Smart meter vendor and grid networking provider Itron swung to a loss in fiscal year 2018, with supply chain constraints and costs related to its acquisition of chief U.S. rival Silver Spring Networks outweighing growing revenues for its utility, smart city and industrial Internet of things networks. 

In its fourth quarter and fiscal year 2018 earnings report this week, Itron reported a loss of $99 million, or $2.35 per share, on revenues of $2.38 billion in 2018, compared to net income of $57.3 million on revenues of $2.02 billion in 2017. The increase in revenue was driven primarily by growth in its networking business, both organically and from its $830 million acquisition of Silver Spring Networks last year. That acquisition created a company rivaled only by Swiss-based Landis+Gyr in terms of global scale across its metering and networking segments. 

Itron CEO Philip Mezey noted "tremendous progress in many areas of the business" during this week’s earnings conference call, but also acknowledged the "mixed financial results.” Over the course of 2018, the combined companies faced both ongoing acquisition and integration costs, and a shortage of critical electronic components that drove down gross margins for its devices business segment and the company at large, to 30.7 percent for 2018, compared to 33.5 percent for 2017. 

“We encountered unexpected headwinds, both internal and external, in our supply chain, which resulted in lower revenue and profitability than we expected,” Mezey said. Over the course of the year, lead times for hundreds of key components have increased to more than six months, he noted — a situation that showed some improvement in the fourth quarter, and which the company is “working hard” to correct through the first half of 2019. 

Itron has broken its business into "Devices," i.e., its smart meters, network nodes and other hardware; "Networked Solutions," which constitutes both Itron and Silver Spring’s latest generation of distributed intelligence, IOT-enabled networking technologies; and “Outcomes,” which includes the software and services offerings of both companies, as well as those of Comverge, the demand response provider Itron bought for $100 million in 2017. 

Itron’s devices are obviously a “critical part of our customers’ infrastructure," Mezey noted, and Itron plans to continue to roll out new products throughout 2019. But it remains the slowest-growing portion of the company in terms of revenues. It has also been a primary drag on its finances over 2018, driven by components shortages that have driven up costs and pushed back delivery dates. 

For years before their merger, Itron and Silver Spring had tried to expand beyond reliance on the manufacture and sale of meters and other devices — with its inherently lumpy and unpredictable flow of business — and into lines of business that can provide additional benefits built on its existing infrastructure, as well as recurring revenues for the companies. This has included branching out into other verticals such as networked streetlights and smart cities, as well as adding software and services to its core utility business. 

“While our Device Solutions business is facing a softer European market, we are very pleased with our bookings momentum in North America, where we expect Networked Solutions and the Outcomes business units will continue to grow at significant rates in 2019,” Mezey said. The Silver Spring acquisition “allowed us to extend our software and services capability deeper into solutions such as distribution automation and smart street lighting,” while Itron’s own IOT technology, OpenWay Riva, has been put to use in smart city, solar monitoring and other grid edge applications. 

The two companies have embarked on an integration effort that has yielded about $70 million in cost reductions over 2018, and is expected to yield $140 million by 2020, Mezey said. Meanwhile, “We continue to prioritize organic investments that will drive higher-margin software and services deeper into our footprint of connected devices." 

Itron predicted 2019 revenues in the $2.35 billion to $2.45 billion range, with easing of supply constraints and continued integration benefits balanced somewhat by headwinds including an expected rise in tariffs for metals and other materials.