Itron's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.12.14 | About: Itron, Inc. (ITRI)

Itron, Inc. (NASDAQ:ITRI)

Q4 2013 Conference Call

February 12, 2014 5:00 pm ET

Executives

Barbara Doyle - VP, IR

Philip Mezey - President & CEO

Steve Helmbrecht - EVP & CFO

John Holleran - EVP & COO

Analysts

Susie Min - Deutsche Bank

Sean Hannan - Needham & Company

John Quealy - Canaccord Genuity

Patrick Jobin - Credit Suisse

Craig Irwin - Wedbush Securities

Operator

Good day, everyone, and welcome to Itron's Fourth Quarter 2013 Earnings Conference Call. Today's call is being recorded. As a reminder, there will be a question-and-answer session following the company's prepared remarks. (Operator Instructions)

For opening remarks, I would like to turn the call over to Barbara Doyle, Vice President of Investor Relations. Please go ahead.

Barbara Doyle

Thank you, operator, and good afternoon to everyone and welcome to Itron's fourth quarter 2013 conference call. We issued a press release earlier today announcing our results. The press release includes replay information about today's call. As you'll also see in our press release in the fourth quarter the company is reporting new segment information. We are reporting operating income results for Electric, Gas, and Water segments.

We have also prepared a presentation to accompany our remarks in this call. The presentation is available through the webcast and to our corporate website under the Investor Relations tab.

On the call today, we have Philip Mezey, Itron President and Chief Executive Officer; Steve Helmbrecht, Itron Executive Vice President and Chief Financial Officer; and John Holleran, Itron Executive Vice President and Chief Operating Officer.

Before I turn the call over to Philip, 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. We have included reconciliations of differences between GAAP and non-GAAP financial measures in our earnings release and financial presentation.

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 discussed in today's call and the comments made during our call and in the Risk Factors section of our Form 10-K and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statements.

Now please turn to Page 4 in the presentation, and I will turn the call over to our CEO, Philip Mezey.

Philip Mezey

Thank you, Barbara, and good afternoon to everyone. I will begin the call with comments on our fourth quarter results and segment performance. As you can see in our press release we are now reporting operating income for three segments, Electric, Gas, and Water providing additional transparency into our business.

Steve Helmbrecht will review our financial results, key metrics, and our financial guidance for 2014. He will also discuss the goodwill impairment charge in the quarter. I will wrap up with some closing comments focused on our outlook and then we'll open up to take some questions.

In the fourth quarter, we continued to make progress on many fronts. A goodwill impairment charge and a large tax item impacted our results. However, steps we have taken throughout the year led to improved core operating profitability. In addition, revenues increased sequentially each quarter in 2013 and Q4 revenues were the highest level in six quarters. Our outlook for 2014 has some continuing pressure in our electric segment, particularly outside of North America, balanced by stability in our water and gas business. We will provide greater detail on this later in the call.

Now let's move to segment performance, beginning with Q4 revenues on Slide 4. Year-over-year growth in electric and water revenues offset lower gas revenues and a negative effect from currency translations. The water segment is summarized on Slide 5. Revenues grew by 5.5% compared to the fourth quarter in 2012 driven by smart water projects in India and growth in heat meters and our heat cost allocation solution EquaScan in Europe. Gross margin increased 300 basis points to 35% due to increased smart meter endpoints and improved service margins.

Non-GAAP operating margin also increased more than 500 basis points to 14.7% on lower operating expenses and higher gross profit compared to last year. Bookings grew nicely to $192 million in the quarter, including $67 million booking for Baltimore. This reflects a strong 1.4 times book-to-bill ratio. Total year-end backlog for water grew 40% from December of 2012. Water is a strong profitable growing business for Itron. Our position as a global leader in water metering and automation strengthened in 2013 augmented by growth in smart solutions, including cloud base non-revenue water and analytic services. Overall the team delivered strong results in the water businesses on track for continued growth in 2014.

Now, turning to the gas segment on Slide 6. Gas revenues of $154 million fell by 5% compared to last year. The decline was primarily driven by a step down in volumes on our large smart prepayment project in Azerbaijan, deployment shifted from the capital region last year to the more sparsely populated rural region this year, and accordingly lower volumes. Gross profit margin was down 220 basis points on the lower volume and a mere product mix and some increase in special warranty compared to Q4 of last year.

We are now reporting non-GAAP operating margin for gas and electric separately. The gas non-GAAP operating margin was 17.2% in the quarter, down by 60 basis points compared to last year. Lower OpEx in the quarter partially offset the gross profit decline. Gas bookings totaled $142 million in the quarter for a 0.9 book-to-bill ratio. The total year-end backlog for gas was up slightly compared to December of 2012.

The gas utility market continues to move through the early stages of the transition to smart metering. That makes for a lumpy business in the short-term but a robust multiyear pipeline of large gas opportunities. The pipeline includes sizable projects in North America, France, and the UK, which are expected to be awarded in 2014. In addition, there is a healthy opportunity for continued replacement of 40G endpoints in North America. We also delivered a number of new gas products in 2013, including new compact smart meters, pipeline monitoring, and analytics, which position us for new business opportunities. Accordingly, we are optimistic about restoring growth in the gas business and delivering further improvement in profitability.

The electric segment is summarized on Slide 7. Electric revenues of $231 million grew by2% in constant currency. The growth was driven by key projects in North America, including Detroit Edison, Duke Energy, Consumers Energy, Los Angeles Department of Water and Power, and others. Growth in smart metering in North America offset declines in other regions.

Electric gross margin increased 10 basis points year-over-year driven by a higher mix of smart volumes to the customers in North America that I just mentioned.

The operations team also made progress on the expense side. Non-GAAP operating expenses in the electric segment declined by 5% year-over-year improving non-GAAP operating margins by 170 basis points.

Reduction in sales, marketing, and G&A expenses, more than offset an increase in R&D as we ramped up hiring at our Bangalore facility.

Electricity bookings in the quarter were $192 million including a significant contract with northeast utilities in New Hampshire for 550,000 advanced meters and a mobile collection and management system. We also had sizable bookings for City Power in South Africa, EDF in France, and Tucson Electric Power among others.

Subsequent to the end of the quarter, we also had some notable wins. We entered into an agreement with a major Midwest electric utility to deploy Itron OpenWay IPv6 smart grid solution. The agreement covers 2 million endpoints with a contract value in excess of $250 million. We will book the order into backlog upon final management and regulatory approvals, which were anticipated to occur in the first half of 2014.

Planning, staffing and other preparations are underway for the project in the pre-regulatory period. And in January we entered into our first European pilot for our OpenWay IPv6 solution with a contract signed with Salzburg AG in Austria. The pilot is an important step in meeting mandates that require 95% of meters in Austria to be smart by 2019.

Before I turn the call over to Steve, let me make some additional comments on the overall profitability in the electric segment. A large portion of our electric business meets or is on track to meet our profitability targets. These are engagements where we bring our full value and expertise in metering, intelligent networks, and software, to partner with utilities. In these cases the utilities we serve are seeking innovative solutions to solve their business problems, including managed services, smart prepayment system, advanced analytics and other extended grid capabilities by our OpenWay platform.

We continue to be very excited about the differentiation and customer value created in this type of engagement. While decisions and sales cycles are taking longer than anyone wants, projects are moving forward. I remain confident in the growth opportunity in electric smart projects around the world over the next 5 to 10 years. And our long-term prosperity in the electric segment will be driven by our continued investment in this part of our business.

Increasingly some pockets of our electric are under pricing pressure for a variety of reasons. These include lower-end legacy products. Some countries in Asia and Europe with lowest bid auction-based price points and bids for low volumes of highly specified hardware that offer limited differentiation. These types of engagements are weighing down the overall margin in the electric segment to an unacceptable level. It's clear that a different set of actions beyond our current restructuring projects is required to address these parts of our electric business.

So we're changing how we engage in these situations. This means re-engineering how we bring our solutions to the market. It means reshaping operations, including sourcing and make or buy decisions throughout the value chain. And if these moves don't generate attractive enough economics then we'll exit the business or the market.

I think our recent action in Brazil is a good example of this shift. In December, we discontinued the low-end residential electromechanical meter business in Latin America. This decision while impacting revenues by $10 million to $20 million annually was the right move for our business. Financially it benefits margin and strategically it allows us to increase our focus on the growing demands for smart technologies across the region.

The majority of our electric business meets margin targets we need to achieve our long-term model. With the hard focus on pruning and reshaping underperforming areas in our electric business, we will move this segment to high single-digit EBITDA.

Now let me turn the call over to Steve Helmbrecht to cover our financials in more detail and provide our financial guidance for 2014.

Steve Helmbrecht

Thank you, Philip, and good afternoon. Before I get into the details of the quarter and our guidance let me discuss goodwill. We took a non-cash goodwill impairment charge of $173 million in the quarter. We performed an annual goodwill evaluation during the quarter, which requires an assessment of each segment's estimated fair value based on a long-term forecast. As a result of this evaluation in the updated forecast, we determine that the carrying value of the electricity segment was higher than its fair value, which results in a write down of goodwill.

The impairment was driven primarily by delays in global smart grid projects, lower volumes, and more conservative pricing assumptions in certain regions of Europe and Asia. The water and gas segments did not incur any impairment charges.

I will move now to Slide 8, which summarizes the consolidated financial results for the quarter compared with the fourth quarter of 2012. You can see total revenues were about the same as last year and our consolidated gross margin improved 30 basis points.

Non-GAAP operating margin was 7.3%, up 150 basis points over last year. The improvement reflects increased gross profit and lower non-GAAP operating expenses. We're continuing to focus on reducing our operating expenses and are starting to see the impact of our restructuring efforts. In the quarter, total non-GAAP operating expenses decreased 5% compared to last year with sales and marketing reflecting a 19% decrease year-over-year.

Adjusted EBITDA was $50.3 million this quarter, with adjusted EBITDA margin of 9.6%. This is an increase of 120 basis points from a year ago. However, earnings per share were negatively impacted by goodwill and by taxes.

On a GAAP basis we had a net loss of $3.93 per share compared with net income of $0.40 per share in 2012. The goodwill impairment charge impacted GAAP EPS by $4.12 per share. In addition, due to the downward forecast in electricity, we established a valuation allowance to write down certain deferred tax assets, which negatively impacted our GAAP earnings by $0.48 per share.

Let me move now to non-GAAP diluted earnings per share, which exclude the impact of the goodwill impairment as well as restructuring charges, acquisition related expenses, and the amortization of intangible assets and debt fees. As you can see on the chart on Slide 9, non-GAAP earnings per share were $0.36 for the quarter compared with $0.58 in 2012. Increased gross profit coupled with the lower operating expenses delivered meaningful improvement to our earnings.

The deferred tax asset valuation item I discussed negatively impacted our non-GAAP earnings by $0.36 per share. Excluding the tax impact, non-GAAP earnings per share would have been at $0.72 for the quarter and $2.25 for the full year in line with the guidance we provided in the last earnings call.

Touching on cash flow for the year, free cash flow was $45 million compared with $155 million in 2012. Cash flow from operations decreased in 2013 primarily due to the lower earnings.

I'll move now to bookings and backlog, and total bookings were $527 million in the quarter, a 13% increase over the fourth quarter of last year. It's also the highest level of bookings we've had in 11 quarters reflecting a nice acceleration of our business activity. As you can see on Slide 10, total backlog at the end of the year was about $1.1 billion with 12-month backlog at $549 million.

Another view of backlog can be seen on Slide 11. The yellow bars on this chart represent the backlog related to the large OpenWay projects. This will be last quarter we will be showing this breakout as the only project remaining in the top five category is Detroit Edison, and we expect them to continue at their historical deployment pace over the next couple of years.

Our base business backlog, which you see in the red bars continues to grow and was $873 million at the end of the quarter, which represents a 15% increase from the fourth quarter of last year. The backlog for the base business reflects an improving trend with increases in each quarter during the year.

I will also provide an update on the restructuring we announced last quarter. We announced plans to reduce our workforce by approximately 750 people and restructure operations to increase efficiency and lower costs. Here's where we are today with the restructuring. We've completed over 50% of the workforce reduction and expect the remaining reductions to be substantially complete by the end of this year. The activity outside the U.S. is subject to labor and employment regulations, which has caused some delays from our original plan to be substantially completed by the end of June.

As previously announced, we discontinued the electromechanical meter business line in Latin America. This was completed in December as planned. We will consolidate the remaining operations of the Sumaré plant into our Americana facility by the end of this year. We are closing an R&D location in San Mateo, California, and are consolidating other administrative offices in the U.S. and in seven other countries.

Now I will cover our guidance for 2014, turning to Slide 12. We anticipate full year 2014 revenues in the range of $1.825 billion to $1.925 billion and non-GAAP diluted earnings per share in the range of $1.30 to $1.80. Our full year revenue guidance forecasts modest growth in gas and water, offset by a decrease in electricity based on our current view of project timelines.

Gross margin is expected to be between 31% and 32%. Although we are estimating lower revenue compared with 2013, we expect the impacts from lower volumes to be somewhat offset by our continued efforts to lower our product cost and to improve manufacturing efficiencies and gain the impact of our restructuring activities.

Our non-GAAP annual tax rate is estimated to be between 30% and 32%. In addition to the impact of deferred taxes, which is about $0.20 per share, the rate also reflects the exclusion of the R&D credit in the U.S. Since legislation to renew the credit was not passed by the end of last year, we believe it is prudent to exclude it from the estimated rate at this time. The R&D credit is averaged about $4 million each year or about $0.10 per share. So the total impact of both these tax items is about $0.30 per share. We use the Euro to U.S. Dollar exchange rate of $1.33 on average for the full year and are estimating approximately 39.8 million average shares outstanding.

We expect free cash flow for the year to be between 2% to 3% of revenue relatively consistent with 2013.

In terms of the shape of the year we expect a similar pattern to what we experienced in 2013, with stronger revenues and earnings in the second half of the year. This will put pressure on first half earnings and we do expect the first quarter to be at a low point of the year. Specifically, in Q1, we anticipate revenues will be similar to the first quarter of 2013, and EPS will be impacted by the headwinds and tax.

Our guidance assumptions are subject to change as the year progresses, and as a reminder we will update 2014 guidance as part of our Q2 earnings call later in the year.

We are setting a wide range of guidance that reflects the uneven global economic recovery and the potential impact on the timing of projects, which we have seen in prior years. As we progress through the year we will be better able to narrow our forecasted range of outcomes.

Now I'll close with some comments on our capital structure and allocation. We ended the year with $125 million in cash, up 2% from Q3, and $379 million in debt, down $20 million from last quarter. We are focused on balancing our capital allocation and preserving flexibility as we continue to transition the business. The strength of our balance sheet provides us with the ability to invest in growth opportunities such as global platforms, data analytics, software, and business services, and return cash to shareholders.

In March 2013, the board authorized a share repurchase plan for up to $50 million, which expires next month. Through today, we have repurchased approximately 720,000 shares under this plan at an average price of about $42 per share for a total of $30 million. Also announced today the board recently authorized a new share repurchase plan of up to $50 million over 12 months to commence upon the expiration of the current program in March.

Now, let me turn the call over to Philip.

Philip Mezey

Thanks, Steve. A year ago when I started as CEO, I laid out a series of key initiatives in quality, collaboration, and innovation to drive our business forward. I'm encouraged by our progress on these initiatives in 2013.

We've launched a companywide program to reinforce our culture of quality at Itron. The initiative has yielded real results with special warranty costs that the company declining by 85% from a peak level in 2011.

We also made significant strides in collaboration and innovation. We extended our collaboration with Microsoft to its CityNext initiative focused on technology solutions for smart cities. We extended our partnership with Cisco to bring true IP multiservice networks to customers around the world launching OpenWay as a platform for global markets. And we enhanced our distribution automation offering by providing seamless integration of multivendor, multiservice communicating devices under our OpenWay IPv6 network.

We had a number of very successful customer projects that highlight the value of our technology across electricity, gas, and water. CenterPoint Energy extended the project to its gas business by installing advanced gas communications modules to 3 million meters in the company's service territory. BC Hydro substantially completed its deployment of 2 million smart meters using OpenWay's IPv6 network architecture. Detroit Edison continued progress on its smart metering program, which is now more than 50% complete. ATCO Gas completed its gas automation project in 2013, which is one of the largest automation projects in Canada.

Azeri Gas in Azerbaijan successfully completed the first phase of their advanced prepayment system deployment and has now moved the territories outside of the capital region.

And in water, Irish Water, RWW in Germany, DJB Delhi in India, and the City of Baltimore among others selected Itron for their smart water automation projects addressing critical needs such as leakage in non-revenue losses, improving customer service, and billing accuracy.

I'm also encouraged by improvement in our financial results over the course of the year. Revenues and non-GAAP operating income increased sequentially in each quarter in 2013. Itron is without question a stronger and more focused company than we were a year ago. But our job is by no means complete. In 2013, we organized into three separate segments to manage our business. Well there are synergies across the segments in branding, marketing, engineering, and in the case of multiservice utilities and sales, I wanted to see a unique portfolio review, business strategy, and set up financial targets for each business. And reporting to the operating income line provides a very clear view of where we are in the different end markets.

In terms of our long-term model of mid-30s gross margin and mid-teens EBITDA, two of our segments and part of our electric business are already on track; we will not let up on our efforts to drive these segments to higher performance.

While our restructuring projects are making a positive impact on our business as a whole, we still have hard work to do. We will make additional substantive changes to address that portion of our electric business that is having a disproportionate impact on our profitability. We are conducting an extensive review internally of perspective actions and I will update you as we develop more information.

I want to be clear about this. Implementing actions to reengineer our offerings, reshape our operations, and rethink our approach to this part of our electric business is my top priority for 2014.

Looking ahead our visibility to revenue growth in 2015 has improved, driven by several factors, including the acceleration of bookings and backlog in 2013, several large projects in early stages of deployments and a strong pipeline of new business opportunities across electricity, gas, and water. Combined with the more aggressive actions we are taking in parts of the electric business I am confident in our path to achieve our target of mid-teens EBITDA.

Thank you, and now let's take some questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We'll take our first question from Vishal Shah with Deutsche Bank.

Susie Min - Deutsche Bank

Hi, this is Susie Min for Vishal Shah. I had two quick questions on the target for a high single-digit EBITDA. Can you just talk a little bit about what the timeframe is here and what are puts and takes? I know Philip you had mentioned that there are substantive changes in your -- in the process of evaluating them. But any color there in how to get to that target would be really helpful?

Philip Mezey

Sure, Susie. I mean, the first is the electric segment has performed at that level in the past when volumes were higher. So for that portion of the electric business that's already hitting our financial targets we see growth and volume in that business, which is going to help us out and then as we take a look at this process that I mentioned these three big parts for the small part of the business of reengineering, repositioning, and reevaluation. We are working on that. And as I said we'll update you as soon as that takes place. But that is really a focus area and we're moving as quickly as we can.

Barbara Doyle

And we would also add Susie that the gas and water segments are really already on track to that model. So the gas and water segments and a large part of our electric segment are already on track.

Susie Min - Deutsche Bank

And I know you guys have done a great job of decreasing your OpEx over the last couple of years. But as volumes come back and hopefully sooner than later, how much does that have to flex back up to accommodate expected increases in volume?

Philip Mezey

It would be our objective to keep those as flat as possible and to the extent we need to add sales and marketing or other functions to help support that growth we would look at making those investments in people, but we're going to try and leverage what we've got.

Operator

Next we have Sean Hannan with Needham & Company.

Sean Hannan - Needham & Company

Yes, can you hear me?

Barbara Doyle

Yes.

Philip Mezey

Yes, Sean.

Sean Hannan - Needham & Company

Okay, great, thanks. Thanks for taking my question. So I want to see if we can get a little bit more color on what's embedded within your expectations for that guidance. And Philip, I think that you had commented you are looking for gas and water to have a little bit of modest growth this year, electric down a little bit. But actually I think actually Steve; you made a comment on that. If we can have a little bit more detail on that mix, and then secondarily to that as we looked at the impact on the earnings is this really the loss leverage that we have on the OpEx there and are there other actions perhaps that we might be able to take at some point during the year? Thanks.

Philip Mezey

I mean, Sean you got it right that the gas and water we see growth so that makes the shifting towards, I mean in terms of the overall revenue number you are seeing more of these higher gross margin, higher EBITDA margin as we've commented and you now have visibility to on our gas and water businesses. However, we do see strengthening in backlog in that electric business giving us more visibility as we move out in time.

Second part of your question about operating expenses further leverage there, Steve's comment in which he has updated you on John's excellent efforts on the restructuring side in which yet about, we are about 50% of the way through, there are continued efforts throughout 2014 to continue to reduce our costs and improve efficiency.

Sean Hannan - Needham & Company

Okay. Is that embedded though within the guidance that you provided? I'm assuming it probably would be given that you have visibility into the actions you could take yourself?

Steve Helmbrecht

Yes, Sean, this is Steve that is embedded as well in the expectations, the restructuring as well. And again as I had mentioned in my earlier remarks there is the headwinds from the tax as well, it's just a higher rate in 2014 for some of those items I mentioned.

Sean Hannan - Needham & Company

Right. So net taxes all else equal we would have otherwise be looking at about $1.06 for 2010?

Steve Helmbrecht

Yes, with a difference in the tax about $0.30, yes.

Operator

We will move next to John Quealy with Canaccord Genuity.

John Quealy - Canaccord Genuity

Hey good afternoon folks. Do you hear me?

Philip Mezey

Yes, John.

Barbara Doyle

Yes, John.

John Quealy - Canaccord Genuity

So the first question back to the financials for a minute, to make the midpoint of the revenues work in modest growth, so you're under 2% growth in gas and water and you're down electric, 11%, 12%, am I off by a magnitude or am I close there?

Steve Helmbrecht

In terms of directionally there is modest growth in gas and water and decline in electric, the specific of that percentage but, yes that's overall we're seeing some modest growth in both water and gas.

John Quealy - Canaccord Genuity

And I hope this doesn't count as my follow-up, but for the OpEx, you did $500 million in OpEx excluding one-times in '13 I think. Now that we've restructuring on the way does that grow or shrink in '14 just ballpark?

Steve Helmbrecht

It will grow a little bit.

John Quealy - Canaccord Genuity

And then secondly, Philip, a lot of moving pieces here. Competition, product cycle, just can we talk big picture for a minute? Do we buy something and pivot away from metering? Where do we go in the next couple years because there's just so much moving with product cycle and timing? Just help frame where we are, if you will, in your thoughts or strategy? Thanks guys.

Philip Mezey

You're welcome, John. I think it's pretty widely accepted that the data that these smart systems are producing is -- has a lot of upside value for our utility customers. You see us -- hear us talking on the call about we mentioned a couple of times growth in managed services and analytics. We see strong opportunities both with products we're developing ourselves and evaluations that we're doing in the marketplace for continued and highly profitable growth by focusing on the value of the data coming out of the system.

So there are strong opportunities for us in expanding throughout the distribution grid. You see in announcements from us in distribution automation, and sensing product, leak detection non-revenue water on services and analytics. There are opportunities both for us organically and inorganically in those spaces.

Barbara Doyle

And John let's just make some, I think John wants a final comment.

John Quealy - Canaccord Genuity

I need to clarify the one comment on OpEx. It actually will go down in 2014 compared to 2013 not up?

Barbara Doyle

Thanks, operator. John, are you still there or can we move on to the next question, operator?

Operator

And Mr. Quealy do you have anything additional?

John Quealy - Canaccord Genuity

No, I'm good sorry, thanks.

Operator

Okay thank you. We'll move to the next question from Patrick Jobin with Credit Suisse.

Patrick Jobin - Credit Suisse

Just first on the electric segment. So I guess you mentioned in your prepared remarks that some businesses were trending towards your profit targets within that segment, which suggests others are clearly not at that level. I guess I was surprised to see it for such a long period of time just looking back, when do you make the exit decision versus fixed decision, just how do you think about that?

Philip Mezey

So Patrick what's changed somewhat in our thinking after we've been studying in the market here over the past year is, in a number of markets we have remained present with low cost basic metering solutions. Based on the assumptions that as these markets went to smart metering that our local incumbency position would give us an advantage. And as we look at the market a couple of things are going on, one what's clear to all of you is it's taking longer for that transition to take place.

In certain markets incumbency does not provide an advantage in the switch to smart metering as those markets have gone to sort of auction-based procurement in which relationship is not a primary driver. And in the case of what we referred to as highly specified markets where the smart metering solution that is specified does not give us differentiation and there is an incredible emphasis on reducing initial procurement cost, it just is, it may not be advantageous for us to remain focused on smart metering in those markets.

So what's changed to your question of what's taken so long to see some of these is that as we've really been able to study the transition in a number of markets from basic metering to smart metering we've seen some trends emerge that allow us to then go back in some of the markets where we have traditionally have been market share focused and really focused on -- increase our focus on profitability.

Patrick Jobin - Credit Suisse

Then a follow-up. You mentioned managed services and data analytics is a big focus for you. How much of your business today would you think is recurring in nature and how much would -- what are the near-term milestones for you on the data analytics side, so I guess it's kind of two questions? Thanks.

Philip Mezey

Yes, we in past discussion we've talked about that somewhere in a range of $100 million to $200 million a year of our revenues is in this recurring software and services area. It's our intention and we have tremendous opportunity to grow that significantly beyond its current levels.

In terms of milestones we are very actively launching analytic offerings. We have initiated an offering called Itron Total in which we are bringing a service based offering to the marketplace. We are brining distribution automation solutions to the marketplace. So there is organic product growth that is going on in order to really increase our focus on software and services.

Operator

Next we'll move to Craig Irwin with Wedbush Securities.

Craig Irwin - Wedbush Securities

Just a housekeeping question first. You gave us the $0.36 impact from the deferred tax asset but I didn't hear a number for the legal reserve you mentioned in the quarter and were there any costs associated with the discontinuation of the electromechanical meters in South America?

Steve Helmbrecht

Craig, this is Steve. We did not mention any additional legal reserve and in terms of the restructuring expense that is already been accounted for in terms of the planned reduction of our activities in Brazil.

Craig Irwin - Wedbush Securities

Then it's a tough question right with the business contracting in '14 why not go ahead and take out more cost and preserve the profitability and give yourselves the opportunity to strategically redeploy capital when you see the top line growing again. Can you walk us through the process in the evaluation you go through internally? And what gives you confidence that this 15% growth in your base business backlog really does drive '15 in a way that delivers the earnings that we would all like to see?

Philip Mezey

So, Craig I'd say that, John Holleran's team has done an excellent job this year in really scrubbing through his line items in operations as Steve on the G&A side. And the question that we really are focused on is how to build the long-term profitable business. And so as an example you see us continue to invest in R&D because we think that that's the growth engine. Where we see the opportunity for cost reduction is in consolidation of factories and some of the initiatives that John has already begun as a part of the restructuring process.

And further opportunities which really fall into this focus area for me of underperforming areas of the electric business where there is a cost reduction opportunity because there is revenue a very low earnings quality in there, and by increasing our focus on areas that have more future promise for differentiation we will have strong opportunities. So reacting in the very short-term has some very negative impact for our long-term growth possibility and we've tried to keep strong balance. I'll turn it John here for any additional comments.

John Holleran

I was just going to echo what Philip just said. It's really a balance between what we're trying to do today to preserve our profitability and what we need to do for the future recognizing that we have to make some of these investments now to be in a position to take advantage of these opportunities when they start rolling out a year or two years from now. And unfortunately that makes for a tough '14 but that's the course we've decided to stay at this point.

Barbara Doyle

And you will see Craig as you saw in 2013 significant reductions in sales and marketing. We'll begin to see more significant reductions in G&A with the shared services, business services model that we're pursuing. So we will continue to make expense -- you will continue to see expense reduction not necessarily in R&D because that is something we're going to preserve.

Craig Irwin - Wedbush Securities

And then if I can squeeze another one in, I guess most people listening this call know that I'm pretty aggressive in looking into what the available opportunities are in North America. I think you just answered in the previous question a year to two years from now as potential timeframe for those projects to materialize, that's not as positive of you as what we've been hearing from some that are involved in the early assembly of these projects and preparation of these projects. May be can you give us a little bit more color as far as what the short-term, medium term, intermediate term pipeline looks like and what it would take for those projects to basically get green lighted in the appropriate areas?

Philip Mezey

So I want to thank you Craig and I know this is an area where you do cover in great detail. So the first thing I want to point out is the strength of the gas and the water businesses as water of course but then we see gas returning to the slow and steady growth path solidly moving forward, not as heavily project driven, yet, but we do see projects picking up, which you see in that better than one to one book-to-bill ratio that they are beginning to develop.

We are sounding a more cautious note here in terms of expectations about some of the large European projects and some of the other opportunities, because we wish to focus on the areas that we can control internally within the company. So you've seen us focusing on cost reduction and this focus for me in really evaluating some of the less profitable markets in which we're currently participating in portions -- smaller portions of our electric business.

Now going back to focusing on some of the larger deals in terms of the build up to those, you do see positive bookings momentum I mentioned a couple of projects that are announced that begin their deployments and continue to ramp up through 2014. Examples of that FortisBC, Duquesne, others that are really establishing momentum in '14 for continued deployments moving forward.

There are regulatory hurdles that are being cleared in Pennsylvania, Massachusetts has made a favorable pronouncement in a move to smart metering or seems to be a greater acceptance in the Northeast after super storm Sandy, the focus on smart infrastructures waving, hardening and increasing reliability in the North American grid.

We are very heartened to see the opportunity at places like Public Service of New Hampshire where not only did we win an AMR deal but sold our bridge meter and as we have in a number of clients now providing a way to bridge 45 million currently installed electric AMR endpoints over to smart metering as that transition occurs, and so we're providing a very strong product in that category.

And then on the Europe side of course those deals has have been likely discussed continue to move forward and we continue to participate in them as they develop. But there is regulatory focus in pockets within the U.S., strengthening business cases, broadening application of smart metering. We sell your solutions with distributor automation solutions that will lead to organic and extended growth within North America as well.

Operator

(Operator Instructions) That does conclude our question-and-answer session at this time. I'll turn the call back over to Barbara Doyle for any final or additional comments.

Barbara Doyle

Thank you, operator. And I think Philip may be would have some final comments to say and then we'll conclude our call.

Philip Mezey

Just I want to summarize for everybody that out of the three business lines that we are now giving you more information about that we see this strong and very profitable growth within our gas and water businesses and a large segment of our electric business. John Holleran's team is focused on the continued improvement in gross margin and ultimately EBITDA margin within those segments and we see some strong opportunities for continued growth there.

Within a portion of our electric business we have some challenges; we are speaking about those in a forthright way and are very, very focused on getting those resolved and meeting, as I've said, our longer-term financial targets within that electric business. Beyond that there are great growth opportunities for us. You see a strengthening in our bookings and visibility in building our backlog throughout '14 and '15 and beyond. And the team is extremely focused on improving those EBITDA results throughout '14 as we prepare for growth in those markets. Thanks very much for your time.

Barbara Doyle

Thank you everyone. That concludes our call.

Operator

And everyone, there will be an audio replay of today's conference available this evening. You can access the audio replay by dialing (888) 203-1112 or (719) 457-0820, with the passcode of 5975912, or go to the company's website, www.itron.com. This does conclude our conference call. Thank you all for your participation.

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