Itron (ITRI) had a tough 2013, and 2014 isn’t expected to revive its fortunes as much as previously hoped, the smart meter maker revealed Wednesday in its year-end and fourth quarter 2013 earnings report. That’s put the company’s stock price into the doldrums -- and pushed it toward restructuring its business around its next-generation smart grid technology, including its partnership with Cisco Systems.
Itron reported revenues of $1.9 billion and a loss of $147 million, or $3.74 per share, for its fiscal year 2013. That’s a steep drop from 2012’s $2.2 billion in revenues and net income of $108 million, or $2.71 per diluted share.
That wasn’t unexpected. Itron has been reporting struggles in its key electricity metering business all year, related to several of its biggest advanced metering infrastructure projects in North America winding down, and having fewer new projects to replace them. In September, it announced plans to cut 9 percent of its workforce, or about 750 employees, as part of a broader restructuring.
But Itron’s outlook for 2014 was also worse than expected, with projections of revenue between $1.825 billion and $1.925 billion and earnings per share between $1.30 and $1.80, compared to analyst predictions of earnings of $2.04 a share on $1.91 billion in revenue.
The market reaction was swift and severe. Shares of the Liberty Lake, Wash.-based company fell by nearly 25 percent between Wednesday afternoon and Thursday morning, from $41.42 to $32.74, and were hovering in the $33 range as of midday Thursday.
At the heart of Itron’s troubles are the poor performance of its electrical metering business, which makes up about 40 percent of the company’s overall business. Itron broke out details on its electric, gas and water metering business for the first time in its Wednesday report, which revealed an electrical segment which eked out 2013 with a mere 1 percent operating margin, compared to 18 percent for gas metering and 14 percent for water metering.
“Increasingly, some pockets of our electric [metering budiness] are under pricing pressure for a variety of reasons,” CEO Philip Mezey said in a Wednesday conference call. “These include lower-end legacy products,” as well as pricing pressures in Asia and Europe and bids for “low volumes of highly specified hardware that offer limited differentiation.”
“These types of engagements are weighing down the overall margin in the electric segment to an unacceptable level. It's clear that a different set of actions beyond our current restructuring projects is required to address these parts of our electric business,” Mezey said.
The solution he laid out is for Itron to exit business lines and markets that don’t offer enough margin, such as its low-end residential electromechanical meter business in Latin America, which it exited in December, resulting in a $10 million to $20 million hit to annual revenues.
In contrast, he said, “A large portion of our electric business meets or is on track to meet our profitability targets. These are engagements where we bring our full value and expertise in metering, intelligent networks, and software, to partner with utilities. In these cases, the utilities we serve are seeking innovative solutions to solve their business problems, including managed services, smart prepayment systems, advanced analytics and other extended grid capabilities by our OpenWay platform.”
These are the kinds of features that Itron is seeking to roll out on its own, with fourth-quarter electricity metering wins adding up to $192 million in new contracts, including 550,000 meters for Northeast Utilities in New Hampshire, City Power in South Africa, EDF in France, and Tucson Electric Power.
But Itron is also placing a lot of emphasis on its IPv6 networking partnership with Cisco, which saw its first large-scale deployment in 2011 with Canadian utility BC Hydro. That partnership has yielded a number of new customers this year, including Duke Energy and Los Angeles Department of Water and Power, as well as some new wins this year. In January, Itron landed a contract with Salzburg AG in Austria, as well as an undisclosed “major Midwest electric utility” that plans to deploy about 2 million endpoints for a value of more than $250 million, Mezey said.
It’s also enabled Itron to start networking devices such as electric vehicle chargers andsolarinverters, alongside distribution automation equipment and home energy management devices. Cisco’s launch of its new IOx platform to enable third-party developers to write Linux-based applications for its smart grid routers is allowing Itron, along with other Cisco partners like Alstom and OSIsoft, to more quickly develop and implement programs like conservation voltage reduction and distributed energy management.
Itron has also joined up with Microsoft’s CityNext initiative, which could lead to inroads in networking city streetlights, parking meters and other such “smart city” endpoints, although no projects on that front have yet been announced.
Mezey also highlighted opportunities to grow the company's share of recurring revenues from software as a service, managed deployments and data analytics. “Somewhere in a range of $100 million to $200 million a year of our revenues is in this recurring software and services area. It's our intention -- and we have tremendous opportunity -- to grow that significantly beyond its current levels,” he said.
One key driver on this front will be “focusing on the value of the data coming out of the system,” he said. “There are strong opportunities for us in expanding throughout the distribution grid. You see in announcements from us in distribution automation, and sensing products, leak detection, non-revenue water on services and analytics.” While Itron is beefing up its analytics platform for all three of its metering business lines, it is also looking for acquisitions, he noted: “There are opportunities for us both organically and inorganically in those spaces.”
All of these initiatives are being pursued by all of Itron’s competitors, it should be noted. Silver Spring Networks, Landis+Gyr, Elster, Sensus, Trilliant, Echelon and General Electric are all moving toward IP-enabled networks, more distributed intelligence to manage more than smart meter data collection, expanded software-as-a-service and data analytics platforms, and the like. In simple terms, selling meters isn’t enough anymore. Smart grid platforms are what the market requires.