Barbara Doyle - VP, IR Philip Mezey - President and CEO Joan Hooper - SVP and CFO Thomas Deitrich - EVP and COO.

Chip Moore - Canaacord Noah Kaye - Oppenheimer & Company Joseph Osha - JMP Securities Sean Hannan - Needham & Company Sophie Karp - Guggenheim Securities Pavel Molchanov - Raymond James.

Good day, everyone and welcome to the Itron Incorporated Q1 2018 Earnings Conference Call. Today's call is being recorded. For opening remarks, I would like to turn the call over to Barbara Doyle. Please go ahead..

Thank you, Stephanie. Good afternoon and welcome to Itron's first quarter 2018 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. This evening we also plan on filing our Form 10-Q for the quarter ended March 31, 2018. The filing will be available on the SEC and company websites tomorrow May 15.

As a reminder, Itron completed the transaction to acquire Silver Spring Networks on January 5, 2018. This is the first quarter that includes results from Silver Spring Networks' acquisition, which is reported as Itron's Network segment.

On the call today, we have Philip Mezey, Itron President and Chief Executive Officer; Joan Hooper, Senior Vice President and Chief Financial Officer; and Tom Deitrich, Executive Vice President and Chief Operating Officer. Following our prepared remarks, we will open up the call to take questions using the process that the operator will describe.

Before I turn the call over to Philip, let me please remind you of our non-GAAP financial presentation and our Safe Harbor statement.

Our earnings release and financial presentation include non-GAAP financial information that we believe enhances the overall understanding of our current and future performance, reconciliations of differences between GAAP and non-GAAP financial measures are available in our earnings release and on our Investor Relations website.

We will be making statements during this call that are forward-looking. These statements are based on current expectations and assumptions that are subject to risks and uncertainties.

Actual results could differ materially from these expectations because of factors discussed in today's earnings release and the comments made during this conference call, and in the Risk Factors section of our Form 10-K, and other reports and filings with the Securities and Exchange Commission.

We do not undertake any duty to update any forward-looking statements. Now please turn to page four in the presentation, and I'll turn the call over to our CEO, Philip Mezey..

Thank you, Barbara. We had a very full quarters since closing the Silver Spring Networks' transaction in January. I've spent a great deal of time of customers discussing their business challenges and our focus on innovation to help them reliably deliver critical infrastructure services.

The response to our strategy continues to be very positive and we are maintaining clear momentum in the industry. In the first quarter, we delivered strong revenue performance, continue to execution on our operational transformation and began to integrate the new networks business.

Revenues of $607 million increased by 27% compared with last year including our Network segment. Revenues increased by 9% excluding networks. This revenue reflects strong customer interest, good sales execution and a robust backlog. Non-GAAP EPS of $0.13 was slightly above the midpoint of the guidance range we provided.

Q1 gross margin was a bit lower than we expected due to elevated costs related to factory and supply chain transitions, product mix and higher cost of materials. As is been widely reported, rising end market demand is leading to tight supply and price increases mainly in electronic components.

We're actively working with our global manufacturing partners to isolate risk areas and develop plans to address these industry wide challenges. Relationships we've established with contract manufacturing partners help strengthen our ability to navigate through cyclicality in the electronics industry.

We continue to see opportunities for higher margins in the second half of the year, as we realized greater efficiency from our global supply chain transformation and restructuring projects. These actions already underway will help mitigate headwinds in materials prices. In terms of bookings and backlog, customer activity continues to be very healthy.

Total backlog at the end of the quarter was $3.1 billion, including $1.4 billion of acquired networks backlog. The networks backlog includes $13 million total endpoints to be deployed, in addition to the $29 million cumulative endpoints delivered through the first quarter of 2018.

Our robust backlog reflects strong industry demand for new technologies and an expanding group of Itron network adaptors across electricity, gas and water utilities and municipalities. Total bookings of $557 million resulted in a book-to-bill of 0.92 to 1.

This was in line with our expectations given typical seasonality of the business and strong bookings in the fourth quarter. We have several notable deals across the business that highlight our momentum. In the Electricity segment, we booked annual orders for the multi-year PLN contract in Indonesia and the Enedis contract in France.

We are also very pleased that Itron's OpenWay Riva solution has been selected by a consortium of utilities including several [Amerax] subsidiaries for their grid modernization and customer engagement initiatives. These deployments will total more than $1.8 million endpoints over the three to five years.

Commencing after contracts are completed and all approvals are obtained. Amerax Tampa Electric has already field tested the OpenWay Riva solution including certain distributed intelligent capabilities. And we look forward to partnering with the entire consortium on this very exciting mass rollout program.

We have very positive customer activity in the Distributed Energy Management segment. We signed a five year contract with Public Service Company of New Mexico to manage 60 megawatts of demand response capacity for residential and small commercial customers.

We also booked a three year agreement with Northwest Iowa Power Cooperative to implement our IntelliSOURCE software, providing technology to upgrade the utilities demand response program. In addition, Itron has selected for a Santiago Gas and Electric project to manage distributed energy resources.

The program includes multiple Itron solutions, which highlights the successful integration of the Comverge business into Itron. In the Network segment, we are very pleased to announce a new booking with Jamaica Power Public Service Company to unify 670,000 electric meters under Itron's smart grid network.

This project will build on the utility’s previous deployments with Itron, which included 51,000 electric meters deployed in 2016 and 2017 and the rollout of 37,000 smart street lights in 2017. Jamaica's nationwide smart grid deployment will extent the utility’s smart meter automation benefits and enhance post storm restorations.

The utility will manage the system through Itron's cloud based SaaS solution. We also secured a seven year contract renewal with Florida Power and Light Company.

The renewal covers managed services for its Itron smart grid network connecting 4.9 million electric meters, distribution automations services covering more than 27,000 DA devices and management for more than 500,000 street lights. FPL will also upgrade to new Gen-5 network hardware access points and network interphase cards for street lights.

Itron's very proud to provide the foundation for FPL smart grid technology that delivered intangible benefits during Hurricane Irma in September of 2017. More than 500,000 outages were presented during the hurricane.

Service was restore to a million customers before the storm existed Florida and service was restored to most of the remaining territory the next day. Today, we also announced a new agreement with Mississippi Power, a subsidiary of Southern Company to deploy and connect under Itron's network nearly 200,000 smart meters across Southern Mississippi.

Itron will also provide managed services under a five year contract to aid and the utilities operational and customer engagement transformation efforts. In the Gas segment, we booked multiple contracts including a significant new Riva project with Northwestern Energy to modernized it's gas and electric systems in South Dakota and Nebraska.

And notable contracts with the [Nexus] and Hermann Pipersberg and EMEA. In Water, we also secured numerous contracts including Aqua America and Mountain States in the U.S. and with Veolia, ISTA and Suez in EMEA. Now let me turn the call over to Joan to preview our financials..

Thank you, Philip. On our last earnings call, we deviated from our normal practice and provided Q1 financial guidance. We did this to the unique circumstances of closing the Silver Spring Networks acquisition and the anticipated elevated cost associated with our supply chain transitions.

In the first quarter, we delivered business results within or slightly above the ranges we provided. The summary of consolidated GAAP results are shown on slide six and non-GAAP results are shown on slide seven. Revenue of $607 million increased 27% versus last year and were slightly above our guidance range of $575 million to $600 million.

Q1 gross margin of 29.6% was down from 33% last year driven by incremental cost associated with manufacturing transitions, increased component and commodity costs and product mix. There was also a negative 70 basis point impact due to purchase price accounting related to the acquisition of Silver Spring Networks.

Regarding the industry wide cost pressure Phillip mentioned, higher prices on electronic components impacted our gross margin a bit more than commodities this quarter. We expect the industry supply and pricing issues will persist creating more headwinds in the second quarter and throughout the rest of the year.

This will push some of the margin benefits we were anticipating in the second quarter to later in the year.

First quarter GAAP net loss of $3.74 per share was driven by $88 million of charges related to the 2018 restructuring plan that we announced last quarter, and $63 million of acquisition and integration related expenses for Silver Spring Networks.

As we indicated on last quarter's call, the 2018 restructuring plan is expected to drive $45 million to $50 million of annualized savings by the end of 2020. We also expect to realize an additional $50 million of annualized synergies from the Silver Spring Networks acquisition also by the end of 2020.

Regarding non-GAAP metrics, adjusted EBITDA of $40 million or 6.5% of revenue was down 300 basis points year-over-year, driven by lower gross margins and added expenses for acquired operations. Non-GAAP EPS of $0.13 was within our $0.10 to $0.15 guidance range.

Cash and equivalents at the end of the first quarter totaled $144 million, down from $176 million net of restricted cash at year-end 2017. Total debt of $1.1 billion includes the financing for the acquisition at a blended interest rate of approximately 4%. Net leverage was 4.4 times trailing 12 month adjusted EBITDA.

Our focus remains on delevering to about two times adjusted EBITDA in approximately two years. In terms of cash flow in the quarter, we had a net use of cash for operations of $24 million and negative free cash flow of $42 million.

As we discussed on last quarter's call, we anticipated negative cash flow in the first quarter due to the cash outlays for acquisition related expenses as well as the timing of working capital. Now turning to the first quarter revenue year-over-year bridge on slide eight.

Total company revenue grew by 27% or 21% on a constant currency basis, with growth across electricity, gas and water and strong performance from the new Network segment. Electricity revenue grew 2% in constant currency due to higher managed services revenue, product revenue growth in EMEA and strong OpenWay Riva demand in North America.

Linky deliveries almost doubled year-over-year in France and Riva deployments continue to ramp in the Americas. Gas delivered revenue growth of 6% in constant currency, driven by higher smart solution revenues in EMEA namely on the Gaspar project in France, increased OpenWay Riva sales in the U.S. and strong residential demand in Latin America.

Water revenue increased by 4% in constant currency. Growth was driven by an increase in Riva deployments in North America and Australia. In addition, demand continues to increase in Latin America, driven by increased funding for residential water projects throughout the region.

Revenue for the Network segment, which is the acquired Silver Spring Networks business was $86 million in the quarter, driven by strong North America network solution and managed services.

First quarter revenue reflected a record billing quarter that was better than we forecasted, driven the timing of customer deployments, some of which carried over from 2017 as well as some of which we had expected to occur in the second and third quarters of 2018. The non-GAAP EPS year-over-year bridge is on slide nine.

Strong volume and revenue performance drove higher gross profit in the quarter. Non-GAAP operating expenses increased due to the addition of departmental expenses for the acquired businesses. Excluding the acquisitions, OpEx declined by $5 million year-over-year.

Increased net interest and other expense lowered EPS by $0.15 year-over-year, driven by the interest on the incremental debt used to fund the acquisition. The tax rate on the non-GAAP income in the quarter negatively impacted EPS by $0.12 compared with last year.

The effective tax rate in each quarter will vary from the annual guidance, we provided based on the timing and mix of income by jurisdiction as well as discrete tax items. We still expect the non-GAAP full year tax rate to be approximately 28%. The net result was a non-GAAP EPS of $0.13 compared with $0.57 in the prior year.

Slides 10 through 13 shows results by segment for the first quarter. Itron's electricity business delivered another strong quarter with revenue of $252 million, gross margin of 27.7% and non-GAAP operating margin of approximately 8%.

Gas gross margin of 31.6% and non-GAAP operating margin of 11.9% were both down compared with last year, driven by a higher mix of meters versus communication modules, higher of European business and elevated cost associated with manufacturing transitions. Gross margin in the Water segment was 28.8% and non-GAAP operating margin was 4.5%,.

Margins were negatively impacted by product mix, increased commodity prices and additional overhead costs during factory transitions. In addition we are investing in implementation services for the growing backlog of new Riva projects. We expect Water’s operating margin percent will increase in Q2 and beyond.

The Network segment gross margin was 33% and non-GAAP operating margin was about breakeven. Gross margin included the negative 500 basis point purchase price accounting impact and otherwise reflected high level of endpoint deliveries and good business mix.

The acquisition was accretive to Itron's overall gross margin in the quarter by approximately 60 basis points. Revenue and gross margin for the networks busses will vary quarter-to-quarter based on project schedules and product mix.

We do not expect the same level of revenue or margin performance in the second quarter given the overachievement in the first quarter. As we previously discussed, we continue to anticipate the translation will be dilutive to adjusted EBITDA and non-GAAP EPS in 2018 turning accretive in 2019.

Overall the integration of the business is progressing well and we are very pleased with the Network segment’s contribution to our Itron’s overall results. With that, I'll turn the call back to Phillip. .

Thank you, Joan. Overall we were pleased with our performance in the first quarter. New solutions drove revenue growth in our electric, gas and water business and the new Network segment delivered strong performance.

We continue to see traction in our smart city services, including the deals we discussed today for distribute energy management, distribution automotive and smart street lights. Our $3.1 billion total backlog has nearly doubled compared with the first quarter of 2017. And our pipeline of new opportunities is increasing.

Operationally we're making our business strong and more efficient, in the last few quarters we have discussed projects to significantly transform our operations and plans to drive sizable synergies from our acquisitions. We are on track with these efforts that will increase our margin and earnings in the second half of 2018 and beyond.

Organizationally, I'm very pleased with the collaboration across the company and the pace of our integration. There is a strong sense of optimism and a clear shared mission.

Our portfolio of smart utility and smart city solutions, utility data and network expertise and talented employees uniquely positions Itron to accelerate innovation, value and choir customers. We're excited by the high level of interest in Itron’s IoT network platforms from our customers and the industry.

And we are a very encouraged about the opportunity for revenue growth, margin and earnings improvements across our business. Operator, now let's open up the call and take some questions..

Absolutely. [Operator Instructions]. And we'll take our first question from Chip Moore with Canaacord. Please go ahead. .

Hey, good evening folks. Maybe you could talk a little bit more about the impact of the component shortages and the commodity inflation impact by segment.

And then does that change your thoughts at all exiting the year on sort of that mid-teens EBITDA goal?.

I'll start out with the exit question and then handover to Tom Deitrich to talk about the particulars. So we still see the opportunity to exit the year at that mid-teens EBITDA level.

So our current plans are focused on mitigating some of these headwinds that we talked about on the call with the expectation that we can still get to those sorts of level. And with that, I'll hand it over to Tom on the more detail question..

Sure, thanks, Chip. What I would say is, it’s been widely talked about in the industry there has been a lot of growth in the electronic sector, it's putting pressure on the supply chain for some unusual places in terms of supply. It’s been passive, so it have been really tough to come back.

So, resisters, indictors, capacitors, things of that sort have been short and they have been in allocation mode in the supply base for a little while now. That certainly has caused some increased cost on our side, as we'll as that supply chain transitions that we've been working our way through.

The good news in this though always a lot of activity going on, on our outside around alternative sourcing, long-term supply agreements, working with contract manufacturers to really end up securing supply.

The headwinds that you saw in Q1, certainly continue on I think a little bit into Q2, but a lot of the actions that were taken now really help bring up the performance as we move throughout the year..

Yes, okay. I appreciate that. And maybe just a follow-up on bookings, I think you called out seasonality, obviously last quarter was very strong, if you take into account I guess some of the Silver Spring business, timing of those deployments.

How are you thinking about bookings and I guess the business on to come there?.

Well, Chip I’d say that we are sticking with our goal of more than replenishing the consumed backlog during the course of the year that is to aim at one-to-one or better for the year as a whole and we expect some variability in the course of the quarters as you've seen in our historical performance..

Very healthy pipelines that were….

Yes, certainly that, I mean, and we're of course very pleased by the uptick in overall coverage of not only the total backlog number, but also see that the 12 months backlog is up very considerably as well..

Right, got it. Okay, thanks guys, I’ll let someone else jump..

Thanks, Chip..

We'll move on to Noah Kaye with Oppenheimer & Company..

Good afternoon and thanks for taking the questions. Philip, obviously in addition to core business, the organic business which did have nice growth this quarter. You digested a big one here with Silver Spring. This question maybe a little bit in the weeds and feel free to pull back and talk about some of the rev rec issues.

But you reported a $337 million 12 months backlog for Silver Spring and that frankly seems a little bit better than what we would have expected. I think on a billings basis at least historically Silver Spring had a pretty healthy book and ship business.

So can you comment on whether or not there is some catch up here on that differ Silver Spring revenue or is the business just stronger than we all though.

And what kind of book and ship business would you expect networks to do in addition to that 12 month backlog?.

Yes, I mean, I'll make a comment on your question around is there some sort of catch up here the answer would be, no. So, we obviously implemented the new revenue standard this quarter, we're reporting a backlog for the Network segment that’s embedded in our 12 month numbers is totally consistent from a methodology standpoint.

So we did have to sync up the methodologies to ensure that we didn't have any contracts in here that didn’t have regulatory approval, but from an accounting standpoint, there is no difference in the $337 million that we brought in for the 12 months and the $1.4 billion was essentially what they brought with that..

Noah, I would say that that's also -- I mean sorry, strong bookings performance in Q3, Q4 and even Q1 timeframe, I mean. So, the bookings performances in the Network segment is coming along well. Generally, so book and ship very modest amount, the business is really primarily project driven and has a low component of book and ship..

Okay.

And then if I could circle back on the margins maybe to put a little bit finer point on it, what was the actual headwind from higher commodities direct in the quarter and then how do you think about measuring the headwind? What was the headwind from the higher components cost?.

We didn't really break that out. What you saw in the financial performance was a combination of factors.

Certainly we had a little bit of our own supply chain transition, we had some acquisition related factors, sort of inventory step up the normal things that you would see in the first quarter after an acquisition, as well as component pricing and the effect on utilization of factory stopping and starting.

So all of those factors are built into the financial results that you saw in Q1. As we work to establish long term supply arrangements, so that we've got the components coming in on a regular basis we end up seeing the benefits of our restructuring from the 2016 plan.

And so forth, we definitely believe we can even that out, but it was clearly something that affected us in Q1..

And I would point out that in terms of commodity pricing, Noah, I mean, the largest impact is in our water business, although we do have a fair number of composites in our water business and there is some steel and aluminum in the gas business.

But this really is primarily an issue within an element of our water business the straight out commodity fluctuation..

Okay, great. And then obviously you're able to overcome a little bit of those margin headwinds in the quarter, just in terms of where the bottom-line ended up.

So we look out to the rest of the year, how are we thinking about kind of the prior guidance any bias there? Still confident or do you anticipate some of these headwinds to maybe pressure that?.

Our normal practice would be to update the guidance on the Q2 call and we do intend to do that as well. We gave a little bit of color around the impact of Q2 versus the rest of the year essentially just a little bit more pronounced than what we have said on last quarter's call.

So we had already provided quite a bit of color that the second half of the year profitability would be quite a bit higher than the first half. And so again we gave a little color on that no intent to really update guidance until the middle of the year..

Okay, perfect. Thank you so much. .

Joseph Osha with JMP Securities. Please go ahead with your question. .

Hello there. Yet another gross margin question, I'm sorry. I recall that we had talked a little more specifically about under absorption charges as you all kept some production in house Q1 to deal with some of the issues you were dealing with.

Can we expect at least that component of the headwinds to roll off in Q2 and how much of an overall impact would that be?.

Yes, good question, Joe, Tom here. The 2016 restructuring plan really had three factories or three pieces of business that we were moving around. We really are completing the all three of those during the first half of this year and you start to see the benefits into the second half of the year.

So a lot of the things that we had talked about last time those tend to timing related transients and they kind of go away for us through the first half of the year..

Okay.

And so then after that the idea would just be we’re having to guess at what input cost do obviously that continues to be headwind until it's not?.

Yes, I wish I have the crystal ball as to exactly some of the -- when some of the supply allocation situations we see in the electronics world will even out. You could read the blog as fair as well as I can to try to guess what it would look like. It usually take several quarters for these things to work their way through in the electronics industry.

But honestly that's historical data rather than anything that’s specific for this times, that's something we'll have to watch and see..

Yes, it's always hard.

And then just two quick ones, first on the acquisition related debt Q is not out yet, there was a bridge loan initially has that been turned out or anything or what are the plans with that debt?.

Yes, I don't know specifically what you're referring to in terms of we had a term loan structure, a bond structure and we talked about that on the last call. And we're still essentially with that same structure, there is different pay down timing of the term loan versus the bonds, but essentially we’re still on the same plan..

Alright, I must have missed that, I am sorry.

And then the last question is looking at that purchase accounting hit to the gross margins on Itron, how much of that is just this quarter or should we think about that for this -- I'm sorry the Silver Spring gross margin, how should we think about that going forward?.

Yes, that should just be a Q1 item..

Alright, that’s just Q1. Okay, thank you very much..

And that was 70 basis points consolidated growth margin and 500 basis points on the network gross margin..

So, we can lift that whole 500 bps, or we can put that whole 500 basis points back on to the networks gross margin for Q2 all other things being equal?.

Well, again we did try to provide a little bit of color Q1 versus Q2 for networks, because it was an exceptionally high quarter. They had some projects that had been expected to be recognized in Q4 and some that we expected in the second half of this year, actually happened in Q1.

So, we try to provide a little color, we would not expect the same level of revenue and gross margin performance in Q2..

Okay, sure. Alright, thank you very much..

Thanks, Jo..

Moving on to Sean Hannan with Needham & Company..

Yes, thanks. Good evening, folks. Thanks for taking the question here. So, just wanted to see if I could follow-up on a kind of a broader issue here or topic, more so a topic. As we've had at least here domestically lot of per strings that are either opening or theoretically may still open.

Can you talk a little about any further indications for how tax reform could stimulate similar activity for you here in the states? Any color around that would be helpful?.

Yes, Sean it's actually kind of a mix bag, I mean, a number of states have already -- and regulatory commissions have already intervened demanding that the utilities return any benefits that they receive from the tax legislation directly to the rate payers.

And there are a number of other jurisdictions in which there is some discussion about the possibility as you are indicating us of using that benefit for infrastructure investment to make capital investment. So that -- how that is going to sort out is really still in development. But I would say that it applies only to a portion of U.S.

jurisdictions again that have not already asked for almost a complete pass through of the benefits to the rate payers..

Fair enough, that's helpful. And then in terms of some of the commentary you folks have provided thinking about the Silver Spring opportunities and kind of just being able to be kind of an invested launch pad for you folks, in getting more involved around various ancillary IoT technologies and have faster solutions moving forward.

Just want to see if there is a potential to get some type of updated color now that you've got them under your wing for a period here. Any adjustments or more color to share around how you see that developing and the broader picture and timeline for how that becomes a little bit more meaningful to the bigger Itron store here? Thanks. .

Sure, Sean. I don't think you need to go very far here and talk about flying cars or trash collection, because nearer to home, we are further along in our plans in order to certify Itron metering and endpoints underneath the Silver Spring Networks in order to create cross selling opportunities there.

We are very pleased with what we've discovered in terms of the opportunities for distribution, automation and street lighting and our ability to both cross sell those back into the sort of legacy Itron environment.

And then looking internationally at how we can use Itron’s -- legacy Itron's large geographic footprint in order to target the Silver Spring, the Gen-5 network appropriately on a global basis. We have the solid makings here of how it is that we can drive the next level of business out of this acquisition.

At that being said, we are focusing on standard space compliance network with a large partner base in order to create an ecosystem of opportunities for many other partners.

And speaking IoT World on Wednesday and we're going to be demonstrating other types of sensors and modules that are connected on to the network and we see a longer term developing opportunity there as well.

But it's going to start out looking at meters and modules and cross selling of DA and streetlights and software opportunities for near-term benefits. .

That’s great, thanks so much for taking the questions here today. .

Thanks, Sean. .

Sophie Karp with Guggenheim Securities. Please go ahead. . .

Hi, good afternoon. Thank you for taking my questions.

Couple of questions if I may, on the commodities exposure, could you guys give us more color on specifically which commodities is most significant driver of the cost for you if any?.

Yes, the biggest commodity movement that we've seen that it really has a material effect on our purchasing is bras, so that's one. Steel and aluminum is much further down the list it's not as bigger factor.

But trumping any commodity has been things that are going on the electronics industry really what's going on with allocation of supply in the passive part of the electronics was probably the biggest cost factors outlaying the others..

Got it.

So been that the steel is like I said further the down list on the value chain exposure that the steel tariffs would probably not be a meaningful factor for you? Would it be fair to say?.

That again it’s really, really difficult to understand exactly what will happen. The news of the day tends to be difficult to predict exactly when those things could happen and what the tariffs would look like. But I would expect it to be pretty mutated in terms of our impact on steel and aluminum..

Got it.

And then lastly, on the Network segment and sort of revenue in that segment, as far the end industry exposure of Network segment, could you give us a little bit more detail on that? Is that -- I guess I am just sort of trying to understand whether it's driven mostly by industrial automation or Electric segment at the end of the day or any other segment that you have?.

So Sophie, it's -- the target customers base are largely investor owned direct utilities. There are municipal and locally owned entities there the exposure is predominantly in North America. Although there are number of global opportunities, but this is a space that we're very focused on and familiar with. So almost entirely utility oriented….

Municipalities..

Yes, businesses.

Did I answered your question?.

Yes, no, I think I got it. Well thank you, appreciate the color and I will jump back into the queue..

Thanks..

[Operator Instructions]. We'll move to Pavel Molchanov with Raymond James. Please go ahead. . .

Thanks for taking the question. Another one from about kind of the cross selling aspect of Silver Spring. In buying Silver Spring you inherited a software platform that can be potentially deployed on top of your existing projects and deployments.

And my question is are you having conversations with legacy Itron metering customers on the electricity side to add on the software capabilities kind of the network management capabilities that Silver Spring brings to the table?.

I mean, there are opportunities I think we're early there. I would say that legacy Itron customers did have reading and management requirements before. There are some select opportunities where we really see some exciting opportunities in the area of distribution automation and street lighting as I said to get back to the legacy Itron side.

But as you point out there were also software opportunities, and I'd say that even on even legacy Itron side the acquisition of Comverge having a demand response is something -- capability is something that we're looking at as well..

Okay. And you may or may not be willing to disclose this number, but Silver Spring standalone historically disclosed managed services and SaaS as a revenue breakout.

Is that something that you could share out of that $86 million of Silver Spring total?.

No, we are not providing that break out at this time..

Okay, fair enough. Thank you, guys..

Noah Kaye with Oppenheimer & Company. Please go ahead. .

Thanks so much for letting me squeeze one more in here. So I just wanted to follow up on something we're talking about earlier in terms of let's call it a -- the cross selling platform, I’m really thinking about the potential harmonization and the convergence of Riva and Gen-5.

I think in prior calls you talked about kind of a planning process to be able to kind of harmonize those and maybe that refines the go to market strategy a little bit over time, but it would be helpful for us just to understand where you are at in that process that sort of technology, planning and integration process? How long you see it paying out and when do you think that starts to kind of influence your commercial strategy what you are selling?.

Sure, Noah, thank you. I would say that we are really on plan in term so that planning process just to refresh everybody on the call both networks provided by Itron and Silver Spring were radio frequency matching networks using very similar types of the technologies even chipsets.

So, there is a -- and now support for a common standard so there is a really opportunity for the harmonization of these networks.

Our teams have been working since the transaction closed on developing a plan, we expected that that would take the first half of this year so that we would be in a better position to discuss the details in the second half.

We also -- when we reported the target of $50 million of cost synergies talked about the fact that we expected that the R&D teams were the most heavily committed in terms of their existing roadmaps and contractual commitments and so that we expected that it would take some time in order to be able to free up these teams to both to get to the synergy numbers, but also to really drive execute on the convergence plan.

So we expect that it's going to take some time to realize that convergence. Now that being said, what we've in the interim done is sorted out a very detailed go to market plan in watch there is no ambiguity about what product is going to be used in what context and I have discussed this with our customers and prospect.

And so have a very targeted plan and have also worked with our customers that we will be not be and of course in any way stranding any assets that are put out in the field and that we provided path to upgrade so that we are able to continue very effectively to sell both of these platforms..

That is great color. Thank you very much..

You are welcome..

And there are no further questions in the queue. I'd now like to turn the call back over to Mr. Philip Mezey for his closing comments..

Thank you everyone. And I just want to close with it was a very busy and productive quarter. And we're very pleased with the results of the preliminary integration work we've done. Somebody made a comment about that we have this under our belt or something like that.

No, actually this is an ongoing task that’s going to take many quarters and a lot of vigilant to ensure that we do this properly, but the initial results are very, very positive.

We're very pleased with the overall market response and our customers response, which we think the backlog really reflects the opportunity and the level of activity that we have in the market reflects a tremendous forward opportunity for us.

The very aggressive plans that had in order to continue to operationally improve and optimize the business give us the tools that we need to weather the kinds of pressures that have been discussed today here on the supply chain.

So, while we are recognizing the headwinds of particularly component supply, we have very active plans underway in order to offset absolutely as much of that as we possibly can. So see a strong opportunity here for the remainder of 2018. Thank you all and look forward to our call next quarter..

There will be an audio replay of today's conference available this afternoon. You can access the audio replay by dialing 1-888-203-1112 or 1-719-457-0820 with the passcode of 3526899 or go to the company's website, www.itron.com. This concludes today's call. You may now disconnect..