BMI Q3 2023: Utility Water Sales Jump 31% as Smart Solutions Outpace Legacy Meters
Badger Meter’s third quarter highlighted a decisive shift toward digital smart water solutions, driving robust utility water sales and improved operating margins. Supply chain normalization enabled modest backlog reduction and better manufacturing output, while disciplined expense leverage supported margin expansion. With a constructive outlook and a $20 billion addressable market, Badger Meter is positioning for sustained growth through innovation, capacity investment, and targeted M&A.
Summary
- Smart Water Outpaces Legacy: Utility digital solutions led growth, reinforcing the shift from traditional meters.
- Margin Expansion Through Leverage: Operating discipline and scale drove improved profitability despite higher R&D and personnel costs.
- Strategic Market Positioning: Broader portfolio and cross-selling unlock new market segments and long-term growth potential.
Business Overview
Badger Meter (BMI) provides flow measurement, control, and communication solutions for water utilities, municipalities, and industrial customers. Its core business centers on utility water metering, but increasingly emphasizes digital smart water solutions—comprising meters, sensors, software, and analytics. Revenue is primarily generated from product sales and recurring software as a service (SaaS) subscriptions, with major segments in utility water (the largest) and flow instrumentation (smaller, focused on industrial and water-related markets).
Performance Analysis
Third quarter results showcased a strong acceleration in Badger Meter’s utility water segment, which surged 31% year over year and now anchors the company’s growth profile. This performance was broad-based, driven by continued robust order demand and improved supply chain conditions, enabling higher manufacturing output and partial backlog reduction. Key contributors included demand for Orion cellular endpoints, E-series ultrasonic meters, and Beacon SaaS revenues, all of which reflect the company’s pivot to digital solutions. Water quality and pressure monitoring sales also added incremental growth.
In contrast, flow instrumentation sales grew just 2% as the company de-emphasizes lower-margin general industrial applications, focusing instead on water-related opportunities. Gross margin expanded 20 basis points to 39.1%, supported by favorable mix and scale, while SG&A leverage (down 50 basis points to 22.2% of sales) reflected effective cost management even as R&D and headcount increased. Operating income and EPS outpaced sales growth, with EPS benefiting from higher interest income and a lower tax rate. Free cash flow conversion remained strong, and inventory as a percent of sales improved sequentially, reflecting operational discipline.
- Utility Segment Momentum: Utility water sales now dominate growth, highlighting the strategic shift away from legacy meters toward smart, connected solutions.
- Expense Leverage Outpaces Revenue: SG&A and R&D investments are being offset by scale, supporting margin expansion even as the company invests for future growth.
- Backlog and Order Health: Backlog remains elevated but actionable, with order rates robust and lead times improving as supply chain headwinds ease.
Management’s ability to balance innovation investment with operational efficiency is translating into both top-line and margin gains, reinforcing the company’s long-term growth thesis.
Executive Commentary
"The growth that we've had and will continue to deliver goes far beyond the meter. As the macro challenges of labor shortages, aging infrastructure, water conservation, and climate events continue to drive much-needed investment into critical water systems, Badger Meter's broad portfolio of customizable solutions...is uniquely positioned to serve the evolving needs of our utility and other customers."
Ken Bockhorst, Chairman, President, and CEO
"SEA leverage, because of our...growth algorithm, we believe, while still being an innovator and doing the things that you talked about, R&D, integrating new businesses that we've acquired, et cetera, we can still do all those great things but grow SEA at a rate slower than sales, and that creates automatic growth."
Bob Rockledge, Chief Financial Officer
Strategic Positioning
1. Digital Smart Water Solutions Drive Growth
Badger Meter’s transition from legacy mechanical meters to digital smart water solutions is the primary growth engine. Products like Orion endpoints and E-series ultrasonic meters, paired with Beacon SaaS, have become central to utility customers’ modernization efforts. This positions BMI to capture a larger share of infrastructure investment cycles driven by water conservation, labor shortages, and climate resilience.
2. Portfolio Expansion and Cross-Selling
Acquisitions such as Cyrenix and ATIS, combined with in-house software development, are broadening the company’s addressable market and enabling cross-selling across metering, sensors, and analytics. Management is focused on integrating these offerings to unlock new verticals, particularly in water quality and pressure monitoring, and to differentiate against larger, more entrenched competitors.
3. Operational Efficiency and Capacity Investment
Investment in operational efficiency and capacity expansion is enabling BMI to capitalize on high order rates and deliver on growth without sacrificing margin. Management views innovation not just as R&D, but also as process and manufacturing improvements, which are supporting rapid scale and backlog reduction.
4. Disciplined Capital Allocation and M&A
Capital allocation remains focused on organic investment (R&D and capacity), annual dividend increases, and disciplined M&A targeting water quality and software assets. The M&A pipeline is described as “target-rich,” with management prioritizing value creation opportunities that expand global reach and software capabilities.
Key Considerations
This quarter’s performance reinforces Badger Meter’s evolution from a meter-centric business to a diversified smart water platform, with implications for margin, growth, and competitive positioning.
Key Considerations:
- Smart Water Penetration Accelerates: Digital solutions are now the main growth vector, reducing reliance on legacy mechanical meters.
- Expense Discipline Sustains Margin Expansion: SG&A and R&D investments are being scaled efficiently, supporting operating leverage and improved profitability.
- Backlog Reduction Signals Supply Chain Normalization: Improved lead times and manufacturing output are enabling BMI to convert elevated backlog into revenue.
- Addressable Market Expansion: The $20 billion global TAM, including replacement and new software-driven markets, provides a long runway for continued growth.
Risks
The company faces risks from macroeconomic volatility, including inflation, interest rates, and geopolitical events such as Middle East conflict, which could impact partners or supply chains. While supply chain conditions have improved, any reversal could pressure lead times and margin. Additionally, as BMI expands into software and analytics, it will encounter new competitive dynamics and integration risks, particularly as it seeks to differentiate against larger incumbents and scale recent acquisitions.
Forward Outlook
For Q4, Badger Meter signaled:
- Solid year-over-year sales growth, though fewer operating days in Q4 due to US holidays may result in sequential revenue moderation.
- Continued margin expansion as supply chain normalization improves manufacturing efficiency and cost structure.
For full-year 2023, management maintained a constructive outlook:
- Strong free cash flow conversion and high single-digit sales CAGR over the strategic cycle.
Management highlighted ongoing investments in innovation, operational capacity, and disciplined M&A as key drivers for 2024 and beyond.
- Monitoring macro and geopolitical developments for potential impacts.
- Focus on leveraging hardware and communication platforms to accelerate software and analytics adoption.
Takeaways
Badger Meter’s Q3 results underscore its successful pivot to digital smart water solutions, operational discipline, and a growing software-centric portfolio.
- Digital Portfolio Drives Growth: Utility water sales and SaaS revenues are now the core growth levers, with legacy meter reliance declining.
- Margin Expansion Through Scale: Cost discipline and operational leverage are translating into higher profitability, even as R&D and integration spending rises.
- Long-Term Growth Outlook Supported by TAM: The company’s expanded portfolio and M&A pipeline position it to capture incremental share in a $20 billion global market, with high single-digit CAGR targeted over the strategic cycle.
Conclusion
Badger Meter’s Q3 2023 results reflect a business in transition, leveraging digital innovation and operational efficiency to outpace legacy peers. With robust demand, a broadening addressable market, and prudent capital allocation, BMI is well positioned for sustained value creation despite macro uncertainties.
Industry Read-Through
BMI’s shift to smart, connected water solutions highlights a broader industry trend toward digital infrastructure and recurring SaaS revenue models. Utilities and municipalities are increasingly prioritizing data-driven water management, opening opportunities for companies with integrated hardware, software, and analytics platforms. Competitors reliant on mechanical meters or single-point solutions risk obsolescence as customers demand end-to-end digital ecosystems. Margin expansion through scale and operational leverage is achievable for those who can balance innovation investment with disciplined cost management. The water sector’s multi-year investment cycle, driven by aging infrastructure and climate adaptation, should support continued growth for digital-first players across the value chain.