Itron Inc (ITRI) Q1 2021 Earnings Call Transcript

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Itron Inc (ITRI -0.44%)
Q1 2021 Earnings Call
May 3, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day everyone and welcome to the Itron, Inc. Q1 2021 Earnings Conference Call. Today's call is being recorded. For opening remarks, I would like to turn the call over to Ken Gianella. Please go ahead.

Kenneth P. Gianella -- Vice President, Investor Relations and Strategy

Thank you, operator. Good morning and welcome to Itron's first quarter 2021 earnings conference call. We issued a press release earlier today announcing our results. The press release includes replay information about today's call. A presentation to accompany our remarks on this call is also available through the webcast and on our corporate website under the Investor Relations tab. On the call today, we have Tom Deitrich, Itron's President and Chief Executive Officer and Joan Hooper, Senior Vice President and Chief Financial Officer.

Following our prepared remarks, we will open the call to take questions using the process the operator describes. Before I turn the call over to Tom, please let me remind you of our non-GAAP financial presentation and our Safe Harbor statement. 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 the comments made during this conference call and in the Risk Factors section of our Form 10-K and other reports and filings with the Securities and Exchange Commission.

In addition, due to the fluid nature of the COVID-19 pandemic, Company estimates regarding the impact of COVID-19 on current 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, May 3, 2021, may materially change and we do not undertake any duty to update any of our forward-looking statements.

Now please turn to Page 4 in the presentation and I'll turn the call over to our CEO, Tom Deitrich.

Tom Deitrich -- President and Chief Executive Officer

Thank you, Ken. Good morning and thank you for joining us.

We had a productive first quarter and there is a lot to cover, so let's get started. You will hear details from Joan shortly, but to summarize our first quarter performance, revenue was $520 million, adjusted EBITDA was $50 million, non-GAAP earnings per share was $0.52 and free cash flow was $39 million. While these results still reflect the ongoing effects from the pandemic, we are constructive on our overall operational and strategic progress. This is highlighted by our recent convertible bond and equity offering that accelerated our delevering efforts and added business flexibility to execute both strategically and operationally in the future.

Now let me provide a brief update on the customer and operating environment as we see it today. Beginning with our customers, consistent with the past few quarters, we have not seen contract cancellations and collections have continued as expected. Both our European and North American markets continue to be somewhat gated by the pandemic. While Q1 revenue was lighter than anticipated, we continue to expect a revenue outlook that is weighted toward the second half of the year and should continue to improve beyond 2021. Our operational efforts continue to yield improvement. Prior and recent actions to reduce fixed cost are on track and we are beginning to see the benefits in our results.

Recently, there has been a lot of talk in the news about supply chain challenges at both the component and transportation level. In Q1, we had a little impact from component supply constraints or in factory production as our mitigation efforts served us well. This includes the consumption of buffer inventory on our key components as reflected in our lower inventory levels at the end of Q1.

Moving forward into Q2 and the second half of 2021, we do anticipate that we will face supply hotspots specifically for certain semiconductors, resins and metals. We will continue our efforts to actively mitigate constraints as they appear and we'll monitor the situation closely over the next few quarters. We are partnering with our customers to increase the visibility of their needs beyond our normal lead times, increasing order coverage for key components and driving alternative sources plus targeting low-value, low-margin product lines for discontinuation.

And finally turning to bookings and backlog, we had another very strong quarter of bookings, that is reflective of the innovation in both our Outcomes Solutions and Riva Distributed Intelligence platform. We continue to see robust activity from our customers looking to deploy higher value solutions and applications that increase efficiency and insight into their operations. Our backlog increased to a new record level and we continue to be pleased with our industry position.

Turning to Slide 5, for the first quarter we achieved a book-to-bill ratio of over 1.321 driven by bookings of approximately $688 million, providing a record total backlog of approximately $3.4 billion and a 12-month backlog at approximately $1.3 billion. It is important to note that our current $1.3 billion, 12-month backlog sequentially improved by approximately $100 million. While this 12-month backlog is still approximately $200 million less than the view we had pre-pandemic entering 2020, we are encouraged by the substantial improvement achieved over the past few quarters.

There are a few recent bookings that I would like to highlight, starting with our Outcomes segment. We are pleased to announce the extension of our long-term partnership with Exelon in a multi-year, multi-application SaaS agreement to deliver industry-leading portfolios of outcomes in advanced metering infrastructure, distribution automation, and smart city applications across the Exelon operating companies. By extending our strategic collaboration, this enables Exelon to continue to optimize their operations while prioritizing security and privacy for their customers. The extension of this agreement is a proof point of the clear benefits, technical flexibility and proven value that our customers are receiving.

Another booking I would like to highlight continues our partnership with Texas-New Mexico Power or TNMP. TNMP is the most recent company to invest in our Riva Distributed Intelligence platform on our multi-application capable Gen-X network. We are pleased to have the opportunity to partner with TNMP to deliver our latest technology platform that provides increased operational resilience and to future-proof TNMP's investment with the flexibility to add applications and offerings for years to come. These are just a few proof points that our investment in technology yields not only success for Itron, but also long-term value for our customers. This quarter, we have grown our deployed Distributed Intelligence capable endpoints to over 2.8 million cumulatively, delivering on our strategy to expand our footprint of our advanced multi-purpose multi-application network. Combined with a SaaS renewal of a long-term partner to a multi-year multi-application platform demonstrates that once we install a network, we can expand our value to our customers with our Outcomes segment. While these are just a few examples of the progress that we've made this past quarter, it is why we remain positive that our efforts will continue to create value as we execute our strategy in 2021 and beyond.

With that, let me hand off to Joan to discuss our first quarter results.

Joan Hooper -- Senior Vice President and Chief Financial Officer

Thank you, Tom.

As Tom mentioned, we continued to execute in line with our strategy during the first quarter. Let me begin by saying we were pleased to successfully complete both the convertible bond and equity offering in early March. We issued $460 million of convertible notes due in 2026 at 0% coupon rate. Additionally, through a follow-on equity offering, we raised $400 million with the issuance of approximately 4.5 million common shares. Combined gross proceeds from the transaction totaled over $860 million. Our primary goal was to accelerate our delevering and to strengthen our balance sheet. This in turn has given us strategic flexibility as we continue to execute our long-term strategy.

Turning to our financial results, we are still facing headwinds, but overall, we made progress in the first quarter. To begin, please turn to Slide 6 for a summary of the first quarter consolidated GAAP results. First quarter revenue of $520 million decreased 13% versus last year or 16% in constant currency. The year-over-year decline was primarily due to the delay of customer projects, which continued to be impacted by COVID-19. Gross margin for the quarter was 32.2% or 350 basis points higher than last year due to a very favorable product and solution mix. GAAP net income was $13 million or $0.30 per diluted share compared with net income of $9 million or $0.21 per diluted share in the prior year.

Regarding non-GAAP metrics on Slide 7, non-GAAP operating income was $39 million. Adjusted EBITDA was $50 million or 9.6% of revenue. Non-GAAP net income for the quarter was $22 million or $0.52 per diluted share. Looking at revenue by business segment on Slide 8, Device Solutions revenue was $173 million, a $43 million or 21% year-over-year decline on a constant-currency basis. The decrease was due to higher Linky volumes in France in the prior year, COVID-related delays impacting the timing of shipments in 2021 and the impact of the Latin America transaction, which we completed in Q2 of last year.

Networked Solutions revenue was $288 million, a $56 million or 16% decline year-over-year in constant currency. The decrease was due to reduced volumes as certain deployments wind down and continued COVID-related delays impacting the start of new projects. Revenue in the Outcomes segment was $58 million, a $2 million or 3% increase in constant currency from 2020. The increase was driven by higher software license sales as well as higher maintenance and professional services. Lastly, foreign currency changes resulted in $18 million higher revenue versus the prior year.

Moving to the non-GAAP year-over-year EPS bridge on Slide 9. Our Q1 non-GAAP EPS was $0.52 per diluted share, down $0.05 from the prior year. The drivers of the year-over-year change were net operating performance, which had a negative $0.04 per share impact versus Q1 of 2020. While we saw lower volumes versus the prior year, this was partially mitigated by better product mix and when coupled with continued tight spending, yielded a $0.02 year-over-year improvement in operational performance. However, this was more than offset by a year-over-year reduction in miscellaneous other income and expense. Lower interest expense resulted in a $0.05 increase in EPS year-over-year. A higher non-GAAP tax rate decreased EPS by $0.03 versus Q1 of 2020 due to the mix of income by jurisdiction and more discrete tax benefits in the prior year. And finally, changes in foreign currency and a higher share count resulted in a $0.03 per share decrease year-over-year.

Turning to Slides 10 through 12, I'll discuss the Q1 results by business segment compared with the prior-year. Device Solutions revenue was $173 million with gross margin of 19% and operating margin of 13%. Gross margin increased 270 basis points year-over-year due to improved product mix as well as reduced inefficiencies related to COVID-19. Operating margin increased 360 basis points due to the higher gross margin and lower operating expenses.

Networked Solutions revenue was $288 million with gross margin of 39% and operating margin of 28%. Gross margin increased 340 basis points year-over-year due to favorable product mix and reduced inefficiencies related to COVID-19. Operating margin increased 150 basis points year-over-year with the higher gross margin partially offset by continued investments in product development.

Outcomes revenue was $58 million with gross margin of 38%. Gross margin increased 600 basis points year-over-year due to favorable solutions mix including higher one-time software license sales. Operating margin was 18%, 290 basis points higher than last year due to the fall to a higher gross margin, partially offset by continued investment in product development.

Turning to Slide 13, I'll cover liquidity and debt. As I just mentioned, we completed a convertible bond offering and an equity raise in the first quarter, which enabled us to accelerate our pay down of debt and in turn strengthen our balance sheet. Free cash flow was $39 million in the first quarter. Cash and equivalents at the end of the first quarter were $575 million. Total gross debt was $921 million and net debt decreased to $346 million at the end of the first quarter. The decrease in net debt reflects paying down a significant portion of the term loan A using proceeds from the equity transaction. As of March 31, total debt included the new $460 million of convertible notes and the $400 million of previously existing 5% senior notes. Subsequent to quarter end, we repaid the 5% senior notes, which with the call premium totaled $410 million. On a pro forma basis, this lower total gross debt to $521 million and cash and equivalents $165 million. Net leverage was 2.0 times at the end of Q1, down from the 4.1 times at the end of last quarter. The convertible note and equity offerings had a net positive impact to our previous full year non-GAAP EPS guidance. So I wanted to provide a restated view reflecting these transactions.

Turning to Slide 14, on our Q4 call, we provided full-year 2021 non-GAAP EPS guidance in a range of $2.15 to $2.55 per share with a midpoint of $2.35. This assumed approximately 41 million of average diluted shares outstanding and approximately $36 million of non-GAAP interest expense. The impact of the capital markets transaction increases our previous 2021 guidance by approximately $0.15 per share. The two drivers are: increasing the diluted weighted average shares outstanding to approximately 47.4 million; and reducing the non-GAAP interest expense by approximately $20 million to a revised level of $16 million. The resulting restated non-GAAP EPS range is $2.30 to $2.70 or $2.50 per share at the midpoint. This restated guidance only factors in the capital markets transactions. As is our typical practice, we'll provide an update on our 2021 business outlook on our second quarter call in early August. Overall, it was a very active and positive quarter for the Company. We strengthened our balance sheet giving us greater strategic flexibility. We continued to maintain disciplined cost controls and delivered strong free cash flow. We're making progress on our transformation projects. These results, coupled with our record backlog, positions the Company well for the second half of 2021 and beyond.

Now, I will turn the call back to Tom.

Tom Deitrich -- President and Chief Executive Officer

Thank you, Joan.

With our strengthened balance sheet and increased strategic flexibility, we are in a great position to drive our business forward. With the activities of this past quarter, we are stronger and even more focused on innovation, resiliency and sustainability to better serve our customers and our communities. As we navigate the near-term headwinds, we are pleased with our progress and we're making great strides on our strategic and operational efforts and remain cautiously optimistic about the future.

Thank you for joining us today. Operator, please open the line for some questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And we'll go ahead and take our first question from Noah Kaye from Oppenheimer. Please go ahead.

Noah Kaye -- Oppenheimer -- Analyst

Thanks, good morning everyone. Appreciate you're taking the questions. Tom, maybe we could start with the supply chain. Your comments in the prepared remarks around some of the well-known headwinds facing the industry and the fact that you've consumed some buffer inventory. I guess, can you just give us a sense for whether or not this really poses any kind of meaningful incremental headwind as you look out over the balance of the year and nd then, how you might plan to mitigate and offset that in terms of operational performance?

Tom Deitrich -- President and Chief Executive Officer

Thank you, Noah. In our prepared remarks, we commented on a few things, supply chain constraints were not really a factor in Q1 and we did consume buffer inventory and you can see our inventory levels were relatively low at the end of the quarter. Looking ahead, I do expect to see the supply chain to be tight. I anticipate some hotspots for the next several quarters. The specific areas that I think are going to be be tight are in certain semiconductor products, maybe some of the resins for plastics and then specific metals. The situation is extremely fluid. These hotspots move around day to day. Coming to what do we do about it and how do we handle it, a dedicated team to work with our suppliers. We've extended PO coverage out over time to make sure we give suppliers visibility into what we need, working with customers on longer term forecast so we can see their side of the equation, the multi-sourcing efforts that we've had under way for the last couple of years to give us flexibility overall. So, that's the recipe to wellness that will play out over the next couple of quarters.

Maybe the last part of your question that I would add is, there's different pads to recovery for those different types of commodities that I talked about and they will all take their own individual path with different timelines. So, this will be a pretty fluid situation I think for the next couple of quarters.

Noah Kaye -- Oppenheimer -- Analyst

Yeah. I mean, I think if you could compare it for a moment to what you went through in 2018, then there were -- there were some near-term impacts on production, but then there were also some, obviously, elevated inventory costs and production inefficiencies, but those were different components, right, different parts of the bond [Phonetic]. So, can you maybe compare and contrast a little bit the situation then versus now.

Tom Deitrich -- President and Chief Executive Officer

Yeah, sure. In 2018, we were in the midst of some pretty big supply chain transformations and we struggled a bit to manage through that situation. It was primarily in MLCCs, so in capacitors, was really where that biggest hotspot was. This situation is very different. We've got a different set of supply chain capability in place with the work that we've done over the last couple of years. Every one of these supply constraints over the last couple of decades of my career has been different and they always play out slightly different, but I think being prepared and being organized as to how you work through limitations that clearly exists in the supply chain is the key to success. So very different companies that we stand in a position today to manage through it.

Noah Kaye -- Oppenheimer -- Analyst

That's perfect. Thank you. And then if I could sneak one more in, just I guess commenting on some of the COVID-related delays and the timing of new deployments, could you characterize that for us? Is that primarily still about regulatory approvals or is it really sort of a logistics matter at this point or is it an actual problem with the customers still taking some time to get the yes?

Tom Deitrich -- President and Chief Executive Officer

Yes. The dynamics are a little bit different by region. In Europe, what we see is really some of the existing lockdowns or partial lockdowns lingering a bit. So there, it is existing projects really getting back to full deployment pace is the primary dynamic to play out. We expect that starts to play through the balance of this year and expect that things would be in a better position to catch up in second half of the year. In the North American space, which is primarily our networks business, a lot of the regulatory delays and some of those customer decisions that you referenced, those were dynamics that were playing out back during 2020 as you can tell by our backlog and some of the bookings pace that we've done in the last quarter or two. A lot of that is behind us now and we're really in that transition period. So, a lot of our existing projects have gotten back to a more reasonable pace, but some of the newer projects where we had that lull in decisions back in 2020 are poised to ramp. And again, that's where we would expect that to play out in the second half of the year.

Noah Kaye -- Oppenheimer -- Analyst

That's perfect color. Thank you so much.

Tom Deitrich -- President and Chief Executive Officer

Thank you.

Operator

And we'll move on to our next question from Jeff Osborne from Cowen and Company. Please go ahead.

Jeff Osborne -- Cowen and Company -- Analyst

Good morning. Just a couple of questions on my end. I was wondering Joan or Tom, if you can touch on the drivers of the mix that you referenced. Is it related to gross margin being so high this quarter?

Joan Hooper -- Senior Vice President and Chief Financial Officer

Yeah. I mean I can start and then Tom can jump in. So, it was really across all three segments and I would say different drivers for each segment. So in the case of devices, as Tom just mentioned, in Europe, we had some delays in existing projects due to some partial lockdowns continuing in Europe and some of those deployments are actually lower margin deployment. So, as they delayed the mix within Devices, it was a little bit higher and we expect those shipments though to come in the second half of the year. So that will probably lower Devices a bit. In the cases of Outcomes, there was some one-time software license revenue, which tends to increase the margin so there tends to be some lumpiness given the scale of that business. And in the case of Networks, it really is just a function of the products and solutions that were sold in Q1 as well as the delay of new starts that Tom just mentioned.

Jeff Osborne -- Cowen and Company -- Analyst

Got it. And then maybe just following up on Noah's question, can you characterize the level of quoting activity that is dew that's not sort of a straggler or leftover from 2020's induced delays, but actually new RFPs. Is that accelerating as well or are you just seeing a catch-up from the 2020 lack of decisions from regulatory bodies?

Tom Deitrich -- President and Chief Executive Officer

The environment is very strong, very robust. Customers are very eager to learn about, to get quotes and information on our new technology, so investments in Distributed Intelligence, that notion of flexibility, in the capability that they put in the ground is keenly important. Resiliency and reliability, safety, distribution, automation, monitoring types of solutions are also very strong in terms of quote activity. Much more willingness, which support a software-as-a-service type of arrangement starting to be pervasive across the customer base multi-use network types of quotes where we've already deployed a network and now they're looking to add some additional use case or additional capability. These are all areas that we see very strong quote activity and requests and customer meetings today. What you see in the bookings is indeed a mix. There is some catch-up in there that you saw before, but I would say that was probably prevalent last quarter versus this quarter and a lot of what you see rolling through now is this new desire on the part of customers to get ahead of the curve as they see a lot of pressures on their business.

Jeff Osborne -- Cowen and Company -- Analyst

That's great to hear and congratulations on the excellent award. It's wonderful to see.

Tom Deitrich -- President and Chief Executive Officer

Great. Thank you, Jeff.

Operator

And we'll go ahead and take our next question from Pavel Molchanov from Raymond James. Please go ahead.

Pavel Molchanov -- Raymond James -- Analyst

Thanks for taking the question. I cannot help asking about your exposure to India from a revenue perspective, obviously, in the context of the calamity with COVID there. Can you talk about how much of a revenue contributor that is and any disruptions that may come in the near future?

Tom Deitrich -- President and Chief Executive Officer

Good morning, Pavel. Our revenue position with India is relatively small. It's really immaterial in the overall results from a revenue perspective. So, certainly our hearts go out to the devastating situation that the country is under. We do have many employees there. It's one of our larger design centers and we're working hard to make sure we support the team and keep everyone as safe as possible. So, it is something that obviously we're concerned about from a human perspective, an employee perspective, but not particularly relevant from a revenue point of view.

Pavel Molchanov -- Raymond James -- Analyst

Okay. I'll follow up by asking kind of more broadly, given the proceeds from your recent equity and debt raise, your balance sheet, it's as cash rich as it's been in a long time, when you think about M&A opportunities, what verticals or what capabilities would you be looking to bolster?

Joan Hooper -- Senior Vice President and Chief Financial Officer

Yeah. I would say it's consistent with prior comments that we've made, which is when we were in a position, we would look to opportunities in the Outcomes space, in particular software analytics. So anything that can help increase our use cases give us more applications that we can sell to our customers would be what we would be looking at. So, primarily in the Outcomes space.

Pavel Molchanov -- Raymond James -- Analyst

Understood. Thanks very much.

Operator

And we'll move to our next question from Tommy Moll from Stephens. Please go ahead.

Tommy Moll -- Stephens -- Analyst

Good morning and thanks for taking my questions.

Tom Deitrich -- President and Chief Executive Officer

Good morning.

Tommy Moll -- Stephens -- Analyst

Wanted to talk about the margin progression. So I think across all three segments, gross margins were up. And then in terms of the flow through to the operating line, consistent with the framework you've laid out, so on Devices, it looks like it all was was flowed through. And then on Outcomes and Networked Solutions, still improved operating margins, but you did call out some incremental investments in both of those two areas. So, I was curious if you could refresh us on what are your investment priorities there near term and then also just how you think about on a through cycle or medium-term basis what the right kind of framework is there for operating expenses to continue to drive revenue growth. Thank you.

Joan Hooper -- Senior Vice President and Chief Financial Officer

Yeah, I can start and then Tom can elaborate. So, from a target model perspective, we're looking at opex to be somewhere around 22%, 23% of revenue. It's a little bit higher this quarter given the revenue was a little lower than we anticipated. But in general that's what our expectation is and we're pretty close on opex. Within that, from an R&D standpoint, we've been targeting 8% to 9% of revenue. And if you look at the chart that we have on our website in terms of target, we're looking over time to actually lower the relative spending in devices and increase it in Outcomes and Networks is about right. So, from a standpoint of investment, you're correct. Some of the gross margin fall through didn't come through to the bottom line, because we are consciously investing in both Networks and Outcomes for future applications. So maybe, Tom, you want to talk about what we're investing in?

Tom Deitrich -- President and Chief Executive Officer

Sure. In the Networked space, the investments hover around that notion of the multipurpose network. We want to be able to broaden out the use cases that we can cover, making sure that you've got, I'll say service transparency or equivalency across all types of other endpoints and making sure that it's done in a seamless way ensuring that [Technical Issues] is unquestionable, as well as security, that's where our investments tend to come in the Networked space. In Outcomes, it is those new use cases. A lot of new application development for downloadable applications is a key area. So, interest on the part of grid side, efficiency measures as well as consumer engagement side types of applications. These are a good way for us to help our customers with some of the things they struggle with. It is part of a lot of that elevated quote activity that we referenced just a moment or so ago, making sure we've got the solutions available for our customers is where we're investing for both Networks and Outcomes.

Joan Hooper -- Senior Vice President and Chief Financial Officer

Yeah, the other thing I would note, we're actually down year-over-year in actual R&D dollar spend and so what you see is as a percentage of revenue that go up slightly because of revenue was down so much particularly in Networks.

Tommy Moll -- Stephens -- Analyst

Got it. Thank you, both. That's all very helpful. And then thinking about the the revenue outlook, if I hear you correctly, we should stay tuned till the next call to get a full refresh from either on the business, but anything you would want to highlight for us today that maybe has just changed even quantitatively versus a quarter ago, whether it's first half, second half and any nudges up or down on the segment level outlooks that you gave last time would be helpful, if you're able to give it. Thanks.

Joan Hooper -- Senior Vice President and Chief Financial Officer

Yeah, the only thing I guess I'd reiterate is we made some comments in the prepared remarks that the revenue was a little bit lower than we expected, given some of the continued COVID-related delays. So if you go back to what we said on the last call, we expected the second half to be much stronger than the first. That is still the case. So, to the extent that there is revenue delays that occurred in Q1, think about that catching up if you will in the second half of the year. So if anything, the back half of the year will be even more back-end loaded than we might have anticipated a couple of months ago.

Tommy Moll -- Stephens -- Analyst

That's helpful.

Joan Hooper -- Senior Vice President and Chief Financial Officer

No real change from -- in terms of segment expectations.

Tommy Moll -- Stephens -- Analyst

Okay, great. Yeah, thank you and we'll stay tuned for a full update in a quarter. I'll turn it back.

Operator

And we'll go ahead and move on to our next question from Ben Kallo from Baird. Please go ahead.

Ben Kallo -- Baird -- Analyst

Hey, good morning guys. Thanks for taking my question. Maybe I have [Indecipherable] question and just -- I just want to understand on the discussion around being second half weighted and maybe to have any component tightness and maybe just the visibility you have on that. And then my bigger picture question, I guess, Tom and congrats on raising money and doing it the right time and Joan. I guess the bigger question is the opportunity set that you have at your Analyst Day and that $5 [Phonetic] free cash flow number I guess people took away from the Analyst Day, how do you kind of view that opportunity set that you laid out for all of us with the backdrop that we see right now. Thank you.

Joan Hooper -- Senior Vice President and Chief Financial Officer

Yeah. So if I go back to the 2019 Investor Day, I would say that target model that we laid out there including the target for free cash flow has not changed. Those are still our targets. Obviously, they have shifted to the right given what happened in 2020 and 2021 is not going to get back to the level of 2019 either. So that has definitely shifted to the right, but those remain the targets and we feel good. We feel particularly good about our free cash flow generation since the pandemic started. We've done a great job I think managing collections and really being much more disciplined in both our capex and expense spending. So we feel really good about about our ability to manage cash. We will have another Investor Day in early October. We'll be in a position then to provide more visibility to some of the out here. So I think stay tuned on that one.

In terms of the second half visibility, obviously, we've got the bookings that we've noted for Q4 and Q1. We've got assumed timing on project starts and those kinds of things and that's our best visibility at this point that the starts will really begin back up in the second half.

Ben Kallo -- Baird -- Analyst

If I could, just one more...

Tom Deitrich -- President and Chief Executive Officer

Yeah, I would only add -- yeah, just one other comment that I would add in, if you refer back to that prior Analyst Day, the areas that we expected to see growth in things like distribution, automation and things like smart cities with street lights, things like distributed intelligence, that's indeed exactly what's playing through in results. That's where the growth tends to be and where the customer excitement is showing through. So, timelines can shift around, but the thesis that we laid out in 2019 remains strongly intact.

Ben Kallo -- Baird -- Analyst

And just one more, just -- smart grid [Indecipherable] benefit to Itron from that, but we get the question quite a bit, just about infrastructure and how you get a tailwind from that. I probably over minimize it when I talk about it, but can you just talk about how we should think about that happening. I know it's probably not the same as it was in 2008, to that same degree, but what -- how you think you can benefit from that?

Tom Deitrich -- President and Chief Executive Officer

So the first point I would make is the -- we're not counting on any change in infrastructure spending in our current guidance. So, what my comments to follow isn't intended to say it's requisite for us based on the outlook that we provided. That said, we definitely see strong reasons to invest in energy and water systems. We're pleased with the heightened level of interest in the discussions across legislative and executive branch today in the U.S. where part of those discussions, GridWise Alliance, which is an industry forum that talks about what's the best way to target that money. I do think that investment in the electricity grid for resiliency, reliability, sustainability could be money well spent and certainly provides a good ROI on that money. It has some societal benefit and I think it will be a good tailwind to our business should it or when it could happen. That said, we're still a ways off from doing that. A major discussion yet to be had on the scope and exactly how the funding for these things would work. So we'll be part of the discussion, but we'll have to let it play out along with the rest of the sorry.

Ben Kallo -- Baird -- Analyst

Great. Thank you guys very much.

Operator

And we'll move on to our next question from Paul Coster from JPMorgan. Please go ahead.

Paul Coster -- JPMorgan -- Analyst

Yeah, thanks for taking my questions. So on the margin front, you seem to be doing pretty good job of improving the margins notwithstanding the headwinds that you face from execution deployment perspective. I'm just wondering once we get through the constraints and you start to execute in a more normal environment, are we to expect a reset higher of gross margins, even in the Device segment? I'm thinking in particular in the context of the the work you're doing on addressing your fixed costs.

Joan Hooper -- Senior Vice President and Chief Financial Officer

Yeah. So, as we mentioned this quarter, the higher really than expected gross margins were really a function of product and solution mix in each of our segments and that can be a little lumpy. As I mentioned, the Device shipments that were delayed tended to be lower margin products. So as they're picked up in the second half of the year, I don't think you'll see Devices margins as strong as they were this quarter. If you go back to what we said on the last call when we talked about margins, we did indicate that we expected margins to get back to about the pre-COVID level of 2019, which is roughly 30% overall for the Company. And then from there, we would expect them to grow as we continue to do execute on some of our restructuring programs.

Our 2020 plan that we announced last September is really just beginning and that plan has $25 million of annual savings with about 75% of it being in the margin line. So by the time you get into '22, most of that is implemented and that's a direct benefit to margin primarily in Devices. So there is targets for each segment. If you go on our investor deck, it's on our website, you will see our target margins for each of the segments. Those remain our targets and again when we get into Investor Day, we'll be able to talk more about the timelines associated with that, but we would certainly expect the '21 margins to be higher than 2020 and the '22 margins to be higher than '21.

Paul Coster -- JPMorgan -- Analyst

Got you. And then opex, a number of companies as they come through the pandemic start to kind of let T&E and other expenses kind of return to more normalized level, is that something we should expect in Itron?

Joan Hooper -- Senior Vice President and Chief Financial Officer

Well, again, our target opex overall is about 22% to 23% of revenue. And as we talked about in the last call, the biggest headwind, if you will, going from '20 to '21 is actually in variable compensation. So, we didn't pay a bonus in 2020 given that our original financial targets weren't hit. So, that creates a bigger headwind. Yes, T&E as well. T&E obviously stopped for the most part last March and April. It really hasn't picked up yet and we'll continue to monitor it closely. At this point I wouldn't expect it to really pick up until the second half of the year and I think we'll continue to monitor it tightly.

Paul Coster -- JPMorgan -- Analyst

Okay, very good. Thanks so much.

Operator

[Operator Instructions] And we'll go ahead and move on to our next question from Connor Lynagh from Morgan Stanley. Please go ahead.

Connor Lynagh -- Morgan Stanley -- Analyst

Yeah, thank you. I just wanted to sort of stay on this margin topic, just so we can sort of think through the trend through the year here. So you sort of have three factors that I guess you've laid out so there shouldn't [Phonetic] be a pretty big ramp in revenues. It seems like maybe some of your G&A might be coming up in the back half of the year as things reopen. And then I guess the final thing is, some of the mix offsets from the first quarter. So just in broad strokes, how would you recommend we think about maybe gross margins, first, but then operating margins, accounting for that opex impact as well?

Joan Hooper -- Senior Vice President and Chief Financial Officer

Well, again, I don't have any updated guidance per se versus what we talked about in February other than the EPS impact of the capital markets transactions. So if you go back and look at what we said in February, we said, second half will be back-end loaded for revenue and even more back-end loaded from an EBITDA perspective. So that really hasn't changed. We've talked about opex in the 22% to 23% range. Nothing -- none of that has really changed. So I would say there is no change to our view of the year at this point.

Connor Lynagh -- Morgan Stanley -- Analyst

Okay. Maybe just to put a finer point on it then, the mix effects that you called out in the first quarter that seems generally skewed positive, is the impact of revenue growth more likely to offset that than see a degrade or should we think about gross margins in the first quarter being sort of a high for the near term here.

Joan Hooper -- Senior Vice President and Chief Financial Officer

I don't know that there'll be high. I don't know how long there will be a high, but I would say I would not view that as a representative. So if you go back to the comment I just made earlier in February, we said we expected gross margins for the year to be roughly the 2019 levels, that's 30%. So it -- we were much higher than that in Q1 so is -- and the mix that we're expecting to come in the second quarter and the second half comes, I would expect the margins to dip down a little bit.

Connor Lynagh -- Morgan Stanley -- Analyst

Okay, understood. Maybe just one last one here. So, can you help us understand -- I appreciate you -- the first quarter was a bit lower and so maybe I should lower expectation a bit, but just in particular in Networked Solutions, the low to mid single digit growth would certainly seem to complement or imply a big back half recovery and basically what I'm trying to understand is how much of that is just truly projects that you are working on that you're not at pace where it's right now versus presumably underlying business recovery in your end market. I mean how big of that ramp is sort of already in backlog versus still needs to come?

Joan Hooper -- Senior Vice President and Chief Financial Officer

Well, I would say most of it's in backlog, the issue is and a lot of it is new project starts. As we talked about, we have new business that they just haven't started yet. The expectation is it does start in the second half of the year. So, that is our current expectation, but virtually all of it's in backlog.

Connor Lynagh -- Morgan Stanley -- Analyst

Okay. Appreciate the context. Thank you.

Operator

And we'll go ahead and take our last question from Pearce Hammond from Simmons Energy. Please go ahead.

Pearce Hammond -- Simmons Energy -- Analyst

Good morning and thanks for taking my question. Can you update us on how things are progressing on reducing in-house manufacturing for Device Solutions and move into an asset light business model? Any updates here would be appreciated. Thank you.

Tom Deitrich -- President and Chief Executive Officer

Our programs remain firmly on track. We have made a number of relatively big moves that you certainly have seen. The most recent, I would say, is the exit of owned manufacturing in Latin America as we went to an asset-light model there. The 2020 restructuring plan that Joan referenced earlier, includes the exit of another Devices-oriented facility in Europe that's still in process at the moment. It will play through between now and let's call it 2022 kind of time frame. So, it takes a while to make that transition. That's what we have announced and we feel very good about the progress. So, our mix of internal and external continues to move toward an asset-light model based on those moves and we continue to be active about understanding how we can best use our manufacturing footprint or adjust it to meet product and customer needs while we are on the journey toward that operating model that we talked about in our Analyst Day.

Pearce Hammond -- Simmons Energy -- Analyst

Excellent. Thank you.

Tom Deitrich -- President and Chief Executive Officer

Thank you.

Operator

And with that, that does conclude our question-and-answer session for today's call. I would now like to turn the call back over to our CEO, Tom Deitrich. Please go ahead.

Tom Deitrich -- President and Chief Executive Officer

Thank you very much. As we sign off for today and with Earth Day just a couple of weeks ago, I wanted to let everyone know that we're on track to deliver our ESG -- 2020 ESG Report on Monday, June 14. We're excited about the progress we're making on sustainability and even more excited about the interest of our customers in the types of goods and services that we're providing. We look forward to sharing our progress with everyone. Thank you very much for joining our call today. Everyone be well.

Operator

And there will be an audio replay of today's conference available this afternoon. You can access the audio replay by dialing 1-888-203-1112 or 1-719-457-0820 with the passcode of 4211257 or go to the Company's website at www.itron.com. And with that, that does conclude today's call. Thank you for your participation, you may now disconnect.

Duration: 49 minutes

Call participants:

Kenneth P. Gianella -- Vice President, Investor Relations and Strategy

Tom Deitrich -- President and Chief Executive Officer

Joan Hooper -- Senior Vice President and Chief Financial Officer

Noah Kaye -- Oppenheimer -- Analyst

Jeff Osborne -- Cowen and Company -- Analyst

Pavel Molchanov -- Raymond James -- Analyst

Tommy Moll -- Stephens -- Analyst

Ben Kallo -- Baird -- Analyst

Paul Coster -- JPMorgan -- Analyst

Connor Lynagh -- Morgan Stanley -- Analyst

Pearce Hammond -- Simmons Energy -- Analyst

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