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Edited Transcript of ITI earnings conference call or presentation 5-Nov-19 9:30pm GMT

Q2 2020 Iteris Inc Earnings Call

SANTA ANA Nov 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Iteris Inc earnings conference call or presentation Tuesday, November 5, 2019 at 9:30:00pm 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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* Jeffrey Wallin Van Sinderen

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

* Joseph Amil Osha

JMP Securities LLC, 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 - 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 Second 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, everyone, and thank you for participating in today's conference call to discuss Iteris' financial results for its fiscal second quarter 2020, ended September 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, I'd like to remind all participants that during the course of this call, we may make forward-looking statements regarding the 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'll find a supplementary report on our second 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 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 the market, we issued a press release announcing the financial results for our fiscal second quarter, ended September 30, 2019. In Q2, Iteris continued to experience strong demand for our smart transportation and digital agriculture solutions. We recorded $27.9 million in total revenue, bringing our total fiscal first half revenue to $54.5 million. This result represents a 14% increase relative to the prior second quarter revenue and a 9% increase relative to the prior first half revenue.

We secured second quarter total net bookings of $34.7 million, bringing our first half total net bookings to $65.7 million. This represents -- I'm sorry, this total net bookings result represents a 3% increase for the quarter and a 7% increase relative to our prior first half. And our total second quarter ending backlog expanded to a record $70.6 million, representing an 18% sequential and a 19% year-over-year increase in total ending backlog.

Now let me provide a brief overview of performance by segment. In Q2, our Transportation Systems segment recognized $14 million in revenue, representing a 14% increase versus the same prior year period. For the first half of fiscal year 2020, the segment reported revenue of $26.4 million, which is a 3% increase versus the same prior year half. Two factors drove the segment's second quarter revenue increase. First, our acquisition of Albeck Gerken, Inc. on July 2 contributed $1.7 million in revenue for the quarter; and second, the Transportation Systems segment resumed slight organic growth as we began, slowly, to convert prior period bookings to recognized revenue. The segment's slower-than-expected rate of organic growth was due to delays in our receipt of authorizations to proceed for 5 large contracts. Although the cause of the delays vary from contract to contract, a common theme is that agencies are struggling in the current tight labor market to recruit and retain employees who would typically perform essential program management and contract administration tasks. Without adequate resource levels, the length of time between contract award and receipt of an authorization to proceed is taking up to 3 to 6 months longer than our historical experience.

We are closely monitoring the status of authorizations to proceed for these 5 major contracts, and we expect to receive authorizations for at least some of these contracts in our third quarter, which would further accelerate the segment's rate of revenue growth as we progress through our second half.

Notwithstanding the delays in revenue conversion, the segment recorded strong second quarter net bookings of $18.9 million bringing first half net bookings to $36.2 million. The segment's more notable second quarter bookings include: $4.3 million in various task orders from the Virginia Department of Transportation, and please note these activities -- or this activity is in addition to our management of VDOT's traffic operation centers, which we've discussed on several prior calls; we also received $2.5 million in various task orders from the Florida Department of Transportation, much of which is a result of our acquisition of Albeck Gerken, which has significantly enhanced our presence in the Florida market; $2.2 million in various contracts for our Advanced Traveler Information System, which we provide to agencies on a hosted basis; $1.5 million in software-as-a-service contracts from various agencies for use of our performance measurement solution branded as ClearGuide and for use of our Commercial Vehicle Operations software products; and finally, a $600,000 task order for the first phase of a design initiative for a large highway construction project near San Antonio.

Additionally, Cisco Systems named Iteris a Cisco Solutions Technology Integration Partner for the Cisco Transportation IoT Solutions Segment. As a STIP, Iteris is now able to resell Cisco products on a highly favorable basis, making it attractive for us to bundle Cisco products into our solutions. The new arrangement with Cisco also provides a framework for a higher degree of commercial collaboration between the 2 companies in certain strategic geographies. Due to the segment's strong second quarter bookings, the total ending backlog for our Transportation Systems reached a record $58.3 million.

In Q2, the Roadway Sensors segment recorded revenue of $12.6 million, representing a 14% year-over-year increase. For the first half of fiscal year 2020, the segment reported revenue of $25.4 million, which is a 16% increase versus the same prior year half. The segment's second quarter result reflects particularly strong performance in the state of Texas, the Pacific Northwest and Southern California.

Additionally, we saw a continued increase in demand for VantageLive!, our SaaS-based intersection analytics platform and for Vantage Radius, our radar-based intersection detection product line that we launched in fiscal 2018.

In Q2, our Agriculture and Weather Analytics segment recognized $1.3 million in revenue, which represents a 20% increase compared to the same prior period quarter. For the first half of fiscal 2020, the segment recorded $2.7 million in revenue, representing a 9% increase relative to the prior year first half. As mentioned on previous calls, the segment's first half and second quarter revenue, in particular, is affected by seasonal pricing for our ClearPath Weather product, which experiences higher usage during winter months. The segment continued to experience strong bookings performance during the second quarter. Despite a delay that pushed the renewal of our largest ClearPath Weather contract to October, the segment's second quarter total net bookings were $2.3 million, bringing first half total net bookings to $2.7 million.

Some notable second quarter customer wins include one of the largest privately owned seed producers in the United States selected ClearAg to provide standard environmental data for its internal functions and to support highly targeted recommendations for the application of crop inputs to its end customers.

BASF Corporation further expanded its use of ClearAg, which was already a key component of xarvio, the company's digital farming solution, and ClearAg was selected to enhance a key customer-facing application of one of the world's largest fertilizer and crop nutrition companies.

Now 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. Following up on Joe's introduction to our financial highlights and the summary of key revenue drivers, consistent with past quarters, 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 with current quarter and year-to-date financial information and our pro forma reconciliation and segment information. As Todd Kehrli mentioned, we also published a key financial metrics document, which is posted on our website under the Investor Relations link under Financial Reports, which provides a trend view of our key financial metrics.

Looking at our Q2 and first half of fiscal '20, there are 2 important dynamics to keep in mind. First, we completed our confidentially marketed public offering in Q1, which we discussed during our last quarterly update. In Q2, as Joe noted, we completed our acquisition of Albeck Gerken. Specifically, we closed the acquisition on July 2. As such, our current reporting quarter shows a full quarter of revenue and operating expense associated with the acquisition.

In addition, we experienced nonrecurring transaction expense related to the acquisition that we call out in our pro forma results detailed in our press release. In all, we recognized approximately $766,000 of onetime third-party acquisition-related expense in our GAAP Q2 fiscal '20 results, bringing our total year-to-date related expenses to $922,000. 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 our Transportation Systems segment. Joe outlined our continued favorable bookings and backlog trends and significant new contract wins. As Joe noted, our current period results include approximately $1.7 million of AGI revenue. Our Q2 year-over-year organic revenue comp is slightly up compared with our prior year period of approximately $12.4 million, primarily due to contract delays, which Joe outlined. It's important to note that the contract start delays do not represent lost revenue, but simply a shift of revenue to future quarters.

In terms of contribution margin, operating costs of $3 million in Q2 includes AGI operating expenses and compares to $2.4 million in the previous year period. In all, Q2 contribution margin of 13.8% compares to 14.3% for the prior year period, however, is an increase from 12.7% in Q1 of the current fiscal year. Of key significance, the period ending September 30 is a seasonally low revenue period for AGI due to seasonal tropical storms in the Florida region. While revenues are lowest during this period, expenses remained somewhat flat throughout the year. Looking forward, we expect the AGI acquisition to contribute more significantly to contribution margins.

Switching to our Sensors segment. Similar to Q1, we saw a significant year-over-year growth in the segment led by the comeback of the Texas region as well as overall strong performance across all regions. The overall product mix in Q2 '20 leaned more towards Iteris product versus third-party product, resulting in gross margins of 45.5% compared to 42.3% in our Q1 of the current fiscal year. From a Q2 year-over-year perspective, gross margins were consistent at 45.5%.

Q1 operating expense of $3.5 million compares to $2.5 million in the prior year period. The increase is attributed to increased sales commission on much higher year-over-year sales as well as a slight increase in engineering expense attributed to a shift from capitalized development to sustaining engineering.

Putting it all together, Q2 contribution margin of 17.7% is within expectations. And it compares unfavorably, however, to 22.6% for the previous year period. It should be noted that our previous year contribution margin percentage benefited from certain favorable nonrecurring accounting adjustments.

Switching to Ag and Weather. As Joe previously outlined, we had very positive bookings and revenue dynamics for this segment for the period and year-to-date. Gross margins for Ag and Weather at 54.5% is within expectations, given $1.3 million in revenue for the quarter and compares favorably to 50.7% for the previous year period.

Operating expenses continue to improve. Current quarter OpEx of $1.8 million compares favorably to $2.1 million for the previous year period. The segment's contribution loss of approximately $1.1 million for Q2 compares favorably to last year's loss of $1.6 million. In all, we continue to post continuous quarters of improved financial performance in this segment.

In terms of corporate expenses, which include unallocated public company expense, accounting, finance, IT, marketing, HR and facilities expense and so on, we have essentially stabilized given many growth-related transitions. Corporate expense for Q2 of '20 was approximately $4.2 million net of acquisition expense. While this is up from $3.9 million in the previous year, we experienced higher than typical proxy related expense this quarter due to a typical shareholder activity.

Finally, let me address our balance sheet. Our year-to-date fiscal year '20 is a unique period due to the Q1 capital raise and the Q2 purchase of AGI. 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 and the AGI acquisition included 869,000 shares. Adding in shares attributed to stock option exercises and restricted stock units, we ended the period September 30, 2019, with 40.6 million shares outstanding.

In terms of cash, we began our fiscal year with approximately $9 million in cash and short-term investments. Taking the capital raise and acquisition out of the equation, we only used about $200,000 in cash year-to-date, including capital expense. That's a great change of 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 $2.5 million as we return to scale in that business unit. Ending cash and short-term investments at September 30, 2019, was $29.5 million.

As a final comment, we saw a non-GAAP operating loss of $322,000 this period. The current period loss does not include internal labor acquisition-related effort that will subside throughout the balance of the year. Our year-to-date loss of $690,000 is an improvement over fiscal 2019's year-to-date non-GAAP loss of $950,000, and we have a clear view of positive non-GAAP operating income for the second half of 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. Thanks, Andy. So Iteris remains in a strong position to capitalize on favorable secular trends in smart transportation and digital agriculture. And during the second half of fiscal 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 associate expectations for the balance of fiscal year 2020. While bookings growth may fluctuate within any given quarter, the sales pipeline for our Transportation Systems segment continues to reach new highs and our opportunity conversion rates remain favorable.

Therefore, we continue to anticipate strong bookings for this segment throughout the second half of fiscal year 2020 and beyond, with the highest rate of opportunity conversion coming from 3 areas: first, customer adoption of our software-as-a-service products, in other words, ClearGuide, Iteris SPM and 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 the second half of fiscal 2020, the Transportation Systems segment should realize year-over-year growth in the high teens as the rate of backlog to revenue conversion increases, and we consolidate the financial results with the recent Albeck Gerken acquisition.

For your reference, we continue to expect Albeck Gerken to contribute over $4 million in revenue to the Transportation Systems segment in our second half. And as our post-acquisition integration activities and associated costs should be largely behind us by December 31, we should start to see the benefit of the Albeck Gerken acquisition drop to our bottom line beginning in our fourth quarter.

Now let's discuss the Roadway Sensors segment. 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!; and third, the implementation of certain programs to enhance the productivity of our direct and indirect sales channels, including the establishment of a new national sales and customer success organization.

Given typical seasonality in a scheduled product cycle, we continue to expect second half growth rates to moderate somewhat to the high single digits. Nonetheless, the segment's second half operating income margin should increase somewhat relative to our first half due to product mix and sales efficiencies. As a result, we continue to expect the segment's second half and full year operating income margin dollars to increase relative to last year's annual segment level operating income margin.

And finally, let's discuss our Agriculture and Weather Analytics business. During the second half of fiscal 2020, we'll continue to strengthen ClearAg's new market position and increase customer adoption. Our commercial activities will focus on penetration in existing strategic accounts, acquisition of new agribusiness accounts and adoption by Allied Providers in North America and Europe.

Due to continued revenue growth and cost containment in our second half, we expect our net investment in ClearAg to further decline, resulting in a full year net investment of less than $4 million.

So in summary, we continue to anticipate full year fiscal 2020 consolidated enterprise-wide revenue growth in the mid-teens. And we further expect the combined effect of incremental operating margin dollars from the organic revenue growth in our Transportation Systems and Roadway Sensors segment, 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 second half of fiscal 2020, as Andy just said.

With that, we'd be delighted to respond to your questions and comments. So 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 Jeff Van Sinderen of B. Riley FBR.

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

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I wanted to start with the bookings, the backlog. You've seen a tremendous increase in booking backlog for Transportation Systems, and I think you said you expect to see an increase in rate of conversion on that backlog. It seems like we're -- like there were some delays in unlocking that. Is that just a matter of timing? And then, I guess, how should we think about that hitting the P&L? Any more color you can give us on that as we're thinking about second half?

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

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Yes, Jeff, great question. Absolutely, we've had -- we -- obviously, we've seen really strong bookings. We're continuing to experience strong bookings growth, we expect that to continue. Our backlog has grown as a result of that increased bookings, it's also grown because, quite candidly, we haven't been able to convert some of the prior period bookings or existing backlog to revenue at the pace that we had expected. We absolutely expect to start unlocking that in Q3. We'll see more of that unlocked in Q4.

As I said in my prepared remarks, the main reason that, that hasn't occurred at the pace that we had expected is that, frankly, like I said, the specifics are different from contract to contract, but across all the agencies, we're seeing the impact of a really tight labor market. And basically, key staff that are necessary to perform program management and contract administration tasks are in short supply.

In some cases, they've reached retirement age and so they've moved on and the agencies are unable to find people to replace them. Also, we're seeing instances where people are leaving agency roles to take jobs in the commercial sector. And so there just simply aren't enough people to get some of this work processed.

That being said, these are firm commitments. It's in our backlog. It will absolutely convert to revenue. It's just simply a matter of time. And just to reiterate, we have good line of sight to at least a couple of the 5 agencies providing us the necessary authorizations to proceed in Q3. Potentially all 5 could come in, but at least a couple of them will. And as a result, you'll see an even higher rate of growth in our Transportation Systems in the second half.

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

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Yes, Jeff, this is Andy. Let me, kind of, add to what Joe just said. What's interesting about these contracts as well is, in some cases, whether it's asked on an optional basis or sometimes it's mandated, even though we don't have the authorizations to proceed, as Joe just discussed, they require us to technically, as we call it, work at risk. And what that means is we're already performing certain tests that are critical to make sure these programs go off when they're ready to actually launch, as Joe said, in their Q3 -- maybe all in Q3, maybe a combination of Q3 and Q4. But the net kicker is we've been actually parking costs that turns into revenue on our balance sheet that's been appropriately authorized by these agencies. So as these projects do get released, they actually get off with a kick start. So not only do we have the staff in place to execute, we also end up with a running start on these projects as we go.

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Jeffrey Wallin Van Sinderen, B. Riley FBR, Inc., Research Division - Senior Analyst [5]

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Okay. That's helpful. And then if we could shift a minute to AG. Maybe you can speak a little bit more about how that's going. Is it on track? What's left to do as far as integration? What are you seeing with the command center? Particularly curious about that. Are there some assignments with AG that you're winning already? And then conversely, are there some gating factors around that?

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J. Joseph Bergera, Iteris, Inc. - President, CEO & Director [6]

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Yes. So great question. So Jeff, just to make sure everybody's on the same page. When you're referring to AG, you're referring to Albeck Gerken, not Ag. And -- yes. And the Albeck Gerken integration is going great. We have a very detailed integration plan, we're actually slightly ahead of schedule on that. As I said, essentially all the integration work will be completed by December 31. And by the way, that will have some benefits in terms of the operating -- the segment level operating income margin or the operating income margin contributions from Albeck Gerken, starting in Q4.

But with respect to, sort of, the commercial landscape and what you're calling the command center, the captive traffic management center, we're actually seeing really nice activity already. As I mentioned, we had a significant amount of bookings in the Florida market in the most recent quarter. And that was due to, really, the combination of the 2 companies. There's been a lot of very positive sort of press and kind of, just viral, kind of, communication across the Florida Department of Transportation and various municipal agencies in Florida, around the unique combined capabilities of the 2 companies. And so we saw very, very strong conversion rates on all the opportunities that we pursued in the Florida market in our second quarter. And again, the total value of the contracts that we received in Florida in our second quarter was $2.5 million.

With respect to the traffic management center. First of all, I want to just say that, as you may remember from prior conversations, that one of the things that was really exciting about Albeck Gerken is they, unlike most business process outsourcing models or managed services models in our space, have their own captive TMC or traffic management center, which results in a really highly leveraged model, and that's why their historical EBITDA margins have been so fantastic.

We plan to absolutely capitalize on that. So far, we have deployed our software products, related software products, like, for example, Iteris SPM and VantageLive!, we've made VantageLive -- and also ClearGuide, we've made available to all Albeck Gerken staff. And so it's available and running in their lab and actually, in the TMC, and they're already starting to take advantage of that.

With respect to the -- our intention to try to leverage that in future deals when we're bidding on other work such as, for example, the Virginia Department of Transportation TOC activity that we perform, there are a number of pending procurements that we are tracking, and we do expect, as we originally stated, to basically leverage or incorporate this captive TMC into our bid on those particular pursuits. But at this point, we have yet to win an award because of the length of the sales cycles. And so that probably won't occur for another couple of quarters. But again, already, really strong, very positive commercial collaboration occurring in the Florida market, between the 2 companies.

And then secondly, we've already deployed our software and Albeck Gerken's staff is using it in their lab and in their captive TMC already.

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Andrew C. Schmidt, Iteris, Inc. - VP of Finance, CFO & Secretary [7]

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Yes. And Jeff, just to follow kind of trailing the integration question. As I mentioned, obviously, we have x amount of staff, our staff and their staff working on integration efforts. As we go forward, that load will lessen. And so you'll see more efficiency out of the model and some really good parts.

For more detail, on our 10-Q, we have our first very specific note on the acquisition where you can get more financial information. But what's been great about it as well, as we've talked about it previously, this is a small private company as they integrate into a public company format, turns out that in the rules of ASC 606 or accounting requirements, their revenue that we've talked to you previously, translates really dead on with how we actually record revenue and our revenue recognition. Our current quarter, again, both models are within $80,000 of each other. So everything we talked to you previously, does translate into public company accounting.

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

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Okay. That's really helpful. And then if I could squeeze in one more. Maybe, just briefly on Cisco. You recently enhanced your relationship with Cisco. So first, is that strategic? And then, maybe, you can just touch on what enables you to do and Cisco to do as you work together in concert?

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

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Yes, sure. So absolutely, we see it as highly strategic. I mentioned this, but it's worth mentioning again. The interesting thing is that if you look at the traffic, infrastructure, the transportation infrastructure across the country, a lot of the devices that have been deployed are not connected necessarily to anything. So for example, in a lot of cases, our intersection detection equipment, while it's capturing, for a particular agency, a lot of really valuable information at the intersection, because there's no connectivity to that intersection, that data is not being ingested into a -- essentially, like a data warehouse to do any, kind of, historical analysis.

The Cisco and other companies recognize that. They see a tremendous opportunity to provide much more significant levels of connectivity to this particular sector. Additionally, the development of connected and automated vehicles is putting a lot of pressure on agencies to even accelerate the pace at which connectivity is provided really across the entire transportation infrastructure. And therefore, you're seeing a number of technology companies such as Cisco, as I said, get really focused on this marketplace.

Because of our experience designing the communication infrastructure for a lot of -- those agents who have the most advanced communication infrastructure, typically, they've used us to help design that infrastructure. And so we're in a very unique position to collaborate with companies such as Cisco, to increase the penetration of connectivity and specific cloud connectivity across the transportation infrastructure.

So anyway, that's -- kind of from a higher level, that's what -- the way Cisco is looking at it. From our perspective, we're very excited about this particular new level of partnership. We have a number of offers, like, for example, intersection-as-a-service, where we see a lot of demand for Cisco gear. With this new partnership, we have the ability to effectively function as a Cisco reseller and resell Cisco gear at very attractive prices. So all of a sudden, it makes economic sense for us to start including Cisco in the solutions that we're going to market with. That will result in additional revenue for us as we're successful in pulling Cisco gear through those deals.

Additionally, because Cisco already has a really strong interest in this market, and they see us as a really strong partner for them, this new relationship provides an even stronger and more formalized framework for the 2 companies to work together and specifically, to develop, kind of, the joint market, if you will, for Cisco and Iteris, primarily in 3. It applies nationwide, but there are really 3 geographic areas that we're especially focused on. One is California, the other is Texas and the third is Florida.

And so with Cisco's resources, brand recognition, their own direct sales channel as well as their other channel partners, we believe that Cisco is going to really help us move the needle, of course, over some period of time, it's not going to happen overnight. But over the next couple of years, we think this relationship with Cisco can really help us move the needle, especially in all 3 of those markets, but potentially nationwide which will, obviously, have nice financial benefits for us. We think it's going to be really important for the broader industry in providing better connectivity for the transportation infrastructure and enabling things like vehicle-to-infrastructure integration.

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

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Well, congratulations on that.

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

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Thank you.

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Operator [12]

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We'll take our next question from Steve Dyer of Craig-Hallum Capital Group.

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Ryan Ronald Sigdahl, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [13]

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Ryan Sigdahl on for Steve. As it relates to Transportation Systems. So my math implies about flattish revenue for the second half of the year organically, if you exclude Albeck Gerken, $2 million a quarter there. First, is that correct?

And then second, I guess, can you help me reconcile the commentary that you expect accelerating growth in backlog conversion and some of these large contracts ramping up in the second half and coming online versus, I guess, that segment growth and my math of high single -- or high teens growth?

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Andrew C. Schmidt, Iteris, Inc. - VP of Finance, CFO & Secretary [14]

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Sure. So this is Andy, Ryan. I'll start with the -- just the actual performance. Yes, it is flattish for the first half. Keep in mind, our first quarter we had that unfavorable comp, where we still were comping year-over-year with the larger VDOT contract that phased out after Q1. So as we get into our Q2, we're slightly up organically. And again, year-to-date, that's good to be where we are, again, at the $12.4 million.

What's interesting as we go into our Q3, Q3 is typically a seasonally down quarter for both our transportation units. But in the case of -- assistance, likewise. Regardless of contract starts that Joe has been commenting to, that we expect a couple of them to kick loose, maybe all of them, regardless, we don't expect to see seasonality in our third quarter, which is a big positive. So again, that's another, kind of, trigger towards how we are very confident we're going to see strong year-over-year growth starting in our Q4 and certainly, continuing into our Q4 as we start seeing these contracts get up and go.

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J. Joseph Bergera, Iteris, Inc. - President, CEO & Director [15]

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So Ryan, this is Joe. I think you were saying that doing quick back-of-envelope math, you were thinking that on an organic basis, systems would be flat in the second half?

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Andrew C. Schmidt, Iteris, Inc. - VP of Finance, CFO & Secretary [16]

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No, first half.

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J. Joseph Bergera, Iteris, Inc. - President, CEO & Director [17]

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Did you say, first half or the second half?

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Ryan Ronald Sigdahl, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [18]

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Yes, I was primarily talking about guidance for the second half. So you commented that you expect high-teens results for the segment in the second half. If you just layer on $4 million on to last year, it gets you about there. So I guess, the commentary doesn't quite align with kind of those numbers and expectations?

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J. Joseph Bergera, Iteris, Inc. - President, CEO & Director [19]

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Yes. So we should take that off-line and talk to you. But in fact, we are looking at strong organic growth in the second half excluding the Albeck Gerken impact. So why don't I -- just I don't want to work -- I don't want to take up a lot of people's time. But I'll just say that, no, we absolutely expect organic growth in the second half -- Transportation Systems organic growth in the second half.

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Ryan Ronald Sigdahl, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [20]

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Got you. Yes, we'll take it off-line here. Switching over. So backlog, I think that includes the Albeck Gerken. Do you have what the organic backlog was? Or how much that contributed to it?

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Andrew C. Schmidt, Iteris, Inc. - VP of Finance, CFO & Secretary [21]

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Yes, sure, Dave. We're about $51.1 million, just organic in terms of ending backlog, which is still up significantly from the $49.5 million we recorded in Q1.

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

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Yes. And so -- and I can just add to that, Ryan. So if you exclude Albeck Gerken, our year-over-year backlog would have been up 10%. And on a sequential basis, the backlog would have been up 9%.

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Ryan Ronald Sigdahl, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [23]

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Got you. And that's just Transportation Systems backlog, right?

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

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I'm sorry, that was on an enterprise basis. It probably would be roughly the same for systems, but do you want to add to that, Andy?

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Andrew C. Schmidt, Iteris, Inc. - VP of Finance, CFO & Secretary [25]

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Sure. So systems in our Q1 of 2019 was $40 million, and we're at $49.4 million in our Q1 and 51.1% in our Q2, so up very significantly.

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Ryan Ronald Sigdahl, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [26]

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Got you. And then the last one for me is, it sounds like the Albeck Gerken integration is going well, what does the acquisition pipeline going forward look like? And then what is, kind of, the realistic cadence for potentially layering on more deals in the future from a human capital as well as just integration and everything?

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J. Joseph Bergera, Iteris, Inc. - President, CEO & Director [27]

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Yes. Sure. Great questions. So yes, the integration is going really well. We think it would make both strategic and financial sense to potentially do some additional acquisitions. And it'd be our desire to do so.

As far as the timing, kind of reverse the order of your question and say that, interestingly, in addition to doing the Albeck Gerken acquisition and then the integration, which is a lot of the heavy lifting, want to remind folks that we have actually taken over the management of traffic operation centers, for example, in Virginia, and then more recently, in Florida, which, as a result, required us to onboard a significant number of employees and then migrate that function to our -- into our infrastructure, our corporate infrastructure. And as a result, we actually have gotten pretty darn good at doing what effectively looks like post-acquisition integration. And in fact, as I mentioned, the Albeck Gerken integration has been going extremely well, and we've kind of largely used the same playbook.

And so we definitely have the capability to do -- as far as integration goes, we have the capability to do additional integrations and snap them into our chassis pretty easily at this point. And by the way, I would add that one of the things that's made -- it is making that possible is that we have been making investments over the last couple of years to migrate to a new ERP system to deploy salesforce.com across all of our segments. And so it's used in the general course of business, and we've implemented and become proficient in the use of other similar sort of enterprise applications, right? So that's kind of enabled this.

But anyway, I don't think the limiting factor in terms of doing additional acquisitions will be our ability to successfully integrate the company. It's going to be a function of finding, like, the right business that makes sense on many levels, right? Does it -- is there a strategic fit; can we get -- is there a reasonable valuation expectation on that particular asset? And in some cases, there may be some businesses we would be interested in acquiring. But like let's take Albeck Gerken, for example, which was owned effectively by the founder. And so he has -- had various objectives regarding whether and when he chose to sell that business. And so we need to get alignment around the desire of the seller to sell in terms of terms that make sense for us, but also the time frame that makes sense for us.

So the bottom line is that's going to be the major limiting factor, is our ability to find the right acquisition at the right price and when that's going to happen. If I were to sort of just guess, I would think that it's going to be like maybe a sort of every 12 to 18 months over the next couple of years we might be successful in finding another Albeck Gerken, closing the transaction and then integrating them into our operation. But there could be periods where things could happen, they can bunch up and be a little bit closer, or then there could be other periods where you could -- maybe it might stretch out to more like 24 months. But again, I think on -- it will sort of average out at about like maybe 1 transaction every 12 to 18 months.

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Operator [28]

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We'll take our next question from Joseph Osha of JMP Securities.

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Joseph Amil Osha, JMP Securities LLC, Research Division - MD & Senior Research Analyst [29]

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And thanks, actually very neatly, for queuing up one of the several questions I was going to ask. As you think about that acquisition cadence, would it be your intention to try and fund that with -- whatever you buy, with internally-generated cash flow? Or might you contemplate levering the enterprise or doing other things to move that forward?

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

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Andy, do you want to talk about it?

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Andrew C. Schmidt, Iteris, Inc. - VP of Finance, CFO & Secretary [31]

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Sure. So something that we didn't kind point out to Ryan, but it's pretty obvious for us is another key qualifier for any acquisition is it's got to be accretive. There's a lot of business out there, a lot of technology that's for sale that's still in growth kind of development mode. We have a firm mindset on whatever rebuy is going to be accretive.

We're close to $30 million in cash, and that's enough cash to lever the next acquisition, in our mind, and what we look at. And as we've talked before, we've been looking at acquisitions for a number of years. This is a pipeline-type event, and so this is not new to us. We have a good pipeline out there that we're always talking to. But it's a combination of using the cash on hand. And as Joe commented before, typically, we're talking to people that do actually enjoy the fact that we're a public company, and we create liquidity from that perspective. And they buy into the story of where we're going in terms of the overall strategy and the opportunity.

So there's typically an expectation of a combination of cash we have in the balance sheet, combined perhaps with shares that we would issue from the perspective of it's a desire of the purchaser to actually have a play in the stock, not just cash.

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J. Joseph Bergera, Iteris, Inc. - President, CEO & Director [32]

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The other thing I would add to that -- to those, as we evolve the financial characteristics of the business, meaning, that we get to consistent operating income profitability, then that -- we'll have the ability to use other kinds of financial instruments to do future acquisitions. And so we would certainly plan to do that going forward. That question is like, when are we able to pull that lever, right? So we'll have to look at that. But that's certainly our intention.

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Joseph Amil Osha, JMP Securities LLC, Research Division - MD & Senior Research Analyst [33]

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Sure. Andy, did you just say $30 million? I must have misheard that. Was that a reference to -- what was that a reference to?

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Andrew C. Schmidt, Iteris, Inc. - VP of Finance, CFO & Secretary [34]

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Approximately $30 million in cash we have in the balance sheet as we talk today. But as Joe said, we're transitioning into cash flow positive performance. And so you continue to build that war chest. And what Joe is alluding to as well is, obviously, we do all our homework and as we get to solid EBITDA performance, different instruments, meaning, debt instruments, become available to us at the right market prices. So again, we have a full array of different financial instruments to put to use in terms of acquisitions.

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

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And Andy, you may want to comment, too, when you're talking about the $30 million in cash, some of that's in the form of cash and others in the form of short-term investments. Just to make sure everybody understands that.

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Andrew C. Schmidt, Iteris, Inc. - VP of Finance, CFO & Secretary [36]

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Sure. So as Joe pointed out, oftentimes, I just say cash, but if you look at our balance sheets, it's referred to as cash and short-term investments. Two combined, about $29.5 million right now.

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Joseph Amil Osha, JMP Securities LLC, Research Division - MD & Senior Research Analyst [37]

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Right. Okay. And then following again on one of the previous questions. I -- and we can take this off-line if you want. I, too, am having difficulty teasing out, in Transportation Systems, what we think the organic rate of growth is. So maybe I'll just ask you at a higher level here for that and Roadway Sensors. As we think not just about the remainder of this fiscal year, where we're coming off some easy comps, but looking forward in the next fiscal year, what kind of organic rates of growth might -- should we be thinking about for those businesses?

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J. Joseph Bergera, Iteris, Inc. - President, CEO & Director [38]

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Yes. So for Transportation Systems, we'd be looking at growth in the mid- to high -- organic growth in the mid- to high single digits for the first half -- for the second half, I apologize. And then looking ahead, as we've said, we think that it's reasonable to expect organic growth in the low teens for Transportation Systems.

Now let's talk about Roadway Sensors. Kind of similarly, we would expect that over the long term, you could expect organic growth in the low teens. In the second half, as I said, we expect there might be a little bit of moderation in the growth that you saw in the first half. That's due to the fact that there is a planned product cycle in Q4. And that will, we expect, result in some, like, moderation, as I said. But we would still anticipate that the segment's growth will be in the high single digits.

So again, the organic growth of both of those segments will be -- well, Transportation's in the kind of the mid- to high single digits; Roadway Sensors in the high single digits. But for different reasons, and we think that's only -- that's the -- that rate of growth is limited to that period of time. And that, again, over the longer term, we would expect organic growth of both of those segments to be in the low teens.

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Joseph Amil Osha, JMP Securities LLC, Research Division - MD & Senior Research Analyst [39]

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Okay. And then the last question for me, I'll try to not hog things here, is there some point at which you think that net investment at the EBIT level for Ag and Weather could get to flat? And how -- I mean, to the extent you can communicate, what are your goals around achieving that?

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Andrew C. Schmidt, Iteris, Inc. - VP of Finance, CFO & Secretary [40]

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Sure. So as Joe pointed out, we made continuous improvement here. We're looking at next fiscal year, again, to continue that improvement to where, on a quarterly basis, it starts rounding down to 0.

So our goal next year is to have that business operating if not flat, definitely under that $1 million burn level, so that you're dealing with, maybe, again, that $250,000 a period. Something that's really de minimis.

So we see that opportunity to do so, and we hit it from both angles. We continue to see this revenue growth. And of course, it's a SaaS model. So while it's sticky as all, get out. Again, we essentially, with the healthy firms out there, see 100% retention. We're hitting it on both sides. We're looking at that. We continue to look at different expense opportunities as the technologies mature.

And so basically, from this point on, there's just not that high requirement from an R&D perspective. We're choosing to actually manage the expense side from the sales and marketing opportunity. So again, we look at significant improvement year in, year out. With next year, bringing it down to a point where it just doesn't hit people's radar in terms of any kind of burn.

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Operator [41]

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(Operator Instructions) We'll take our next question from Mike Shlisky of Dougherty & Company.

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Michael Shlisky, Dougherty & Company LLC, Research Division - Senior Research Analyst [42]

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I wanted to just back up to something you said in Ag in your earlier comments. Did you say that one of your larger -- or your largest customer contract renewal was delayed after the end of the quarter? Was that what you said? And I wanted to just make sure that was, in fact, signed after the quarter was over. Could you comment also on whether there was any kind of expansion or increase in the pricing or scope of that deal?

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J. Joseph Bergera, Iteris, Inc. - President, CEO & Director [43]

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Yes. So that was -- it was in Ag and Weather. So this is Joe. And yes, that was a Ag and Weather Analytics contract. It was specifically a ClearPath Weather contract, not a ClearAg. So I want to be super clear about that. And yes, that was our -- by far, our largest ClearPath Weather contract. It's for what's called a pooled study. There are several states that collaborate. They share funds in order to procure our service at arguably somewhat preferential pricing because of the total size of that contract. And it was scheduled for renewal in our September 30 ending quarter. There was a delay. Kind of, again, sort of a consistent theme, with a lot of things being delayed due to staff shortages in these various agencies. But ultimately, it did come through. We did receive it in October. And it did reflect -- to be honest, it was modest, but it did reflect some growth over the prior year contract value.

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Michael Shlisky, Dougherty & Company LLC, Research Division - Senior Research Analyst [44]

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Okay. I'm sure you don't want to say the exact amount, but would you be able to tell us whether the segment backlog would have been up year-over-year had you signed it by the end of the month?

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J. Joseph Bergera, Iteris, Inc. - President, CEO & Director [45]

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Yes. So I -- this particular contract, I don't really want to disclose the total value, but it is -- I will say it's a 7-figure total contract value. And yes, the total bookings would have been up with this additional contract in the mix.

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Michael Shlisky, Dougherty & Company LLC, Research Division - Senior Research Analyst [46]

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Okay, got it.

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J. Joseph Bergera, Iteris, Inc. - President, CEO & Director [47]

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And let me further say, too, that if you just look at the ClearAg bookings alone, they were up significantly year-over-year.

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Michael Shlisky, Dougherty & Company LLC, Research Division - Senior Research Analyst [48]

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Got it. And that actually is my other question. You had commented, and this wasn't in the results, that this quarter, typically, there's a step-down in the top line for the Ag and Weather segment. Happened last year, is happening again this year. But from what you signed, what you've got kind of less -- [besides 2] for the back half and for next year, could that seasonality change in fiscal 2021? Or is it going to be kind of the same going forward?

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J. Joseph Bergera, Iteris, Inc. - President, CEO & Director [49]

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Yes. I would like to think that it's going to change, and for 2 reasons. One is as ClearAg revenue overtakes ClearPath revenue, that's going to reduce the seasonal effect because the seasonality is entirely due to ClearPath Weather.

And remember, just for everyone's benefit, the primary current use case for ClearPath Weather is by snow states that are using the information to help them plan and operate their snow plow operations. And because of that use, a lot of states have essentially required that we provide them a seasonal pricing model. And because we have the seasonal pricing model, we -- even though the contracts are for a full year, the usage is in the winter. And that's when we recognize the revenue for that contract under the current model. So again, as ClearAg starts to represent a larger and larger portion of the total segment revenue, that'll minimize the seasonality.

The second thing is that we are doing a lot of work with agencies to find -- state agencies, to find year-round uses of the environmental information. So you can imagine that like park and recreation departments could use us to help them better optimize their irrigation of like fields, for example, and also medians along certain roadways. And so as we're successful in selling that additional value-add, that represents additional total revenue for us, but it'll also smooth this current kind of seasonal pricing effect that we have. So for both those reasons, over time, absolutely, the seasonality will start to decline.

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Michael Shlisky, Dougherty & Company LLC, Research Division - Senior Research Analyst [50]

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Got it. And then I wanted to just ask a follow-up on your comments about some of your customers having some staff shortages and helping some of your deals move forward. I guess I wanted to ask whether your folks, you're fully staffed when they're ready? Because you've got some pretty good backlog and splendid of growth here. I'm curious are you sure that you've got enough people to kind of do the work once they actually release the work.

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J. Joseph Bergera, Iteris, Inc. - President, CEO & Director [51]

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Mike, that's a really smart question. So yes, so -- yes. So that's -- as we think about the second half, we're very optimistic, very bullish because we have a ton of backlog. We have clear line of sight as to getting some of these critical notices to proceed. But there are a couple of questions in our mind.

One is, do we get 2, do we get 3 or do we get all 5 of those notices to proceed, and when specifically do they come in. And then secondly, do we have the internal labor or do our subcontractors, in some cases, have the internal labor or the product that we need to fulfill within that window.

And so we are being slightly more cautious about the second half today than we were like a quarter ago. But that being said, everything is moving in the right direction. These are firm orders. We're absolutely going to get this revenue. It's just a matter of precisely when does it lay out. And again, it is a function of when precisely do we receive those notices to proceed. And as Andy said, in some cases, that'll allow us to take revenue on work that's actually already been performed, and is sitting on our balance sheet now.

The second thing is exactly what you said. It's like what is our staff availability and how does that affect the revenue conversion.

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Operator [52]

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Thank you. I'll now turn it back to management for closing remarks.

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J. Joseph Bergera, Iteris, Inc. - President, CEO & Director [53]

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Awesome. Great. I appreciate it. So let me just say that, with that, a lot of great questions. We do have -- I do want to make everybody aware that we've got some stuff going on in Investor Relations front. And we are going to be at a couple of conferences actually this month, and we'd love to see you.

So please look for us at the Craig-Hallum Capital Group Tenth Annual Alpha Select Conference in New York City. That's taking place on November 12. And then also at the Furey Research Partners Hidden Gems 2019 Conference, which is also in New York City, on November 21. So any of you are attending these conferences, we'd love to see you. Please come see our presentation and/or sign up to visit with us in a one-on-one meeting.

In the meantime, we look forward to updating you guys again on our continued progress when we report our results for the third quarter of fiscal '20.

And so with that, it concludes today's call.

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Operator [54]

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