Itron Q2 2010 Earnings Call Transcript

Itron Q2 2010 Earnings Call Transcript
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Itron (ITRI)

Q2 2010 Earnings Call

July 28, 2010 5:00 pm ET

Executives

Steven Helmbrecht - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Ranny Dwiggins - Vice President of Investor Relations

Malcolm Unsworth - Chief Executive Officer, President and Director

Analysts

Jeff Osborne - Stifel, Nicolaus & Co., Inc.

Michael Horwitz - Robert W. Baird & Co. Incorporated

Stephen Sanders - Stephens Inc.

Stuart Bush - RBC Capital Markets Corporation

Benjamin Schuman - Pacific Crest Securities, Inc.

Craig Irwin - Wedbush Securities Inc.

Carter Shoop - Deutsche Bank AG

Sanjay Shrestha - Lazard Capital Markets LLC

Sean Hannan - Needham & Company, LLC

Paul Coster - JP Morgan Chase & Co

Elaine Kwei - Piper Jaffray

Steven Milunovich - BofA Merrill Lynch

John Quealy - Canaccord Genuity

Michael Coleman - Sterne Agee & Leach Inc.

Presentation

Operator

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Previous Statements by ITRI
» Itron Q1 2010 Earnings Call Transcript
» Itron, Inc. Q4 2009 Earnings Call Transcript
» Itron, Inc. Q3 2009 Earnings Call Transcript

Ladies and gentlemen, thank you very much for standing by, and welcome to the Itron, Inc. Second Quarter 2010 Earnings Conference Call. [Operator Instructions] For opening remarks and introductions, I'd like to turn the call over to Ranny Dwiggins, Vice President, Investor Relations. Please go ahead.

Ranny Dwiggins

Good afternoon, everyone, and thank you for joining us. On the call today, we have Malcolm Unsworth, our President and CEO; and Steve Helmbrecht, our Chief Financial Officer. Steve will begin by giving us a financial overview of the quarter, and then Malcolm will provide a business update. After that, we'll take your questions.

Our earnings release includes non-GAAP financial information that we believe enhances your overall understanding of our current and future performance. We also have a supplemental slide deck that is intended to augment our prepared remarks as well as provide a reconciliation of differences between GAAP and non-GAAP financial measures that we will talk about today. You can find this supplemental information on our corporate website under the Investor Relations tab.

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 discussed in today's earnings release and the comments made during this conference call and in the Risk Factor section of our Form 10-K, Form 10-Q and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statement. And with that, I'd like to turn the call over to Steve Helmbrecht, Itron's CFO.

Steven Helmbrecht

Thank you, Ranny, and good afternoon. We had an excellent quarter. Let me give you a quick financial snapshot. Record quarterly and six-month revenue of $569 million and $1.1 billion; quarterly and six-month non-GAAP diluted earnings per share of $0.98 and $1.99; quarterly and six-month adjusted EBITDA of $84 million and $150 million; quarterly and six-month bookings of $806 million and $1.3 billion; record 12-month backlog of $1 billion and total backlog of $1.7 billion.

Our North America business is growing rapidly. Our International business is stable, and the impact of foreign exchange fluctuations has been modest. Our financial position keeps getting better with increased liquidity and improved credit ratios.

Back to Q2 financial performance, Itron's revenue of $569 million was up $155 million or 38% from Q2 2009 and up 14% sequentially from Q1 2010. Our revenue growth was driven primarily by record revenue of $303 million in Itron North America, an increase of 112% from the second quarter of 2009. OpenWay led the way. We shipped approximately 1.2 million OpenWay units during the quarter with OpenWay revenue contributing approximately 47% of total Itron North America revenue.

International revenue was $266 million, down about 2% from the second quarter of 2009. Revenue grew about 0.5% on a constant dollar basis.

Gross margin for the quarter was 31% down from 32.2% in the second quarter of 2009. Itron North America gross margin was 34%, up sequentially from 32.9% in the first quarter. The sequential improvement in Itron North America gross margin was driven by higher volumes.

Itron International gross margin was 27.5% for the quarter, down from 30.7% in the second quarter of 2009. The decrease in margin was due almost entirely to increased warranty expense of about $9.7 million. The warranty accruals of $9.7 million impacted Itron International gross margin by about 3.6 percentage points, impacted overall gross margin by about 1.7 percentage points and impacted non-GAAP diluted earnings per share by about $0.16. The increase in these accruals relates to two arbitrations in Sweden. I'll provide some background.

They involve claims that certain of our meters are affected by high-frequency pollution from third-party devices in the home environment, which were not anticipated at the time of the meter design. We believe that we have corrected the problem and satisfied our customers' concerns. While we have ongoing warranty claims and will make ongoing adjustments as required, we do not expect adjustments of these magnitude to occur on an ongoing basis.

Let's address operating expenses. Excluding amortization of intangible assets, total operating expenses were $107 million, an increase of about $10 million due mostly to increased compensation expense resulting from the reinstatement of bonus and profit sharing plans. As a percentage of revenue, operating expenses, excluding amortization of intangibles, were 18.8% in the quarter compared to 23.5% in the second quarter of 2009.

Higher revenue coupled with lower growth in operating expenses drove improved operating margins. Non-GAAP operating margin was 12.1%, up from 8.7% in the second quarter of 2009. Adjusted EBITDA was $83.6 million compared with $47 million in the second quarter of 2009, an increase of 78%. Adjusted EBITDA margin was 14.7% compared with 11.4% in the second quarter of 2009. Cash flow from operations for the quarter was $51 million. Capital expenditures were $12 million, resulting in free cash flow of approximately $40 million.

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