Earnings Call Transcript - ITRI Q4 2022

Operator, Operator

Good morning, ladies and gentlemen, and welcome to Itron's Fourth Quarter 2022 Earnings Conference Call. Please note that today's conference is being recorded. I will now hand the conference over to your speaker host today, David Means, Director of Investor Relations. Please go ahead.

David Means, Director of Investor Relations

Thank you, operator. Good morning and welcome to Itron's fourth quarter 2022 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 Dietrich, 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 I turn the call over to Tom, please let me remind you of our non-GAAP financial presentation and our safe harbor statement. Our earnings release and financial presentation include non-GAAP financial information that we believe enhances the overall understanding of our current and future performance. Reconciliations of differences between GAAP and non-GAAP financial measures are available in our earnings release and on our Investor Relations website. We will be making statements during this call that are forward-looking. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially from these expectations because of factors that were presented in today's earnings release in 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. All company comments, estimates or forward-looking statements are made in a good faith attempt to provide appropriate insight into our current and future operating and financial environment. Materials discussed today, February 27, 2023, may materially change and we do not undertake any duty to update any of our forward-looking statements. Now, please turn to Page 4 of the presentation and I will turn the call over to our CEO, Tom Dietrich.

Tom Dietrich, CEO

Thank you, David. Good morning and thank you for joining us. You will hear fourth quarter details from Joan coming up shortly, but here is a brief overview of the quarter: revenue was $467 million. Adjusted EBITDA was $34 million and non-GAAP earnings per share was $0.71. Our fourth quarter financial results were a step in the right direction. The team executed well to convert and deliver additional components that were supplied late in the quarter, which unlocked revenue and EBITDA ahead of our expectations. For the third consecutive quarter, we achieved a new record level for total backlog, which reached $4.6 billion. Continued strong demand drove bookings in the fourth quarter to $898 million or a 1.9 book-to-bill ratio. The full year bookings were approximately $2.5 billion which is a book-to-bill ratio of 1.4. Our key bookings in the fourth quarter continued to be driven by distributed intelligence and analytics over our network technologies. Our network solutions and outcomes offerings continue to contribute over 90% of the total backlog. Itron received regulatory approval for their AMI 2.0 program which is an important step in moving forward with deploying our Gen 5 Riva solution. This includes our distributed intelligence capabilities across their service territory in Ontario, Canada to support grid reliability, resiliency, and consumer engagement initiatives. In the water vertical, the city of Detroit is upgrading to our water network and Itron will also provide managed services. CPS Energy extended our SaaS contract by an additional 10-plus years which strengthens our technology partnership in San Antonio, Texas, a fast-growing community that is now leveraging Itron's network technology to deploy AMI and distribution automation across electricity and gas as well as water in conjunction with a sister utility. We are now excited to begin deployment of our Intelis gas solution, bringing market-leading safety functionality and increased edge intelligence to CPS Energy. Lastly, in Paris, France, CLS and Itron entered a long-term strategic collaboration to provide Paris with a citywide Canopy network, connecting more than 200,000 street and traffic lights across the city. Coupled with deploying innovative breakthrough services, Paris will be able to cut public lighting energy by up to 30% beyond the impact of LEDs, resulting in massive energy savings and improvements in sustainability. Now turning to Slide 6, I would like to provide some operational updates and insights from around the business. We have a robust pipeline of opportunities ahead as our customers' needs are aligned with our technology portfolio and continued investments. While quarter-to-quarter bookings will vary, we anticipate the strong demand environment to continue. Seasonally, I note that first quarter bookings are typically lower than the fourth quarter. The current supply environment is showing improvement with choppy component deliveries in the near term, specifically for some analog and power semiconductors. We will continue to work aggressively to mitigate these constraints, including increasing inventory levels of selected components as it becomes available to improve supply chain security. Customer support remains strong and we have not experienced nor expect any material cancellation of backlog. Looking forward, we expect improving supply availability across the year. We are watching the macro situation closely, including the timing of supplier capacity expansion, demand in the automotive industry, potential impacts from China reopening and the overall inventory level across the full spectrum of the supply chain. The underlying improvement supply trend is positive with some degree of volatility as the global supply chain rebalances. Input cost inflation rates have leveled out but component costs remain elevated. Tactical pricing actions, combined with the increased pricing flexibility and more recent contracts have improved margin on a portion of the backlog. Finally, I want to cover that we announced a plan to further streamline our global manufacturing operations and company overhead as we continue to execute our stated strategy. When complete, this plan will improve our operational and financial performance. I will now hand off to Joan to cover the fourth quarter results, 2023 outlook and the details of our recently launched restructuring plan.

Joan Hooper, CFO

Thank you. As Tom mentioned, we received earlier than anticipated component supply late in the fourth quarter, allowing us to ship and recognize more revenue than expected. The additional component supply had been anticipated in Q1 of '23, so a portion of Q4 strong performance was a shift from Q1. I'll provide more color on our 2023 expectations, but first, let me cover fourth quarter and fiscal year 2022 results. Please turn to Slide 7 for a summary of consolidated GAAP results. Fourth quarter revenue of $467 million decreased 4% versus last year and was flat in constant currency. Revenue declined year-over-year due to the sale of our C&I gas business in our Device Solutions segment. This decline was offset by higher revenue in both our Network Solutions and Outcomes segments. Gross margin for the quarter was 30.1%, 510 basis points higher than last year, primarily due to favorable mix partially offset by elevated component costs. GAAP net income of $22 million or $0.49 per diluted share compares with a net loss of $59 million or $1.30 per share in the prior year. The improvement in the current period was due to higher GAAP operating income, partially offset by a lower tax benefit. Regarding non-GAAP metrics on Slide 8. Non-GAAP operating income was $25 million. Adjusted EBITDA was $34 million. Non-GAAP net income for the quarter was $32 million or $0.71 per diluted share. Free cash flow was negative $18 million in Q4, driven by an increase in working capital, particularly inventory. We will continue to invest in critical components as they become available. Looking at revenue by business segment on Slide 9. Device Solutions revenue was $100 million, a $42 million or 27% year-over-year decline on a constant currency basis. The decline was due to the sale of our C&I gas business as well as continued product pruning. Network Solutions revenue was $301 million, a $39 million or 15% increase in constant currency. The increase was driven by a ramp of new and existing deployments. Network Solutions benefited from the extra component supply received late in the fourth quarter. Revenue in the Outcomes segment was $66 million, a $4 million or 7% increase in constant currency. The increase was due to higher software license and product sales, partially offset by the continuing decline in the EMEA prepay business. Lastly, foreign currency changes resulted in $19 million lower revenue versus the prior year. Moving to the non-GAAP year-over-year EPS bridge on Slide 10. Our Q4 non-GAAP EPS was $0.71 per diluted share, down $0.04 from the prior year. Net operating performance had a positive $0.48 per share impact due to the fall-through of higher gross profit and lower operating expenses. A negative tax impact of $0.52 per share more than offset our positive operating performance. The negative year-over-year tax impact was due to a large tax benefit booked in Q4 of 2021. Turning to Slides 11 through 13, I'll discuss Q4 results by business segment compared with the prior year. Device Solutions revenue was $100 million with gross margin of 11% and operating margin of 3%. Gross margin increased 230 basis points due to improving mix, partially offset by elevated component costs. Operating margin increased 40 basis points due to the fall-through of the higher gross margin, partially offset by a higher percentage of operating expenses. Network Solutions revenue was $301 million with gross margin of 33%. Gross margin increased 260 basis points from the prior year due to favorable mix, partially offset by higher component costs. Operating margin of 23% increased 480 basis points due to the fall-through of higher gross profit and lower operating expenses. Outcomes revenue was $66 million with gross margin of 46%. Gross margin increased 390 basis points due to very favorable solutions mix and improved operational efficiencies. Operating margin of 26% increased 130 basis points due to the fall-through of the higher gross profit, partially offset by higher R&D investment. Now to briefly recap full year 2022 results, please turn to Slide 14. Revenue of approximately $1.8 billion was down 9% from 2021. On a constant currency basis, revenue was down 6%, and when further adjusted for the sale of our C&I gas business, revenue was down only 2%. The revenue decline was due to the component shortages which limited our ability to fulfill customer demand. Gross margin was 29.1%, 20 basis points higher than 2021. Adjusted EBITDA was $95 million compared with $115 million in the prior year. Non-GAAP earnings per share was $1.13 per share versus $1.75 in 2021. Free cash flow was $5 million compared with $120 million in the prior year. The year-over-year decrease in free cash flow was due to higher working capital usage, higher variable compensation payments and lower EBITDA, partially offset by lower capital expenditures. Turning to Slide 15. I'll cover liquidity and debt at the end of the fourth quarter. Total debt remained flat at $460 million and net debt was $258 million. Net leverage was 2.7x at the end of Q4. Cash and equivalents at the end of the fourth quarter were $202 million. Please turn to Slide 16. I'd like to provide you some color on our 2023 expectations. We anticipate full year 2023 revenue to be in a range of $1.85 billion to $1.95 billion. We remain cautious to start the year as component supply continues to be constrained and somewhat unpredictable, including the nonlinear timing of deliveries within a quarter, but we do anticipate that the supply environment will improve gradually throughout the year. At the midpoint, the 2023 annual guidance is approximately 6% year-over-year growth. This is driven by growth in our Networks and Outcomes segments, partially offset by a continued decline in our Devices segment. We anticipate full year non-GAAP EPS to be within a range of $0.70 to $1.10 per diluted share. At the midpoint of this guidance, and normalizing the tax rate to 28% for both years, the year-over-year operational earnings growth is approximately 6%. This growth is somewhat muted due to an expected increase in variable compensation expense in 2023. The variable compensation costs in our 2022 results were not at the target payout and we are planning to achieve targeted payout in 2023. Given our expected gradual improvement in supply throughout the year, earnings will be heavily skewed to the second half of the year. Other full year guidance assumptions are a euro to U.S. dollar foreign currency exchange rate of $1.05 and an average non-GAAP effective tax rate of approximately 28%, average shares outstanding for the full year of approximately $45.7 million. Now, please turn to Slide 17 for our first quarter outlook. Given the continued volatility in the component supply, I am also providing our view of Q1. We anticipate first quarter revenue to be in a range of $460 million to $475 million which at the midpoint is flat versus our Q4 performance. As I mentioned in my opening comments, the unexpected delivery supplied late in the fourth quarter was initially anticipated to be delivered and converted to revenue in the first quarter. This supply shift is contributing to slightly lower revenue in Q1. We anticipate first quarter non-GAAP EPS to be within a range of $0.05 to $0.15 per diluted share. This is down sequentially from Q4 due to the very favorable product mix in Q4, an increase in variable compensation expense, and a much higher tax expense given Q4's rate was negative 30%. While we anticipate the full year 2023 tax rate to be approximately 28%, the quarterly rates will fluctuate based on the amount of earnings and any one-time true-ups. For the first quarter, we are expecting a one-time increase in tax expense of approximately $2 million. This is related to a required true-up of prior stock grants vest. Including the impact of this $2 million true-up, we expect the overall tax rate in Q1 to be in the range of 40% to 60%. In summary, the constrained and unpredictable nature of component supply continues to impact our results. However, signs of supply improvement started to appear in our fourth quarter. We are optimistic we will see improvement of supply availability throughout 2023. Please turn to Slide 18 for details on the restructuring announcement we made this morning. Last week, our Board of Directors approved a new restructuring plan. This plan is a continuation of our asset-light strategy and includes further actions to streamline our manufacturing operations as well as overall overhead in the company. We expect this project to cost between $40 million and $45 million and generate annualized savings between $14 million and $17 million. The project should be substantially complete by early 2025.

Tom Dietrich, CEO

Thank you, Joan. I would like to close today by highlighting our expanding distributed intelligence offerings. To date, we have shipped approximately 5.8 million DI capable endpoints and have approximately 7 million applications in operations today. Through partnerships, our proven and scalable DI platform will enable a new and innovative approach to improving grid resiliency and transforming the relationship between utilities and consumers. We recently announced a partnership with Smart Energy Water to transform the utility-consumer relationship to enable the management of distributed energy resources. That builds upon our partnership ecosystem that already includes our long-term collaboration with Microsoft to accelerate cloud adoption and the next generation of consumer and grid solutions for the utility and smart city industries. With partnerships, we will transform how end users view and manage their energy and how utilities meet the demands of a rapidly changing industry. Thank you, everyone, for joining today. Operator, please open the line for some questions.

Operator, Operator

Our first question is from Noah Kaye with Oppenheimer.

Noah Kaye, Analyst

And Tom, I want to pick up right where you left off with remarks around the expansion of the DI platform. Can you talk a little bit about the interest you've gotten from different players in the DI ecosystem following your announcement in January? Who are you seeing the demand coming more strongly from? And I think in the release, you mentioned that the revenue opportunities around this would really start to manifest in 2024 but maybe give us a sense of what the revenue model might actually look like for some of the DI offerings?

Tom Dietrich, CEO

Sure. Thanks, Noah. We see interest in DI applications from a broad swath of the industry. Certainly, there are utilities that want to develop their own applications and then a host of ecosystem partners from large companies to small companies that are interested. The applications that they are working on tend to be a mix of great efficiency types of things as well as consumer engagement types of applications. It really depends on what problem they're trying to solve. The revenue model is largely a subscription kind of model where an application is used for a certain period of time and based on usage or time. The portion of that revenue that accrues to Itron is dependent on whether it's a power application or if it's from a third party. If it's a third party, there's a hosting fee, and if it's our owned applications, it's quite a bit higher in terms of the revenue we get. You're right regarding the timing. Think of it as a case where networks are deployed, initial applications in AMI or use case is stabilized by the utility and then they start layering in incremental services. So it tends to follow on in terms of deployments by maybe 18 months or so and that's where you're starting to see the scalability. I mentioned in our prerecorded remarks that there are about 7 million applications running in the field today, sometimes one per endpoint, often multiple applications running in parallel at the endpoint, more like a smartphone kind of model.

Noah Kaye, Analyst

Very helpful. I might leave it for others to pull on the thread of what that means for outcomes. I do want to ask just a couple of clarifying questions around the outlook. It sounded like we had some revenue shift from Q1 '23 into Q4. So if I just add a little bit to Q1, it really seems like the revenue outlook for the full year is annualizing Q1 would have been not much improvement. So just given your comments around expectations for the improving supply chain, I wonder if we could square that up a little bit. How kind of conservative is the outlook in terms of the revenue run rate? And what kind of level of increase are you assuming as we go throughout the year?

Joan Hooper, CFO

Yes. Let me take a stab at that. So the outlook that we provided is based on our current expectations after discussions with suppliers in terms of when supply will arise. Certainly, to the extent that the suppliers are able to exceed our current view, there is upside to the view. But right now, what we would say is that we expect gradual improvement throughout the year. So all things being normal, we would expect Q1 to be the low point, and we would continue to grow through the year. The range is pretty wide. And as you said, if you take the kind of high end of the range, it's a different assumption than the low end of the range. But I do think we will see somewhere around the midpoint or higher of revenue growth, which would be over 6%.

Tom Dietrich, CEO

The fourth quarter clearly showed the potential for increased revenue. We received components late in the quarter, but the team excelled in managing that situation. Our customers are enthusiastic about the products and technology we offer. As we receive those components, our goal is to process them as quickly as possible. We anticipate that, as Joan mentioned, supply will gradually improve throughout the year, though there may be some fluctuations in timing, especially in the first half of the year.

Operator, Operator

And our next question coming from the line of Jeff Osborne with Cowen.

Jeff Osborne, Analyst

Just a couple of quick ones here. I was wondering, Joan, can you quantify what the semiconductor impact was for the quarter and the full year?

Joan Hooper, CFO

Yes, I would say the fourth quarter was pretty similar to the prior quarters we experienced in 2022. So somewhere call it, $100 million or so a quarter, maybe slightly better than Q4. But exiting the year, we probably had about $400 million of revenue that was constrained because of the constraints.

Jeff Osborne, Analyst

Got it. And then on the restructuring, just a couple of quick housekeeping there. The $14 million to $17 million, is the majority of that savings on the cost of goods line?

Joan Hooper, CFO

Yes. I'd say 80% or so is in the cost of goods line.

Jeff Osborne, Analyst

Got it. And then what was the outsourced production mix? And then what do you anticipate that to be sort of post these actions?

Tom Dietrich, CEO

We are probably running around 45%, maybe 50% quarter-to-quarter internal, external today. I think this takes it up probably another 5% or so. So by the time we finish it, we will be meaningfully above 50% in terms of the amount of outsourced production.

Jeff Osborne, Analyst

Got it. And then my last one, Tom, was just on the book-to-bill. Obviously, a great Q4. You implied that Q1 would be a bit softer seasonally. Do you anticipate it to be above one for the year? Or how should we think about just the level of activity that you're quoting?

Tom Dietrich, CEO

We do definitely think that the book-to-bill for the full year will be above 1:1. The pipeline of opportunities remains very rich and strong based on needs from our customers for resiliency and reliability as well as new technology applications, whether they be consumer side or EV integration. So a rich set of opportunities and we're bullish on what the year will bring in terms of bookings. That said, the only caution I would provide is it will be a little bit lumpy quarter-to-quarter just with normal seasonality as well as timing of individual contracts coming through.

Operator, Operator

And our next question coming from the line of Chip Moore with EF Hutton Group.

Chip Moore, Analyst

So I wanted to ask one on the regulatory environment. It seems like more and more states are looking at performance-based mechanisms to meet their goals. Is that something you're seeing with your customers for some of the more advanced solutions?

Tom Dietrich, CEO

Indeed, the regulatory environment continues to understand the need for new technology and new models. The number of states that allow some type of performance-based rates or capitalization is nearly 40 out of the 50 right now, with plenty of changes underneath each one of those along the way. So in general, the regulatory model is moving in the direction of enabling the technologies that we've been investing in.

Chip Moore, Analyst

Great to hear. And Joan, you talked about the weighting in the back half on the guidance. Can you give us any color on sort of the mix and perhaps cadence of implications for margins for the year?

Joan Hooper, CFO

Yes. I mean, I would say for the full year, we would look at margins being pretty similar to what they were in full year '22. So certainly, as we get more supply, you get the benefit of more factory even out the production and therefore, less absorption synergies, but we're also fortunate to create things to that level. So for the full year, I would say, 22 levels are pretty consistent. Those will start out slower in the first quarter and then grow through the year. So for the first quarter, I would say the gross margin to be similar to Q1 of last year.

Chip Moore, Analyst

That's super helpful. And just more housekeeping, Joan, on the restructuring, can you just remind us where we are on the prior programs just to keep us abreast with the new program?

Joan Hooper, CFO

Yes. The 2020 program is basically complete. And so we still are working on our 2021 program which should be complete mostly maybe early next year and those are all on track. If anything, the payback has gotten a little bit higher because we just had a little bit less severance than we expected when we first initially booked the plan. So those are going according to plan. And again, this new program should be complete by early '22 with a cash out of really $24 million to $26 million. So really no impact on cash for '23.

Chip Moore, Analyst

Got it. Okay. And sorry, one last one. It looked like there was an impairment charge on a software project. Any more there?

Joan Hooper, CFO

Yes. We had a cloud-based software project going out for really the last couple of years and we continued to struggle with the vendor in terms of being able to deliver the software that was missing the functionalities that we were expecting. So we made a determination in Q4 to basically exit that project and what we ended up having to write off was capitalized both external costs as well as internal costs for a total of about $8.7 million.

Operator, Operator

And our next question coming from the line of Kashy Harrison with Piper Sandler.

Kashy Harrison, Analyst

So you've previously indicated a 2024 OpEx target of, I think, 22% to 23% of sales. 2022 came in at 26% which is slightly up from '21. And so I'm just curious how you're thinking about the progression of OpEx for '23 and then where your confidence level is on the 2024 target.

Joan Hooper, CFO

Yes. So we did the 2024 targets in the fall of '21. And at that point, we did not expect the kind of supply constraints that we saw in '22 and continue to see in '23. So I would say while those are still our longer-term targets, I don't believe those targets will be met in 2024. That said, the OpEx target of 22% to 23% is still the longer-term target. It's just I think that's going to be pushed out a year or so as we work through the backlog. I think it has been delayed because of the supply component. So the rate long-term targets do not expect it to be 2024.

Kashy Harrison, Analyst

I would like to follow up with a question about free cash flow. I noticed you generated just under $5 million in 2022. How are you planning for free cash flow in 2023? Additionally, if there is a recovery in the supply chain and you achieve the $100 million per quarter in Network Solutions revenue, how do you view the potential use of that free cash flow?

Joan Hooper, CFO

Yes. So the cash flow was a positive $5 million for all '22. It was actually negative in the fourth quarter to the tune of around $18 million, and a lot of that was continuing to invest in inventory. So as components become available, we will continue to test to make sure we've got all the components necessary. My expectation for free cash flow for 2023 is negative for the full year really for a couple of reasons. One is we have some large cash tax payments due in the second quarter. Those relate to two things. One is settling from international tough tax audits that we have incurred but haven't paid. But the bigger issue is the legislative change that happened with the 2017 tax reform which essentially forced you to capitalize R&D. We were expecting those laws to get overturned as was everyone else and they haven't yet. So the current tax law relative to the capitalization of R&D creates quite a bit larger cash tax payments. So as an example, just cash tax alone is going to be up something like $25 million year-over-year. In addition, we will continue to invest in working capital as we grow the business. So our guidance is to grow the business. And typically when that happens, you've kind of growth in receivables, and as I mentioned, we will continue to make sure we grow. So while it's negative for the full year, I expect it to turn in the second half, expect and Q2 to be negative. Q1 also is the quarter where we will pay a discretionary bonus to the nonexecutive team and Q2 is the large cash payments. By the time we get to Q2, earnings are starting to improve versus the first half. I expect cash flow to be positive. But again, for the full year, something in the range of minus $25 million to minus $35 million.

Operator, Operator

And our next question coming from the line of Ben Kallo with Baird.

Ben Kallo, Analyst

Congrats on the bookings. Just quickly, maybe, Tom, just the environment for new projects than maybe bookings this quarter explains it all, but there have been some reports of smaller utilities not being able to implement plans because of the variety of electricity prices and that effect at all. And then I'll have a couple of follow-ups.

Tom Dietrich, CEO

Very good. So the bookings environment or the pipeline of opportunities, maybe correctly stated, continues to be very robust. The need for investment in resiliency and reliability, whether you are a large or small utility, is there. The need to prepare your environment for growth in NAV and continued growth in things like rooftop solar means a lot of investment in the distribution grid. So we feel very bullish about what the future will bring for us in terms of demand from customers. And that is something we hear directly from customers. The range of opportunities continues to expand. We launched a product called the distributed intelligence network interface card, which really allows us to put DI into third-party types of devices like smart panels and others to again continue to broaden out the range of applications. On your point about smaller utilities delaying investments based on affordability and energy prices, I would say I've seen that on occasion, but it certainly hasn't been widespread. There are a broad range of municipalities and cities that are investing, and investor-owned utilities have been investing very aggressively and driving up big bookings projects that you see in our backlog today. The work that's going on certainly is multi-year and probably will be a decade of growth in terms of the needs of the electricity grid and water systems, and that is good future growth for the company.

Ben Kallo, Analyst

And a portion of the backlog was signed before we got to the inflationary environment. And just how do we think about that backlog and pricing? And how that impacts margins or if you're able to reprice with customers going forward?

Tom Dietrich, CEO

Sure. I can jump in on that one and then perhaps, Joan, you want to add anything additional. The work that we've been doing over the last year plus on changing contracts for new agreements to provide a little bit more flexibility around pricing, specifically in the inflationary environment, has gone well. I would say that the vast majority of new bookings are in a place where you've got a little bit better protection against inflation. That said, we still have a fair amount of overhang of bookings prior to that change in our operations a little over a year ago. And that work has sometimes worked for us and sometimes we haven't been able to achieve a price increase. So in terms of backlog, it's inflation protected. We're above 1/3 but probably less than half in terms of what the size of that is. But new projects, as they continue to roll through and as deliveries happen, it rolls off that stuff where we do have a margin push and gets us into a better position from a margin perspective.

Ben Kallo, Analyst

And just maybe lastly, could you remind us of the cadence of especially outcomes? I think I saw the service revenue tick up more, but just the trajectory of how things get implemented with service before it hits something else and then the different margin profile.

Tom Dietrich, CEO

Sure. So a few steps on the outcomes side of things that I think are helpful. Roughly 75% of that revenue is recurring revenue. The majority of that is sort of staff or service-based revenue, which has a meaningful higher margin, which is why outcomes tends to run materially above the gross margin line compared to network or even devices. The timing of outcomes revenues, generally, let's call it, 18 months after the network deployment in terms of timing. It changes a little bit project-to-project, but that's a good way to understand what the timing would be. And that revenue tends to come over a very long period of time. So I think we have 10-year SaaS or managed service agreements, so you get that revenue over a very long period of time.

Operator, Operator

Now our next question coming from the line of Graham Price with Raymond James.

Pavel Molchanov, Analyst

It's Pavel Molchanov here. Same question I asked a few months ago in this kind of quasi-recessionary environment, is there any improvement in terms of multiples from an M&A perspective as you look at private companies?

Tom Dietrich, CEO

I think that valuations are certainly coming down. There's still a meaningful difference between, I would say, hardware valuations and software valuations where software tends to be a bit higher. But indeed, valuations are coming down a bit. Large-scale enterprise software valuations still tend to be pretty rich compared to the traditional valuation that you've seen, but coming down a little.

Pavel Molchanov, Analyst

Okay. Can you get an update also on the demand response business? I mean, it's obviously one slice of outcomes, but we get these extreme weather dynamics which I would imagine pushes up the appetite among ISOs for demand response.

Tom Dietrich, CEO

Indeed, the demand response world continues to move along pretty nicely. What I've seen is not only using that capability from a traditional demand response, like shaving the peak off and dealing with a very high-pressure kind of situation, but also using that capability much more as a normal course of practice to understand when to charge things like EVs and how rooftop solar can be managed much more effectively. So I think it's moving from a demand response peak shaving scenario to much more of a localized control for distributed energy resource management, which is where the industry tends to be heading and a lot of the discussions we have with our customers accomplish both of those use cases.

Operator, Operator

And our next question coming from the line of Marin Malloy with Johnson Rice & Company.

Martin Malloy, Analyst

I wanted to ask about the guidance. I would have anticipated for the level of revenue that you're guiding to that the earnings per share would be higher. Could you maybe give us some help in terms of the magnitude for the variable comp that you talked about? And also, any help would be appreciated on the gross profit margin side.

Joan Hooper, CFO

Yes. I think I answered the gross profit already. So from an annual perspective, I think at or slightly above the full year 2022 level. In terms of OpEx, I think you've sort of talked about that we're going to continue to be a little bit higher as the revenue is not at the scale level. So for OpEx, I think it will also be in a percentage similar to 2022, which would imply higher dollar OpEx between '22 and '23. And as I mentioned on the call, think a lot of that is due to variable compensation. So I really don't want to talk about exactly how much our variable comp is, but it was materially enough that we mentioned it. The other thing I would point to for 2022 is EPS versus 2023; we normalized for you in the discussion point. So the tax rate in '22 was 4%. The tax rate in '23 is 28%. We had a lot of favorable discrete items linked to statute limitations expirations in '22. If you normalize for the same tax rate year-over-year, 2022 would have been $0.85 on the midpoint of our guidance, which is $0.90, so roughly 6%. Again, we've built the guidance based on our current view of supplier commitments. To the extent they're better than that and more predictable, we'll be in a position to update the guidance in the August timeframe. Yes. Over 90% is networks and outcomes. It doesn't materially change much from quarter to quarter.

Operator, Operator

Thank you. And I will now turn the call back over to Mr. Tom Dietrich for any closing remarks.

Tom Dietrich, CEO

Very good. Thank you all for joining us today. We look forward to updating you on our progress after Q1. Thanks, all.

Operator, Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.