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Edited Transcript of ITI earnings conference call or presentation 6-Aug-19 8:30pm GMT

Q1 2020 Iteris Inc Earnings Call

SANTA ANA Sep 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Iteris Inc earnings conference call or presentation Tuesday, August 6, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew C. Schmidt

Iteris, Inc. - VP of Finance, CFO & Secretary

* J. Joseph Bergera

Iteris, Inc. - President, CEO & Director

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Conference Call Participants

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* Hilary Elizabeth Cauley

JMP Securities LLC, Research Division - Associate

* Jeffrey Wallin Van Sinderen

B. Riley FBR, Inc., Research Division - Senior Analyst

* Ryan Ronald Sigdahl

Craig-Hallum Capital Group LLC, Research Division - Research Analyst

* Todd Kehrli

MKR Group, Inc. - Co-founder & President

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Presentation

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Operator [1]

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Good day, and welcome to the Iteris Fiscal First Quarter 2020 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Todd Kehrli of MKR, Investor Relations. Please go ahead, sir.

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Todd Kehrli, MKR Group, Inc. - Co-founder & President [2]

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Thank you, operator. Good afternoon, everyone, and thank you for participating in today's conference call to discuss Iteris' financial results for its fiscal first quarter 2020, ended June 30, 2019. Joining us today are Iteris' President and CEO, Mr. Joe Bergera; and the company's CFO, Mr. Andy Schmidt. Following their remarks, we'll open the call for your questions.

Before we continue, we'd like to remind all participants that during the course of this call, we may make forward-looking statements regarding future events or the future performance of the company which statements are based on current information are subject to change and are not guarantees of future performance. Iteris is not undertaking an obligation to provide updates to these forward-looking statements in the future. Actual results may differ substantially from what is discussed today and no one should assume that at a later date, the company's comments from today will still be valid. Iteris refers you to the documents that the company files from time to time with the SEC, specifically the company's most recent Forms 10-K, 10-Q and 8-K, which contain and identify important risk factors that could cause actual results to differ materially from those that are contained in any forward-looking statements.

I'd like to remind everyone that you'll find a supplementary report of our first quarter financial metrics as well as a webcast replay of today's call on the Investor Relations section of the company's website at iteris.com.

Now I'd like to turn the call over to Iteris' President and CEO, Mr. Joe Bergera. Please go ahead.

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J. Joseph Bergera, Iteris, Inc. - President, CEO & Director [3]

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Great. Thank you, Todd, and good afternoon, everyone. Thanks for joining us today. As you saw at the close of market, we issued a press release announcing the financial results of our fiscal first quarter ended June 30, 2019.

In Q1, Iteris recorded $26.6 million in total revenue, which represents a 4% increase relative to the same prior year quarter. Additionally, we secured first quarter total net bookings of $31 million, representing an 11% year-over-year increase and a 29% sequential increase. Due to our strong sustained net bookings growth, our total first quarter ending backlog rose to $59.8 million, which represents a 20% year-over-year increase and an 8% sequential increase.

Now let me provide a brief overview of performance by segment. In Q1, our Transportation Systems segment recognized $12.4 million in revenue, representing a 6% decline versus the same prior year period. As discussed on prior calls, there is some remaining noise in the first quarter comparison due to a change in the structure of the segment's largest customer contract last year. This noise will be fully behind us starting in our fiscal second quarter ending September 30, 2019.

Despite the decline in recognized revenue, the segment continued to experience strong demand, with net bookings increasing 7% to a record first quarter total of $17.3 million. Similarly, the segment's total ending backlog reached $49.5 million, which represents a 22% increase compared to the same prior year period.

Some of the segment's recent notable bookings include over $4 million in various task orders to provide traffic, video and data services to Virginia Department of Transportation.

Please note this activity is in addition to our management of VDOT's traffic operation centers, which we've discussed on prior calls. Other notable bookings include an additional $3 million in task orders from the Federal Highway Administration to continue to enhance the nation's reference architecture for connected and automated vehicle deployments; over $2.8 million in task orders from various agencies across the country, including the Bay Area Metropolitan Transportation Commission for use of our Advanced Traveler and emergency information services system; a new $2 million IDIQ contract with the Texas Department of Transportation for smart transportation and traffic engineering services, an additional $1.4 million in task orders from OC 405 Partners for our expanded support of the I-405 improvement project in Orange County; and over $1 million in software as a service contracts from various agencies for use of our performance measurement and commercial vehicle operations, software products.

In Q1, the Roadway Sensors segment recorded $12.8 million in revenue versus $10.9 million in the same prior year quarter, representing an 18% year-over-year increase. This result reflects the renormalization of business in Texas following the reinstatement of the Texas SmartBuy contract as well as the especially strong performance in the Midwest, Southwest and Southern California. Additionally, we saw a general increase in demand during Q1 for VantageLive!, and we received our largest single order to date for 58 intersections. At this time, our annualized VantageLive! renewal rate is 94%. As stated on prior calls, we've seen an increase in the lead time for steel products, such as cabinets and pulls due to the current trade environment. These longer lead times may impact our sales because our smart sensors are often deployed alongside these steel products.

Although the situations vary somewhat by region, we believe lead times have generally stabilized within a 6- to 12-month range, which is the new normal and is factored into our current forecast.

In Q1, our Agriculture and Weather Analytics segment recognized $1.4 million in revenue, which represents a 1% increase compared to the same prior period quarter. This result reflects some noise due to a true-up in the prior year period associated with the previously discussed elimination of a third-party royalty for ClearPath Weather. Excluding this factor, both product lines continue to experience solid revenue and bookings growth. In fact, the segment's bookings increased 139% on a year-over-year basis and 101% on a sequential basis.

During our first quarter, we continued to add new ClearAg customers while deepening our relationships with existing customers. Some recent notable customer wins include one of the world's largest seat producers committed to integrate ClearAg into its customer-facing applications as well as utilize ClearAg environmental intelligence to support internal research and development activities. Indigo Ag, an agricultural technology company focused on biologics, selected ClearAg to enhance its agronomous facing crop modeling platform as well as supported seed treatment, research and development efforts. And FluroSat, an Australian crop health solution providers, like to ClearAg's location-specific environmental intelligence to enhance its decision-support platform.

With that, I'd like to turn the call over to Andy to walk through our financial results.

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Andrew C. Schmidt, Iteris, Inc. - VP of Finance, CFO & Secretary [4]

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Thank you, Joe, and good afternoon, everyone. Okay. Following up on Joe's introduction to our financial highlights and summary of key revenue drivers, I'll focus on providing an update of our 3 business segments from a modeling perspective and finish with our balance sheet highlights. As a reminder, our press release issued today includes financial tables, which include current quarter and year-to-date financial information and our pro forma reconciliation and segment information. We also published a key financial metrics document, which is posted on our website under our Investor Relations link under Financial Reports, which provides a trend view of key financial metrics.

Looking at our Q1 of fiscal '20. There are 2 important dynamics to keep in mind. First, we completed our confidentially marketed public offering in our current reporting period. We also incurred significant expense related to the acquisition of Albeck Gerken in our Q1 of '20. It should be noted that the AGI acquisition was not completed until July 2, which is our Q2. So while you'll see the full effect of our capital raise in our current period results, you will only see certain expenses related to the acquisition in our results. Specifically, we recognized approximately $156,000 of onetime third-party expense in our GAAP Q1 fiscal '20 results. We have added this category to our non-GAAP reconciliation this period to provide a clearer view of our year-over-year operating results. Please refer to the non-GAAP reconciliation provided in our press release for more detail.

Okay. Let's consider our 3 business segments and business model updates. Staying consistent with Joe's order, I'll start with Transportation Systems. Joe outlined our continued favorable bookings and backlog trends and significant new contract wins. Consistent with past quarters, our Q1 year-over-year comp is difficult as our prior year period still includes part of the original VDOT TOC contract. Current period gross margin of 33.7% compares favorably with last year's 30.8%. The favorable gross margins can be attributed to product mix. Subcontent component this period was approximately 13% less than it was at the year ago period.

In terms of contribution margin, operating costs of $2.6 million in Q1 is down from our prior year of $2.7 million. In all, the favorable product mix, combined with lower operating expense resulted in an increase in contribution margin. Q1 contribution margin of 12.7% compares favorably to 10.3% for the prior year period. Of key significance, while our revenue was down 6% year-over-year, our contribution margin dollars increased $200,000 to $1.6 million for Q1 of '20.

Switching to our Sensors segment. As Joe noted, we saw significant year-over-year growth in the segment led by the comeback of the Texas region. A unique aspect of the Texas market is our strong third-party product distribution business. While we have seen a return to strong sales of Iteris product in Texas, the renormalization of business in the region naturally includes a step-up in sales of third-party product. This is an important point as the overall gross margins for the Texas region is slightly lower than the other geographies due to the unique product mix. Specifically, Texas third-party distribution represented approximately 14% of overall sensors revenue versus a typical run rate of 10%. The overall product mix resulted in Q1 '20 gross margins of 42.3% as compared to 48.7% for the prior year period.

Q1 operating expense of $3.1 million is down from last year's $3.5 million. Putting it all together, Q1 contribution margin of 18.2% compares very favorably to 16.9% for our previous year. Switching to Ag and Weather, as Joe previously outlined, we had a very positive bookings and revenue dynamic for this segment this period. However, the year-over-year P&L performance is somewhat obscured by a onetime revenue pickup of approximately $250,000 in our Q1 of fiscal '19. Gross margins for Ag and Weather of 57.2% is within expectations given the $1.44 million in revenue for the quarter and compares to 58.8% for the previous year period.

While the year-over-year gross margin comparison represents a slight decline, the onetime revenue adjustment attributed to Q1 of fiscal '19, had no associated cost of sales. This led to higher-than-expected gross margins for the fiscal '19 quarter.

Operating expenses continue to improve. Current quarter OpEx of $1.86 million compares favorably to $1.98 million for the previous year period. The segment's contribution loss of approximately $1 million for Q1 compares favorably to last year's loss of $1.14 million. In all, we continue to post continuous quarters of improved financial performance in this segment. In terms of corporate expense, which includes unallocated public company expense, accounting, finance, IT, marketing, HR, facilities expense and so on, we have essentially stabilized given our many growth initiatives. Corporate expense for Q1 of '20 was $4.3 million on a GAAP basis, which includes $156,000 of nonrecurring acquisition expense. Netting out nonrecurring acquisition expense, corporate expense was $4.2 million. We expect recurring corporate to be closer to $4 million, but had approximately $225,000 of accounting accrual adjustments associated with our fiscal year-end.

Finally, let me address our balance sheet. Our Q1 was a very unique period due to the capital raise. In regard to share count, we started the fiscal year with 33.4 million shares of common stock outstanding. Our raise added about 6.2 million shares, leaving us with 39.6 million shares at June 30, 2019. The share count does not include shares issued at July 2, in conjunction with the purchase of Albeck Gerken.

In terms of cash, we began our fiscal year with approximately $9 million in cash and short-term investments. Taking the capital raise out of the equation, we only used about $300,000 in cash during the period, including capital expense. That is a great change pace for this company. In particular, we have made great improvements in our working capital position. Inventories associated with our Sensors segment have dropped from $2.9 million at the beginning of the year to $2.4 million as we return to scale in that business. In addition, we saw a reduction in accounts receivable of about $450,000 from the beginning of the year despite the acceleration of the sensors business.

Ending cash and short-term investments at June 30, 2019, was $35.4 million, comprised of approximately $8.7 million for operating, plus $26.7 million generated from the capital raise.

As a final comment, we saw a non-GAAP operating loss of $368,000 this period, a 32% improvement over the same period last year. We certainly have a clear view of positive GAAP, non-GAAP operating income for this fiscal year.

At this point, I'll turn the call back to Joe.

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J. Joseph Bergera, Iteris, Inc. - President, CEO & Director [5]

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Great. Thank you, Andy. Iteris remains in a strong position to capitalize on favorable secular trends in smart transportation and digital agriculture. And during fiscal year 2020, we will continue to introduce product and service innovations to expand our addressable market and enhance our competitive differentiation as we further develop highly meaningful, high-margin SaaS models in both of our end markets.

I'll provide some commentary on our approach by segment and our associated expectations for the balance of fiscal year 2020. While bookings growth may fluctuate within any given quarter, the opportunity pipeline for our Transportation Systems segment continues to reach new highs, and our conversion rates remain favorable. Therefore, the segment continues to anticipate strong bookings through fiscal year 2020, with the highest rate of opportunity conversion coming from 3 areas. First, customer adoption of our software products, such as ClearGuide and our Advanced Traveler and emergency information system. Second, customer adoption of our business process outsourcing and managed services offerings, such as intersection as a service, which is a software-enabled managed service; and three, additional penetration in 3 strategic geographies. The Midwest where we intend to build upon the local team we absorbed in the third quarter of fiscal 2019, Texas, where our Transportation Systems segment continues to co-market and co-sell with our Roadway Sensors segment, which is the dominant intersection detection vendor in the state; and Florida, where the recent acquisition of Albeck Gerken will accelerate our ongoing organic initiatives.

In our second quarter ending September 30, the Transportation Systems segment should realize year-over-year growth in the mid-teens as historic levels of prior period bookings convert to revenue, and we consolidate the financial results of the recent Albeck Gerken acquisition. More specifically, we expect Albeck Gerken to contribute approximately $1.5 million in revenue in the second quarter, which is a seasonally slow quarter for Albeck Gerken due to factors unique to the Florida market, including project disruptions associated with the hurricane season.

We further expect to complete a substantial amount of our post-acquisition integration activity in the same quarter, which will offset the segment level operating income benefit from the acquisition in the period. In the second half of fiscal 2020, we expect Albeck Gerken to contribute over $4 million in inorganic revenue to the Transportation Systems segment. And the combination of this inorganic revenue and the revenue conversion from the prior period bookings will support segment level revenue growth in the high teens, with continued improvement in segment level operating income margins.

Now let's discuss the Roadway Sensors segment. With the renormalization of the Texas intersection detection market, we continue to expect the Roadway Sensors segment to report full year revenue growth of more than 10%. The segment's primary growth drivers include, first, several product innovations that further enhance our competitive differentiation; second, an increase in product revenue and also SaaS revenue attributable to VantageLive!, our SaaS-based intersect analytics platform; and three, the implementation of certain programs to enhance the productivity of our direct and indirect sales channels.

Given typical seasonality and other market constraints, such as the timing of agency fiscal years, the segment's second quarter revenue growth should exceed 10% year-over-year, while second half revenue growth is expected to be in the single digits year-over-year. Additionally, we continue to expect the segment's full year operating income margin to increase relative to last year's annual operating income margin due to product mix and sales efficiencies.

And finally, let's discuss our Agriculture and Weather Analytics business. The repositioning of ClearAg as an environmental intelligence and agronomic solution platform continues to improve our customer adoption while also creating operating efficiencies. As we progress through fiscal year 2020, we'll continue to strengthen ClearAg's new market position and increase our overall market share. Our commercial activities will focus on penetration in existing strategic accounts, acquisition of new agriculture equipment and irrigation OEM customers and adoption by allied providers in North America and Europe.

As our revenue growth accelerates, we expect our net investment in ClearAg to further decline to about $4 million for the full year, which is a significant improvement compared to our prior year performance.

In summary, we anticipate our full year fiscal year 2020 consolidated rate of revenue growth to reach the mid-teens, and we further expect the combined effect of incremental margin dollars from the revenue growth in our Transportation Systems and Roadway Sensors segments; a decrease in our net investment in ClearAg; and the accretive effect of the Albeck Gerken acquisition to yield a non-GAAP operating profit for the year.

With that, we'd be delighted to respond to your questions and comments. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question from Steven Dyer of Craig-Hallum Capital Group.

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Ryan Ronald Sigdahl, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [2]

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Ryan Sigdahl in for Steve Dyer.

First off, so several new ClearAg awards? And it seems like a steady cadence every quarter of new business expansions with existing customers. And you talked about the cash burn and the operating loss significantly lower this year. But when do we really see that hockey stick inflection in revenue from all this new business? Is that something that can happen later this year or next year? Or just any cadence, I guess, on how to think about that over the next several quarters and years?

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J. Joseph Bergera, Iteris, Inc. - President, CEO & Director [3]

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Yes. So a couple of things. First of all, our internal plan and the general directional guidance that we're providing reflects the continued base hits. So we keep coming in with every single quarter. So that leads to consistent growth we have talked previously about the fact that we expect some acceleration this year. For the full year, we expect the rate of revenue growth to be generally in the range of the bookings growth prior year, which was in the low 30%, but definitely reflects improvement over prior year. With respect to the hockey stick, the -- again, we're looking to continue to deliver base hits. The significant inflection would come most likely from the conversion of an existing strategic relationship with a large multinational agribusiness into an enterprise agreement, which is something we've talked about on previous calls. And I think probably you're -- that's one way of asking that question. Do we have line of sight to that enterprise deal today? Situation remains the same. We remain in discussions with all of our largest agribusinesses about the potential enterprise-wide deployment of ClearAg. When one of those deals converts, there would be a dramatic acceleration in the rate of revenue growth, generally speaking. Now that being said, because it's a SaaS model, the way that, that booking that's recognized could result in a slightly more modest step-up than the rate of growth in the bookings would be because of just general revenue recognition practice. So again, right now, our plan is to continue to bring in new customers, deliver base hits. We will convert those customers ultimately into an enterprise deal, but I don't have immediate line of sight to that.

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Ryan Ronald Sigdahl, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [4]

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Great. Very helpful, Joe. As it relates to SaaS revenue. I don't think I heard it in the prepared remarks, you gave it last quarter, but what was the recurring SaaS revenue in the quarter? And then how does that compare to the prior period quarter?

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J. Joseph Bergera, Iteris, Inc. - President, CEO & Director [5]

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I'm sorry, you're talking about for Ag and Weather Analytics or on an enterprise basis?

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Ryan Ronald Sigdahl, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [6]

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Enterprise basis. I guess if you want to break it out between segments, you can do that as well, but primarily looking overall?

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J. Joseph Bergera, Iteris, Inc. - President, CEO & Director [7]

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Yes. So there's a little bit of noise there because in the Transportation Systems segment, where we have our largest amount of software revenue, we are transitioning some of our existing customers, specifically our iPeMS customers to ClearGuide, which is our new SaaS platform. It is somewhat difficult to strictly differentiate as to whether some of that revenue should be in a -- should considered more of a traditional hosted model versus a SaaS. But generally speaking, right now, our total enterprise SaaS revenue would be in excess of $15 million. And our total enterprise software revenue would be in excess of $20 million.

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Ryan Ronald Sigdahl, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [8]

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Great. And then as it relates to the cash, so if you take out the $6 million for the acquisition, I get $29 million of pro forma cash. What are your thoughts there? I guess is that -- are you expecting to use it? Do you need it for organic initiatives? Or can you self-fund yourself at this point? And then as you think about more M&A, are there certain segments that you're targeting or technologies? Or how should we think about that?

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J. Joseph Bergera, Iteris, Inc. - President, CEO & Director [9]

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Yes. Andy, do you want to talk to that?

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Andrew C. Schmidt, Iteris, Inc. - VP of Finance, CFO & Secretary [10]

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Sure. Yes. Yes, we are very clear that when we did the raise, it was not for organic purposes. It's primarily for inorganic. If you look at our current period, again, our non-GAAP results of about $368,000 loss that's basically the amount of our CapEx. And so when you look at the reduction in cash from $9 million to $8.7 million, they tend to be the same number. But what's great about that is from an operations perspective, we really didn't use cash this period. It's just -- we're not very capital intensive. But basically, right now, our cash usage is just for our minor CapEx. When we start looking going forward, we started out the year at $368,000 non-GAAP loss. Now at Albeck Gerken layering in, we expect, again, every quarter that non-GAAP performance to accelerate. So that as we get into, certainly, our third and fourth quarter, very positive cash flow, and we'll end the year at a positive cash flow perspective from operations.

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J. Joseph Bergera, Iteris, Inc. - President, CEO & Director [11]

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And then just a follow-on to that, Ryan, as Andy said, the intent is really to reserve the net proceeds from the [CMPL] for strategic use, which really translates into potential future acquisitions. And again, just to reiterate, there is no need to use that cash for current operating needs.

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Operator [12]

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We'll take our next question from Jeff Van Sinderen of B. Riley & Co.

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Jeffrey Wallin Van Sinderen, B. Riley FBR, Inc., Research Division - Senior Analyst [13]

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I know you guys gave some metrics on Texas in your prepared comments. But just wondering if you can speak more about what you're seeing in Texas with the new SmartBuy program in place and what the outlook is for that region for your business?

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J. Joseph Bergera, Iteris, Inc. - President, CEO & Director [14]

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Yes, sure. Thanks, Jeff. Happy to do that. So to be clear, we saw largely a normal return to business in Texas. There was, arguably, some pent-up demand, which got released in the first quarter. We were slightly above plan in that market, but I want to be clear that the 18% growth for the business unit does not reflect a onetime dramatic increase in sales from Texas. As we've said all along, the Texas market is only going to be able to absorb so much of our products at any given point in time. And we think it will take a number of quarters for the sales that did not occur in the prior fiscal year to ultimately flow through. So just, again, to be clear, we had very strong sales nationwide with some improvement of results above plan in Texas. At this point, as I said in my prepared remarks, we expect that the Texas market is renormalized and we would continue to expect consistent growth in the Texas market, as has been the case for the last several years with the exception of FY '19, when we actually saw negative growth every single quarter due to the fact that we did not have access to the SmartBuy contract.

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Jeffrey Wallin Van Sinderen, B. Riley FBR, Inc., Research Division - Senior Analyst [15]

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Okay, good. That's helpful. And then just kind of from a broader perspective, Joe, you've been there for a few years. And maybe you could just give us your sense of how you're seeing the nature of the new projects that are coming on evolving versus kind of the older projects a few years ago, maybe touch on how the SaaS component is becoming more important? And where you see the SaaS penetration headed for you over time?

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J. Joseph Bergera, Iteris, Inc. - President, CEO & Director [16]

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Yes, sure. I'd be happy to. So one of the biggest differences between where we are today and where we were a few years ago is, I think, reflected in the bookings growth. So first of all, we have significant, continued increases in net bookings for the transportation and systems business unit. I do want to caution that these numbers get really big, there could be some fluctuations from quarter-to-quarter. But overall, the long-term trend has been positive, will continue to be positive. As you start to peel that away and you look at what's driving that, what's interesting is you see a lot of big orders. So I went through some of the most notable orders in the most recent period, where we booked our net bookings were $17.3 million. I mean if you add up the bookings that I discussed there, they reflect about $14 million of the $17.3 million. Those are all million-dollar-plus orders. That's radically different from where we were 4 years ago when our average order was about $50,000. So that's one of the biggest changes. That does present some challenges as we end up with our portfolio of projects, having relatively small set of really big projects, and we still -- we have lots of them that are small. Over time, that's going to balance out. But again, the biggest change is in the size of the deals that we're closing. That has a lot of benefits to us. There's fairly high sales and marketing costs in this business, whether it's a very large deal or it's a very small deal. Obviously, therefore, I'd rather go after the larger deals. The larger deals tend to be longer term, oftentimes, multiyear in duration. So that allows us to get better utilization as opposed to when you're trying to reallocate staff almost continuously across very small, very short-term projects. So it's definitely improving the financial characteristics of the business.

And then with respect to the nature of those larger projects, you are, in fact, seeing a big shift from traditional consulting, which was made up the bulk of the business for transportation systems, 4 years ago, to businesses more recurring in nature. And there are 2 different types of recurring revenue in the Transportation Systems business unit today. There's an increasing amount that's software-related and more specifically SaaS and then the second is, there is an increasing number of managed services or increasing amount of managed services revenue as well. And as we look forward, we would anticipate that the recurring revenue, again, coming from both managed services and software will grow at a much faster rate than the consulting revenue, which will change the overall financial characteristics of that business unit. With respect to the Roadway Sensors business, there's less change in the financial characteristics. To date, the VantageLive! revenue still continues to be less than 2% of the business units total revenue, but we're starting to see a faster rate of adoption and even more importantly, of deployment of the VantageLive! implementations, which allows us to start recognizing revenue more quickly. And we will gradually see a shift in the revenue profile for the Roadway Sensors business unit as well to include more recurring revenue.

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Jeffrey Wallin Van Sinderen, B. Riley FBR, Inc., Research Division - Senior Analyst [17]

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Okay. Good. Great to hear. And then just one last one, if I could quickly throw it in. Just anything to report back in terms of the integration process with Ag. Just wondering if there's anything there that it's worth pointing out?

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J. Joseph Bergera, Iteris, Inc. - President, CEO & Director [18]

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Yes. No, actually, it's a great question. It's where we're spending a lot of time on. We have a very, very comprehensive integration plan. We're working extremely closely with Albeck Gerken team on that. And at this point, everything is proceeding exactly on plan. Just to remind folks, as I was asked that question previously, integration is going to occur on a staggered basis. At this point, Albeck Gerken is operating in the Florida market as Albeck Gerken Iteris company. We are starting to align commercial activities and various employment HR policies, financial and other operating like back-office systems will gradually be transitioned from Albeck Gerken legacy systems to ours over the course of the current fiscal year. And the expectation is that the business will be fully integrated into Iteris at the start of our next fiscal year.

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Operator [19]

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(Operator Instructions) We'll take our next question from Joseph Osha of JMP Securities.

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Hilary Elizabeth Cauley, JMP Securities LLC, Research Division - Associate [20]

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This is Hilary on for Joe Osha. I just had one question for you guys. I was wondering if you could talk a little bit about the upside to the acquisition, particularly as you look to use that to kind of grow your intersection as a service offering and what that scaling kind of looks like?

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J. Joseph Bergera, Iteris, Inc. - President, CEO & Director [21]

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Sure. Andy, do you want to take a crack at that?

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Andrew C. Schmidt, Iteris, Inc. - VP of Finance, CFO & Secretary [22]

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Sure. So as we've talked to -- when we first started introducing the acquisition, we feel Albeck Gerken has a very unique model that we look in terms of, let's say, the business process outsourcing part of our business that we look to emulate and bring into other markets where we're very strong. So that we expect that to be a net adder as we go into the end of our fiscal year and the start of next fiscal year. In terms of intersection as a service, again, again, it's going to be the relationships, and it's going to be, for lack of a better word, that footprint within the different geographies that help us accelerate that initiative. Again, Florida market is very important. It's a very robust market in terms of intelligent transportation initiatives. So we feel it's a fertile ground for us to actually push that forward. As Joe said, we're already experiencing very strong renewal rates in our existing launch but this is a particular product that we look forward to actually accelerating, given it's sticky a bit nature and the SaaS nature of it. And now with Florida is a very -- let's say, available market to us, given the acquisition, we think we're going to see some good things come from that.

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J. Joseph Bergera, Iteris, Inc. - President, CEO & Director [23]

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Yes. So just to add to that, it's difficult to provide sort of quantitative figure as to the degree of acceleration at this point. But from a timing perspective, I will share that the -- because of the typical length of procurement process in our market, I would not expect to see a significant inflection in -- relative to the already planned adoption rate for intersection as a service as a result of the Albeck Gerken acquisition this fiscal year. I think it would be next fiscal year where would start to realize that benefit. And as Andy was alluding to, we think that the Florida market is probably the primary geographic market where we would realize that rate of acceleration. But at this point, it's difficult to provide more sort of quantitative specificity, but hopefully, that gives you kind of a general sense as to what we're thinking.

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Operator [24]

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We'll take our next question from Mike Latimore of Northland Capital Markets.

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Unidentified Analyst, [25]

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This is [Paul] on for Mike. I have 2 questions. How do you see opportunity pipeline beyond the Texas market in the TS segment.

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J. Joseph Bergera, Iteris, Inc. - President, CEO & Director [26]

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I'm sorry, beyond the Texas market in which segment?

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Unidentified Analyst, [27]

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The Transportation segment, basically.

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J. Joseph Bergera, Iteris, Inc. - President, CEO & Director [28]

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Okay. So I'm going to assume you mean transportation systems, but I'm going to talk about both Transportation Systems and Roadway Sensors. So with respect to Roadway sensors, let's start there. As we've talked about previously, Texas, by far, our largest market, 25% of the segment's revenue comes out of the Texas market. In FY '19, we actually saw a decline in our year-over-year revenue in that segment as a result of not having access to SmartBuy contracts, which pulled down the overall results for the business unit, which is very frustrating for all of us because we were seeing growth everywhere except for Texas, but that was masked by this unique circumstance that we saw in Texas.

Now as we look forward, we continue to think that the Texas market is going to be a very robust market for our Roadway Sensors business because of the overall economic and population growth in the region, which we would expect to support sustained growth in -- definitely in the Texas market. That being said, it is a highly competitive market, and we always have to stay on top of our game. And to that end, we continue to introduce new product innovations, and we have additional product innovations I talked in my prepared remarks, which are expected to bring to market later this year, which will reinforce our leadership position, not only nationwide, but specifically in Texas.

Now with respect to the Transportation Systems segment. Just to remind folks, while Texas are, by far, our largest market for Roadway Sensors, it's actually one of the smaller markets for our Transportation Systems segment. And we believe it represents a significant growth opportunity for our Transportation Systems business to provide traditional consulting services, managed services and also software products, and we do expect to see growth across all those different lines of business. And in fact, it's worth noting that Texas so far has been arguably the largest geographic market as to intersections of service adoption. And we would expect that to continue for a lot of reasons. One, because of the fact that we've installed a lot of intersection detection equipment being modern and usually connected to either private network or the cloud. It is already technically easy to deploy our intersection as a service model at corridors in the Texas market. And then additionally, we tend to find Texas is really oftentimes sort of leading edge of the technology curve generally and more specifically with respect to traffic engineering. So again, the Texas market represents a significant growth opportunity for our Transportation System across all lines of business and specifically, a major growth area for intersection as a service.

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Operator [29]

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(Operator Instructions) At this time, there are no further questions in the queue. I would like to turn the floor back over to management for closing remarks.

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J. Joseph Bergera, Iteris, Inc. - President, CEO & Director [30]

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Super. Great. So thank you, operator. And we appreciate everyone's support and thoughtful questions. On the Investor Relations front, I wanted to make sure everyone was aware we'll be presenting at several upcoming conferences, 2, in particular, in the near term. So please look for us at the Dougherty & Company Institutional Investor Conference in Minneapolis on September 5 and at the Craig-Hallum Capital Group 10th Annual Alpha Select Conference in New York City on November 12. If you're attending these conferences, we'd love to see you. Please come see our presentation and/or visit with us. In the meantime, we look forward to updating you again on our continued progress when we report our results for the second quarter of FY '20.

With that, we'll conclude today's call. Thanks, everybody.

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Operator [31]

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Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.