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Edited Transcript of ITI earnings conference call or presentation 4-Feb-20 9:30pm GMT

Q3 2020 Iteris Inc Earnings Call

SANTA ANA Feb 11, 2020 (Thomson StreetEvents) -- Edited Transcript of Iteris Inc earnings conference call or presentation Tuesday, February 4, 2020 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Douglas L. Groves

Iteris, Inc. - Senior VP & CFO

* J. Joseph Bergera

Iteris, Inc. - President, CEO & Director

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Conference Call Participants

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* Jeffrey Wallin Van Sinderen

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

* Michael James Latimore

Northland Capital Markets, Research Division - MD & Senior Research Analyst

* Michael Shlisky

Dougherty & Company LLC, Research Division - Senior Research Analyst

* Ryan Ronald Sigdahl

Craig-Hallum Capital Group LLC, Research Division - Senior 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 Third 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, MKR Group. 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, and thank you for participating in today's conference call to discuss Iteris' financial results for its fiscal 2020 third quarter ended December 31, 2019. Joining us today are Iteris' President and CEO, Mr. Joe Bergera; and the company's CFO, Mr. Doug Groves. 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 of the forward-looking statements.

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

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

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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 for our fiscal third quarter ended December 31, 2019. In Q3, Iteris continued to experience strong demand for our smart mobility and digital agriculture solutions.

We recorded $28.7 million in total revenue, representing a 24% increase relative to the same prior year period. Some of the growth is attributable to some project revenue moving forward. However, even without this timing effect, we would have exceeded analyst consensus for the quarter. So we're very pleased with our results.

Our third quarter total net bookings of $27.5 million was 28% better than the same prior year period. And our third quarter total ending backlog was $69.4 million, which is a third quarter record and represents a 21% year-over-year increase.

Now let me provide a brief overview of performance by segment. In Q3, our Transportation Systems segment recognized $15.3 million in revenue, representing a 35% increase versus the same prior year period. The segment's growth was due to a combination of strong organic growth and the contribution of $2.3 million in revenue from our acquisition of Albeck Gerken on July 2. At this time, the integration of Albeck Gerken is complete and the acquisition continues to meet all of our original expectations.

In our second quarter earnings call, we noted delays in the receipt of 5 notices to proceed, which affected that quarter's results. As of December 31, 2019, we received 2 of the 5 notices to proceed, but the timing of those particular notices had only a modest impact on the segment's organic third quarter revenue results.

We expect to receive 1 more of the remaining 3 outstanding notices to proceed in the next 90 days. In the meantime, the segment continues to experience significant bookings growth despite the delay in converting these specific contract awards to bookings and then to revenue. During our third quarter, the Transportation Systems segment recorded third quarter net bookings of $13 million, which is a 60% increase relative to the same prior year period. Notable third quarter bookings include a $3.6 million contract from Orange County Transit Authority to increase traffic flow and safety across the main street corridor of 3 Orange County cities. This contract includes intersect -- I'm sorry, this contract includes Iteris' Intersection-as-a-Service solution, which will provide 24/7 monitoring of device and system health throughout the corridor.

A $1.6 million task corridor under a new $2 million subcontract provide traffic operations analysis and design services for new light rail transit system in Los Angeles County.

Several Software-as-a-Service contracts for a total value of $1.4 million from various agencies for use of our performance measurement solution branded as clear guide and for use of our commercial vehicle operations and software products. Several additional software contracts for a total value of $900,000 from various agencies for advanced traveler information system, which we provide on a hosted basis, and a $900,000 contract provide a transit signal priority system for Pace, which is the Chicago suburban bus division of the regional transit authority.

With the segment's strong third quarter bookings, the Transportation Systems segment ended the quarter with $56.1 million in backlog, which represents a 24% increase year-over-year.

In Q3, the Roadway Sensors segment recorded revenue of $11.4 million, representing a 12% year-over-year increase. We were especially pleased with this result because our third quarter sales are historically constrained due to the holiday season and inclement weather, which limit the window for product installations.

While we believe the inherent performance of our detection products is and will remain demonstrably superior to our competitors, we continued in our third quarter to enhance our related cloud-enabled services, which further differentiate our core detection products. For example, we released additional enhancements to our SaaS-based intersection analytics platform, VantageLive! and a new real-time traffic video mobile app that provides traffic engineers and technicians remote access to analytics and live streaming intersection video.

In Q3, our Ag Culture and Weather Analytics segment recognized $2 million in revenue, representing a 27% increase compared to the same prior year quarter. The segment also experienced strong bookings performance, recording third quarter net bookings of $4 million, which represents a 70% increase year-over-year. Notably, 3 recent bookings represent meaningful additional account penetration. For example, in Q3, one of the world's largest crop science companies expanded its use of ClearAg bringing our annual recurring revenue from this 1 account to $1 million.

Before I turn the call over to Doug Groves, to walk through our financial results, I want to take a minute to thank Andy Schmidt for his contributions to Iteris. And he was a strategic asset and a strong business partner during our previous stage of development. Looking ahead, however, I'm delighted to add Doug to the team. Doug brings a unique set of expertise and talent that'll be vital to Iteris' next stage of development.

With that, Doug, can you comment on our financial results?

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Douglas L. Groves, Iteris, Inc. - Senior VP & CFO [4]

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Thank you, Joe, and good afternoon, everyone. As a reminder, please see the company's 10-Q filing, press release and key financial metrics document posted on our website for a further description of the matters under discussion during the call today. During our fiscal year 2020, in the third quarter, we've seen the performance of the business continued to improve with favorable year-over-year trends in certain key metrics, including top line growth, increasing backlog and margin expansion.

Now I'll move to the detail of the results. As Joe mentioned, total revenue for the fiscal 2020 third quarter increased 24% to $28.7 million compared to $23.1 million in the same quarter a year ago. Our gross margins in the third quarter were 41.5% compared to 38.4% from the same quarter last year. The improvement in margins was driven by increased volume and improved product mix across the portfolio.

Operating expenses in the third quarter were $14.1 million compared to $11.4 million in the same prior year quarter and were up $400,000 sequentially over the second quarter of 2020. The sequential increase includes $553,000 in nonrecurring executive severance and transition costs.

One of my primary goals as the new CFO is to better manage our operating expenses, so that as we get more operating leverage in our P&L as we move into fiscal year 2021 and beyond. The company reported a GAAP operating loss in the third quarter of $2.2 million compared with $2.5 million in the same quarter a year ago. The net loss in the third quarter was $2.1 million or $0.05 per share compared with $2.5 million or $0.07 per share last year.

We achieved a major milestone this quarter by basically breaking even on a non-GAAP basis or $0.00 per share compared with a non-GAAP net loss of approximately $1.5 million or $0.04 per share in the same quarter a year ago.

As we'd previously communicated, we do expect to be non-GAAP profitable in the second half of 2020, and we're well on our way.

Now let me turn to the segment results. Our Transportation Systems revenue was $15.3 million compared to $11.3 million in the prior year quarter, an increase of 35%. Albeck Gerken contributed $2.3 million of this growth. Operating income was $2.7 million compared to $1.1 million from the prior year quarter and the related operating margins were 17.4% compared to 10.1% last year. The margin expansion was primarily driven by increased volume as we get more scale in this segment.

Our Roadway Sensors revenue was $11.4 million compared to $10.2 million in the prior year quarter or an increase of 12%. Operating income was $1.5 million compared to $1.2 million last year, and the related operating margins were 13% versus 11.3% last year, driven by the increased volume and favorable product mix.

Our Agriculture and Weather Analytics revenue was $2 million compared to $1.6 million in the prior year quarter or an increase of about almost 27%, with the operating loss at $800,000 versus $1.1 million last year. This improvement is consistent with our goal of continuing to drive this business to breakeven over the next several quarters.

Corporate expenses were $4.9 million compared to $3.6 million in the prior year. This increase was driven by the executive severance and transition costs I previously mentioned, an increase of $250,000 in compensation and benefit costs and $300,000 in nonrecurring charges related to several strategic initiatives the company is working on.

Turning to liquidity and capital resources. Total cash and short-term investments are $27.4 million, and we spent $115,000 in capital expenditures and capitalized software costs in the quarter, reflecting our asset-light business model.

We continue to be focused on improving working capital. And as I mentioned, with our expected improvement in profitability, we should see our cash position start to build going forward. So in summary, we're pleased with our progress this quarter, and I couldn't be more delighted to be joining the company at such an exciting time.

With that, I'll turn the call back over to Joe.

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

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Great. Thank you, Doug. I appreciate it. Iteris remains in a strong position to capitalize on favorable secular trends in smart mobility and digital agriculture. And during our fiscal 2020 fourth quarter, we will continue to introduce product and service innovations to expand our addressable market and enhance our competitive differentiation with our primary focus being our smart mobility infrastructure management platform, Iteris' ClearMobility. We believe this platform will enable us to better package and promote our portfolio of smart mobility products and services, while also enabling new sources of recurring revenue for the company.

Although the ClearMobility platform spans our 2 Transportation segments and the road weather product line of our Agriculture and Weather Analytics segment, each of our 3 reporting segments will continue to pursue additional unique opportunities in our fourth quarter and beyond, that'll take a couple of moments to describe. The sales model for our Transportation Systems segment has matured into a hybrid model, which includes a mix of consultant-led sales pursuits, complemented by a small, dedicated national business development team focused on strategic pursuits and a small, dedicated national software sales team. This model has produced a robust sales pipeline and a strong conversion rate. And we believe this model will continue to produce strong bookings results in our fourth quarter and for the full year of fiscal 2020, with the highest rate of opportunity conversion coming from 3 areas.

First, customer adoption of our Software-as-a-Service products, for example, ClearGuide, Iteris SPM, in our commercial vehicle operations product family. 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 third, additional penetration in the Midwest, Texas, and of course, Florida, where we have significantly enhanced our presence with the recent acquisition of Albeck Gerken.

In our fiscal fourth quarter, the Transportation Systems segment should realize year-over-year growth in the mid-20% range. Based on our forecasted product and service mix, the segment's fourth quarter gross margin and segment-level operating margin should expand modestly to yield a sequential improvement in operating income dollars.

Now let's discuss the Roadway Sensors segment. We continue to believe 3 factors will drive full year segment growth of more than 10%.

First, several product innovations that will continue to increase market share and product revenue for our core detection products. Second, an increase in product differentiation, customer stickiness and SaaS revenue from our cloud-enabled services, such as VantageLive!. And third, the implementation of programs to enhance the productivity of our direct and indirect sales channels, including the further optimization of our sales and customer success organization.

While we continue to expect the Roadway Sensors segment to grow more than 10% for the full year, we expect fourth quarter revenue to increase in the mid-single digits. The more modest growth is largely due to the prior period difficult comparable.

As you may remember, we had a significant number of pent-up orders in the state of Texas that we finally were able to process for an alternative purchasing cooperative that led to a revenue spike in our prior fourth quarter. This segment's fiscal 2020 fourth quarter gross margin should be similar to our fiscal 2020 third quarter; however, we expect this segment's operating income margin to expand on higher revenue.

And finally, let's discuss our Agriculture and Weather Analytics business. During the fourth quarter of fiscal 2020, we will continue to leverage ClearAg's enhanced market position to increase customer adoption and increase our penetration in existing strategic accounts. Due to continued revenue growth and cost containment in our fourth quarter, we expect our net investment in ClearAg to further decline, resulting in a further improvement in the segment's operating income performance.

In summary, we continue to anticipate fourth quarter total revenue growth in the mid-teens and second half revenue to be in the high teens. Additionally, we continue to expect the Transportation Systems and Roadway Sensors segments to produce a sequential increase in operating income dollars, while we further decrease our net investment in ClearAg and hold our corporate expenses essentially flat.

As Doug noted, this should yield enterprise-wide positive non-GAAP operating income for our fiscal 2020 fourth quarter and our second half.

Now I'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)

Our first question in the queue comes from Jeff Van Sinderen with B. Riley.

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Jeffrey Wallin Van Sinderen, B. Riley FBR, Inc., Research Division - Senior Analyst [2]

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First, let me say, congratulations on the strong metrics in the quarter. Great to see. Just wanted to circle back to the discussion around the contracts that were, I guess, low to converting Q2. And it sounds like a couple of those are converting, and you're expecting 1 more to convert.

Maybe you could just give us a sense of how you think we're going to see that revenue hit your P&L? Any other color you can give us on that?

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

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Yes, sure. So one thing, I guess, I want to start off with is just some context because I think that we perhaps could have done a better job of messaging last quarter. We never meant to say that we needed all 5 of these contracts to come in, in order to achieve our original expectations. We were originally trying to say is that we were, frankly, surprised and we didn't hit our second quarter results, because we were -- had a high degree of confidence that at least 1 of those 5 major contracts would have converted to revenue based on our receipt of at least one of those notices to proceed.

So I just wanted to make sure everybody understands that context. We never said we needed all 5. We're just saying we are, frankly, shocked we didn't get 1 of 5 that were queued up to convert to revenue in our second quarter. So anyway, at this point, 2 of them have converted to revenue. They did late in our third quarter because of the specific contracts that converted and the revenue recognition associated with that had a minimal effect in our third quarter results. They will -- those 2 will certainly contribute to our revenue in the fourth quarter. And that's one of the reasons that we're expecting sequential growth from Q3 to Q4.

We expect another one to convert within the next 90 days. So it could be in our fourth quarter to be early in our first quarter. That will add to our sequential growth going forward. And ultimately, the other 2 will also convert. But again, just to make sure everybody understands, we never expected that all 5 of them would have converted in the second quarter. We were just shocked that not a single one did, and we're glad to see that they're now starting to convert to revenue, and they will continue to sustain sequential growth going forward.

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Jeffrey Wallin Van Sinderen, B. Riley FBR, Inc., Research Division - Senior Analyst [4]

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Okay. Good to hear. And then if we can turn a little bit to your SaaS or recurring revenue. I think recently, you said that was running about 25% latest 12 months. And if I'm not mistaken, what was the LTM figure for that, if you had it, including Q3? And then given your product evolution that focuses on recurring revenue platforms, how should we think about SaaS recurring revenue penetration looking, let's say, out a year from now? Where do you think that percentage might be? Hopefully higher.

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

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Do you want to comment on that, yes, that recurring revenue split?

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Douglas L. Groves, Iteris, Inc. - Senior VP & CFO [6]

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Sure. So Jeff, Doug Groves. So as a percentage of revenue, it remained constant, but as was alluded to by Joe, there -- we did start to see continued momentum in several of our SaaS platforms. So we're expecting that that rate of growth should grow much faster than the overall company's revenue growth rate. So when we talk about low double digits for the company, we would expect that the SaaS growth rate to be substantially more than that as we get more adoption from our customers on these new platforms.

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

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And, Jeff, with respect to like our future expectations, I think we'll feel more comfortable commenting on that at our -- in our next earnings call, when we'll be providing more color on FY '21. But just to build on what Doug is -- and his basic point is that we absolutely expect that our recurring revenue growth will be greater than the total enterprise growth rate for the foreseeable future.

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Jeffrey Wallin Van Sinderen, B. Riley FBR, Inc., Research Division - Senior Analyst [8]

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Okay. Good to hear. And then I think some of us forget how many sensors you guys have out there. Maybe you can just remind us kind of what that number is in the installed base? And as the end markets continue to move towards smart mobility, if you will, how do you think about the value of the data those sensors produce or provide? And how might you be able to monetize that data in the future?

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

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Is that all, Jeff?

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Jeffrey Wallin Van Sinderen, B. Riley FBR, Inc., Research Division - Senior Analyst [10]

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Yes.

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

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Yes. So yes, there is a view that the number of signalized intersections in the country is anywhere between 320,000, 400,000 intersections. I usually refer to 400,000, but there is some debate in the industry. We, by far, have the largest -- well, so -- and then let's talk about those signalized intersections. They could have simple actuated signals where the timing is strictly -- the phase timing is signally time-based, it's simply time-based, and there's no detection occurring. A lot of those intersections also will have wired loops or magnetometers, which are placed under the pavement, and they detect the presence of a magnetic field, which they extrapolate to mean there must be a vehicle there. And there's wide adoption of magnetometers or wired loops.

To date, the minority of those, let's say, 400,000 intersections are running what we would call advanced detection or aboveground detection. Probably less than 40% of the total 400,000 would have aboveground or advanced detection. We are, by far, the leader in that market. We would have the major installed base in excess of 30% of those intersections with aboveground detection.

But there's still a huge number of intersections that are running more outdated technology, magnetometers there, that's still simply have actuated signals. And so that certainly represents a greenfield opportunity for us to convert those intersections to aboveground or advanced detection. But it is important to note that, especially across the sun belt, there continues to be a lot of economic development, a lot of growth. There are a lot of new intersections that are continuing to be built and then they're established intersections, which will become signalized. And it is important, I think, everybody understands that there are actually a total of over 1.2 million total intersections in the country and only a very small percent, about 1/3 or less than 400,000 even have signals.

With respect to the kind of data that we've collected these intersections, there's just -- there's a plethora of information and advanced detection sensors, such as ours, are able to collect, including the number of vehicles, the type of vehicles, the speed of vehicles, the number of pedestrians, the number of bicycles, the time at which those vehicles, those pedestrian, those bicycles pass-through an intersection, you can do trend analysis to look at how that's changed from day-to-day, from month-to-month, how it compares to other intersections. So it's just a tremendous amount of data that we collect.

And also just to remind everybody that, unfortunately, even though we're collecting all that interesting data and we're doing very sophisticated edge processing and increasingly applying AI against that data at the edge, a lot of these intersections, even if they are signalized, may not be connected to anything. And so historically, that data has been stranded. That's why we introduced VantageLive!, and we're working with companies like Cisco and communication service providers to increase the connectivity to the intersections, so that we can get access to the data that we're collecting. And we believe that there are many, many ways of monetizing that data. So hopefully, that answers, which was -- what was a pretty big, complicated question, but hopefully I got everything there, Jeff.

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Operator [12]

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Our next question in the queue comes from Mike Latimore with Northland Capital Markets.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [13]

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Congratulations. Looks great. In terms of just some of the regional flavor, you touched on a little bit. But can you talk about how some of your more important states performed? And maybe are there any areas of strength or weakness?

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

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Yes. Sure, Mike. Good question. So we continue to see a lot of strength on the West Coast, and particularly in California, I mentioned, for example, the OCTA deal, which was a huge win for us. California remains a major market. It is, by the way, the -- by far, the largest market for intelligent Transportation Systems in the entire country. And so if you're going to be a leader in a market, that's a great market to be a leader in. And so we're glad to continue to own this geography. But that being said, we don't want to stop there.

And so as you know, our Roadway Sensors business has a pretty established presence in Texas, which actually worked against us last year because there was a delay in being able to utilize a cooperative purchasing agreement there, which has now been fully resolved. But anyway, we have a huge -- our Roadway Sensors business has a huge presence in Texas. But interestingly, our Transportation Systems segment has actually had modest exposure to the Texas market. And we've seen significant growth in our Transportation Systems business in that geography over the last couple of years. That continues. We continue to win more business. We've got a sizable backlog already in Texas, and we're tracking a number of very, very large opportunities in the state of Texas. So I feel very confident about the opportunities in front of us in that state. Texas, by the way, is another 1 of the top 5 largest geographic markets for intelligent transportation system in the entire country.

The third largest market is Florida. And that's a market where both our Roadway Sensors and our Transportation Systems businesses have had some exposure over the last period. But to be honest, our penetration has been modest for both of our segments. We continue to win new Roadway Sensors business in that market, and we're pursuing some very large, very exciting deals in that market, which I hope we will convert and be able to talk about in the near future. Our Transportation Systems business has benefited considerably from the recent acquisition of Albeck Gerken. And as I think I mentioned, we secured bookings in the broader Southeast region, but it's mostly made up of Florida in excess of $2 million -- our Transportation Systems segment in excess of $2 million in our third quarter alone, which is a huge increase for us. And it's largely based on the positive results that we're seeing from the -- for the acquisition and our ability to leverage our business development infrastructure and Albeck Gerken's existing relationships and sort of feet on the street. And so we expect that market to grow considerably.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [15]

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Very good. And then in terms of Albeck Gerken contribution to the quarter, is that -- should we think of that as a good baseline number? Or is there some seasonality to that on a quarterly basis?

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

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Yes, excellent question. So there is a little bit of seasonality. So as you guys may recall, we kind of tried to allude to it just a couple of moments ago in our prepared remarks. But typically, for our Transportation Systems and Roadway Sensors business, our third quarter of the period ending December 31 is a seasonally slow period for us. And that's because we do have a decent amount of explaining, and kind of generally concentrated in sort of the sun belt, we absolutely have exposure to the Midwest and the Pacific Northwest and the Northeast. And for weather reasons that tends to slow down the deployment of our Roadway Sensors products in those geographies. And then the holiday season tends to impact our Transportation Systems business units. We just don't have as many billable days. We actually saw some counter seasonality in our most recent quarter, which was kind of unique. But generally, that's kind of a slow quarter.

Anyway, Albeck Gerken has kind of the reverse because most of their revenue is concentrated in Florida. And as everybody knows, you get into the hurricane season in the late summer. There's a lot of disruption typically in September, and so that tends to be a seasonally slow period for Albeck Gerken. And the most recent period, ending December 31, tends to be one of their strongest, because weather tends to be really great in Florida. So the good thing is that kind of balances out our historical seasonality somewhat, although, again, our presence in Florida is still much smaller than other regions. But anyway, that's probably more information that you -- than you wanted, but I wanted to make sure everybody understood that we've got kind of unique seasonality scenarios in each of our segments and then Albeck Gerken adds yet another twist.

Now going forward, we certainly expect Albeck Gerken to continue to grow consistent with the overall growth for our Transportation Systems segment, which we've said would be in excess of 10%. But at the time of the acquisition, what we were saying is that Albeck Gerken was doing approximately $8 million in revenue. If you averaged it out, on average, the quarterly revenue would be about $2 million, with a little bit softer revenue in the period ending September 30 and a little bit higher revenue in the period ending December 31 due to weather.

So hopefully, that helps, Mike.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [17]

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Yes, perfect. No, very last question, I just want to make sure I got this correctly. Did you say you expect your cash position to build in the fourth quarter? Or was that a longer-term comment?

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

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I'll let Doug comment on that.

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Douglas L. Groves, Iteris, Inc. - Senior VP & CFO [19]

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Yes, we should start to see it turn positive. We had a slight use of cash in the current quarter due to an increase in inventory related to some product transition in the Sensors business, but we expect that inventory to snap back down in Q4. And as we turn the quarter -- corner on non-GAAP profitability, the cash will -- yes, we'll definitely start to build as we exit this year and head into '21.

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Operator [20]

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Our next question in queue comes from Ryan Sigdahl with Craig-Hallum Capital Group.

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Ryan Ronald Sigdahl, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [21]

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So maybe first off, Joe, I think you mentioned in your prepared remarks that there was some pull forward in sales. Can you allude or explain what that was? And then what segment that was in?

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J. Joseph Bergera, Iteris, Inc. - President, CEO & Director [22]

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Yes, sure. That was in our Transportation Systems segment, and it was related to some subcontract effort, which we don't have as good a visibility to as our own direct labor. So we got a bit of a surprise. It was a positive surprise, so we liked that.

The total revenue pull forward would probably be in the range of like $600,000 to $800,000, and probably a little bit closer to $800,000. So that certainly was positive. And it wasn't insignificant. I want to be clear with people about that. But I do want to say that notwithstanding that pull forward, we would have still beat analyst consensus with respect to the revenue estimate. So I don't want people to feel like, "Oh, well, they only had this great number because there was this pull forward." That's not the case. We would've still exceeded analyst consensus and had a really strong result regardless. But there was a little bit of pull forward, and it was associated with subcontract content.

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Douglas L. Groves, Iteris, Inc. - Senior VP & CFO [23]

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So Ryan, for the full year, it's really unchanged from what we were talking about last quarter from a year-over-year growth perspective. It just had a little bit of revenue split between the quarters.

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J. Joseph Bergera, Iteris, Inc. - President, CEO & Director [24]

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And that's true. Obviously, since true for the year, it's absolutely true for the half. So we're not changing our expectations for the half, but there was a little bit of movement between Q3 and Q4 for the Transportation Systems' subcontract revenue.

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Ryan Ronald Sigdahl, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [25]

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Got it. Yes, pulled that out of Q4. And then as it relates to R&D, so it's up $0.5 million quarter-over-quarter versus Q2. I guess can you elaborate on what that's been spent on? And then I think you said that you expect corporate costs to remain flat. Is that the right run rate for Q4 and then going forward?

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Douglas L. Groves, Iteris, Inc. - Senior VP & CFO [26]

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Well, it was up a little bit because of -- there was less capitalization of the R&D. So from quarter-to-quarter, it's going to fluctuate between the efforts we're spending on sustaining the products that we've got versus brand-new products or brand-new functionalities. So I would say that it's probably a range between what we saw in the second quarter and the third quarter.

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Ryan Ronald Sigdahl, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [27]

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Great. Last one for me. Great to see the $1 million ARR in the large crop science company. Can you talk about how that relationship has evolved? And then how the scope of services changed from before to now?

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

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Yes, sure. So the -- this particular customer has embedded ClearAg into its digital farming platform. And they continue to expand the feature set of their digital farming platform. And as a result, they're extending their use of ClearAg. And so I don't want to get like preannounce what this particular customer is planning to do with their digital farming platform. So I'm kind of -- I guess I'm going to avoid getting into specifics other than to say that they're extending their platform. And as a result, they're expanding their use, largely from a feature function perspective or capabilities perspective. But also somewhat from a geographic perspective as well, but it's largely capabilities-driven as opposed to geographic-driven. In addition to that, they've also adopted the use of ClearAg for some internal uses in addition to using ClearAg as an essential element of their digital farming platform.

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Operator [29]

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(Operator Instructions)

And we'll take our next question from Mike Shlisky with Dougherty & Company.

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Michael Shlisky, Dougherty & Company LLC, Research Division - Senior Research Analyst [30]

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Can I maybe follow-on to that last question about the Ag and Weather Group? Can you give us just a sense as to what the pipeline of opportunities is that you're looking at right now, both on the large customer side and the smaller customer side? I'm trying to get a sense for the ramp-up to a positive profit there, if possible.

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J. Joseph Bergera, Iteris, Inc. - President, CEO & Director [31]

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Yes, sure. So the pipeline continues to be robust, that we -- kind of, to your point, we sort of distinguish between large agribusiness opportunities and then sort of smaller allied provider and ag solution provider deals. In the case of the large agribusinesses, they tend to incorporate ClearAg into their digital farming platform, such as the customer I just talked about. In other cases, they use ClearAg internally for -- to support their R&D function or potentially their sales and marketing or their field service functions. And generally, those deals tend to be larger for each, sort of, program deployment. We would expect generally sort of a minimum of $100,000 in ARR for that individual program use. Those programs can grow like the one customer that I talked about. And then also we're interested in seeing them stream together a number of programs. And eventually, we would expect to realize significant account penetration as a result of that.

But anyway, so as we look at our pipeline, we continue to see more opportunities to be deployed for additional programs within our existing large agribusiness customers. We still see opportunities to penetrate new large agribusinesses that we've yet to penetrate. Those would include Tier 2 and Tier 3 crop science companies, additional ag equipment manufacturers, additional irrigation companies, and then there are literally hundreds, if not thousands, of allied providers and other ag solution providers that use ClearAg for a variety of purposes. They can embed our components into their software products or their agronomists use it in the field, perform certain tasks. And we just -- we have literally probably hundreds of opportunities with these smaller companies. So there's interesting mix of opportunities.

And we continue to see really nice growth in the pipeline and consistent customer adoption. That being said, it's -- I just want to go on record to say that, in my opinion, I think ClearAg is already -- will -- my expectation continues going forward to be probably the largest independent digital ag solution in the marketplace. But that being said, the overall growth of the digital ag market for independent solutions has clearly materialized slower than we thought.

So while we are the leader, the overall market just isn't as sizable -- for independent solutions, that is, is not as sizable as we had expected. And as a result, we're trying to be very thoughtful about our investments. And at the same time, we're talking about revenue growth, we're also talking about cost containment. And as both Doug and I mentioned, our expectation is that based on what we believe to be reasonable growth expectations, this segment will be breakeven within the next few quarters.

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Michael Shlisky, Dougherty & Company LLC, Research Division - Senior Research Analyst [32]

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Okay. That's great color. I wanted to ask secondly about M&A activity. Clearly, you've got the cash from last year. You're even generating more, it seems, over the next few quarters. Can you update us on what you're pursuing? How far along you might be with certain targets? And kind of what spaces you're looking in right now?

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J. Joseph Bergera, Iteris, Inc. - President, CEO & Director [33]

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Yes. So I've talked a lot, and actually, I think it's kind of interesting to get Doug's perspective on this because it's great to have somebody new come in and take a fresh look at what we're doing and how we're doing things. So maybe, Doug, you could kind of talk about that?

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Douglas L. Groves, Iteris, Inc. - Senior VP & CFO [34]

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Sure. So I think the company has, for its size, I think, a good process set in place to both not only just identify the targets, but begin to vet the targets. As you can imagine, a lot of these targets are on the much smaller scale. So it's a little bit more challenging from that perspective, because putting together a small deal takes almost the same level of effort as some that are much, much larger. So we have to be selective in which ones we pursue. But I would say that the environment is solid, and we've got plenty of things to look at as we look at making the acquisitions a part of our growth story going forward.

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J. Joseph Bergera, Iteris, Inc. - President, CEO & Director [35]

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Yes. And I guess I would just add to that that we definitely see opportunities in both, that ag and transportation market, but we see many more opportunities for a variety of reasons in the transportation space. And so my expectation is that going forward, we will do additional acquisitions and they'd be much more likely to be transportation than agriculture. And to Doug's point, due to valuations and kind of an odd bimodal distribution curve, where you've got a few really big companies in transportation and a lot of little ones, it's -- the acquisitions that we do will probably be relatively small, more or less sort of on the size of Albeck Gerken. And we believe that there's substantial opportunity there to string a number of these things together and create a formidable platform. And that's our expectation that we'll do that.

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Operator [36]

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And at this time, I would like to turn the call back to management for closing remarks.

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J. Joseph Bergera, Iteris, Inc. - President, CEO & Director [37]

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All right. Great. Thank you. So we appreciate everybody's support and your thoughtful questions. I do want to note that on the Investor Relations front, we'll be presenting at a couple of upcoming conferences. So please look for us at the JMP Securities Technology Conference in San Francisco on February 24. And the B. Riley FBR Institutional Investor Conference in Beverly Hills on May 20 and 21. So if any of you are attending these conferences, I hope you'll please come see our presentation and/or set up some time to visit us -- visit with us while you're there. In the meantime, we look forward to updating you again on our continued progress when we report our fiscal fourth quarter and our full year 2020 results.

And with that, it concludes today's call. Thanks, everybody.

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Operator [38]

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Thank you, ladies and gentlemen. This concludes today's presentation. You may now disconnect.