Smartgrid
Image source: Itron.

Specializing in the measurement, management, and analysis of energy and water, Itron (NASDAQ: ITRI) is helping to make our cities smarter. With shares down almost 20% from the 52-week high, would investors be smart to leave this company alone, or is now a great time to open a position? Let's take a look at the company's recently released third-quarter earnings to help us decide.

A dollar so strong, it hurts
One theme which has emerged during earnings season is the danger of the strong dollar, and Itron, with over 8,000 customers in more than 100 countries, is certainly susceptible. Reporting $469.1 million in revenue for the quarter, Itron took in about 5.5% less than the $496.5 million it booked during the same quarter last year. In terms of constant currency, though, Itron's revenue grew more than 4%. Although the adverse currency effects did not have much bearing on the company's gas segment, electricity and water didn't come away unscathed.

Reporting revenue of $206.4 million, the electricity segment improved 1.4% year over year -- 9.4% excluding foreign exchange. The water segment reported $126.1 million in revenue for the quarter. Although that represents a drop of 12.3% year over year, on a currency-adjusted basis, it equals growth of 1.1%.

It's not just the top line that's feeling the hurt; margins have also been beat up.

 
Metric Q3 2015 Q3 2014  Change (YOY) YTD 2015  YTD 2014 Change (YTD)
GAAP Gross margin 31.3% 30.4% 90 bps 29.1% 32.1%  (300 bps) 
GAAP Operating margin  5.8% 3.3%  250 bps  2.7%  3.6%  (90 bps) 

Data source: Itron 10-Q.

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The bumpy bottom line
Having found complexity in the company's segment revenue and margins, one shouldn't be surprised to find it in the company's earnings. Solely in terms of the quarter, year-over-year comps show that the company is improving; however, in the scope of year-to-date performance, the results indicate that the company has struggled to grow its bottom line -- adjusted EBITDA, adjusted EBITDA margin, and diluted earnings per share. 

The primary culprit for the drastic drop in the company's year-to-date earnings is a significant warranty charge in the water segment. Accounting for $26.7 million during the first six months of the year, the warranty charge affected the company's earnings by $0.43. Also contributing to the decline was an unfavorable tax adjustment -- one which compromised earnings by $0.21 during the same six month period. However, in comparing the Q3 diluted EPS with those from last year, it seems as though the company has taken the appropriate measures to get things back on track.

 
Metric Q3 2015 Q3 2014 Change (YOY) YTD 2015 YTD 2014 Change (YOY) 
Adjusted EBITDA  $41.9 million $39.5 million 6.1% $75.3 million $121.3 million (38%)
Adjusted EBITDA margin 8.9% 8% 90 bps 5.4% 8.3% (290 bps)
GAAP diluted EPS $0.33 $0.19 $0.14 $0.09 $0.67 ($0.58)

Data source: Itron 10-Q.

Management, on the earnings call, provided some commentary and guidance on the declining adjusted EBITDA margin. Initiating restructuring projects in November 2014, management foresees being mostly finished with the plans by the end of 2016. Furthermore, management contends that once the restructuring is finished, Itron will meet its mid-teens EBITDA margin target by 2017 and yield $40 million in annualized savings beginning in the same year. 

OpenWay Riva is open for business
Itron's meter and module offerings fall into three categories: standard, advanced, and smart. It's largely in the smart meter market that the company had recognized its growth opportunity. But, the company is moving in yet another direction -- one which relies heavily on the Internet of Things and one which would generate revenue for all three of the company's operating segments: electricity, gas, and water. 

Screen Shot

OpenWay Riva is making cities and grids smarter Image source: Itron

Looking to grab market share in the smart city market, Itron announced its plan to launch its distributed intelligence solution, OpenWay Riva, in the second half of 2016. According to Itron's president and CEO, Philip Mezy, "With OpenWay Riva, we will have a single open standards-based network and application platform for electricity, gas and water utilities -- differentiating Itron and positioning the company to deliver an industry-leading multipurpose network."  

Partnering with Cisco to develop the OpenWay Riva solution, Itron has already found a customer for the smart grid solution in Brazil. The country's power utility, Electrobras, will be using the OpenWay Riva solution in six of its subsidiary distribution companies. Successful implementation of the solution in Brazil is crucial for Itron if it expects to be a leader in the smart city market -- a market which is expected to grow significantly in the coming years. Navigant Research forecasts global smart city technology revenue will grow from $8.8 billion annually in 2014 to $27.5 billion in 2023. 

The takeaway
Though Itron is facing tough year-to-date comps with 2014, there is still reason to be optimistic. The company demonstrated quarterly year-over-year growth, and management seems fairly confident that its restructuring plan will effect greater profitability. What may be of most interest though has nothing to do with its earnings figures -- it's the rollout of the OpenWay Riva solution, which, should it gain widespread industry acceptance, would help transition the company away from the traditional metering market to one which is ripe with potential for tremendous growth. For now, it seems like the smart move with Itron and the smart city market is to keep an eye on how well management executes before picking up shares.

Scott Levine has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.