Itron, inc (ITRI) Q2 2021 Earnings Call Transcript

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Itron, inc (ITRI 3.70%)
Q2 2021 Earnings Call
Aug 5, 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 Incorporated Q2 2021 earnings conference call. [Operator Instructions]

For opening remarks, I would like to turn the call over to Ken Gianella. Please go ahead.

Ken Gianella -- Vice President, Investor Relations

Thank you, operator. Good morning and welcome to Itron's second quarter of 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 described.

Before turn the call over to Tom, let me remind you of our non GAAP financial presentation in 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 gap and non gap 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 our current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially from these expectations because the factors that were presented in today's earnings release and the comments made during this conference call in in the risk factors section of our form 10k and other reports and filings with the Securities and Exchange Commission.

In addition, due to the fluid nature of covid 19 pandemic company estimates regarding the impact of COVID-19 on current are forward looking statements are made in a good faith attempt to provide appropriate insights to our current and future operating and financial environment. Materials discussed today, August 5, 2021 may materially change and we do not undertake any duty to update any of our forward looking statements.

Now, please turn to Page four 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. You will hear details from Jones shortly. But to summarize our second quarter performance revenue was $489 million. adjusted EBITDA was $36 million. Non gap earnings per share was 28 cents, and free cash flow was $64 million. Our operational results were below our expectations primarily due to component shortages that increased through the quarter. These constraints reduced revenue within the quarter by approximately 40 to $50 million. While our second quarter revenue level was disappointing.

The demand outlook started to recover during the quarter as anticipated with numerous customer projects beginning to move forward again. Barring any negative impacts from COVID-19 resurgence, we expect the demand to continue to recover into the second half of the year and into 2022. This increased confidence is reflected in our latest bookings and backlogs numbers.

Turning to slide five, for the third consecutive quarter we saw very strong customer activity for our network solutions and outcome segments. We achieved a book to Bill ratio of over 1.2 to one driven by bookings of approximately $596 million, allowing a new record total backlog of approximately $3.5 billion in a 12 month backlog of approximately $1.4 billion. We are pleased with the continued increase in the 12 month backlog.

But note it remains approximately 100 million below the view we had pre pandemic. This quarters bookings performance is highlighted by an agreement with national grid to upgrade their gas communication solutions in New York in New England, an expansion of our ami footprint in Asia Pacific with Singapore power. complete solution for ami great operations, data management with Gainesville, Florida, and importantly, the continued expansion of our standing partnerships with excel in Colorado and an extension of our SAS agreement with Con Ed in New York. We are encouraged by the bookings achieved over the past few quarters and see our demand rebounding across the customer base and the globe. However, we do anticipate component constraints to persist through the second half of the year and likely into 2022.

Turning to slide six, I would like to have a brief discussion on the component constraints that impacted the quarter and the temporal effect that is having on our operations and near term outlook for that As a few quarters, we have been navigating through macroeconomic driven supply challenges from supplier factory disruptions, logistics constraints, raw material and component shortages stemming from the pandemic. Up until the second quarter, we saw minimal impact from the component supply constraints as our mitigation efforts served as well.

This includes the consumption of buffer inventory and key components, partnering with our customers to increase the visibility of their needs beyond our normal lead times, increasing our order coverage for key components, driving alternative sources, and targeting low value low margin products for discontinuation. Entering the quarter, we saw elevated supply and cost pressures on steel resins, logistics, and in particular semiconductors. During the quarter, the revenue related hotspots largely fell away on all except for semiconductors. In the semiconductor space, specifically for microcontrollers and matching analog components. We had significant an unexpected delays in delivery coupled with limited delivery commitments.

Components in focus here are in general commonly used industrial and automotive applications that are experiencing industry wide allocations. These heavily constrained semiconductors were the primary driver for the unfulfilled demand within the quarter and predominantly impacted our Network Solutions segment performance. Our team is continuing to aggressively mitigate constraints by working with the executive leadership teams at the handful of semiconductor suppliers associated with these bottlenecks to maximize our allocation and alternatives. We are also working with customers to align project schedules as the delayed demand is not lost, but shifted into future periods. The situation remains fluid and is expected to continue to be volatile for icron and across multiple industries in the near term.

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. I will cover the second quarter results and then provide an update on our outlook for the full year. As Tom mentioned, our q2 results were lower than expected primarily due to component constraints. as anticipated, we saw customer demand begin to recover in the second quarter. But due to the parts shortages and delayed deliveries, we were unable to fulfill a portion of that demand.

Turning to slide seven, which is a summary of the q2 consolidated gap results, second quarter revenue of 489 million decreased 4% versus last year or 7%. In constant currency. The year over year decline was primarily due to component constraints limiting our ability to meet customer demand. We estimate that the component shortage negatively impacted q2 revenue by approximately 40 to $50 million, with the largest impact being felt in the network solution segment.

Gross Margin for the quarter was 30.6% 340 basis points higher than last year, due to favorable product mix and lower manufacturing inefficiencies related to COVID-19. This was partially offset by higher supply chain costs. The gap net loss of 33 million or negative 73 cents per diluted share, compared with a net loss of 63 million or negative $1.56 per diluted share in the prior year. The net loss in q2 2021 was primarily due to changes concerning the 2020 divestiture in Latin America.

Regarding non GAAP metrics on slide eight non gap operating income was 27 million. adjusted Eva was 36 million or 7.4% of revenue. Non gap net income for the quarter was 13 million or 28 cents per diluted share. Looking at the revenue by business segment on slide nine, device solutions revenue was 163 million a 24 million or 19% year over year increase on a constant currency basis. The increase was due to a favorable year over year compare with COVID related factory closures impacting the prior year partially offset by the impact of component constraints this year.

Network Solutions revenue was 265 million a 63 million or 19% decline year over year in constant currency. The decrease was due to the impact of component constraints limiting our ability to meet customer demand, as well as the delayed timing of customer projects. revenue in the outcome segment was 61 million a 4 million or 6% increase in constant currency from 2020. The increase was driven by hire managed and professional services. And lastly foreign currency changes resulted in 16 million higher revenue versus the prior year.

Moving to the non gap year over year ETS bridge on slide 10, our q2 non gap ups was 28 cents per diluted share up 25 cents from the prior year. The drivers of the year over year improvement were net operating performance, which had a positive three cent per share impact versus q2 of 2020. Improved operating performance was driven by better product mix and improved manufacturing efficiencies. This was partially offset for the negative impact related to component shortages. lower interest expense resulted in a four cent increase in ups year over a year. A lower non gap tax rate increased ETS by 22 cents versus q2 of 2020. And finally, changes in foreign currency and a higher share count resulted in a four cent per share decrease year over year.

Turning to slide 11 through 13. I'll discuss the q2 results by business segment compared with the prior year. Device solutions revenue was 163 million with gross margin of 19% in operating margin of 12%. Gross Margin increased 940 basis points year over year, primarily due to reduce manufacturing inefficiencies related to COVID-19. operating margin increased 13 points due to the higher gross margin and lower operating expenses. Network Solutions revenue was 265 million with gross margin of 36% and operating margin of 24%. Gross Margin increased 280 basis points year over year due to favorable product mix and reduce manufacturing inefficiencies related to COVID-19.

Operating margin increased 60 basis points year over year due to higher gross margin partially offset by higher operating expenses. Outcomes revenue was 61 million with gross margin of 38%. Gross Margin increased 560 basis points year over year due to favorable solution mix as well as cost efficiencies. operating margin was 20% 390 basis points higher than last year. With the gross profit improvement partially offset by higher investments.

Turned into slide 14 I'll cover liquidity and debt. As discussed in our last call, we completed a convertible bond offering in an equity raise in the first quarter, which enabled us to accelerate our pay down of debt and in turn strengthen our balance sheet. While the transaction was completed in the first quarter. Some of the delivery didn't occur until q2, including the repayment of the 5% Senior notes, which with the call premium total $410 million. free cash flow was 64 million in the second quarter versus a negative 10 million a year ago. The strong cash flow improvement was primarily driven by lower interest in capex and better working capital, some of which is timing. Cash and equivalents at the end of the second quarter were 207 million. total gross debt was 491 million in net debt was 284 million at the end of the second quarter. NET leverage was 1.6 times at the end of q2 2021, down from 3.8 times at the end of q2 2020.

Now turning to our full year 2021. outlook on slide 15. Our full year outlook for customer demand continues to show recovery from COVID-19 and is in line with our original guidance expectations albeit at the low end of the range. However, as you just heard from Tom, we expect the component constraints that we experienced in q2 will continue through the second half of the year. We estimate the component shortages will result in lower revenue of approximately 150 to $200 million for the full year, including the 40 to 50 million we experienced into to factoring in these component constraints results in a revised for your 2021 revenue range of 2.05 to 2.1 5 billion, versus the 2.23 to 2.3 3 billion we provided in February.

We expect to recover most of this delayed revenue beyond 2021. When the component supply chain recovers and allows us to fulfill this demand. The earnings will be negatively impacted by these component shortages given the fall through of lower revenue as well as higher supply chain related costs. Our estimate of this impact is a reduction of pre tax income of approximately 65 to $95 million. This results in a non gap APS outlook have $1 to $1.50 per share versus previous guidance of $2.30 to $2.70 per share. This updated outlook assumes price 44 point 7 million average shares outstanding for the full year 2021. We're assuming a euro to US dollar foreign exchange rate of 1.2 in the second half of the year, a full year non gap effective tax rate between 32 and 34%, and full year interest expense of approximately 11 million.

In summary, we were pleased to see customer demand begin to recover in q2, and our second half demand outlook continues to reflect that recovery. q2 was another strong quarter for new bookings, which signals future demand growth. However, due to the component constraints, and the resulting negative impact will have on our 2021 performance. Our full year outlook for revenue and earnings is now lower than the original guidance. The operational projects we have underway to reduce our fixed costs will continue as we navigate these near term headwinds, and we remain confident in our long term financial model targets.

Now I'll turn the call back to Tom.

Tom Deitrich -- President and Chief Executive Officer

Thank you, Joan. We remain positive on the overall outlook for the company as we work through the near term component constraints. With our strong balance sheet record backlog and increase strategic flexibility, we are in a great position to drive our business forward. We have grown our distributed intelligence capable endpoints to over 3 million cumulatively delivering on our strategy to expand the footprint of our advanced Multi Purpose multi application network.

During the second quarter, we saw continued year over year growth in our outcome segment demonstrating that once we install a network, we can then expand our value to our customers with our outcome solutions. We continue to execute on our asset light strategy reducing our fixed costs and becoming nimbler in this dynamic environment. Well, these are just a few examples of the progress we've made so far in 2021. It is also why we remain positive on the efforts that will continue to create value as we execute our long term strategy.

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

Questions and Answers:

Operator

[Operator Instructions] And our first question today comes from Tommy mole with Stevens

Tommy Moll -- Stephens -- Analyst

Thank you for taking my questions. The morning Can you hear me? Wait weekend?

Tom Deitrich -- President and Chief Executive Officer

Good morning. Yeah.

Tommy Moll -- Stephens -- Analyst

Tom, I wanted to start just if you could address in terms of the disruptions have has there been any major contract cancellation? Or does all this just push to the right. And then anecdotally, you know, last year you had pandemic related delays, now substantial component related delays? It feels like on the back end of this this spring is going to be pretty well compressed and ready to pop. But you know, are your customers growing? How impatient are your customers at this point?

Tom Deitrich -- President and Chief Executive Officer

Very good, Tommy. Good morning, Tom here, I would start by saying no contract cancellations at all. We have been pleased with the response of the customers and in terms of working with us on making sure that project schedules are aligned appropriately. So the demand that is unfulfilled in the second quarter and the stuff that we were thinking about for the back half of the year that is rolling forward into future periods. So not lost but but delayed in time. Based on the nature of the contracts and the customer relationships we have. Clearly customers are interested in improving the reliability and resiliency of their networks, which is that the point of the investment and where our technology is really helping them shore up their business in that regard are doing the various automation projects that are out there.

That's where we see desire on the part of the customers to implement those technologies as quick as possible. So appropriate level of impatience as and we're very aligned on that, from our standpoint, we very much want to fulfill those agreements as quickly as possible based on the supply of the components themselves. So that's how I would characterize it, good customer relationships and they remain strong. The demand is is indeed pushed out into future periods.

Tommy Moll -- Stephens -- Analyst

And Tom as a follow up any any impact from these component delays to your m&a appetite. And could you characterize the pipeline there and refreshes on what the priorities might be?

Tom Deitrich -- President and Chief Executive Officer

Sure. The current environment doesn't change our strategy nor our long term financial model that we've talked about. Clearly the pandemic has, has pushed it out a little bit, first demand and now supply but all sort of related to that the nature of the pandemic itself, no change in our financial model, no change in our desire to continue to grow our business organically and in organically on the organic front. Our interest remains high in solutions that really will target where the market is going. So more resiliency, reliability, automation, cybersecurity, better ability to incorporate renewables and safety applications into the the energy and water space that is out there. We certainly continue to look at that space actively. I would say most likely in the the outcome spaces is where you would see us make an inorganic move.

Tommy Moll -- Stephens -- Analyst

Thank you, Tom. I'll turn it back.

Tom Deitrich -- President and Chief Executive Officer

Thanks, Tommy.

Operator

Your next question will come from Jeff Osbourne with Cowen and company.

Jeff Osbourne -- Cowen and company -- Analyst

Good morning at a couple on my end. I was wondering on the component side is using contract manufacturing would have mitigated some of these issues. I know you've got both your own facilities like in South Carolina. But also third parties, are you finding that relative to auto maybe you're having a tougher time procuring direct, but maybe your contract manufacturing is having less of an issue? I'm just curious if this changes your manufacturing footprint, longer term,

Tom Deitrich -- President and Chief Executive Officer

No change in our manufacturing strategy whatsoever. The the electronics components that are constrained today, in the semiconductor space, specifically things like microcontrollers, and all of the associated analog components that sit around it on the board itself. That is work we largely do in partnership with the contract manufacturers. And we clearly are leveraging their spend power as well as our direct relationships with suppliers to maximize the supply.

Certainly that is an area where those the components that are in play are largely very commonly used, and they are constrained across the the chain itself. So I definitely believe that our relationships with contract manufacturing is helping us in this regard. But it certainly doesn't insulate us from the macroeconomic conditions that lead to the shortage. Based on on our business environment, though the demand that we are not fulfilling in this quarter rolls forward. So it isn't lost. It is it's a timing issue for us.

Jeff Osbourne -- Cowen and company -- Analyst

Got it. Just a couple other quick ones is COVID coming back in Southeast Asia, in particular Malaysia, making the situation worse in the second half. Are you not as exposed to that region?

Tom Deitrich -- President and Chief Executive Officer

From a demand perspective, or are thinking about it from a revenue side? Yeah, it's not an issue. That's where I was going. So not an issue on on revenue, certainly it is something to consider on the supply side of things. We are not directly exposed in terms of where the hotspots are today from a manufacturing environment. But I do look through the chain. There are a lot of raw materials and raw components that come out of that part of the world that feed the broader ecosystem. So they are suppliers to semiconductor suppliers as an example that are often in in that part of the world. And that is something that will will need to be watched closely. All of that is is absolutely considered in the guidance that we have provided.

Jeff Osbourne -- Cowen and company -- Analyst

Got it Two other quick ones, you had some nice wins in the quarter. Can you just articulate what the RFP pipeline and quoting activity looks like for the second half? And then just another quick one is the board have any outstanding capability on a buyback plan in place?

Tom Deitrich -- President and Chief Executive Officer

So I think the first and Joan can address the second. We definitely continue to see very strong interest on the part of our customers for the types of technology we provide. So grid resiliency and reliability is high on everyone's mind, safety in the gas space is important and security and automation is very important in the water vertical. So each and every one of the verticals that we serve. The pipeline remains strong and we're very optimistic about where things stand. bookings in the quarter in second quarter were very strong. We have another record total backlog. In terms of where we are heading so that the future is bright, in terms of with the need for our customers so that the winds that we highlighted really revolve around those basic functions and technologies, and we're excited to provide it. And the question on there is no current board authorization for any set stock buyback.

Jeff Osbourne -- Cowen and company -- Analyst

Thanks.

Operator

And we'll hear next from Paul Costner with JP Morgan.

Mark Strouse -- JP Morgan -- Analyst

Good morning. This is Mark Straus. Thanks for taking our questions. Just to follow up on on Jeff's questions, and let's dig in a little bit deeper there. To the extent that you're aware, your direct competitors, are they using the same semiconductor components, potentially using different suppliers and it sounds like your, your booking activity remains pretty strong. But I'm just curious if you think there's a risk of some kind of near term market share shifts here.

Tom Deitrich -- President and Chief Executive Officer

In terms of the supplier base, I don't know that I've got any insight that is significant in terms of supply base, I would say that, in general, the kind of components that are really constrained today are very commonly used across the industry in industrial and automotive applications. So I would suspect, given the the consolidation in the semiconductor industry, we are all in discussions with with the same sets of suppliers across the board. I don't see any particular share move, that the long term agreements that we have, are certainly important to us in terms of the engagements we have. And when we contract with a customer. For a long term agreement, it usually takes a couple years to implement the project and then a long term SAS and service agreement follows after that I don't detect any particular movement in terms of share across the board. We remain very strong in a number of the verticals that we play in and we're pleased to work with the customers on that front.

Mark Strouse -- JP Morgan -- Analyst

Okay, thanks, Tom. And then just a quick follow up. Can you just talk about some of the you know, give a bit more color on the mitigation efforts within the semiconductor specifically, are you? Are you looking to add additional suppliers are you locking into longer term supply agreements knew what what can be done there near term.

Tom Deitrich -- President and Chief Executive Officer

I would say that the standard types of things that you mentioned are alive and well and work we work with the suppliers on every day. So certainly exploring alternatives, whether they are another supplier, or they are specification changes to common parts. That's something we have been working on and will continue to do. So we had undertaken a number of multi sourcing efforts over the last couple of years. And those have indeed been a benefit. But again, given the current state of the macroeconomics, I think it's a wider set of shortages than any one particular supplier long term agreements with, with suppliers to to have firm forecasts and purchase orders out there is part of it working closely with the customers to align on their longer term demand outlook so that we can provide better information over a longer time horizon to the suppliers themselves is another. All of those are efforts that we will continue to work. In the short run, the most important part is is maintaining the current continuity of supply and, and the allocations as components are really, really tight.

Mark Strouse -- JP Morgan -- Analyst

Thank you very much.

Operator

Our next question today comes from Ben Kallo with Robert W. Baird.

Ben Kallo -- Robert W. Baird -- Analyst

Hey, Tom. Hey, Joan. Thanks for taking my question. Baby. Can we talk about just the cadence of the shortage? Ito as you relate it to the auto industry just because I think that there was like last year there wasn't as much or as when autos were talking about it. And so was there a lag? Or am I just not remembering correctly? was my first question.

The second question is maybe just a differences on on your business. And here that you talked about the competitive environment and thank you for that. But just some of the differences where you saw bc more headwinds in the Europe exposure or factory footprint there. Were both and then on.

The third question was just on costs. You know what kind of levers can Call, you know, just because you said the ability to try construction 2022. And so what are you doing on the cost? Tom. Thank you very much.

Tom Deitrich -- President and Chief Executive Officer

Very good. So a number of things there, let me see if I can't cover them all. So on that, that the shortage side of things, we started to see the lead time start to stretch out in I'll say the late 2020. We reacted appropriately to that and placed orders and actually came into the year with some some good buffer inventory during the first quarter and most of second we consume that buffer inventory. And sadly, we ended up with shortages really starting to materialize in the in the second half of of q2. And that that is the position that we are in today. The shortage is obviously been well publicized and discussed in the in the broader press it and been present in a number of different industries auto clearly got a fair amount of discussion on it, given the nature of their manufacturing footprint.

On our side of things, when it when it comes to the regional differences. The European market while a bit behind North America, in terms of the pace of the recovery, on the demand side post pandemic, it is up nicely year over year, you could use the devices business as a pretty good proxy where we were up 25 plus percent from second quarter last year to second quarter this year. So the demand on the European side is coming back nicely compared to 2020. albeit a little bit behind the pace of recovery in North America, where the the revenue shortfall and the unfulfilled demand really happened in q2.

And what we have baked into our guidance is really a bit more on the electronic side, which means that the networking business, the networking business has very, very strong backlog networking outcomes relates to about three quarters plus of our total backlog. So we feel good about the trajectory of that business over time, we just got to be able to register fill the demand and work with our customers to implement the projects.

Joan Hooper -- Senior Vice President and Chief Financial Officer

On the cost side of things. Clearly, we will continue to work aggressively on mitigating the component supply, getting that revenue back on the board is is the best medicine for sure. For us, we'll continue to be careful in terms of operating expenses, we will continue to work to make sure that our factories are operating as efficiently as they can given the revenue constraints themselves. All of the projects for ongoing asset light work and the restructuring types of things that we announced back in 2020 continue on that pace with with no change in in our overall plans there, that that will be part of the longer term portfolio.

We also as a final point, use this current situation to continue to make that portfolio changes that we are had been working on for quite some time now as we phase out an end of life certain products that are lower margin for us overall. So that would be a quick snapshot or perhaps a lengthy snapshot of the overall game plan and how we go from here. So I hope I did all your points Ben.

Ben Kallo -- Robert W. Baird -- Analyst

No, you guys all Thank you.

Tom Deitrich -- President and Chief Executive Officer

Very good. Thank you.

Operator

And we'll hear next from Pearce Hammond with Piper Sandler.

Pearce Hammond -- Piper Sandler -- Analyst

Yeah, thank you for taking my questions. Just to clarify in the prepared remarks. Were you saying that like the specialty steel, the resins and the shipping, those are getting better, but really from here, it's more on the semiconductors? just want to clarify that.

Tom Deitrich -- President and Chief Executive Officer

Correct. that the exact context just to repeat it again on the revenue side meaning where is it gating our shipments, it is down to two semiconductors as the only material delay on the the other areas that we've seen hotspots earlier in the year that they are no longer gating us on the revenue side. We continue to work to to monitor that make sure that nothing pops up again, but that's not a high concern for us today. That that said we do see cost pressures across the board. So the environment is definitely remaining under pressure from from an overall cost. Across the board meaning steel and resin and logistics as well as semiconductors. And that's something we work hard to mitigate through productivity means to make sure that it doesn't impact our bottom line.

Pearce Hammond -- Piper Sandler -- Analyst

And thank you for that. And then in the press and the press release, you had said, but didn't impact the second half of the year and then also impact into 22. So I'm just curious, how far do you expect this to kind of bleed into 22? Is it more first quarter or first half or longer than that?

Tom Deitrich -- President and Chief Executive Officer

Yeah, very difficult to to put a, a fine point on it. Generally, given my experience, on the semiconductor side, as well as on the importantly, on the equipment side, these things tend to run a little bit, a couple of quarters when they start to happen until things come back into balance. Again, we don't have great visibility as to what it would look like, we want to be forthcoming that it may not be done by the end of the year, but no specific guidance that we've placed for 2022 at this time

Pearce Hammond -- Piper Sandler -- Analyst

Thank you. And then last one, for me, the Biden infrastructure bill, I'm just curious how you see, I tried being a beneficiary. If that bill gets passed.

Tom Deitrich -- President and Chief Executive Officer

As you know that the process continues on in DC, the bipartisan package that's out there, it looks to be making its way through it's it's working through a long series of amendments, right now, if you look inside of that 1.1 approximate trillion dollar package, there are provisions in there for energy, water, and for our carbon grid, Eb related electric vehicles types of preparedness, there are a couple 100 million dollars approximately spread across those a couple 100 billion sorry, dollars says spread across those various provisions. In particular in the electricity space, there is funding for smart grid graduate matching grants, which is very similar to the types of programs that happened back in the Oh 809 kind of timeframe, which reads directly on the types of products and services we do.

Pearce Hammond -- Piper Sandler -- Analyst

Thank you very much.

Operator

And our next question comes from Noah Kaye with Oppenheimer.

Noah Kaye -- Oppenheimer -- Analyst

Hi, good morning, thanks for taking the questions. You know, in the past, I think when we've seen some guys revision, sometimes we've gotten a bridge from you know, prior to the current, you do have a couple of assumptions you've given us on the on the guidance slide. But I wonder if it'd be possible to ask for, you know, something like a bridge just help us understand the moving parts here include lower networks, and that's relatively high margin business. So understand it'll be, you know, margins a little bit. You have some other levers to potentially, you know, offset or mitigate. So, you know, just help us maybe understand how you think of some of the moving parts here within the revised guidance?

Joan Hooper -- Senior Vice President and Chief Financial Officer

Yeah, let me take that. So if you look at the if I think about the prior guidance to the new guidance, Amit, let me just take it at the midpoint just to make the math simple. So the midpoint of the revenue guidance is about 180 million down, as we discussed, it's really all supply chain component related constraints. So that range of 150 to 180, to 200, roughly 100, maybe in between the the other comments I made in the script where that pre tax income would be down in a range of 65 to 95 million, so call that kind of 80 million at the midpoint.

So the flow through to to income is quite high, much higher than our average gross margin in the company. And that's for really three reasons. One is the component impact is primarily in our networks solution segment. And so that, by definition, has higher gross margins than our overall company level. And it is, it is some high margin business that is getting pushed out right now. So that's kind of number one. Two is, as Tom mentioned, there is cost pressure on components, freight, etc. So that is factored in our revised guidance as well. And then third issue is there's factory overhead absorption issues. So all of those end up with a higher flow through to earnings from the revenue shortfall, and again, this shortfall we expect to recover in the future, but it is quite, quite heavy fall through right now.

So think that really the majority of the fall through that we provided in EBS is margin related fall fall through so if you looked at what we're expecting for the year when we started out, you know, it was basically to get back to gross margins at the pre COVID-19 level, call it 30% all of this probably costs us a pointer so so That's really what that is. Obviously, we continue to, to try to control optics as best we can we really haven't resumed the kind of travel and things like that across the company. So optics, spending controls continue to be in place. But in general, most of this lowering of the APS is his margin related to the component shortage.

Noah Kaye -- Oppenheimer -- Analyst

Joan, that's very helpful, I guess, a question really around product design and ability to mitigate this in the future. You know, it's not a fair comparison. But in industries like auto we've seen, you know, trucks and cars shipped with maybe reduced functionalities, such as using older chipsets, you know, to be able to, you know, still meet customer demand, I guess, can you help us understand why exactly, there's, there's not as much flexibility, you know, in this business in terms of, you know, specific components constrain the ability to make products? And is there a possibility to design for greater flexibility in the future, it just feels like, you know, what you're using is typically kind of off the shelf, you know, components. And, you know, I think the ability to design and greater flexibility in the future would certainly help the company and reduce this kind of volatility.

Joan Hooper -- Senior Vice President and Chief Financial Officer

Agree with with your general premise, and the current generation of products that we are working with in terms of InDesign and the latest products that we've reduced, we do have a lot better control from a Alcala platform kind of perspective, and the ability to mix and match and modify components. From from the start, that does give us a lot more agility, and ability to weather these types of events, as they the issue that we are struggling with tends to be over multiple generations of products with given the lifecycle of the product itself, older generations were not designed with that methodology and that thought process in mind.

So we're we're into the journey to be able to operate in a with a different model from a R&D perspective, we're only a few years into that journey. Whereas the large number of our products and a bulk of our revenue is based on previous generations of products, which is where the lack of flexibility is, is driving some volatility into the results. Again, that is one area that we've been working on actively for for several years now. And we will continue to do so and it pays benefits in the future. The flip side of it is the long term customer contracts that we do have, which means those multiple year deployments, and that the long term agreement, whereas the demand rolls forward, rather than then being cancelled or lost, which is why we get attack going forward. So in a future sense, we'd have the best of both, which is why we've been working on it for the last couple of years.

Noah Kaye -- Oppenheimer -- Analyst

Thanks, some sort of help. I mean, I guess the follow up would be, you know, maybe this is unrealistic to expect just given that a lot of these deployments need regulatory approval and some very specific specs, why isn't it possible to just go to customers with a more modern, you know, better functioning product that you can make easier versus like do you know, second and third generation, you know, legacy products, and just, you know, we can make this so we can upgrade your system, you know, provide even more functionality? Is that just not possible or, you know, financially imprudent to do?

Tom Deitrich -- President and Chief Executive Officer

I would say possible in in certain cases, if you look at how we work with some of the customers that are on the latest generation of platform, we can continue to increase the mix between generations of products. So if I would take the the Gen X network as an example, we have customers that have a set of endpoints running three, Gen three, Gen four and Gen five all in in the same network at the same time. It allows the customer to have an increased level of functionality and they can deploy it as they need in the area that that's targeting that capability. That's absolutely the model that we continue to pursue.

The agility space, though at the same time does absolutely live on the notion of assets have to go and have to be amortized over a long period of time and when you deploy something, you want to be able to get the benefit over a very, very long period of time. So how you design the product from from the start with Is that the latest generations of products that that's where you get that ability to, to pay as you as you go from a customer standpoint and add as you need, which is a very beneficial business model, when it comes to to managing ebbs and flows in terms of business and the macroeconomic environment. So agree, and that's exactly the direction that we are, are heading.

Noah Kaye -- Oppenheimer -- Analyst

I appreciate that. And it does seem like you're bearing a disproportionate level of the risk around supply chain and your customers aren't. And so hopefully, we can see that also continue to evolve. I'll jump back into it.

Operator

Our next question will come from Graham Price with Raymond James.

Graham Price -- Raymond James -- Analyst

Hey, good morning. And thanks. Thanks for taking our questions. As quickly on timing was wondering, do you expect the component shortage impact to be spread pretty evenly across the second half? Or is that something where we should expect it to be weighted? more toward one quarter or the other?

Tom Deitrich -- President and Chief Executive Officer

Yeah, I don't know that we get specific timing, as Tom mentioned, it's really hard to predict the situation is pretty fluid. I mean, hopefully, we'll be talking in a quarter on the q3 call to say we think the worst is behind us. But at this point, I don't really have any color for q3 versus q4.

Graham Price -- Raymond James -- Analyst

Okay, got it. And then secondly, you've touched on that already, but was wondering if you could talk a little bit about how you see the revenue impact, kind of broken down by segment, maybe between devices, Network Solutions, and outcomes, as you said, it looks like it's primarily Network Solutions, but just want to want to, we'll call over there.

Tom Deitrich -- President and Chief Executive Officer

Yeah, the vast majority is, is Network Solutions, which you would expect just given the, you know, higher end technology, more use of electronic, so the vast majority is, is networks. And then there is a, you know, a fair amount that's in devices, very little outcomes, other than outcomes, growth tends to follow follow networks. So to the extent that our deployments are delayed, you won't see the same kind of growth that we would have normally expected with outcomes, but but that will catch up as well as as the, you know, as the demand shifts to the right, so no material impact on outcome.

Graham Price -- Raymond James -- Analyst

Okay, got it. Thank you very much.

Operator

[Operator Instructions] And we'll go next to Thomas Johnson with Morgan Stanley.

Thomas Johnson -- Morgan Stanley -- Analyst

All right, yeah, thanks for taking my call. Joan, I wanted to start off on the order, Fred, clearly, another strong quarter for orders. I know kind of, with some of your competitors, they've seen customers start to pull orders forward, in hopes of, you know, kind of offsetting some of the longer lead times for components. So I was just wondering, you know, what do you guys seeing on the customer side, you know, there's some deceleration on a year over year basis here. So, you know, just any hour for the second half of the year and order trends.

Joan Hooper -- Senior Vice President and Chief Financial Officer

The backlog itself, remains very, very strong, we see a strong pipeline of customer activities. And that's what is reflected in that 3.5 approximate billion dollars of of total backlog that on the order front, call it basic demand, as Joan commented in our prepared remarks, we see demand, definitely continuing to improve as customers have desire to put the new technology in, in practice to to solve the problems that are really putting pressure on their business. So I continue to expect that demand will continue to increase. And that the the the pipeline of opportunities beyond that remains very, very strong.

Thomas Johnson -- Morgan Stanley -- Analyst

Great, thank you. And then just one question related to the backlog. So obviously, you know, the bulk of the revenue is being pushed out in the electronic components side of things. So Network Solutions, clearly margin and creative. So I guess it's worth thinking about, you know, some of these projects getting pushed farther to the right, due to that kind of component headwind issue, to just maybe talk to us about your ability to pass through any price on that front and impossibly how you see the margin profile of the backlog evolving into 2022.

Tom Deitrich -- President and Chief Executive Officer

The best way to think about it is is Our business really has two types, that the there is a book and ship business or turns based business, which is an area that we have a bit more ability to, to manage price and pass that cost through in a more tactical sense. Clearly there's a competitive environment out there. And we need to be competitive in the marketplace. But on that turns based business, that there's ability to to work with price on an ongoing basis, on the longer term contract side of things, which is largely in the backlog, piece of it.

That is pricing that we have agreed with customers on so that they can work with their regulatory Commission's to to make sure that the proper rate of return is is present in the business case at the customer level. So their pricing flexibility on our side is is is very, very limited. That said, What is in that backlog is primarily networks and outcomes based business, which is where our businesses is overall driving to and the area that we're keenly interested in growing and that is a creative to the corporate gross margin.

Thomas Johnson -- Morgan Stanley -- Analyst

Great, thanks very helpful. I'll turn it back now.

Operator

And this concludes our question and answer session. I'd like to turn the conference back to Mr. Tom Deitrich for any additional or closing remarks.

Tom Deitrich -- President and Chief Executive Officer

Thank you, operator. We appreciate everyone joining today as a reminder in conjunction with icon inspire, which is our large industry event that is held in October we'll also be holding our 2021 investor day that will be hosted both virtually and hopefully if conditions permit live, so please mark your calendars and we look forward to seeing everyone there. Thank you for joining.

Operator

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 171945708 to zero with the passcode of 3115180 or go to the company's website www.patreon.com. And this concludes today's conference. You may now disconnect

Duration: 52 minutes

Call participants:

Ken Gianella -- Vice President, Investor Relations

Tom Deitrich -- President and Chief Executive Officer

Joan Hooper -- Senior Vice President and Chief Financial Officer

Tommy Moll -- Stephens -- Analyst

Jeff Osbourne -- Cowen and company -- Analyst

Mark Strouse -- JP Morgan -- Analyst

Ben Kallo -- Robert W. Baird -- Analyst

Pearce Hammond -- Piper Sandler -- Analyst

Noah Kaye -- Oppenheimer -- Analyst

Graham Price -- Raymond James -- Analyst

Thomas Johnson -- Morgan Stanley -- Analyst

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