Iteris, Inc.
Q3 2021 Earnings Call Transcript

Published: 2 Feb 2021

[Operator:]

Good day, ladies and gentlemen, and welcome to the Iteris Fiscal Third Quarter 2021 Financial Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Todd Kehrli, MKR Group. Please go ahead.

[Todd Kehrli:]

Thank you, operator. Good afternoon, everyone, and thank you for participating in today's conference call to discuss Iteris' financial results for its fiscal 2021 third quarter ended December 31, 2020. Joining us today are Iteris' President and CEO, Mr. Joe Bergera; and the company's CFO, Mr. Doug Groves.

[Joe Bergera:]

Great. Thanks, Todd, 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 of our fiscal third quarter ended December 31, 2020. Please bear in mind the effect of two recent transactions on the presentation of this period's results. On May 5, 2020, we completed the sale of our Agriculture and Weather Analytics segment to DTN LLC. Therefore, we're reporting the results of that segment as discontinued operations for all periods presented in today's earnings announcement. And as such, I'll be discussing only our continuing operations during the remainder of this call. Conversely, we completed the acquisition of the assets of TrafficCast International Inc. on December 7, 2020. Although a substantial portion of the acquisition costs were incurred in our December 31, 2020 period, the revenue impact for the subperiod was minimal. The results for TrafficCast's commercial business, which is software, is included in our Transportation Systems segment results. And the results of TrafficCast public sector business, which is primarily IoT devices, is included in our Roadway Sensors segment. Given that Doug will discuss the TrafficCast accounting implications in more detail in a few minutes, I'd like to now turn your attention to our third quarter highlights. Our software-enabled delivery model continued to demonstrate its resiliency in our third quarter. However, COVID-19 impacted the operations of some of our subcontractors. This led to milestone and revenue recognition delays on a couple of large projects in Southern California, in particular. Similarly, the Transportation Systems segment experienced some timing issues that impacted our third quarter net bookings result of $20.6 million. Despite these issues, we reported $28.2 million in total revenue, representing a 5% increase compared to the same prior year period. Our year-to-date total net bookings of $188.9 million represents a 3% year-over-year increase.

[Doug Groves:]

Thank you, Joe. Good afternoon, everyone. As a reminder, please see the company's 10-Q filing, press release and supplemental financial metrics document, all of which are posted on our IR website for a further description of matters under discussion during the call today. As Joe noted, the results of the Agriculture and Weather Analytics segment are reported as discontinued operations in our SEC filings. And today, my comments will be focused only on our continuing operations. Likewise, the TrafficCast acquisition, which closed on December 7, 2020, are included in our results for the quarter, albeit one month. The commercial business, which is all software, is included in our Transportation Systems segment results. And the public sector business, which is primarily IoT devices, is included in our Roadway Sensors business results. Consistent with the last several quarters' results, we've seen the performance of the business in the third quarter continuing to improve with favorable year-over-year trends in certain key metrics, including top line growth, increasing backlog and margin expansion. We continue to diligently manage our costs, which is helping to drive the year-over-year operating margin expansion. Now I'll move on to the details of the third quarter results. The total revenue for fiscal 2021 third quarter increased 5.4% to $28.2 million compared to $26.7 million in the same quarter a year ago. Our gross margins in the third quarter were 41.4% compared to 39.8% from the same quarter last year. The increase in gross margins was driven primarily by better product mix and increased volume in the Roadway Sensors segment. Operating expenses in the third quarter were $12 million and flat compared to the prior year quarter. As we mentioned on our second quarter earnings call, we're continuing to improve our profitability year-over-year and remain focused on solid execution to drive improved results. We reported a GAAP operating loss in the third quarter of $300,000, which included $300,000 in acquisition costs compared with a GAAP operating loss of $1.35 million in the same quarter a year ago. The GAAP net loss from continuing operations in the third quarter was $261,000 or a loss of $0.01 per share as compared with a $1.25 million loss or $0.03 loss per share last year. Adjusted EBITDA for the third quarter increased $1 million to $1.45 million or 5.2% of revenue, which compares to $512,000 or 1.9% of revenue in the third quarter of last year. Now let me turn to our segment results. Our Transportation Systems revenue for the third quarter was $14.1 million compared to $15.3 million in the prior year quarter, a decrease of 8%. As Joe mentioned, this segment was negatively impacted by temporary COVID-related supply chain and logistics issues that affected some of our subcontractors and led to project and revenue recognition delays, particularly in Southern California.

[Joe Bergera:]

Great. Thank you, Doug. Although we expect the economic environment to remain volatile and uncertain in the near term, we do expect our rate of revenue growth in the fourth quarter to increase compared to the rate of growth in our third quarter, and we remain bullish about the long-term prospects for the smart mobility infrastructure management market. Indeed, mobility of the service, vehicle electrification, vehicle-to-infrastructure integration and connected and automated vehicles represent favorable secular trends. We'll continue to shift the allocation of transportation infrastructure budget from traditional pick-and-shovel projects to advance technology initiatives. And these same trends will foster new software-enabled service delivery models that will continue to change our transportation agencies at all levels of government fulfill their missions. Vitesco mobility platform is a key element of our strategy to capture these public sector opportunities. And with the recent acquisition of TrafficCast, we've added intellectual property to our ClearMobility platform that positions us to address new commercial markets as well.

[Operator:]

We do. We'll take our first question from Jeffrey Van Sinderen with B. Riley. Please go ahead.

[Jeffrey Van Sinderen:]

Maybe you can just talk a little bit more about the supply chain issues with some of the subcontractors, just, I guess, kind of what the nature of those are maybe the status at this point, expected duration? It sounds like it's still going to be a headwind in Q4. And when do you kind of expect those to ramp and the segment to resume organic growth?

[Joe Bergera:]

Yes, Jeff. So excellent questions. And obviously, we're spending a lot of time thinking about those varied things. I don't want to comment on the specific operational issues of specific companies. So I'm going to talk in generalities here, but hopefully it'll provide some useful color. In the particular projects that I talked about, we have a dependency on some equipment which is provided by third-parties. Some of this equipment is signal controller equipment. And in the case of this particular company, the signal controller equipment is actually manufactured outside of the United States. And this particular vendor experienced about 4 to 6 weeks during which manufacturing facility was shut down. It's an international manufacturing facility that was shut down due to COVID. They subsequently resumed manufacturing, but then they encountered issues importing that equipment into the U.S. As a lot of people may be familiar, there is a lot of backlog at a number of our ports right now. And when the equipment was finally received by this customer, the customer is unable to take possession because they had recent -- this figure customer in Southern California was being impacted by some of the more aggressive mitigation measures or shelter-in-place measures that were instituted by the state, and so those measures were particularly severe in Southern California and impacted this agency's workforce. So it's just a series of events that led to an approximate three month delay and prohibited us from proceeding to a critical milestone at which point we would have been able to recognize revenue. At this point, the equipment has been shipped. And I -- actually, I believe it has been received. I'm not sure whether we've cleared the technical milestone, but we would anticipate to do so shortly. So that particular issue, we think we're going to get over and we'll put behind us. But what we're trying to say here is that based on the experience in the third quarter and the fact that the overall environment hasn't changed a lot, we are anticipating that there could be other similar situations like this that might occur in the fourth quarter, and therefore, we're taking a slightly more cautious note. With respect to your question about when we expect this to lift, no one has a crystal ball. These questions are obviously being asked of many people, including all of our public health officials who would also say that this is a very dynamic environment. But I would hope that as we get into our first quarter, we'll start to see some higher degree of renormalization in the broader economy. And as a result, I would like to think that our business would begin to renormalize. But obviously, there's a lot that can happen between now and April 1, and we'll be monitoring that closely. But again, we do feel that, in general, with availability of the vaccines, some other measures that are being taken, not the least of which is potential additional stimulus, we would expect to see things begin to resume some normalcy, hopefully as early as our first quarter. But we'll have more to report on that in March or April.

[Jeffrey Van Sinderen:]

Okay. That's really helpful. And then if we could turn to ClearMobility Cloud for a moment, I know you talked about that during your Analyst Day. You talked a lot about ClearMobility during the Analyst Day, and you spoke to the Cloud launch in your prepared comments today. But could you speak more about the kind of partners that you're aiming to bring on board to integrate with ClearMobility Cloud? And also if you could remind us of the commercial opportunity there?

[Joe Bergera:]

Yes. Sure. There are a number of different types of partners. One obvious partner would be different data providers. As we've talked about in the past, we have a quite mature partnership with Clear technologies, which provides, in particular, a lot of connected vehicle data that we use extensively. There are other potential sources of similar data, and then there are sources of entirely different data that would further enrich our overall data set. And some of these relationships are somewhat not necessarily proprietary, but there's some level of trade secrets, so I don't want to get into discussing all the various parties that we're in conversations with because we think that our know-how is a competitive differentiator, and we don't want to share that with the competition. But I would just say that there are certainly additional data providers that we would like to develop relationships with, and those data sources would be ingested and processed in ClearMobility Cloud. As today, we do with Clear technology data, various agency data and some other third-party data sets. Another logical partner for us would be other application vendors. As I mentioned on this call, in the first release of ClearMobility Cloud, we certified out-of-the-box integration with Iris, which is an open source commonly used ATMs that operates in the cloud. We would expect -- or you can expect that we would likely be announcing relationships with commercial -- other commercial software application vendors or integrations with other open-source software applications such as Iris. And then beyond that, we are also interested in working with solution providers that can incorporate components of our ClearMobility Cloud into their own solution sets. And so those potential partners would be -- likely to be like systems integrators or other traffic engineering and traffic operations firms.

[Operator:]

We'll take our next question from Mike Latimore with Northland Capital Markets. Please go ahead.

[Mike Latimore:]

Great. Guys -- results there, solid profitability. On the recurring revenue side of things, can you kind of update us on what percent of revenue was recurring in the December quarter? And then what should we think about TrafficCast's contributing to the March quarter?

[Joe Bergera:]

Doug, do you want to take that?

[Doug Groves:]

I'll take that one, Joe. Yes. So Mike, in the current quarter, the recurring revenue was about 20% because we only had 1 month worth of TrafficCast's revenue in our quarter. Because that business is almost 60% software recurring revenue, we expect that 20% to start moving towards the mid-20s, like 24% over the next several quarters as we get them under our belt and their results into our consolidated results. So it will increase in addition to the bookings that we've been recording the last few quarters, which have been heavily weighted to annual recurring revenue. So I think we're expecting that we're going to continue to grow that much faster than the top line as part of our overall strategy and improving the business model. As far as the run rate goes, I think in our press release, we put out that they were doing a trailing 12 months at about $14.3 million a year in revenue. And obviously, we're going to grow that as well.

[Mike Latimore:]

Got it. Okay. And then on the recurring piece of your business, are the EBITDA margins on that similar to the overall business? Or are they a little worse because you're investing a little bit better? How should we think about just kind of EBITDA margins on your recurring revenue?

[Doug Groves:]

So the EBITDA margins definitely will continue to improve with TrafficCast in the portfolio. As we've talked about, I think, in the past with investors, to our related SaaS platforms today are subscale. And I think as they grow, we'll use operating leverage, but we're certainly expecting to see margin expansion with TrafficCast and more recurring revenue.

[Mike Latimore:]

Okay. Got it. Great. And then I guess just last one. Will you be able to, over time, bundle some of your hardware sales into these maybe larger deals -- or I guess, small city deals, too? And then could that become part of recurring revenue?

[Doug Groves:]

Well, that's absolutely our strategy. When we think about the platform, the ClearMobility platform, that's all the products and services that we offer. And we've got several initiatives underway to go to market. I'll say more as 1 company than maybe we have been in the past. So product revenues, by definition, are not recurring, but the services that will go along with it that we're able to bundle certainly will. So that's going to be part of what we're doing going forward.

[Operator:]

We'll take our next question from Joe Osha with JMP Securities. Please go ahead.

[Joe Osha:]

Two relatively simple financial questions and then a product question. We've kind of talked around this, but can you just help us understand what the non-TrafficCast organic rate of growth for the business in aggregate was in the December quarter? If you want to talk about that sequentially or year-on-year, it's fine. I'm just trying -- I think I can take that number out, but it would be easier to just ask you.

[Doug Groves:]

Sure. So year-over-year in that 5% growth, a little less than half of that was TrafficCast-related revenue as we only have them for one month, so it was -- well, it's disclosed in our 10-Q, it was about $800,000.

[Joe Osha:]

Right. Okay. So the -- about half of that year-on-year growth comes from the one month of TrafficCast?

[Doug Groves:]

Right.

[Joe Osha:]

Okay. And then looking into the March quarter, is there a decent amount of linearity so we can just roughly take that in December traffic cash number and sort of multiply it by 3 to get a sense as to how that's impacting the March quarter?

[Doug Groves:]

No. I mean we think it's going to do a little better. I mean the good thing about the business is about half of it is software. It's SaaS revenue, so it's really pretty much straight line. But the hardware, the IoT devices, just like our hardware business can be a little bit lumpy with big orders weighing any given quarter. So I think we're going to do a little bit better the first month under our ownership. We're in to know them, they're getting to know us, so we would expect the fourth quarter revenue to do better than just a straight-line of the one month we had in our third quarter.

[Joe Osha:]

Okay. And by hardware, that the TrafficCast hardware component result moved to -- ?

[Doug Groves:]

Exactly. Yes.

[Joe Bergera:]

Correct.

[Joe Osha:]

I like the name. And then just to help us understand a little bit at the operating level, how should we be thinking your -- your SG&A and R&D, 10.1% and 1.4% in the December quarter, I mean is that -- to what extent is that a reasonable good bogie for a run rate going forward for those line items?

[Doug Groves:]

Well, I think it is. I mean that's what in our comments said. It was flat year-over-year, and that's really been our objective. So I mean I would expect R&D to probably reach about 5% of revenues on an annualized basis, but we should be able to keep SG&A close to what it has been running.

[Joe Osha:]

Well, you're down here in Europe, but you drop some business out. I mean that's -- there's a lot of puts and takes here, that's why I'm asking the question. Last year, it was 14.1%, so I'm just trying to understand what that run rate is going forward.

[Doug Groves:]

It's about what it would be that we experienced in the third quarter, so it's pretty all right.

[Joe Osha:]

Okay. And then the last question is just shifting to the technology side. You talked about Clear and other platforms there. I mean there's an enormous proliferation of these data aggregation platforms out there. At this point, you've got not just Clear and Inrix, but some of the Orbital folks or Jesper, you got Aspire, Plant Orbiting, all this stuff, have you thought at all about maybe kind of broadening the funnel in terms of the type of data set that you invest?

[Joe Bergera:]

Yes, we have. Now that's not to say that we are stepping back from our relationship with Clear. And Clear is a fantastic partner. We utilize both their mapping technology, and they also provide incredibly valuable data to us, and we expect to continue to collaborate closely. But to your point, Joe, there are various data providers. And we think that part of our secret sauce is getting the best data from the best sources and then aggregating that and applying our domain knowledge to present valuable insights to our end customers. So we're very focused on getting the best possible data, again, to benefit our larger data set, like there's no one provider in our opinion that has access to all of the data. And of course, we have access to our own effectively proprietary data through our own detection products as well, so I don't want people to lose sight of that. But again, we're very focused on getting the most robust data set possible. We think that we're uniquely able to do that because of our domain expertise. Our own position at the intersection and in a number of cases, our trusted adviser relationship with agencies through which we're able to get access to data that's not necessarily proprietary because agencies are in the business of providing the public with information, but our know-how we think is unique. And therefore, we think that the resulting aggregate data sets, our data sets, are unique and therefore more valuable than what other data platforms are you able to provide.

[Operator:]

We'll take our next question from Mike Shlisky with Colliers Securities. Please go ahead.

[Mike Shlisky:]

I kind of wanted to start by asking about the kind of medium and long-term outlook here. Given what happened in this quarter and what may happen in the fiscal fourth quarter, I mean, is there any sense as to whether the longer-term outlook for, let's say, the next fiscal year? You've been saying you can get mid-teens organic growth most of the time, is that number at risk? Do you still think you can get that if COVID doesn't get any worse from here?

[Joe Bergera:]

Yes. So Mike, that's -- it's a tough question to answer, and we've been very intentionally just talking one quarter at a time, about one quarter at a time because -- I mean nobody has a crystal ball, and we continue to be amazed at the pace of change in that extremes of the gyrations that we seem to be going through from week-to-week and even sometimes day-to-day. So it's super, super hard to predict. But I would say that there are some things that we're monitoring. And 1 is, for example, state budgets. And there's been a lot of research lately, which is generally consistent with what I think we talked about, to some degree, at our investor conference, which is that its state budgets have actually -- the revenue is coming closer to expectations than most states predicted. And actually, a number of states, including California, for example, which is probably our largest market, is expected to have a revenue surplus this year. So things are not -- at least at the state level or probably not as dire as people had expected. And also, we, being focused in the transportation infrastructure market, benefit from having dedicated sources of revenue that cannot be redirected under most state law. And so we're cautiously optimistic about next year given where things stand in terms of the current state budget situation and the current outlook, but, of course, the market is highly -- or the environment is highly unpredictable, and we'll certainly know more in March than we know today.

[Mike Shlisky:]

All right. And I also want to get a little more information about what you called -- I think they were called awards, that aren't actually being called bookings or backlog right now because you have two or three countries that you mentioned in your prepared comments.

[Joe Bergera:]

Right.

[Mike Shlisky:]

I guess I just wanted to kind of like figure out, is that comment -- I haven't heard that happen too many times with Iteris here, so is that a common thing? And then is this ultimately going to end up being backlog, all of it? Or does it kind of get booked and burned in the same quarter? It's a bit more short-term than other kinds of business that you currently do?

[Joe Bergera:]

Yes. So yes, we don't get a ton of these contracts. We do -- you might recall that in the past, we've talked about our federal highway administration contract or we maintained the connected vehicle reference architecture for United States. We will get awarded large indefinite delivery and definite quantity contracts to support that program, and then there'll be subsequent task orders against that. So we have in the past talked about those contract awards and then the subsequent task orders. But at the state level, it's actually pretty unusual for us to win such large. In this case, Florida calls them on-call contracts, but they're essentially indefinite delivery indefinite quantity contracts, and we don't get many of those at the state level, so that was somewhat unique. And we thought it was noteworthy that we were awarded, between the two contracts, $8 million in on-call contracts from the state. And yes, we would expect that the full $8 million will eventually convert to a formal order. It will become a booking, and then it'll go into our backlog and eventually, it will convert to revenue. It's -- the contracts have different periods to them, but I do want to point out that they're both multiyear contracts.

[Mike Shlisky:]

Okay. So you spent the time, got the bid in, got the award because you just can't efficiently put into your backlog because if not...

[Joe Bergera:]

Yes, it's not showing up -- yes it's not showing up as a booking, and it's not in our backlog at this point. But it is -- those are sizable deals, particularly at the state level, and so we wanted to make sure that people understood that we did receive those awards. They're not in our reported bookings number or a backlog number for the December 31 period.

[Mike Shlisky:]

Got it. And again, just looking at the growth

[Joe Bergera:]

And it will convert to revenue.

[Mike Shlisky:]

Yes. Just kind of -- just trying to look at it from a over versus the prior year or the prior quarter, it was very little of this type of business last quarter and in the prior year. Is that correct?

[Joe Bergera:]

That's correct. Yes, yes. I mean we try to be very explicit when we differentiate between awards and task orders or bookings, and the only notable IDIQ that we've recently announced was that the FHWA contract extension. Occasionally, we'll also win similar contracts in Texas, but we haven't done so recently. And these two deals in Florida we thought were notable, and we wanted to make sure that people were aware that we had won those awards.

[Operator:]

We'll take our next question from Ryan Sigdahl with Craig-Hallum Capital Group.

[Ryan Sigdahl:]

Just one follow-up for me here is -- so based on the segment guidance you gave, kind of mid-teens growth percent or mid-single-digit systems. Does that include the TrafficCast acquisition?

[Doug Groves:]

Yes, it does.

[Ryan Sigdahl:]

So if I assume kind of the $14 million, break that down by quarter, it implies negative low single-digit organic growth in Q4. Is that correct?

[Doug Groves:]

On the base business, we're expecting it to be about flat and maybe possibly down just depending on timing on a couple of big orders that we're working on.

[Joe Bergera:]

And Ryan, just -- Ryan, just as a reminder, too, I mean, we've got a couple of things that are working against us in this particular period. One is the overall environment, which we talked about. But also, I just wanted to restate that we have a very unusual comparable due to a sizable amount of revenue recognition, which occurred in the prior fourth quarter, and that was due to -- just simply to timing on a number of large projects where we ended up hitting milestones. And therefore, these are fixed price -- fixed time, fixed price deals, and so we ended up taking all that revenue in the period. And also recognizing all that contribution margin, there was no expense associated with that revenue in the prior year. So we have a very unusual comparable, I just want to make sure everybody understands that.

[Operator:]

It appears there are no further questions in our queue. I'll turn the conference back to Joe Bergera for any additional or closing remarks.

[Joe Bergera:]

I appreciate that, operator. Thank you very much. We appreciate everybody's support and the thoughtful questions. This is a very complicated period, and we've done our best to try to explain the puts and takes and to answer various questions. We're always happy to take additional questions from investors, and so we encourage people to reach out to us any time if you have specific questions. Additionally, I wanted to note that we will be presenting at the JMP Securities Technology Conference taking place from March 1 through March 2. If you're participating at that conference, that's a great opportunity to schedule a visit with us, and we hope to hear from you. In the meantime, we're continuing to work very hard through this dynamic period. And we look forward to updating you again on our continued progress when we report our fiscal 2021 fourth quarter and our full year results. And with that, we'll conclude today's call. Thank you, again, everyone.

[Operator:]

Ladies and gentlemen, this concludes today's conference. We appreciate your participation. You may now disconnect.