon Securities, Analyst . Michael Horwitz, Stanford Group, Analyst . Richard Verdi, Sturdivant & Co., Analyst . Alex Kurt, Merriman Curhan Ford, Analyst . Sanjay Shrestha, Lazard Capital, Analyst
OVERVIEW
ITRI reported 2008 revenues of $1.91b and non-GAAP diluted EPS of $3.36. 4Q08 revenues were $432m and non-GAAP diluted EPS was $0.71. Expects 2009 revenue to be $1.78-1.88b and EPS to be $3.35-3.75.
FINANCIAL DATA
A. Key Data From Call 1. 2008 revenue = $1.91b. 2. 4Q08 revenue = $432m. 3. 2008 non-GAAP diluted EPS = $3.36. 4. 4Q08 non-GAAP diluted EPS = $0.71. 5. 4Q08 GM = 34%. 6. 2008 CapEx = $63m. 7. 4Q08 CapEx = $22m. 8. Cash balances as of 12/31/08 = $144m. 9. Total debt at Dec. 31 = about $1.2b. 10. 2009 revenue guidance = $1.78-1.88b. 11. 2009 EPS guidance = $3.35-3.75.
PRESENTATION SUMMARY
S1. Financial Review (S.H.) 1. 4Q08 Results: 1. Faced some headwinds in 4Q08 with slower year-end spending in US coupled with significant strengthening of dollar. 2. Revenue, $432m. 1. $48m or 10% lower than 4Q07. 3. GM, 34% favorably vs. 33% in 4Q07. 1. Due to increased Actaris revenues and higher margin regions. 4. OpEx was comparable to prior year. 1. Higher as a percentage of revenue, due primarily to: 1. Increased Actaris sales and marketing, and R&D expense. 2. Expenses related to SOX compliance. 5. Non-GAAP operating margin, 11.2%. 1. Down from 12% for 4Q07. 1. Due primarily to increased OpEx and lower revenue. 6. Non-GAAP effective tax rate, 27% for 4Q08 and year. 1. Bit higher than expectations, due to impact of exchange rates on foreign earnings. 7. Non-GAAP diluted EPS, $0.71 vs. $0.81 in 4Q07. 2. 2008 Results: 1. Revenue, $1.91b vs. $1.46b in 2007. 1. Up about 30%. 2. Actaris results for 2007 were from April 18 acquisition date. 2. Non-GAAP operating margin, 12.1% vs. 12.5% in 2007. 1. Due primarily to: 1. Increased compensation in R&D expenses. 2. Expenses for SOX compliance. 3. Wrapping up SOX project for Actaris, which Co. launched in 2007. 1. This was an extensive project. 2. Pleased with results in terms of assessment of internal controls. 3. Expects ongoing compliance costs for SOX in 2009 to be much lower than costs incurred in 2007 and 2008. 4. Non-GAAP diluted EPS, $3.36 vs. $2.81 in 2007. 1. Up 20%. 3. Balance Sheet: 1. Cash Flow from Operations: 1. $37m for 4Q08. 2. $193m for 2008. 2. 2008 CapEx, back-end loaded. 1. $22m for 4Q08. 2. $63m for 2008. 3. CapEx in 4Q08 was primarily for: 1. AMI related equipment in North America. 2. Automation of electricity metering manufacturing in UK. 3. Free Cash Flow: 1. $15m for 4Q08. 2. $130m for 2008. 4. Liquidity: 1. Cash balances, $144m as of 12/31/08. 1. Has about $65m in unused capacity on revolver line. 2. Rest is currently being used for LOC and bonds. 2. AR remains healthy. 3. 4Q08 adjusted EBITDA, $60m. 1. EBITDA margin, 14%. 4. 2008 adjusted EBITDA, $280m. 1. EBITDA margin, 14.7%. 5. Makes several adjustments, including add back of stock-based compensation expense when calculating EBITDA for debt ratios. 1. 2008 stock compensation expense, $16.5m. 6. At Dec. 31, had about $1.2b in total debt at blended interest rate of 4.6%. 7. During 4Q08, made $4m in debt payments, including repurchase of $1m in senior subordinated notes. 1. Made lower debt prepayments in 4Q08 in order to maintaining higher level of liquidity. 2. For year, made debt payments of $388m. 8. Debt-to-EBIDTA ratio, 4.1 times at Dec. 31. 1. Co. was in compliance with debt covenants. 9. As Co. moves into 2009 starting at 1Q09-end, credit agreement calls for a tightening in these covenants with: 1. Maximum debt-to-EBIDTA ratio of four times. 2. Minimum interest coverage ratio of 3.5 times. 10. In Jan., issued about 2.25m shares of common stock in exchange for $121m in face value of convertible notes. 1. These exchanges reduced convertible debt from $345m to $224m. 2. Including exchange, reduced debt by $585m, since April 2007 acquisition. 1. Debt reduction of over 35%. 5. Exchange: 1. Notes have been and continue to be an important part of capital structure. 2. Issued the notes in 2006 to help fund Actaris acquisition. 1. It has been 2.5 years since Co. issued notes. 1. This exchange reduced the balance by about a third. 2. Estimates exchange will be dilutive to 2009 EPS by approx. $0.17 a share, which Co. has already taken into account in guidance. 3. Accounting for convertible notes is getting increasingly complex. 1. New accounting pronouncement became effective on Jan. 1, which will result in additional non-cash interest expense of about $9.5m in 2009. 1. Exchange will result in one-time, non-cash charge of about $10m pretax. 2. Additional non-cash interest expense and loss on exchange are excluded from 2009 non-GAAP earnings guidance.
S2. 2009 Outlook (M.U.) 1. Expectations: 1. US housing start report this morning of 466,000 is clearly indicative. 2. As Co. came out of 2008, mentioned year-end spending was disappointing, especially in US and it was. 1. As Co. has come through Jan. and moved through Feb., business in US continues to decline. 1. Unclear that it will continue to worsen or level off. 3. As Co. moves through first two months of 2009, FX and currencies other than euro have weakened relative to US dollar. 1. Since last month, deterioration on non-euro currency, primarily Brazilian reais and British pound have decreased 2009 projected revenues in US dollars by approx. $20m. 2. While modeling at $1.30 for euro has been closed, others have deteriorated. 1. Quite hard to know what the year will be. 2. As it has been well publicized, San Diego has chosen to delay their OpenWay roll-out in order to upgrade to high level of platform security, a move that is not helpful from 2009 perspective. 4. Moved guidance range down to reflect uncertainty, particularly in 1H09 and reality of San Diego moving out. 1. New revenue, $1.78-1.88b. 2. EPS, $3.35-3.75. 3. EBIDTA, $270-290m. 5. Lowering guidance for 2009. 1. At this point, thinks it is a prudent think to do.
S3. Itron North America (INA) Review (P.M.) 1. Highlights: 1. 4Q08 revenue, $153m. 1. 8% lower than 4Q07, primarily due to lower than usual year-end spending from utilities in US. 2. In 2008, quarterly revenue pattern was bit different from normal years. 1. Instead of slower 1H, experienced more revenue in first nine months of the year than Co. was expecting. 1. By year-end between economy and financial markets, many utilities did not adhere to their normal use it or lose it budget spending, and instead began delaying those purchases that were discretionary. 2. Ends up at lower end of revenue guidance. 3. Had lower GM during 4Q08 vs. 2007, primarily due to lower revenue. 1. Unabsorbed overhead was a bit higher. 2. Product mix was not as favorable as last year. 4. Expenses were basically in line. 1. Ended year with non-GAAP operating margins for 4Q08 and year of about 16%. 1. Slightly lower than 2007 non-GAAP operating margin of 17% but not out of line considering all of the work Co. did this year bringing OpenWay to market. 5. 4Q08 bookings, $422m. 1. 2008 total booking, $1.25b. 2. For 4Q08, a large part of this was electric AMI portion of Co.'s contract with CenterPoint Energy for $334m, whose project was approved by Public Utility Commission of Texas in Dec. 6. While Co. is pleased with AMI bookings, the fact that 4Q08 core business bookings, excluding AMI. were only $88m, indicates a concerning slow down in core business in North America. 1. Delivered over $628m of core business in past year. 2. Most significant factor is impact that AMI project consideration has on AMR and base electric metering business. 7. Last week at DistribuTECH, one of customers made a presentation in which they commented publicly on their roll out plans. 1. Would like to clarify a few misconceptions that have risen after that presentation. 2. Inferences were drawn from this change in deployment plans in terms of revenue impact to ITRI and reasons the change was made. 3. Questions were raised about whether or not security function of OpenWay was major reason for the delay. 4. Latest software release further enhances security capabilities. 1. Has been a part of road map for quite some time. 5. To clarify, customer has chosen to implement enhanced version of security that new release provides and intent to test software thoroughly until Aug. 1. It will affect the initial deployed scheduled for 2009, but it will provide customer with the right solution and that is more important in long-term. 8. There have been some concerns expressed about ITRI's ability to successfully launch OpenWay into fast evolving Smart Grid marketplace. 1. Currently working with and deploying technology at four large high profile customers. 1. This alone is validation of viability of system. 2. Large projects of this kind are of similar magnitude to ERP or billing system replacement with schedules that frequently shift around. 3. Shipment forecast for AMI changes monthly, some up and some down. 1. Feels that it is not fruitful for Co. to comment on shipments or deployment plans for individual projects and further restrained by confidentiality provisions with each of these customers. 4. Co is not able to speculate on customer's future deployment schedules. 9. Secured four significant contracts for nearly $14m smart metering end points. 1. Three of the four contracts include deployment of gas modules. 1. All customers are proceeding with their deployments. 2. Each is thoroughly testing the complete system, including advanced meter functionality, disconnect switch, home area networking and advanced security. 3. Each is integrating system into their information architecture, including meter data management and billing systems. 4. Each is planning large-scale rollouts involving project teams of potentially hundreds of individuals. 5. San Diego Gas and Electric, and CenterPoint are beginning their deployments next month. 1. Solid milestones expressing confidence in OpenWay. 10. Customers are performing extensive audits on manufacturing facilities, design and implementation methodologies, quality assurance and deployment readiness. 1. While some vendors may have version of their smart meters deployed in greater quantities, it's important to understand that those meters may not be full featured version that are now required as a part of an advanced meter infrastructure or smart gird deployment. 2. They may not have: 1. Disconnectability in meter or home area network capability. 2. Outage notification or firmware download. 3. Full software capabilities needed in this more open and interactive environment. 4. Full range of functionality to support smart grid demands. 3. They may not be as feature rich as Co.'s systems, so any comparison to numbers deployed in field is likely to be an unfair comparison. 11. There has been a total of speculation about new entrance in this market. 1. Understands that as this industry expands and becomes more attractive, it will attract a broader group of competitors and partners. 1. Some of which are much larger outside of the utility space than Co. is. 2. There is room for other companies that bring a new level of expertise. 1. Does not necessarily see them as competitors. 2. May end up partnering with them as Co. does with IBM, Capgemini SAP, Microsoft and others. 3. Recently Google announced that they were...
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