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Edited Transcript of ITI earnings conference call or presentation 9-Jun-20 8:30pm GMT

Q4 2020 Iteris Inc Earnings Call

SANTA ANA Jun 25, 2020 (Thomson StreetEvents) -- Edited Transcript of Iteris Inc earnings conference call or presentation Tuesday, June 9, 2020 at 8:30:00pm 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

* Joseph Amil Osha

JMP Securities LLC, Research Division - MD & Senior Research Analyst

* Michael James Latimore

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

* Michael Shlisky

Colliers Securities LLC, Research Division - Senior Research Analyst

* Ryan Ronald Sigdahl

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

* Jim Byers

MKR Group, Inc. - SVP

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Presentation

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Operator [1]

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Good day, and welcome to the Iteris Fiscal Fourth Quarter and Full Year 2020 Financial Results Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Jim Byers, MKR Investor Relations. Please go ahead, sir.

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Jim Byers, MKR Group, Inc. - SVP [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 2020 Fiscal Fourth Quarter and Full Year ended March 31, 2020. 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 would 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 and such 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 would like to remind everyone that you will find a supplementary report of Q4 and full year financial metrics as well as a webcast replay of today's call on the Investors section of the company's website at www.iteris.com.

Now with that said, I'd like to turn the call over to Iteris' President and CEO, Joe Bergera.

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

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Great. Thank you, Jim, and good afternoon, everyone. I appreciate you joining us today. As you saw at the close of the market, we issued a press release announcing the financial results for our fiscal fourth quarter and full year ended March 31, 2020. Our fourth quarter fiscal 2020 results reflect a significant financial inflection point for Iteris and also demonstrate the unique agility of our company. Recognizing the potential disruption from COVID-19, we moved early and fast to remote operations, some of which was only feasible because of our software-enabled delivery model. This minimized any disruption to our fourth quarter operations and even enabled us to accelerate certain commercial activities. As a result, Iteris is reporting record fourth quarter total revenue of $30.9 million and record full year total revenue of $114.1 million, which represents an 18% and 15% year-over-year increase, respectively.

We secured record fourth quarter total net bookings of $28.7 million, representing a 19% increase year-over-year and record full year total net bookings of $121.9 million, representing a 14% increase year-over-year. The strong bookings growth resulted in a total ending backlog on March 31, a $67.2 million, which represents a year-over-year increase of 21%. The company's record total revenue, total net bookings and total ending backlog results reflect strong performance across all reporting segments. I'll take a few minutes to summarize the commercial and operational performance of each segment, after which, Doug will discuss our fourth quarter financial results in more detail.

Our Transportation Systems segment recognized record fourth quarter revenue of $16.3 million, representing a 26% year-over-year increase and recognized record full year revenue of $58 million, representing a 17% year-over-year increase.

On a full year basis, the revenue performance reflects particularly strong growth in the segment software and managed services lines of business as well as the benefit from Albeck Gerken Incorporated, which was acquired on July 2, 2019. The Transportation Systems segment recorded fourth quarter net bookings of $13.6 million, representing an 11% increase from the same prior year period and full year net bookings of $62.9 million, also representing an 11% increase from the same prior year period. The segment's solid net bookings growth resulted in an ending backlog on March 31, a $53.4 million. The segment's fourth quarter and full year net bookings performance reflects continued demands for all lines of business, consulting, software and managed services as well as an increase in market penetration in Texas and Florida to strategic geographies. Almost 50% of the segment's fourth quarter net bookings will be recognized as annual recurring revenue.

Some notable fourth quarter bookings include: $4.4 million in combined task orders to provide traffic operations related managed services to 4 different agencies; $1.3 million in combined software-as-a-service contracts for ClearGuide, our mobility intelligence application with several customers, including 2 international entities; and $900,000 task order with Los Angeles County to evaluate the addition of high occupancy toll Express Lanes across the I-405 Corridor; $800,000 in combined software contracts for commercial vehicle operations, reporting and compliance; $650,000 in task orders were leased under a recent $3 million contract with the Texas Department of Transportation; and $500,000 in combined task orders were 2 -- to lead 2 public-private partnerships funded -- I'm sorry, to lead 2 public-private partnership funded connected vehicle pilots, one of which is being funded by Cisco Systems.

Now let's discuss our Roadway Sensors segment. The Roadway Sensors segment reported fourth quarter revenue of $12.6 million, representing a 10% year-over-year increase and record full year revenue of $49.4 million, representing a 14% year-over-year increase. These results reflect particularly strong performance in 4 geographic territories: Texas; Southern California; the Southwest; and the Pacific Northwest.

Additionally, we experienced positive customer response to the following 3 major product releases: first, the introduction of a standard VantageLive! API that now enables third-party applications to ingest vehicle count data from VantageLive!; second, the introduction of Iteris' video viewer, which streams real-time video and data to new mobile and web applications from any intersection equipped with Iteris detection products; and third, the second-generation of our radar detection product, which is branded as VantageLive!

The Agriculture and Weather Analytics segment reported fourth quarter revenue of $2 million, representing a 15% year-over-year increase and a full year -- and full year revenue of $6.7 million also representing a 15% year-over-year increase. The segment secured fourth quarter net bookings of $500,000 and full year net bookings of $7.2 million, which represents a year-over-year increase of 152% and 15%, respectively. The segment's net bookings growth resulted in ending backlog on March 31, a $5.2 million.

As a reminder, we completed the sale of our Agriculture and Weather Analytics segment to DTN LLC on May 5, 2020.

Now I'd like to turn the call over to Doug.

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

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Thank you, Joe. Good afternoon, everyone. As a reminder, please see the company's 10-K filing, press release and supplemental financial metrics document posted on our website for further description of the matters under discussion today during the call. Consistent with our third quarter results, we've seen the performance of the business in Q4 continuing 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 details of the fourth quarter results. As Joe mentioned, total revenue for the fiscal 2020 fourth quarter increased 18% to $30.9 million compared to $26.1 million in the same quarter a year ago and was a new record for the company.

Our gross margins in the fourth quarter were 45.4% compared to 37.8% from the same quarter last year. The improvement in margins was driven by increased volume, as we get more scale with our AGI acquisition, increasing demand in our software and managed service offerings and improved product mix across the portfolio. Operating expenses in the fourth quarter were $13.9 million compared to $12.3 million in the same prior year quarter and were down $200,000 sequentially over the third quarter 2020. The increase over the prior year quarter was primarily due to cash retention bonuses related to the AGI acquisition and retention costs for certain Agriculture and Weather Analytics segment employees, which were both nonrecurring in nature. As we mentioned last quarter, we are improving our profitability and expect this trend to continue. As Joe noted, we completed the sale of the Agriculture and Weather segment on May 5, 2020, which will significantly improve the profitability of the company going forward, since that segment lost nearly $3.9 million in fiscal year 2020.

We reported GAAP operating income in the fourth quarter of $100,000 compared with a GAAP operating loss of $2.5 million in the same quarter a year ago. The GAAP net income in the fourth quarter was $200,000 or $0.01 a share compared with a $2.4 million loss and $0.07 per share loss last year.

Non-GAAP net income for the fourth quarter increased $3.1 million or $0.08 per diluted share to $1.8 million or $0.04 per diluted share. This compares to a $1.3 million loss or $0.04 a share loss on a non-GAAP basis a year ago.

Now let me turn to our segment results. Our Transportation Systems revenue for the fourth quarter was $16.3 million compared to $12.9 million in the prior year quarter, an increase of 26%. Albeck Gerken contributed $2.5 million of this growth. And segment level operating income for the fourth quarter was $4.4 million compared to $1.6 million from the prior year quarter and the related operating margins were 27% compared to 12.6% last year.

The margin expansion was primarily driven by increased volume, as we get more scale in this segment with our AGI acquisition and increasing order demand within our software and managed service offerings.

Our Roadway Sensors revenue for the fourth quarter was $12.6 million compared to $11.4 million in the prior year quarter or an increase of 10%. Segment level operating income was $1.7 million for the quarter compared to $1.5 million last year, and the related operating margins were 13.9% versus 13.6% last year, driven by the increased volume.

Our Agriculture and Weather Analytics revenue for the fourth quarter was $2.0 million compared to $1.7 million in the prior year quarter, an increase of 15%. Segment level operating loss in the fourth quarter was $865,000 versus a loss of $1.2 million last year.

Corporate expenses in the fourth quarter were $4.7 million to $4.4 million in the prior year. The increase was driven primarily by an increase in compensation and benefit costs.

Now turning to liquidity and capital resources. Total cash and short-term investments were $25.8 million at the end of the fourth quarter, and we spent $188,000 in capital expenditures and capitalized software costs in the quarter, which consistently run below 1% of revenue, reflecting our asset-light business model.

We continue to be focused on improving working capital and with our expected improvement in profitability, our cash position should start to build going forward.

In summary, we're pleased to report another solid quarter of performance and continued progress in improving both the bottom and the top line. With that, I will 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. Thanks, Doug. I'll now provide some commentary on our broader market strategy, key product and commercial initiatives for both reporting segments and associated expectations for fiscal year 2021.

We believe that convergence of ubiquitous connectivity, cloud computing and various innovations in mobility is profoundly changing the operation and utilization of transportation infrastructure. For example, we anticipate public sector spending will continue to be reallocated from traditional pick and shovel projects to advance technology initiatives. And at the same time, new software-enabled service delivery models will change how transportation agencies at all levels of government fulfill their missions.

These dynamics represent meaningful opportunities to increase our annual recurring revenue in general and our software-as-a-service revenue in particular.

Iteris' ClearMobility platform is the key element of our market strategy. It applies cloud computing, artificial intelligence, advanced sensors, advisory services and managed services to enable cloud-based monitoring and operation of mobility infrastructure.

Agencies may continue to purchase, integrate and use discrete components of the ClearMobility platform, such as our ClearGuide and VantageLive! software products, however, we plan to also deliver these individual components increasingly in the form of new software-enabled managed services to address changing customer preferences. These new software-enabled managed services will expand upon the intersection of service offer, we introduced last year.

To maximize operating leverage from this managed services model, we plan to introduce the Iteris Cloud in fiscal 2021. This unified cloud enablement service will support licensing, provisioning, identity management, workflow and other common services and processes for the ClearMobility platform.

Going forward, the road maps for each of our individual products will be aligned to the Iteris Cloud road map. This alignment should increase the efficiency of our development resources and accelerate the adoption of our ClearMobility platform.

Now let's discuss the key product and commercial initiatives for both reporting segments. In FY '21, the Transportation Systems segment will focus on 3 key initiatives: first, our continued penetration of strategic geographies, which principally include Texas and Florida; second, the customer adoption of several major software-as-a-service releases; and third, the further development and commercialization of our growing managed services portfolio.

While bookings growth may fluctuate in any given quarter, especially as we continue to pursue more multimillion-dollar contracts, the sales pipeline for our Transportation Systems segment continues to grow, and our conversion rate remains favorable. Therefore, we're cautiously optimistic about continued bookings growth through fiscal 2021, despite COVID-19 and the recent political unrest.

Likewise, we've yet to experience any deterioration in revenue despite the broader economic uncertainty, and we continue to anticipate the Transportation Systems segment's fiscal 2021, first quarter revenue to increase year-over-year by about 20%. We also expect this segment's fiscal 2021 first quarter gross margin and operating income dollars to increase year-over-year. Though the segment's operating income will decline sequentially due to product mix.

Now let's discuss the Roadway Sensors segment. In FY '21, the segment will focus on 3 key product and commercial initiatives: first, improvements in sales enablement and channel development; second, the alignment of our Vantage sensors value offer, with our ClearMobility platform, which we expect to drive more cross-sell and upsell revenue; and third, an introduction of new product capabilities to create additional competitive differentiation and further increase customer adoption, while also contributing to our Iteris Cloud road map.

Want to take -- or make a particular note of 3 upcoming product releases: first, a new detection platform that, among other features, will include high definition video; second, the use of artificial intelligence by our Edge detection devices for real-time deep level object classification; and third, the ability to provide real-time streaming of intersection data from our detection devices to support adaptive traffic control.

Each of these upcoming product releases is expected to create significant customer value measured in economic, safety and sustainability terms as well as contribute to our Iteris Cloud vision.

Assuming no significant adverse events, the Roadway Sensors segment is expected to report a year-over-year increase in fiscal 2021 first quarter revenue. That said, the segment's first quarter growth rate will be lower than recent quarters, for example, in the low single digits due to a very unusual prior year comparable. As a reminder, we experienced a surge in sales in our fiscal 2021 first quarter due to the reinstatement of the Texas Smartbuy contract and the associated release of several months of accumulated orders. Still based on the expected first quarter fiscal 2021 volume increase and product mix, we anticipate both sequential and year-over-year improvements in the segment's gross margin and operating income dollars.

In summary, we are aware of some softening in the transportation and infrastructure construction segment due to COVID-19. But our primary exposure is to essential infrastructure operations that have been less affected, and our software-enabled delivery model has proved quite resilient to date. Therefore, as we enter fiscal year 2021, the demand for our products and services remains strong. And given the current financial expectations for our reporting segments, we anticipate fiscal 2021 first quarter total revenue growth in the low double digits as well as adjusted EBITDA and non-GAAP net income profitability. So we will incur various GAAP expenses associated with the sale of our Agriculture and Weather Analytics segment and some additional restructuring charges as previously communicated.

For the balance of the year, we remain cautiously optimistic for the reasons noted in today's prepared remarks. However, the current environment certainly poses unusual degrees of uncertainty, and we believe it could actually be misleading to attempt to characterize expectations too far in the future. As a result, we do not plan to provide commentary more than one quarter ahead until the economic environment reestablishes some form of equilibrium.

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

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Questions and Answers

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Operator [1]

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[Operator Instruction]

The first question will come 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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So I know you touched on some of this in your prepared comments, but any more color you can give us on what you're experiencing with agencies in terms of new business procurement?

Has that changed in recent weeks? With the using of restrictions, COVID restrictions? Just any other color you can give us there?

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

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Yes, Jeff, thanks for the question. So to be honest, we really didn't see any meaningful impact in it's -- for the last couple of months. And as a result, we haven't really seen any significant change as various geographic areas that have kind of come out of the lockdown. And I think it's largely due to the fact that, again, what we're involved in is supporting the delivery of essential infrastructure, which was never subject to any of the work-from-home restrictions. It's critical and the activities that we're supporting are provided 24/7 by 365.

So again, we really didn't experience any significant slowdown in activity, and therefore, we haven't really seen any significant resumption either. It's been largely steady state. Now that being said, there were a couple of instances where there were kind of unusual in some respects, almost a little bit funny, had disruptions. A lot of these agencies as a matter of practice, require wet signatures for new contracts. And in some cases, some of the executives were not in the office, and therefore, we weren't able to get wet signatures. And so we've had to work with agencies to help them start to use DocuSign and other things like that. But those things have started to happen. And again, those were -- those kinds of things where we did see some slowdowns were not significant in terms of contract value perspective.

Now all that being said, I want to be really clear that if we have a long sustained recession, now Iteris is not immune, right? I think every sector is going to be impacted. We would certainly be impacted as well. But again, to date, we have not seen any slowdown, and we've not seen any change either really since the restrictions have been listed.

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

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Okay, that's helpful. And then I know you touched on new product introductions. Can you speak a little bit more about those, maybe what they include in terms of differentiating features and then maybe timing of revenues around that? Just wondering when revenues might start there? And are most of those incremental products? Or are they more sort of new generation replacing current products?

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

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Yes, good question. So in general, all of the -- most of everything that I talked to represents feature enhancements and platform modernization activities. The managed service offerings, however, we're wrapping around these new capabilities, those are -- represent whole new offers.

So again, from a software and from a technology perspective, we're continuing to push the envelope. We've always set the performance and feature standard in the industry. We'll continue to do that. And so that again, is just continuing to move the bar. But with respect to the managed services offers, these are entirely new product concepts. There's really not anything comparable in the market to date. To some degree, we're creating new categories as we do that. And so just to set expectations, we -- there is some degree of evangelization that's going to have to occur as we introduce, particularly, the new managed services concept. We would expect to see some tangible financial benefit. But it's from the introduction of some of these managed services, but that will probably be limited to the form of bookings. Given that the evangelization work that needs to happen and then the length of typical contract cycles and then the time that it takes to convert bookings to revenue. I wouldn't expect material impact on revenue from the introduction of any of these managed services in FY '21.

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Jeffrey Wallin Van Sinderen, B. Riley FBR, Inc., Research Division - Senior Analyst [6]

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Okay, that's helpful. And then just one final one, if I could squeeze it in. Just given the COVID and recessionary environment, how are you thinking about opportunistic acquisitions? Do you think that there may be some opportunities that come up that maybe wouldn't have come up otherwise?

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

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Well, so first of all, we -- when the country began to shut down due to COVID-19, like most companies, we -- not understanding what the new normal was going to look like. We had -- we would have been reticent to undertake an acquisition at that point. But now fast forward a couple of months, we feel like we understand our market and specifically the categories in which we compete. We know some of the acquisition targets are within those particular categories. And while I wouldn't say that we reestablished a new norm, we do think we understand the risk environment, again, within the existing categories in which we currently operate.

And so while I don't think that we'd want to go out and do an acquisition in an entirely new category, where we don't feel like we understand the current dynamics, if we were able to find an acquisition candidate that participates in categories in which we already participate and we understand well, we would be open to that at this point in time. And we would -- we do believe that the current environment might lead to more possibilities for acquisitions than perhaps we would have seen 6 or 12 months ago. Now that being said, I don't see like valuation expectations declining dramatically. At this point, I think most people that are considering the possibility of a sale are tending to take the position that this is somewhat of a transitory situation. And therefore, they're still expecting, I think, reasonably strong valuation.

So we'll have to see how things play out over the next couple of months. But to answer your question, yes, we are now open. Do you -- we understand, particularly in our -- the categories in which we participate, we understand the risk and would certainly be open to an acquisition where you could find the right target.

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Operator [8]

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The next question will come from Michael Latimore with Northland Capital Markets.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [9]

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Yes, thanks. Congratulations on a great year there. The service gross margin was up a fair amount sequentially. I guess, what drove that? And is that sustainable?

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J. Joseph Bergera, Iteris, Inc. - President, CEO & Director [10]

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Doug, do you want to answer that?

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Douglas L. Groves, Iteris, Inc. - Senior VP & CFO [11]

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Sure. So Mike, that is where we report our software revenue is in the service gross margin. So as alluded to in the prepared remarks, we're seeing a nice increase in our SaaS offerings. And so that is helping drive an increase in the margins.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [12]

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Great. And then when you -- you sold your AWA division, and you're doing this additional cost reduction. I guess, what can you get to in terms of the base operating expense level then, given those 2 dynamics?

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Douglas L. Groves, Iteris, Inc. - Senior VP & CFO [13]

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Sure. So with the restructuring that we previously announced, we signaled that there's probably cost savings across the enterprise of a little over $1 million a year. And so that's what we're working towards. And it's kind of spread across the company. It's not in any one given segment or strictly isolated to the corporate line.

So we would expect through the elimination of that headcount, we would see about $1 million -- a little over $1 million in annual cost savings, coupled on top of, obviously, the divestiture of the Ag and Weather business, which, as I said, was about a $4 million -- not quite $4 million drag on earnings in fiscal year 2020.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [14]

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Got it. And then just on the -- a couple of these new products, the real-time streaming is that something that is going to be sold mainly into sort of new installations? Or are there some easy upgrades out there as well?

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

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Yes. So that feature is -- so it is only going to be available with the most current release and then the new platform that I referred to going forward. So you're correct, Mike, that there won't be -- there'll be some some intersections running some of our older products, which -- from which we would not be able to support the streaming capability. I don't know what the adoption rate is of the versions of our products that would support the streaming capability off hand, but I could get back to you with that information, if you'd like.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [16]

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Great. And then just last one on the managed service. I know that's more bookings this year, but what would be the maybe most attractive use case, you think you would have there? And then what kind of gross margins are you thinking about on this managed service?

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

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Yes. So I'll talk to the first part and then let Doug talk to the gross margins. So where we're seeing the most interest right now with respect to these new managed services concepts is working particularly with small and medium-sized cities to take over certain aspects of arterial road management. And particularly, it is monitoring and optimizing that -- not just our own detection equipment, but any detection equipment. That's deployed at intersections, in particular. And so we view this as part of a larger arterial management managed service.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [18]

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Okay.

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

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And on the gross margins, Mike, it really varies by contract, depending upon how much of our software is bundled in and the types of managed service that we're providing. So generally speaking, it's going to be at least at or above what those current service margins run at. So it depends on the size of the contract and different services that we're going to provide and how much is software versus other professional services.

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Operator [20]

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The next question will come from Mike Shlisky with Colliers Securities.

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Michael Shlisky, Colliers Securities LLC, Research Division - Senior Research Analyst [21]

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In your comments, Joe, you noted 2 international entities in -- had some pretty big orders. And I'm curious, is that a big opportunity going forward, going to other countries? And has your pipeline of opportunities that you're looking actively grown outside of the U.S.

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

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Yes, Mike. That's a good question. So I mentioned that because we were really excited about it. This was inbound -- these were inbound opportunities. We don't have a channel per se to market our software products internationally. We do have some international distributors who sell our Roadway Sensor products, but not our hardware products, but not our software. One of the opportunities was actually with a commercial entity or from a commercial entity that operates in Greece. And the second one was an expansion on some work that we previously sold in Canada.

So yes, we were really excited to see the inbound interest in the software products. We would like to believe that there is an international opportunity. But at this point, we have not yet made the investment in developing a true international distribution channel for our software products. We will, however, as it makes sense, continue to respond to inbound demand. And I would hope we would continue to see that, based on the market response that we've had, particularly to our ClearGuide product, which is fully internationalized.

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Michael Shlisky, Colliers Securities LLC, Research Division - Senior Research Analyst [23]

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Got it. I wanted to turn to your gross margins in the quarter and your gross margin outlook. Can you maybe give us a little more detail. You had mentioned some of the gross margin upside was due to scale and some was due to mix. Can you kind of just kind of break out for us, which was the most prevalent piece of the upside? I'm kind of curious, if you have strong growth in fiscal '21, if most of this is just based on scale, there could be some pretty handsome upside here. Just can you guess any kind of a breakdown between just your fixed gross margin and your contract mix.

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Douglas L. Groves, Iteris, Inc. - Senior VP & CFO [24]

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Sure. So I'll take that, Joe. So if you looked at just in contrast to, say, our Q3 results is as a comp, the revenue was up pretty significantly, and we saw a good portion of that really fall through to the bottom line because a lot of our costs are fixed, particularly in software business. So depending upon the mix in any given quarter, how much is software versus, say, professional services, consulting business, which is a little bit more variable, that will drive what the gross margin is going to be. So we did have a nice quarter with the volume. We did have actually a really good mix in the quarter. So it will vary quarter-to-quarter. But I think our expectation, as we've been signaling is that margins will continue to expand as the volume increases.

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Michael Shlisky, Colliers Securities LLC, Research Division - Senior Research Analyst [25]

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Okay, fair enough. And perhaps one more for me. There's been the headlines very recently. Some states have already started to act to defund or change the police department operations. I'm curious does Iteris have any role to play in future business to help cities with cut enforcement and asset reporting and things like that to help them at least save costs in their traffic business that can maybe deploy what could be a scarce budget elsewhere?

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

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Yes, that's an interesting question. So there's a difference in our market between products and services that are designed to operate and manage the transportation infrastructure versus products that are designed really for enforcement. So like red light camera running, for example, some -- like certain zones where there'll be variable speed limits and dynamic pricing. Those kinds of solutions will have an enforcement component to them. We actually do get -- we have been getting involved in the design of those sections of highways in certain arterial corridors. But currently, we do not have any software or hardware products that are part of an enforcement application. And so therefore, I don't -- to answer your specific question, I don't think we have an offer today that would address that particular potential demand. Let's not to say that we couldn't get into that market, but we don't currently compete in that category.

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Operator [27]

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The next question will come 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 [28]

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Just on Transportation Systems. So the outlook you gave for fiscal Q1 on a year-over-year basis. My back of the envelope math implies that's down something like 10% sequentially quarter-over-quarter. I guess, is that correct? And then can you help elaborate, I guess, when there isn't a lot of seasonality there, what's going on?

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J. Joseph Bergera, Iteris, Inc. - President, CEO & Director [29]

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Doug, do you want to speak to that?

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Douglas L. Groves, Iteris, Inc. - Senior VP & CFO [30]

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Sure. Yes. It generally has to do with, yes, seasonality and just the timing of the recognition of revenue on certain of the contracts. I mean, as we said, it will be down sequentially, but up almost 20% year-over-year. So I think that we're still expecting strong performance in Q1 from Transportation Systems.

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

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And Ryan, when you're, I mean, in those numbers, are you comparing just the 2 transportation businesses to one another? Or are you comparing the entire enterprise results, including AWA, to the a Q1 results or you obviously exclude that?

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Ryan Ronald Sigdahl, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [32]

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I was just looking at the Transportation Systems segment.

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

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Okay. Yes. So the -- So I think your question was -- I'm not sure if Doug totally understood. You were saying that typically the seasonality goes the other way for us. And that has historically been true. However, we did see some unusual seasonality in the second half of our fiscal '20, as you might recall, our third quarter was actually unusually strong, and there was sort of atypical seasonality. And again, we saw particularly robust results in the fourth quarter. So we're not 100% sure what happened there. But again, on a -- to Doug's point, on a year-over-year basis, we are still expecting very, very strong growth in the first quarter of fiscal '21.

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Ryan Ronald Sigdahl, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [34]

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Got it. And then maybe just as a follow-up, if you can break out what Albeck Gerken has included in that assumption? Because presumably, that's a lot of that growth?

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

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Actually, Albeck Gerken doesn't -- we're not going to be able to break that out going forward. We -- when we acquired Albeck Gerken, we talked about the fact that their primary operations were in Florida. And you might remember that we had some -- made some investments to develop that market ourselves. And so we already had some resources in the Florida market. And Iteris even pre-Albeck Gerken -- Iteris Transportation Systems, even pre-Albeck Gerken had some Florida-based revenue. But in addition to Albeck Gerken's presence in Florida, they also had some activities in the Mid-Atlantic and also the Midwest. And so the reason I'm pointing this out is we've now reorganized our Transportation Systems region and created a southeast region, which combines what was formerly Albeck Gerken as well as our Iteris' Southeastern operations prior to the acquisition. And then Albeck Gerken resources that were in the Mid-Atlantic and the Midwest have now been absorbed into those respective Transportation Systems regions. So it's really not possible for us any longer to break out Albeck Gerken revenue. But I would say that we previously estimated that Albeck Gerken revenue like in a typical quarter, would be on the order of about $2 million.

So you could kind of think about it that way. But again, we fully integrated the operations, and we can't really -- I don't think it makes sense to think about breaking that out any longer.

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Operator [36]

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The next question will come from Joseph Osha with JMP Securities.

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

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A couple of questions. First, back to this managed service question. You spoke earlier in the call, about your Transportation Services bookings being, I believe, Joe, you said half were recurring. I don't recall, if that's correct. I'm just wondering...

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

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Yes, that's right. About half the Transportation Systems bookings in Q4 were annual recurring revenue.

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

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Okay. So let's imagine that it's the end of fiscal 2021, what percentage of that division's revenues do you imagine might be comprised by recurring revenues at that point?

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J. Joseph Bergera, Iteris, Inc. - President, CEO & Director [40]

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Yes. So Joe, we don't have a good view of that right now. I was obviously over the moon with that bookings mix. That was a fantastic result. I wish I could say that, that was planned and that we had a good view of what the split is going to be going forward. Unfortunately, we don't. I would expect there will be some -- probably a large degree of variability from quarter-to-quarter. But the reason I wanted to highlight it is because I think it demonstrates the potential of shifting the mix of revenue for not only Transportation Systems, but for the entire enterprise. And I would say, which we've previously talked to, today, are on a total enterprise basis, this is excluding AWA, which is now obviously been sold. About 21% of our total revenue is annual recurring. And we do have an internal objective to try to increase the mix of annual recurring revenue to 30% of the total enterprise revenue over 3 years.

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Joseph Amil Osha, JMP Securities LLC, Research Division - MD & Senior Research Analyst [41]

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Okay. And I assume it would be fair. To assume that more of that recurring revenue is in Transportation Services than Sensors, yes?

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Douglas L. Groves, Iteris, Inc. - Senior VP & CFO [42]

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Yes. Yes, on an absolute basis, that's absolutely correct. We do believe that there are opportunities to increase the annual recurring revenue in our Sensors business, we'll continue to work on that. But that's obviously on a much lower basis. And so you're correct, on an absolute basis, most of the annual recurring revenue will be in our Systems segment.

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Joseph Amil Osha, JMP Securities LLC, Research Division - MD & Senior Research Analyst [43]

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Okay. Next question. You mentioned that you had a trial connected vehicle project, or really 2 of them. How long until we might see some of that turn to actual production revenue? That's an interesting area.

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J. Joseph Bergera, Iteris, Inc. - President, CEO & Director [44]

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Yes, we think so as well. So one of them is in Minnesota, and the other one is in Las Vegas. The one in Minnesota is a multi-phase pilot, and we're currently in the first phase. The second pilot -- for the second phase of the pilot assumes the release of a mobile application.

And so I -- we have better visibility to what the follow-on revenue could look like on that particular project than we do on the Las Vegas project, which, at this point is a little bit more speculative.

But to your point, Joe, that the million-dollar question is, what does -- how do you monetize these connected vehicle models that are being experimented with across the country. And the answer right now is it's still unclear. But we do believe that there will be opportunities to monetize it. And of the 2, the one in Minnesota has the shortest path or the clearest path to some kind of recurring revenue model. And it will be in the form of a mobile application.

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Joseph Amil Osha, JMP Securities LLC, Research Division - MD & Senior Research Analyst [45]

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Okay. And then the final question, there's been lots of talk about that revenue gross margin today. There's, I think, some room further down the P&L as well. So understanding you're not guiding revenue for the full year. Let's imagine that revenue growth is X. Is operating cost growth going to be flat? Is it going to be X minus 2%? How do you think about your operating model for FY '21?

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J. Joseph Bergera, Iteris, Inc. - President, CEO & Director [46]

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Doug, do you want to talk about that?

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Douglas L. Groves, Iteris, Inc. - Senior VP & CFO [47]

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Yes. So Joe, I think, as we look at the infrastructure of the company, we have our 2 reporting segments now moving forward. And then our corporate costs. I would expect the corporate cost to remain flat, as we go through this year because we've already made significant investments in the past. So there shouldn't be much of an increase at all in those corporate costs. And then as we see the revenue growth in the 2 reporting segments, we should see some margin expansion there. So a combination of those 2 things, when you roll it up, should be expanding operating margins at the company-wide level moving through FY '21.

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Joseph Amil Osha, JMP Securities LLC, Research Division - MD & Senior Research Analyst [48]

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Okay. And so to be clear that, that's let me flat it in dollar terms, right? So that would represent a pretty significant reversal from this trend where your overhead has been a growing percentage of revenue for the last several years. You're saying you can hold that number flat in dollar terms while your revenue grows?

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Douglas L. Groves, Iteris, Inc. - Senior VP & CFO [49]

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That's right. That's the plan.

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Operator [50]

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I show no further questions at this time. I'll turn it back to Joe Bergera for closing remarks.

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

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All right. Great. Thank you. We appreciate everybody's support and all the good questions today. We are, as always, look forward to updating you on our continued progress. At this point, we would expect to announce our First Quarter FY '21 Results in August. And so we hope that we'll be speaking to you at that time. At this point, we'll conclude today's call. And thanks again. We appreciate everyone participating.

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Operator [52]

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