Q3 2022 Iteris Inc Earnings Call

February 3, 2022

Good day and welcome to the eye terrorists fiscal third quarter 2022 financial results Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Mr. Todd Curly with M Care Group. Please go ahead Sir.

Thank you operator, good afternoon, everyone and thank you for participating in today's conference call to discuss that terrorists as financial results for its 2022 fiscal third quarter ended December 31 2021.

Joining us today on our I terraces, President and CEO , Mr. Joe <unk> and the company's CFO , Mr. Doug Grose.

Following their prepared remarks, we'll open the call for questions from the company's covering sell side analysts before we continue we'd like to remind all participants that during the course of this call. We may make forward looking statements regarding future events or the future performance of the company, which are statements based on current information are subject to change and are not.

Guarantees of future performance.

This does not undertake any 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 I terrorist 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 an IDE.

<unk> important risk factors that could cause actual results to differ materially from those that are contained in any of the 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 I terrorists dot com.

Now I'd like to turn the call over to a terrorist as president and CEO , Mr. Joe <unk>.

Joe.

Super Thank you Todd and good afternoon to everyone. I appreciate all of you joining us today.

I want to remind everyone that we completed the sale of our agriculture and weather analytics segment to D. T N L. L C.

May five 2020.

As such we're reporting the results of that segment as discontinued operations for all periods presented in today's earnings announcement.

I'll be discussing only our continuing operations for the remainder of this call.

The company reported fiscal 2022 third quarter total revenue of 32 million in fiscal 2022 year to date total revenue of $99 3 million, representing a respective 14% and 16% year over year increase.

At the same time, our third quarter annual recurring revenue of $8 1 million increased 27% year over year, while year to date annual recurring revenue of $24 9 million increased 43% year over year.

In other words, our annual recurring revenue growth significantly outpaced total revenue growth, which resulted in the company recording about 25% above third quarter and year to date total revenue is annual recurring revenue.

Due to the continued favorable customer response to our clear mobility platform, we reported record third quarter total net bookings of $40 9 million, representing a 99% increase compared to the same prior year period.

This brings our year to date total net bookings to a record $113 6 million, representing a 28% increase year over year.

Given our sustained record net bookings we ended the December 31 period with record total ending backlog of $92 3 million, representing a 20% increase year over year, and an 11% increase on a sequential basis.

As always our reported net bookings and ending backlog figures reflect firm customer orders.

Of our $32 million in third quarter total revenue, 50% was recorded as product revenue and 50% was recorded as service revenue.

As a point of comparison, 52% of our $99 3 million and year to date revenue was reported as product revenue and 48% as service revenue.

The company's product revenue is composed of two components first our intersection detection sensors travel time sensors and infrastructure to vehicle communication devices and second third party products that we distribute deploy and often integrate with our own products.

Our fiscal 2022 third quarter product revenue was $15 9 million versus $16 4 million in the same prior year period, representing a 3% decrease year over year.

The decrease was due to a continued divergence in the sales performance of <unk> products, which increased 10% year over year, and third party products, which declined 49% year over year due largely to the inability of certain third parties to meet critical delivery deadlines.

We saw a similar issue with the performance of third party products and our second quarter.

With respect to our own products, we too experienced some supply chain issues in the third quarter.

These issues presented us or prevented us from shipping approximately $1 9 million and vantage sensor product orders limiting the revenue growth for our own products to 10% is just noted and precluding us from offsetting the third party product revenue variance.

At the same time, we incurred unplanned cost to source and expedite components from alternative suppliers that were necessary to manufacture our products.

Although we expect these issues to resolve eventually as global supply chains, we normalize we implemented a 10% price increase on certain products effective January one 2022 to help offset these increases in cost of goods sold.

Later, I'll discuss our product pricing dynamics in more detail, including the timeline to start to realize the impact from our price increases.

Notwithstanding the recent supply chain issues are terrorists continues to take market share in the intersection detection travel time monitoring and infrastructure to vehicle device product categories. Our share gains are due to excellent sales execution and continuous innovation across our product portfolio enables us to.

Yet the performance standards for the product categories in which we compete.

For example, during the third quarter, we launched a first of its kind vehicle to everything or V to X enabled detection solution branded as vantage fusion in partnership with Continental AG.

Vantage fusion, which uniquely fuses infrastructure and in vehicle sensors enables advanced the intersection visualization and real World Vida acts applications, such as virtual basic safety messages cooperative perception messaging near Miss analysis, Q detection and pedestrian activation.

Thus vantage fusion will help transportation agencies, and automotive Oems achieve their objectives, a safer smarter and more sustainable mobility as well as provide a pathway to level three to level five autonomous driving.

Now, let's discuss our service lines of business.

We recognized two forms of services revenue. One is project based revenue that is associated with our consulting activities and to annual recurring revenue from our software as a service solutions and from our managed services activities. Our fiscal 2022 third quarter services revenue was $16 1 million versus 11.

8 million in the same prior year period, representing a 37% year over year increase on a year to date basis fiscal 2022 services revenue was $47 7 million versus $38 4 million in the same prior year period, representing a 24% year over year increase.

As mentioned earlier, our third quarter annual recurring revenue of $8 1 million increased 27% year over year and our year to date annual recurring revenue of $24 9 million increased 43% year over year.

In the third quarter, we recorded $26 2 million in net services bookings with the following bookings being some of the more notable.

A $6 $8 million contract for the first phase of a vehicle to infrastructure connected by signal priority system for La Metro as you may recall in our recent Investor Day presentation. We noted that transit signaled prioritization represents a near term use case, an important use case for connected vehicle applications.

A $4 $5 million signal synchronization project in cloud enabled managed services contract with the Orange County Transportation Authority.

A $1 5 million integrated corridor management, our ICM contract with the Florida Department of Transportation's District five.

Over $1 million in total contracts from several state and regional agencies for advanced traveler information system clear out.

And a $1 million traffic signal synchronization program with the San Bernardino County Transportation Authority.

Additionally, we amended the contract with the state of Iowa that we discussed on our last earnings call. As a result, we resumed the development of new commercial vehicle operations software capabilities.

Enhance our existing compliance inspection software.

Under the terms of the contract Amendment, we have retired the prior financial risk, while preserving our ability to retain the intellectual property rights as well as co market the solution with the state support.

In summary, customer response to our clear mobility solutions roadmap continues to exceed our expectations.

<unk> and record total third quarter and year to date net bookings as well as record total ending backlog.

Before I discuss our fiscal 2022 fourth quarter priorities in full year expectations I'd like to turn the call over to Doug to provide some more color on our third quarter financials.

Thank you Joe Good afternoon, everyone. As a reminder, please see the company's 10-Q filing and press release, which is posted on our IR website for a further description of matters under discussion during the call today as Joe mentioned, we faced several supply chain challenges that impacted both the top and bottom line results. This quarter, while we had planned.

For some of this disruption it turned out to be more severe than we had anticipated from a revenue standpoint, there were approximately four core components as part of the printed circuit card assemblies within our vantage sensor product family that we're simply not available driving the revenue Miss that Joe referred to.

On the cost of goods sold side, we had multiple components that were not available from our normal suppliers. So we had to access secondary markets, where we saw prices on these components increase anywhere from two to <unk> 50 times their normal cost. These.

These component cost increases coupled with lower overhead absorption due to the lower volumes impacted the product gross margins by about $1 5 million or almost 1000 basis points.

Obviously, we have many ongoing initiatives to manage this situation. However, we do expect there to be continued supply chain pressure for the next few quarters on the bright side demand for our products and services continues to be strong as evidenced by our record bookings and backlog in the quarter.

Now I'll move on to the details of the third quarter results.

Revenue for the fiscal 2022 third quarter increased 14% to $32 million compared to $28 2 million in the same quarter a year ago.

Our gross margins in the third quarter decreased 670 basis points to 34, 7% compared to 41, 4% from the same quarter last year. As previously mentioned this was due to higher component costs and some unfavorable overhead absorption due to the lower volume in our hardware business.

Turning to revenue mix product revenue decreased 3% to $15 9 million compared to $16 4 million in the same quarter last year. The biggest impact was the approximate $1 9 million in revenue that slipped out of the quarter as previously discussed adjusting for this product revenue growth would have been 8% year over year.

And our vantage sensor product revenue growth would have been 25%.

Product gross margins declined 1410 basis points of our 34, 5% compared to 48, 6% from the same quarter last year due to the volume and supply chain issues mentioned previously.

Our service gross margins grew 37% excuse me service revenues grew 37% to $16 1 million compared to $11 8 million in the prior year quarter as Joe mentioned in the third quarter, 25% of total revenue was annual recurring revenue compared to 23% in the same quarter last year.

Service gross margins increased 360 basis points to 34, 8% compared to 31, 2% from the same quarter last year. This was due to the higher volume and a better mix of more annual recurring revenues.

Operating expenses in the third quarter were $13 1 million compared to $12 million in the same prior year quarter. As a result of the traffic cost acquisition in the third quarter of fiscal year 'twenty. One however, the current quarter operating expenses were down 400000 on a sequential basis with the prior quarter and we continue to focus on keeping.

Our general and administrative expenses flat to get more leverage in the P&L and improve our operating margins notwithstanding the supply chain issues in the current quarter.

We reported a GAAP operating loss in the third quarter of $2 million compared with a GAAP operating loss of 309000 in the same quarter a year ago. This was driven by the supply chain issues as previously mentioned.

The GAAP net loss from continuing operations in the third quarter was $2 4 million or a loss of <unk> <unk> per share, which compares with a net loss from.

<unk> from continuing operations of 261000 or <unk> <unk> per share in the same quarter a year ago.

Adjusted EBITDA for the third quarter was 100000 or 3% of revenue, which compares to approximately $1 5 million or five 2% of revenue in the third quarter of last year.

Given the supply chain challenges in the current quarter and continued expected supply chain headwinds. We are expecting some continued gross margin pressures for the next few quarters.

Turning to liquidity and capital resources total cash and short term investments were $27 5 million at the end of the third quarter. The $700000 decrease quarter over quarter was a result of changes in our working capital specifically, we're buying more raw materials as buffer stock to hedge against the ongoing supply chain shortages were seeing.

We spent 64000 in purchases of property and equipment in the third quarter, reflecting our asset light business model.

In summary, while we experienced supply chain challenges during the quarter, which were very frustrating we recognize that we're not alone in this situation. Many fortune 500 companies have also reported similar experiences given the global shortages on a multitude of products.

Some of the examples of steps, we're proactively taking to mitigate this situation include extending lead times on our purchase orders buying ahead, where we can and in some cases reengineering certain aspects of our products to find replacement components for those that are just unavailable in.

In the meantime, we're pleased by the continued strong demand for our products and services as evidenced by our record bookings and backlog in the quarter and expect to see organic growth rates start to accelerate in the fourth quarter as a result.

With our industry, leading products and services, we believe <unk> is well positioned to capitalize on the investment that will be made over the next several years to modernize this country's transportation infrastructure with that I will turn the call back over to Joe Joe.

Great.

Thank you Doug I appreciate it.

Despite the global pandemic and associated economic turbulence terrorists continues to enhance its position in the large dynamic and highly fragmented smart mobility infrastructure management market.

<unk> characterized by favorable secular trends as well as historic new investment flowing from the recently passed infrastructure investment and jobs Act or Iga.

<unk> market access sizable backlog and platform based strategy provide degrees of freedom and Optionality that most companies in our sector a lag.

As a result, we are very optimistic about the opportunity in front of Vitaros and believe the current environment actually improves our clear mobility value proposition and competitive position. Despite some near term disruption.

For example, in our fiscal 2022 fourth quarter, we will launch a new software as a service solution clear asset, which will help state and local transportation agencies better manage the life cycles of their intelligent transportation system or <unk> assets.

Given the increase in federal funding from JA and the simultaneous impact of supply constraints on agency operations. We believe the timing of clear assets launch is particularly favorable.

As you May recall, we already offer asset management is a cloud enabled managed service to several agencies, including the Georgia Department of transportation.

Incorporated our asset management best practices into the clear asset feature set.

Additionally, clear asset Leverages, our clear mobility cloud and inter operates with our family of Smart mobility infrastructure management software.

Therefore, it offers transportation agencies, a proactive ability to monitor manage and optimize the health of their mobility infrastructure.

Going forward, we will offer a clear asset on a SaaS basis to agencies, who want to manage their own etfs assets as well as use clear asset to deliver our asset management cloud enabled managed service to agencies looking to Virtualized. This process.

Due to the inherent scalability of clear asset this new approach will expand our asset management addressable market beyond state departments of transportation to include regional and local agencies, who are critically challenged in this supply constraint environment to maintain their Ics assets.

Similarly, we're seeing a significant increase in demand for our congestion management cloud enabled managed service, but we've also referred to as intersection as a service.

With about 3000 intersections adopting this model today, we have achieved meaningful customer validation and agencies are increasingly interested in this form of process virtualization to mitigate the labor supply shortage as they face.

As a result, we have a sizable backlog of intersections pending deployment of our congestion management cloud enabled managed service to accelerate their deployment and associated revenue recognition, we're continuing to expand our customer success function <unk>.

Additionally, we now have sufficient customer feedback to characterize a significant return on investment and reduction in carbon emissions associated with its cloud enabled managed service.

Next week, we'll begin a multifaceted communication and demand generation program to promote these compelling benefits.

Given our market leadership superior solution portfolio and the timeliness of our value proposition, we are well situated to implement certain price increases to offset the increase in our cost of goods sold and better capture the full value of our solutions. For example, as mentioned earlier, we implemented a 10% <unk>.

Rice increase for our family of vantage sensors effective January one.

The impact will be de Minimis in our fourth quarter since most of the quotes for the period were generated prior to January one.

Still these price increases will have an increasingly positive impact as we progress through calendar year 2022.

In addition to certain price increases will continue to take actions in our fourth quarter and beyond to manage supply chain challenges. Doug noted that were already extending lead times on our purchase orders buying ahead, its feasible and redesigning aspects of our products to swap components for those that are unavailable.

Moving onto guidance, the company's sales pipeline, which includes both public sector and private sector demand for a clear mobility platform continues to reach new historic levels due to the sustained release of best in class technology and solid sales execution.

Therefore, we anticipate continued bookings growth in our fourth quarter and beyond even though results may fluctuate from quarter to quarter, especially as we continue to pursue more multimillion dollar contracts, including complex agreements with large private sector entities.

Based on our current record backlog and anticipated bookings growth, we anticipate double digit organic revenue growth in our fiscal 2020 to fourth quarter.

However, we are lowering our full year total revenue guidance to $134 million to $136 million due to supply constraints and third party product delays.

This new full year revenue guidance represents year over year revenue growth of 14% at the low end and 16% at the high end of the range.

Although we continue to anticipate elevated supply chain costs for the next few quarters. This will be better offset by higher sales volume and other mitigation beginning in the fourth quarter, including the price increases that we mentioned.

As a result, we anticipate a fourth quarter improvement in gross margin and operating leverage that should yield a low single digit adjusted EBITDA margin producing full year adjusted EBITDA margins of 5% to five 4% of fiscal 2022 full year revenue.

We will provide fiscal 2023 financial guidance when we announce our fiscal 2022 full year results in early June .

In the meantime, I want to reiterate that we continue to make solid progress in executing our platform based business strategy and anticipate sustained above market demand for a clear mobility platform, which is translating to notably improve performance of our service revenue lines.

With regards to our product lines of business, we're taking actions to mitigate the impact of supply constraints and we expect to continue to see strong demand for our industry leading sensors.

Given our industry, leading products and services <unk> is well positioned to capitalize on the historic investment that will be made over the next several years to modernize the country's transportation infrastructure and we are very optimistic about the opportunities in front of us.

With that we'd be delighted to respond to your questions and comments. So operator could you open up the line. Please.

Thank you, ladies and gentlemen, if you'd like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off players similar to reach our equipment.

Again press Star one to ask a question, we'll pause for just a moment to allow everyone an opportunity to signal for questions.

And your first question will come from the line of Jeff <unk> with B Riley. Please go ahead.

Hi, everyone.

So Joe is it fair to say that lowering guidance was really almost all due to supply chain headwinds.

Yes, Jeff Thanks for the questions good to hear your voice.

It was entirely due to <unk>.

Supply chain constraints.

And.

But those are supply chain constraints that would impact our ability to manufacture and ship our own product as well as supplier issues that the ability.

Of third parties to provide critical equipment, where we're actually operating as a reseller.

As you may recall in our second quarter, we indicated that there was about a $1 5 million dollar slippage in third party.

Product sales, which we had hoped to make up in the third quarter that didnt materialize.

This particular quarter as we mentioned we were unable to ship about $1 9 million and our own product and we are anticipating that even though we're in we are forecasting double digit organic growth in the fourth quarter. We believe we could have done better than that.

If not for the supply chain and third party supplier constraints that we're facing so yes. The the reduction is entirely due to supply chain issues.

Okay, and I know you mentioned that you are taking a number of steps to mitigate the supply chain pressures, but overall would you say it's worsening at this point.

Appears to be to me, but just I guess your overall assessment of our supply chain is it getting worse, and then where do you see or when do you see light at the end of the tunnel.

Yes, Doug do you want to take a crack at that question.

Yes, well, we've been talking about supply chain issues.

Since the first quarter I would say that.

They're going to continue to be there I.

I think we are.

Getting a little better at understanding what the impact is going to be but I don't think its going away in the next couple of quarters I mean, if you are.

Her GE or intuit or any of the big.

The company said, it's here at least through the middle of 'twenty three some say the end of 'twenty three so it's really hard to tell to be blunt, but just know we're doing everything we can to manage it and I think.

We are expecting to see a little better improvement in Q4 in the margins, but theres still going to be a lot of pressure.

Okay and then if we can just turn to I just had a couple of questions on your guidance what level of organic growth as reflected in the 14% to 16% revenue growth for the fiscal year.

What level of organic growth isn't that.

Sure. So if you look at the.

Midpoint, it's about six 8% at the low.

End of the guidance of 134, it's five nine at the high point, it's about seven 7%.

Okay, so kind of kind of mid single.

Organic revenue growth for the year.

And then also you may have mentioned this but what was the organic revenue growth in the quarter you just reported.

It was about three 4% in the quarter.

Okay, and then did you give us and again I apologize if I missed this but did you give us the mix of managed services and SaaS and also did SaaS continue to grow faster than managed services.

No we didn't mention that.

Annual recurring revenue was about half of the service revenue that Joe mentioned.

The mix continues to be about 50, 50, because remember the SaaS revenue is going to grow but it takes longer to grow just because of the nature of the contracts and that it's amortized usually over three to five year period, so to get.

A good comp it takes several quarters to do that.

Okay, and so if we're thinking about kind of I guess getting back to supply chain and the pressure you guys have there what level of gross margin do you think is feasible for you to reach in the next.

The fiscal year, that's about to begin what seems feasible I don't know if you want to give a range or just maybe a sense of what youre thinking.

Well I would I think you have to bifurcate.

Product revenue from our service revenue right.

Because those do have different margin profiles.

Historically the product revenues.

<unk> ran in the 45% to 50% range.

Obviously, we are way down in the quarter for the reasons, we talked about but we would certainly expect over the next several quarters that they would they would get back to that 45% to 50% range, where they were I mean, they were only 34 and a half in the current quarter, but I think that was.

No.

Very very on maybe an all time low.

From a product margin standpoint, so we're expecting them to come back over the next couple of quarters.

Hopefully as we continue to work our way out of the supply chain issues like everybody else.

Okay, and then so thats product and one about service if we're thinking about kind of modeling the next fiscal year and getting to a consolidated gross margin.

Yes, I mean, those have been running at.

Around 35% and that's where they've kind of settled in and as I said we.

Do expect those to increase as the amount of annual recurring revenue goes up but we'll be giving more specific guidance when we get to our fourth quarter call.

Okay.

Fair enough.

And I just wanted to just so everyone's clear on this.

On operating expenses, just say, let's call it all else being equal excluding incremental acquisitions that you may make what would you expect operating expenses to be in dollars in the new fiscal year, and I guess as it as a percentage of revenues and how much would you expect to leverage on Opex.

Sure.

As I mentioned, our plan is to keep the G&A you know almost flat year over year and we would.

Spec that.

R&D, probably as a percentage of revenue goes up a percentage or two in that.

Sales and marketing is going to go up a few percentage of the revenue growth just because you know investments, we'll be making in our <unk>.

Sales for us as well as marketing campaigns as such as we bring on a lot of these new products. So you can take the current run rate as a percentage of revenue and add a couple of percent to each of those lines with G&A staying relatively flat.

Okay, and then one more if I could squeeze it in and then I'll turn it over.

Can you give us your latest thoughts maybe for Joe your latest thoughts on kind of the M&A pipeline, what it looks like.

Size of potential targets, how many acquisitions do you think we might see in the new fiscal year.

Yeah sure. So Jeff as you know, we've said that we'd like to do at least one acquisition every 12 months to 18 months, we closed our last acquisition in December .

12 months ago.

So we're now 13 months beyond that so we're into that 12 to 18 month window.

As you can imagine we're working hard at trying to identify and develop new acquisition targets all the time as.

As we've said previously you can assume that at any point in time, we're probably in some level of active discussion with at least one target, but unfortunately, we need to date a lot of.

Girls before we get engaged and so.

Certainly people fall out and.

And we continue to find new dates.

In terms of the overall.

Kind of.

Deal pipeline, if you will I.

I would say that it is.

Probably a little bit more favorable now than it was six months ago.

And by that I mean, we're seeing.

We're always.

Pursuing opportunities, there's a lot of outbound activity, but I would say right now there is probably more inbound activity than certainly we saw six months ago, and we'll have to see what happens, but my sense is that targets are probably a little bit more realistic about valuations today than they were sick.

Months ago so.

<unk>.

There is this is a very attractive market. There is a lot of capital focused on this market. So I don't want to make it sound easy, it's not but I would say that overall I feel more optimistic or more we're bullish about our acquisition opportunities today than I did when we talked over the summer.

Okay. Good to hear thanks for taking my questions and best of luck.

Thanks.

Thank you.

We will now take the next question is from the line of Ryan signal with Craig Hallum Capital Group. Please go ahead.

Great Good afternoon guys.

Curious on the supply chain, you guys talked a little bit I don't know that I've got a full explanation or maybe I missed it but I guess what has gotten worse specifically within the supply chain over the last couple of months.

Doug do you want to take a crack at that sure sure yes.

I think its specific really to the components that we need to source our products with.

And as I.

And in the prepared remarks.

For components that.

We're just literally completely unavailable.

There were a couple of dozen components, where we had to go to secondary markets, meaning usually brokers.

To find these components.

As I mentioned the prices are.

From double to 50 times, what they normally are so.

To be honest it ebbs and flows.

Massive trillions of dollars supply chain and electronic components. So.

Think for us.

The particular components that we need to manufacture our products.

With and it was more exaggerated in the current quarter than it was in the second quarter and again, we've been talking about this every quarter that there has been pressure on it just seem like the mix of products and components we needed.

Worked against US this quarter, but as I also mentioned I think.

Getting ahead of it with placing longer lead times, and even reengineering certain aspects of our products to find components that are available.

How much windows.

<unk> improves that you can get those components are customers ready to receive.

Shipments and installations, where you can see kind of an immediate recovery or will this be spread over.

A multi quarter kind of duration do to recover those potentially deferred sales.

Yes, so I'll take a crack at that yet right.

I would I think there is the opportunity for us.

Acceleration in revenue if you will.

In the past.

Haven't had the same kind of situation, but we had sort of some similar ones and at that point.

I was advising people not to expect there to be.

Like a.

Kind of a massive increase in revenue as a result of that because it would take time for the market to absorb this product, but I think the current circumstances are different.

A lot of our customers.

Actually are in critical need our product and are able to attain it right now because of supply chain impacts to us, but also to other vendors and so I would expect that.

The agencies are not only in a position but are in dire need.

A lot of this product so should.

The components become available and we were able to accelerate our manufacturing and our shipping it could result in.

Hey, Gabe.

A windfall if you will.

It could happen with any within any given quarter.

And then as we as we think I know youre not guiding to next year, we're one quarter away it.

Sounds like you could get some big recoveries pretty quick I guess the medium term.

Guidance targets is for low double digit top line growth organically.

How confident are right in that.

Given the current situation.

So from a demand perspective, we're extremely confident I mean, if you just look at the.

Year to date.

Third quarter bookings in the year to date backlog I think it's.

The backlog growth, which was 20% on a year to date basis would indicate that there is certainly more than low double digit demand.

For our products and services and so it's going to be simply a matter of supply.

As Doug said the market.

Supply chain continues to be a challenge I think everybody is hearing that.

Across all sectors.

And we're certainly.

Impacted by that the same way that everyone else is.

That being said.

We are taking a number of them that we started taking a number of measures in the third quarter. We continued to take them. So I would say that having gone through this in the third quarter were probably better prepared.

To manage in this current environment in our fourth quarter than we were in the third so we're cautiously optimistic on our supply on the supply side, but again on the demand side, we're highly confident about our ability to achieve double digit growth.

Last one for me.

You mentioned M&A pipeline. Your stock has also pulled back here, how do you think about capital allocation and.

The most accretive use of that share buyback versus M&A.

Yes, Doug do you want to talk to that.

Sure, Yes, I mean, it really depends upon the target and the seller to be honest.

Characteristics of the asset that we're buying.

Obviously issuing stock at $4 a share is not ideal so that would be certainly lower on the list and quite frankly, we have looked at things where the sellers want they don't want stock. They just want an all cash deal. So it really depends upon the purchase price and the financial characteristics of the target that really drives how.

Do we think about how we might pay for that but we have ongoing discussions with lots of private equity firms.

You may have saw we put in.

<unk> line of credit with capital one.

We've got various different options, we can look at but it's really dependent upon the target their financial characteristics and what the seller's willingness.

To work with.

Just just a clarification I was referring to.

Share buyback share buyback stock, yes, so I mean that.

We do have an open authorization from our board and it's something that we continue to look at and talk about.

And at some point, if something on the M&A horizon doesn't look like it's going to materialize.

Certainly one option, but as Joe mentioned the pipeline is definitely looking better now than it was during the summer. So we're continuing to feel like Thats, probably the best use as opposed to a share buyback.

Thanks, guys. Good luck.

Sure. Thanks Ryan.

Once again, ladies and gentlemen, if you do have a question. Please press the star followed by the one on your telephone keypad and if you're using a speaker phone. Please make sure. Your mute function is turned off by your signal to reach our equipment.

We'll take the next question is from the line of Mike Latimore with Northland Capital. Please go ahead.

Okay.

Hi, This is <unk> on behalf of Mike Latimore could you give some color on if youre getting any signals from the federal government regarding any programs that could benefit you or any potential benefit from the infrastructure build that code a much by the end of this calendar year.

Oh.

Absolutely.

That as we've said before we expect that most state and local agencies will start to see an impact from that.

And their new fiscal year.

<unk>.

Those fiscal years in general.

Art either July one or October one.

And.

They are.

A number of different program areas it would certainly benefit us.

One particular area that's been in the news lately is related to safety and the creation of a national safety Council by the U S Department of transportation.

We are actually affiliated with a coalition.

That is.

Working closely with the National Safety Council, that's actually a relatively small amount of funding. The initial funding is $1 5 billion, but.

We.

That's just an example of one activity or that we're closely engaged.

With.

Key sponsors and Thats quite topical because it's been in the news lately.

Alright and also.

It's our most active when it comes to investing in your technologies and another related programs.

For sure yes.

If you look at the total Nash.

National spending in smart mobility infrastructure, it's largely concentrated in California tax.

Texas, and Florida, which are three largest markets.

I'd say a combination of those three markets represent about 40% of the total national spending.

Not only do they tend to spend the most in general they tend to be.

On the Vanguard a lot of the newer ideas are generated tested validated and those markets and then later adopted throughout other regions of the country.

Alright, and could you also tell me how much did traffic costs contributed to this particular quarter.

Sure, Yes, Doug do you want to talk to that.

Are you there Doug.

I'm, sorry, I was on mute.

It's about $3 $7 million in the quarter.

I'm, sorry can you repeat that again.

Sure $3 $7 million of revenue in the quarter for traffic cost.

Alright, alright, thanks Frank.

Actually Doug Doug So just to confirm though was that $3 7 million in the quarter, but as opposed to eight 8 million.

Prior quarter. So is it a net $2 $9 million impact or did I hear that right.

It was 800000 in the prior year quarter. So.

Net of.

The traffic has revenue on a comparable basis was $3 1 million.

You can reconcile that back to the organic growth of three four that I mentioned.

Yeah.

Alright got it thanks guys.

Sure.

And there are no further questions at this time, Mr. <unk> I'd like to turn the call back over to you for any additional comments or closing remarks.

Super Thank you operator I appreciate it.

And as always I appreciate everybody's support and thoughtful questions on the Investor Relations front, we will be participating in various investor outreach events this quarter with our covering sell side analysts and will also be presenting at the B Riley institutional Investor Conference on May 25th in 'twenty six.

<unk>.

If you'd like to meet with us or you are participating in the B Riley conference. Please plan to attend our presentation <unk> schedule, a one on one meeting with us in.

In the meantime, we look forward to updating you again on our continued progress when we report our fiscal 2022 fourth quarter and our full year results in early June .

With that we'll conclude today's call. Thank you.

Ladies and gentlemen, this concludes today's call. Thank you for your participation and you may now disconnect your lines.

Okay.

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Yeah.

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Okay.

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Thank you operator, good afternoon, everyone and thank you for participating in today's conference call to discuss <unk> financial results for 2022 fiscal third quarter ended December 31 2021.

Joining us today on our I terraces, President and CEO , Mr. Joe <unk> and the company's CFO , Mr. Doug Grose.

Guarantees of future performance.

Terrorists does not undertake any 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 by 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 an IDE.

Identify important risk factors that could cause actual results to differ materially from those that are contained in any of the 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 I terrorists dot com.

Now I'd like to turn the call over to <unk>, President and CEO , Mr. Joe for sure.

Joe.

Super Thank you Todd and good afternoon to everyone. I appreciate all of you joining us today.

I want to remind everyone that we completed the sale of our agriculture and weather analytics segment to Dts L. L C.

May five 2020.

As such we're reporting the results of that segment as discontinued operations for all periods presented in today's earnings announcement.

I'll be discussing only our continuing operations for the remainder of this call.

The company reported fiscal 2022 third quarter total revenue of $32 million in fiscal 2022 year to date total revenue of $99 3 million, representing a respective 14% and 16% year over year increase.

At the same time, our third quarter annual recurring revenue of $8 1 million increased 27% year over year, while year to date annual recurring revenue of $24 9 million increased 43% year over year.

This brings our year to date total net bookings to a record $113 6 million, representing a 28% increase year over year.

As always our reported net bookings and ending backlog figures reflect firm customer orders.

Of our $32 million in third quarter total revenue, 50% was recorded as product revenue and 50% was recorded as service revenue.

As a point of comparison, 52% of our $99 $3 million and year to date revenue was reported as product revenue and 48% as service revenue.

The Companys product revenue is composed of two components.

First our intersection detection sensors travel time sensors and infrastructure to vehicle communication devices and second third party products that we distribute deploy and often integrate with our own products are.

Our fiscal 2022 third quarter product revenue was $15 9 million versus $16 4 million in the same prior year period, representing a 3% decrease year over year.

The decrease was due to a continued divergence in the sales performance of <unk> products, which increased 10% year over year, and third party products, which declined 49%.

Year over year due largely to the inability of certain third parties to meet critical delivery deadlines.

We saw a similar issue with the performance of third party products and our second quarter.

With respect to our own products, we too experienced some supply chain issues in the third quarter.

These issues presented us are prevented us from shipping approximately $1 9 million and vantage sensor product orders limiting the revenue growth for our own products to 10% is just noted and precluding us from offsetting the third party product revenue variance.

At the same time, we incurred unplanned cost to source some expedite components from alternative suppliers, who were necessary to manufacture our products.

Although we expect these issues to resolve eventually as global supply chain re normalize we implemented a 10% price increase on certain products effective January one 2022 to help offset these increases in cost of goods sold.

Later, I'll discuss our product pricing dynamics in more detail, including the timeline to start to realize the impact from our price increases.

Notwithstanding the recent supply chain issues of tariffs continues to take market share in the intersection detection travel time monitoring and infrastructure to vehicle device product categories are.

Our share gains are due to excellent sales execution and continuous innovation across our product portfolio that enables us to set the performance standards for the product categories in which we compete.

For example, during the third quarter, we launched a first of its kind vehicle to everything or V to X enables detection solution branded as vantage fusion in partnership with Continental AG.

Vantage fusion, which uniquely fuse as infrastructure and in vehicle sensors enables advanced intersection visualization and real world Vida acts applications, such as virtual basic safety messages cooperative perception messaging near Miss analysis, Q detection and pedestrian activation.

Now, let's discuss our service lines of business.

$8 million in the same prior year period, representing a 37% year over year increase on a year to date basis fiscal 2022 services revenue was $47 7 million versus $38 4 million in the same prior year period, representing a 24% year over year increase.

As mentioned earlier, our third quarter, our annual recurring revenue of $8 1 million increased 27% year over year and our year to date annual recurring revenue of $24 9 million increased 43% year over year.

In the third quarter, we recorded $26 2 million in net services bookings with the following bookings being some of the more notable.

$6 $8 million contract for the first phase of a vehicle to infrastructure connected by signal priority system for La Metro as you may recall in our recent Investor Day presentation. We noted that transit signaled prioritization represents a near term use case, an important use case for connected vehicle applications.

A $4 $5 million signal synchronization project in cloud enabled managed services contract with the Orange County Transportation Authority.

At $1 5 million integrated corridor management, our ICM contract with the Florida Department of Transportation's District five.

Over $1 million in total contracts from several state and regional agencies for advanced traveler information system clear out.

And a $1 million traffic signal synchronization program with the San Bernardino County Transportation Authority.

Additionally, we amended the contract with the state of Iowa that we discussed on our last earnings call. As a result, we have resumed the development of new commercial vehicle operations software capabilities that will enhance our existing compliance inspection software.

In summary, customer response to our clear mobility solutions roadmap continues to exceed our expectations.

<unk> and record total third quarter and year to date net bookings as well as record total ending backlog.

Before I discuss our fiscal 2022 fourth quarter priorities in full year expectations I'd like to turn the call over to Doug to provide some more color on our third quarter financials.

On the cost of goods sold side, we had multiple components that were not available from a normal suppliers. So we had to access secondary markets, where we saw prices on these components increase anywhere from 2% to 50 times their normal cost. These.

These component cost increases coupled with lower overhead absorption due to the lower volumes impacted the product gross margins by about $1 5 million or almost a 1000 basis points.

Now I'll move on to the details of the third quarter results.

Total revenue for the fiscal 2022 third quarter increased 14% to $32 million compared to $28 2 million in the same quarter a year ago, our gross margins in the third quarter decreased 670 basis points to 34, 7% compared to 41, 4% from the same quarter last year as previously mentioned this.

This was due to higher component costs, and some unfavorable overhead absorption due to the lower volume in our hardware business.

And our vantage sensor product revenue growth would have been 25%.

Product gross margins declined 1410 basis points over 34, 5% compared to 48, 6% from the same quarter last year due to the volume of supply chain issues mentioned previously our service gross margins grew 37% excuse me service revenues grew 37%.

$16 1 million compared to $11 8 million in the prior year quarter as Joe mentioned in the third quarter, 25% of total revenue was annual recurring revenue compared to 23% in the same quarter last year.

Service gross margins increased 360 basis points to 34, 8% compared to 31, 2% from the same quarter last year. This was due to the higher volume and a better mix of more annual recurring revenues.

Our general and administrative expenses flat to get more leverage in the P&L and improve our operating margins notwithstanding the supply chain issues in the current quarter.

The GAAP net loss from continuing operations in the third quarter was $2 4 million or a loss of <unk> <unk> per share, which compares with a net loss from.

<unk> from continuing operations of 261000 or <unk> <unk> per share in the same quarter a year ago.

Adjusted EBITDA for the third quarter was 100000 or 3% of revenue, which compares to approximately one 5 million or five 2% of revenue in the third quarter of last year.

Given the supply chain challenges in the current quarter and continued expected supply chain headwinds. We are expecting some continued gross margin pressures for the next few quarters.

Turning to liquidity and capital resources total cash and short term investments were $27 5 million at the end of the third quarter to $700000 decrease quarter over quarter was a result of changes in our working capital specifically, we're buying more raw materials as buffer stock to hedge against the ongoing supply chain shortages were seeing.

We spent 64000 in purchases of property and equipment in the third quarter, reflecting our asset light business model.

Great.

Thank you Doug I appreciate it.

Despite the global pandemic and associated economic turbulence terrorists continues to enhance its position in the large dynamic and highly fragmented smart mobility infrastructure management market.

Hector characterized by favorable secular trends as well as historic new investment flowing from the recently passed infrastructure investment and jobs Act or Iga.

<unk> market access sizable backlog and platform based strategy provide degrees of freedom and Optionality that most companies in our sector lack.

For example, in our fiscal 2022 fourth quarter, we will launch a new software as a service solution clear asset.

Each will help state and local transportation agencies, better manage the life cycles of their intelligent transportation system or <unk> assets.

Given the increase in federal funding from JA and the simultaneous impact of supply constraints on agency operations. We believe the timing of clear assets launch is particularly favorable.

As you May recall, we already offer asset management is a cloud enabled managed service to several agencies, including the Georgia Department of transportation.

We've incorporated our asset management best practices into the clear asset feature set Additionally, clear asset Leverages, our clear mobility cloud and inter operates with our family of Smart mobility infrastructure management software.

Therefore, it offers transportation agencies, a proactive ability to monitor manage and optimize the health of their mobility infrastructure.

Going forward, we will offer clear asset on a SaaS basis to agencies, who want to manage their own etfs assets as well as use clear assets deliver our asset management cloud enabled managed service to agencies looking to Virtualized. This process.

Due to the inherent scalability of clear asset this new approach will expand our asset management addressable market beyond state departments of transportation to include regional and local agencies, who are critically challenged in a supply constraint environment to maintain their Ics assets.

Similarly, we're seeing a significant increase in demand for our congestion management cloud enabled managed service and we've also referred to as intersection as a service.

Additionally, we now have sufficient customer feedback to characterize a significant return on investment and reduction in carbon emissions associated with its cloud enabled managed service.

Next week, we will begin a multifaceted communication and demand generation program to promote these compelling benefits.

This increase for our family of vantage sensors effective January one.

The impact will be de Minimis in our fourth quarter since most of the quotes for the period were generated prior to January one.

Still these price increases will have an increasingly positive impact as we progress through calendar year 2022.

Moving on to guidance the company's sales pipeline, which includes both public sector and private sector demand for a clear mobility platform continues to reach new historic levels due to the sustained release of best in class technology and solid sales execution.