Q2 2022 Iteris Inc Earnings Call
Please standby.
Good day and welcome to the terrorists fiscal second quarter 2022 financial results Conference call. Today's call is being recorded at this time I'd like to turn the conference Mr. Todd Curly M. K. Our group. Please go ahead Sir.
Thank you good afternoon, everyone and thank you for participating in today's conference call to discuss a terraces financial results for its fiscal 2022 second quarter ended September 30th 2021.
Joining us today are terrorists as president and CEO, Mr. Joe <unk> and the company's CFO Mr. Doug grows.
Following their prepared remarks, we'll open the call for questions from the company's covering sell side analysts.
Following that we will answer questions that investors submitted to the company in advance of the call.
The instructions in our press release dated October 21 2021.
Before we continue we'd like to remind all participants that during the course of this call.
They make forward looking statements regarding future events or the future performance of the company, which statements are based on current information are subject to change and are not guarantees of future performance.
Terrorists 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.
Hey, terrorists refers you to the documents the company files from time to time with the SEC specifically the company's most recent forms 10-K, 10-Q, and 8-K, which contain and identify important risk factors that could cause actual results to differ materially from those that are contained in any forward looking statements.
As always you'll find a webcast replay of today's call on the investors section of the company's website at www dot terrorists dot com.
Now I'd like to turn the call over to <unk>, President and CEO, Mr. Joe <unk>.
Sir Please proceed.
Great. Thank you Todd and good afternoon to everyone. I appreciate all of you joining us today.
Before we begin our regular earnings commentary I wanted to comment on the status of the strategic review.
<unk> initiated in March 2021.
The strategic review is focused on the identification and <unk>.
Assessment of new opportunities to enhance our value and market position.
This ranges from a potential sale of the business to a more aggressive M&A program to various strategic partnership opportunities and more.
We don't have any material updates to share on this call, but I can say that we are confident that our terrorists participates in a large and dynamic market due to our focus on smart mobility infrastructure management.
Anti terrorist is in a unique position with its market, leading platform and digital ecosystem to capitalize on favorable secular trends such as the advent of government data sharing as a service programs adoption of cloud first or everything as a service initiatives at every level of government and perhaps most importantly.
The proliferation of connected vehicles automated vehicles electric vehicles mobile commerce and mobility as a service all of which require significant investment in mobility infrastructure and or infrastructure to vehicle communication.
We will be conducting our second annual Investor day in early December we will provide an update on various aspects of the business, including a further update on the strategic review.
In the meantime, we don't have anything to say beyond what we've included in our prepared remarks. So we would appreciate everyone keeping today's questions focused on our operational and financial performance.
On a separate note I want to remind everyone that we completed the sale of our agriculture and weather analytics segment to D. T N L. L. C on may 5th 2020.
As such we're reporting the results of that segment as discontinued operations for all periods presented in todays earnings announcement I'll be discussing only our continuing operations for the remainder of this call.
So with that background, let's discuss the results for the period ending September 32021.
The company reported fiscal 2022 second quarter total revenue of $33 2 million in fiscal 2022 first half total revenue of $67 3 million, which represents a 14% and 18% year over year increase respectively.
About $8 5 million or 26% of second quarter total revenue was recorded as annual recurring revenue and about $16 8 million or 25% of first half total revenue was recorded as annual recurring revenue.
Additionally, we secured record second quarter total net bookings of $36 7 million and record first half total net bookings of $72 7 million.
Due to our record net bookings we ended the September 30 period with record total ending backlog of $83 4 million, which is a 14% increase year over year and a 4% increase on a sequential basis.
The company's second quarter total revenue net bookings and ending backlog results reflect particularly strong performance by our family of intersection detection products.
I'll take a few minutes to provide some more color on those products as well as our service lines of business, including our family of commercial vehicle operations software that recorded a large write offs in the second quarter.
Following my remarks, Doug will discuss our financial results in more detail.
At this time lets review our product lines the.
The company's product revenue is composed of two components.
First our intersection detection sensors travel time sensors and infrastructure to vehicle communication devices in second or third party products that we distribute deploy and often integrate with our own products.
Our fiscal 2022 second quarter product revenue was $17 7 million versus $16 3 million in the same prior year period, representing a 9% year over year increase.
In the period, we saw divergence and the sales performance of <unk> products, which increased 16% year over year, and third party products, which declined year over year due to factors such as the inability of certain third parties to meet critical delivery deadlines.
We believe the sales performance of the third party products in general and Theyre delivery delays in particular will resolve itself over time.
In the meantime, we have already started to deploy some of the products that were previously delayed and we expect to recover the balance of delayed third party revenue in future periods.
With respect to <unk> product lines, the strong second quarter product sales performance was due to excellent sales execution proactive actions to manage our supply chain and continuous innovation across our product portfolio that enables us to continue to set the product performance standards for the industry.
For example, during the second quarter, we launched our next generation intersection detection sensor vantage apex.
Vantage Apacs is the industry's first 10 ADP high definition video and four dimensional radar sensor with integrated artificial intelligence algorithms.
Vantage apex identifies objects using <unk> artificial intelligence video analytics extensive image library machine learning and neural network algorithms.
This innovative application of artificial intelligence enables high precision and detailed classification and many different vehicle types and vulnerable road users such as pedestrians and cyclists.
In turn this not only differentiates our product performance, but contributes rich new datasets to our clear mobility platform and enables various new applications that will drive growth in our annual recurring revenue.
Additionally, vantage apex is connected vehicle ready with the ability to provide critical infrastructure data through vehicle to everything or V to X communications to connected and automated vehicles, including through <unk>, one connected vehicle communication devices, which we recently launched and brand as Blue <unk>.
<unk> CV.
Now, let's discuss our service lines of business.
We recognized two forms of services revenue first project based revenue that is associated with our consulting activities and second annual recurring revenue from our software as a service solutions and for our managed services activities.
Our fiscal 2022 second quarter services revenue was $15 $5 million versus $13 million in the same prior year period, representing a 19% year over year increase.
$7 million or 45% of our services revenue is project based whereas about $8 5 million or 54% of our services revenue was annual recurring revenue.
And as I mentioned earlier, 26% of our second quarter total revenue was annual recurring revenue.
While it didn't impact revenue in the period, we did take a write off in the second quarter of $2 8 million for one of our service lines related to nonrecurring engineering activity most of which was performed in prior periods.
More specifically the write off was related to a contract with the state of Iowa to develop and then co market certain software capabilities that augment our existing commercial vehicle operations compliance and inspection software.
The write off effectively represents the accounting impact of the complexity associated with an innovative partnership we have with the state to develop and commercialize highly complex software.
At this time the state continues to use our commercial vehicle operations compliance and inspection software and we've agreed with the state in principle on a path forward for completion of additional software functionality.
At this time, we expect to release, the new software capabilities in calendar year 2022.
Additionally, I want to confirm that we do not have any other contracts with similar terms. This was a very unique contract and we've certainly learned several lessons from this experience.
I can assure you that we will not have this issue again in the future.
Moving on we continue to see especially strong demand for our specialized consulting services software as a service and managed service lines.
In the second quarter, we recorded $16 3 million in net services bookings with the following bookings being some of the more notable.
Our $1 $8 million systems integration and technical services contract with the Virginia Department of transportation.
About $1 5 million for several software as a service agreements for the use of our commercial vehicle operations compliance and inspection software.
At $1 $1 million traffic signal synchronization project for the city of Orange, California.
Another $1 $1 million project. This time with Caltrans district, seven to develop a framework for the deployment of advanced technology to improve accessibility to mobility for persons with disabilities.
And $800000 task order to manage the traffic operation Center for the Florida Department of Transportation and about 675000 in software as a service agreements for the use of our mobility intelligence solution clear guidance.
So in summary, the company's total second quarter revenue was constrained due to supplier issues.
But our first half sales execution was solid and we continue to make measurable progress executing our platform based business strategy.
Due to strong net bookings and a record ending total backlog, we enter the second half of our fiscal year in a very strong position.
Before I further discuss opportunities in front of Vitaros, However, I'd like to turn the call over to Doug.
Thank you Joe Good afternoon, everyone. As a reminder, please see the company's 10-Q filing and press release, which are posted on our IR website for a further description of matters under discussion during the call today.
As Joe mentioned, we took a charge in the second quarter of $2 $8 million related to our execution on the Iowa contract.
But we believe with the expected changes to the contract going forward and improved governance processes for the project.
We are now positioned to be successful in that endeavor.
Setting aside the one time nonrecurring noncash charge of $2 $8 million the performance of the business in the second quarter continued to improve with favorable year over year trends and certain key metrics, including top line growth, improving EBITDA and increasing backlog.
Now I'll move on to the details of the second quarter results.
Total revenue for the fiscal 2022 second quarter increased 14% to $33 2 million compared to $29 3 million in the same quarter a year ago.
Our gross margins in the second quarter decreased 530 basis points to 33, 5% compared to 38, 8% from the same quarter last year.
However, after adjusting for the $2 $8 million charge in the Iowa contract gross margins would have been 41, 9% an improvement of 310 basis points over the prior year quarter.
Turning to our revenue mix the product revenues grew 9% to $17 7 million compared to $16 3 million in the same quarter last year.
Gross margins improved 680 basis points and were 49, 4% compared to 42, 6% from the same quarter of last year due to improved product mix, we had a higher percentage of direct sales in this quarter versus OEM or distributor sales and we're seeing good market penetration with our market leading sensors.
Portfolio, which is driving above market growth rates.
Our service gross margins grew 19% to $15 5 million compared to $13 million in the prior year quarter.
As Joe mentioned in the second quarter, 26% of total revenue with annual recurring revenue compared to 19% in the same quarter last year. As a reminder, our annual recurring revenue are comprised of our software and managed services revenue.
Service gross margins declined significantly to 15, 3% compared to 34, 1% from the same quarter last year. This was due to the onetime charge of $2 $8 million related to the Iowa contract adjusting for the Iowa write offs service gross margins would have been down just slightly at 33, 4%.
Operating expenses in the first quarter with $13 5 million compared to $10 6 million in the same prior year quarter and this was as a result of the traffic cast acquisition in the third quarter of 2021.
Fiscal 2021, however, the current quarter was essentially flat on a sequential basis with the prior two quarters and we continue to be focused on expense management to improve our operating margins.
We reported a GAAP operating loss in the second quarter of $2 4 million compared with a GAAP operating income of 748000 in the same quarter a year ago. This was driven by the onetime nonrecurring noncash charges previously mentioned.
The GAAP net loss from continuing operations in the second quarter was $2 1 million or a loss of <unk> <unk> per diluted share after adjusting for the onetime charge diluted earnings per share would've been <unk>, which compares with net income from continuing operations of 719000 or <unk> <unk> per diluted share.
In the same quarter a year ago.
Adjusted EBITDA for the second quarter was $2 3 million or six 9% of revenue, which compares to approximately $2 million or six 7% of revenue in the second quarter of last year. This was an 18% improvement in adjusted EBITDA year over year, and we continue to expect our adjusted EBITDA margin as a percentage of revenue.
<unk> to be in the 7% to 8% range for the full fiscal year.
Turning to liquidity and capital resources cash and short term investments were $28 2 million at the end of the second quarter the.
$2 $9 million decrease quarter over quarter was a result of changes in our working capital specifically, we are buying more raw materials as buffer stock to hedge against the ongoing supply chain shortages that we're seeing.
We spent 269000 in purchases of property and equipment in the second quarter and these were up $48000 year to date over the prior year, reflecting our asset light business model.
So in summary, while we are disappointed with the onetime charge in the quarter. We delivered good bookings growth and we remain focused on growing the business and our annual recurring revenue, while managing our working capital and cost to improve margins as we move forward with second quarter record backlog of $83 4 million, we are maintaining our full year revenue guidance.
$734 million to $142 million, which positions us well for the remainder of fiscal year 2022 with that I will turn the call back over to Joe Joe.
Super Thank you Doug.
As mentioned earlier, the smart mobility infrastructure market is a dynamic sector characterized by favorable favorable secular trends as well as emerging network effects from the introduction of new forms of mobility.
These forces will require the sector to transition from disparate applications to integrated platforms from legacy outmoded practices to multi disciplinary best practices from closed systems to open Configurable and extensible systems from brittle legacy architectures to a dynamic and resilient.
Ecosystem.
And from fragmented resources to seamless partnerships.
With a unique combination of core competencies and market access in this highly fragmented industry <unk> is in a particularly strong position with this platform enabled ecosystem to capitalize on this significant market opportunity.
To that end, we're moving quickly to introduce new platform capabilities will accelerate platform engagement and creates sustainable shareholder value.
For example in the second half of fiscal 2022, we plan to introduce potentially disruptive vehicle to infrastructure technology that we expect to expand our addressable market and enable new business models in the future.
We will provide more information about this vehicle to infrastructure technology at our second annual Investor Day in December.
Our overall sales pipeline, which includes both public sector and private sector demand for our clear mobility platform continues to reach new historic levels due to the sustained release of best in class technology and solid sales execution.
Therefore, as we begin the second half of fiscal 2022, we continue to anticipate solid full year bookings growth, even though results may fluctuate in any given quarter, especially as we continue to pursue more multi million dollar contracts, including complex agreements with large private sector.
Our entities.
Based on our current record backlog and additional bookings growth as Doug noted, we are maintaining our total revenue guidance of $134 million to $142 million.
This would represent 15% at the low end and 21% at the high end of the range.
Also we continue to anticipate improvement in our full year fiscal 2022 gross profit margin relative to the prior fiscal year driven by a continued increase in the company's scale and the higher concentration of software as a service and sensor revenue.
In turn we continue to anticipate a significant year over year improvement in adjusted EBITDA for our full fiscal year 2022.
So with that we would be delighted to respond to any investor questions or comments operator.
Thank you if you would like to signal with questions. Please press star one.
Touchtone telephone if you're joining today use a speaker phone. Please make sure new function is turned off to allow your signal to reach our equipment again that is star.
One if you would like to signal with questions Star one.
And our first question will come from Jeff Van <unk> with B Riley.
Hello. This is Richard Magnuson for Jeff Thanks, Andrew and thank you for taking our call. My first question is.
The recurring revenue right now you're around 26%.
Could you.
Just remind us of what your longer term expectations or goals are as far as.
Growing that annual recurring revenue and then again.
What portion of that was particularly SaaS revenue.
Okay.
Do you want to talk about our target operating model and the composition of the annual recurring revenue.
Sure Yeah happy to take that Hi, Richard So yes, we've said over the next couple of years, we would like to see that annual recurring revenue get north of 30% of total revenue of the company.
As you can see by this quarter.
Great strides towards that against the compare in the prior year quarter of only 19%. So we're continuing to develop our software platforms in particular to to increase that and we currently don't disclose the breakout between how much is managed services and actual SaaS revenue.
Other than to say, it's relatively evenly split with the SaaS piece growing.
Much faster than the managed service fees.
Okay and then.
Regarding the geographical.
Targets.
Is there anything any more color on it.
Any areas geographically that you might be targeting right now.
Let me expand into.
Organically not about any acquisitions or anything in this case just areas of opportunity you see.
You may want to use your existing technologies.
<unk> offerings.
Our growth.
Yes for sure. This is Joe and I am glad to take that.
Just for everybody's benefit I don't want to make sure.
Everyone understands that.
We are particularly good penetration at this time on the West coast.
Substantial in <unk>.
And then similarly and increasingly.
Nice footprint in the Florida market, those particular markets represent the three largest market for smart mobility infrastructure spending.
At this time.
That said there are other large markets into your question, Richard one market, where we don't have particularly <unk>.
Significant penetration at this time would be the northeast that is a big focus for us.
And I'm pleased to say that the results, which we just.
Just reviewed with everyone.
Actually represent.
Thanks.
Based on relative historical performance.
Really outstanding results in the eastern region.
You may recall that we recently announced.
A couple of big projects in New Jersey in particular related to connected vehicle.
And vehicle to infrastructure integration initiatives across that region, and we continue to see a lot of opportunity in the northeast in particular and that will be a major focus for us in terms of organic growth.
Thank you very much I'll jump back into the queue.
Thanks.
And our next question will come from Mike Latimore with Northland capital markets.
Great. Thanks, a lot.
I guess just a question on the service gross margin.
<unk>.
Where do you see that kind of progressing to over time and then.
I think you've talked about recurring going from 19% of revenue to 26%.
I guess I would have thought that might have bumped up gross margin in service a little bit year over year, but kind of flat year over year. So maybe a little color on that would be great.
Sure so.
Yes, Mike the service margins in this particular quarter were significantly down because of the.
Iowa right off.
<unk> for that they would have been.
Up close to what they had been.
They have generally ran in the 735% range and.
As a reminder that line.
Line item in our P&L has our professional services business. So we're expecting that as the software.
Revenue in particular grows in that line that that margin should begin to really expand.
Significantly so that over.
The next several quarters, we should see margin expansion in that particular line item in the P&L.
Alright, Great and then can you just talk you talked a little bit about private sector opportunities in the pipeline can you give a little more color there and are those more of a SaaS or a product.
Okay.
Yes.
Happy to try to answer that Mike.
The answer is it does have a very high technology content.
As opposed to.
Our consulting.
Product lines, which are largely focused on the public sector.
Those.
The private sector opportunities I would further say.
Our largely SaaS related however, there is some.
Technology product component sensor component as well.
We what.
What we're looking to do is.
Yeah.
Effectively.
Integrate clear mobility platform with.
Other clouds that are managed by various.
Private entities that are also addressing.
Sort of broadly similar markets and most of that revenue will.
Be recognized in the form of annual recurring revenue will look like SaaS revenue. However, we do see an opportunity in some instances to partner with certain entities.
Either be pulling through some of our product technology or we'd be co selling some of our product technology, which.
Because of it.
Yes.
Fact that once it's deployed becomes a source of revenue.
<unk> is viewed by certain commercial entities as being critical to their broader platform strategy.
Okay great.
Great. Thanks very much.
And our next question will come from Ryan <unk> with Craig Hallum Capital Group.
Hey, guys. This is Matt Wagner on for Ryan Thanks for taking our questions.
Just one on the supplier issues you cited.
Any estimate on kind of how much that impacted revenue in the quarter.
Sure. It was two separate suppliers with two separate really sets of circumstances, but it was a little over $1 million, probably about $1 $2 million. One was a raw material supplier that had issues and then we also had a different actually subcontractor.
Her on one of our large professional services engagements that ran into supply chain issues and was unable to deliver.
The needed equipment to the project in the third quarter that has since been in is in the process of being delivered I am sorry in the second quarter is now being delivered in the third quarter. So it was really more of a timing issue than anything else.
Any sense that I mean, some of those kind of issues could crop up in the next couple of quarters I mean, just given the.
Sort of global supply chain issues that we're seeing.
Yeah.
Unfortunately, I think the answer is yes.
It continues to be a very challenging situation, we are doing everything within our power to manage it but when it comes to third parties.
We are highly dependent upon their ability to execute and manage the issues that so many companies are facing so.
Okay, and so just to follow up on that like that sort of manifest itself, where you mentioned you know your products were up 16%. The the product revenue, whereas third party third party product was down.
Correct.
Gotcha, Okay, Latvia for me just a housekeeping did you did you give a net bookings number I thought I heard it but I think I got the wrong number [noise].
[noise], Yeah, do you have that handy.
We did well no we didn't give that but let me let me get back to you I don't want to give you the wrong number Matt, but let me let me get back to you.
He was about 37 million, but let me get back to you Yeah I know I'm.
That's correct and we did get it.
Okay Yeah.
To be exact yeah, sorry.
Hi, Matt Yeah, 36, seven [noise].
No problem. Thanks, that's all how about it yeah and.
And Mad I finally found the same figure and just for completeness. We also said that the first half total net bookings figure was 72.7, so as Doug said in the second quarter is 36.7 and for the first half it was 72.7.
Thanks, guys.
Thank you.
So operate are there any other questions.
Covering analysts.
Absolutely, Sir and as a reminder, if you would like to signal with questions. Please press star one again.
<unk>, we will go ahead and take our next question from Alex Silverman with a W. M investments.
Good evening did I hear correctly that the Virginia 511 contract was part of the service bookings in the quarter.
[noise] no no.
No that was not the case Alex Okay.
I thought I heard you there was there was a separate.
There was an issue.
Project generally related to systems integration.
But it's not specifically to 511 contract.
Got it Okay and can you tell us roughly how much of the revenue increase was the was traffic cashed in the quarter.
Dark orange or Conversely, what organic growth was.
Oh is it was it was about $3.4 million in traffic cast revenue in the quarter.
Okay. So it's.
Call It 600000 of of organic.
Yes.
Okay. So as we sit here and we look to the second half of the year.
Pretty wide range on guidance I, you know not a lot of organic growth in the second quarter.
You would have to think that the lower end of your guidance is probably the appropriate place to be now.
Well, we didn't break down the top end to squeeze it to the middle So we held at the same so again, it's a range.
By design, but we still think that.
We look at the second half and some of the opportunities that are ahead of us that range is still appropriate.
Ah Okay.
[noise] got it thank you.
Thank you and Mister Chairman.
There are no more questions at this time would you like to address any investor questions that were submitted in advance today's earnings call.
Yes, Thank you I would like to do that.
And in fact, we did receive one investor question.
That was not already addressed that we received more than one but I think all the other questions were either dressed in the prepared remarks.
Mark's or covered and the.
Question and answer period with the covering analysts, but there is one that I do want to touch on and specifically the investor asked how much financial impact to existing backlog ongoing bookings revenue gross profit in pretax profit lost you foresee them and now ongoing Q3 beyond <unk>.
Two three.
And the answer that question is regardless of the outcome of current contract negotiations with the state of Iowa, the impact to existing backlog is immaterial and by that I mean, it's less than 1.5%.
As far as future revenues gross profit in pretax profit. They impact is also immaterial since we took the charge for the program in the second quarter.
I also want to note that just for everybody's benefit that while the Iowa contract did have a big impact in our second quarter.
Contract is only one of hundreds of contracts in our current portfolio.
So anyway that was the only.
Additional investor question as I said that was not already covered and.
So at this point I don't believe there are any I do not have any further investor questions will conclude today's question and answer session.
So moving on.
I want to say that is always we appreciate everyone's support and your thoughtful questions an investor Relations front I wanted to make sure that everyone is aware that we are presenting at the Craig Hallum Alpha Select conference on December 16th and the need them Technology Conference on January 11th January 13th.
If you are participating in these conferences, please plan to attend our presentation and or schedule a visit with us.
Additionally, please watch for future details and plan to attend our second annual investor confidence a week of December 6th.
In the meantime, we look forward to updating you again on our continued progress when we report our fiscal 2022 third quarter results.
And at this time I will conclude today's call.
Thank you and that does conclude today's conference. We do thank you for your participation have an excellent day.
[music].
[music].
[music].