Q2 2023 Iteris Inc Earnings Call
Good day and welcome to the fiscal second quarter 2020 financial results Conference call.
At this time all participants are in a listen only mode and the floor will be opened for questions and comments after the presentation.
Please note. This event is being recorded I would now like to turn the conference over to Todd Curly of MTR Investor Relations. Please go ahead.
Good afternoon, everyone and thank you for participating in today's conference call to discuss <unk> financial results for its fiscal 2023 second quarter ended September 32022.
Joining us today are <unk>, president and CEO , Mr. Joe <unk> and the Companys CFO Mr. Doug grows.
Following their 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 and May make forward looking statements regarding events or future performance of the company, which statements are based on current information are subject to change.
Not guarantees of future performance <unk> 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.
<unk> 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 <unk> Dot com.
Now I'd like to turn the call over to <unk>, President and CEO , Mr. Joe <unk>.
Joe go ahead.
Great. Thank you Todd and good afternoon to everyone. I appreciate all of you joining us today.
For the fiscal 2023 second quarter.
<unk> reported record total revenue of $39 3 million, representing an 18% increase year over year.
This growth was due to the strong demand for our products and services as well as the progress of our supply chain mitigation. Our improvement program that helped to unlock our quarterly vantage sensor backlog for reference we reduced our fiscal 2023 second quarter unshipped advantage backlog to $900000.
<unk>.
Because our supply chain management program enabled us to ship a record number of vantage sensors, we were able both to continue to meet our customer commitments and to flush high cost inventory items from our balance sheet through the P&L.
This resulted in an extraordinary increase in the cost of goods sold in the second quarter. However, it will improve our inventory position going forward.
Despite reports of a slowdown in the broader economy customer adoption of our clear mobility platform remains very positive.
In the second quarter, we reported total net bookings of $42 2 million, representing a 15% increase compared to the same prior year period.
This brings our trailing 12 month total net bookings to a record $167 6 million, representing a 33% increase relative to the same prior period.
As a reminder, our trailing 12 month bookings figure does not include the large opportunity in front of us with the infrastructure investment and jobs Act, where I J a.
Iga, a funds will flow to local entities through either formula or grant funding Formula funding is just beginning to show up in state and local budgets in the first fiscal year. After the law went into effect, which is October one 2022 for most state and local entities.
With respect to grant funding USD Ot has not issued any intelligent transportation systems specific grant funding from the Iga to date. The first wave of grants, which will start to be awarded early next calendar year will be dedicated to USD OTC streets for all initiative.
At this time, we've submitted safe streets for all grant applications with three cities and various other state and local entities have included pricing for my Trs and their grant applications, even though we were not involved in the preparation of those grant applications.
Additionally, we are beginning to work with customers to submit applications for the second wave of grants, which are designated for the strength in mobility and revolutionize transportation or smart program.
Due to sustained strong total net bookings we ended the September 30 period with a record total ending backlog of $111 8 million, representing a 34% increase year over year, and a 3% increase on a sequential basis.
As always our reported total net bookings and ending backlog figures reflect firm customer orders.
The total value of customer contracts.
Which varies from quarter to quarter averages on a historical basis about 200% of our total ending backlog.
Fiscal 2023 second quarter product revenue increased 17% year over year to $28 million, even after 900000 shipments slipped out of the quarter due to global supply chain constraints.
Otherwise product revenue would have been 900000, higher or $21 7 million for the quarter, representing a 22% increase relative to the product revenue in the same prior year period.
Our January one 2022 vantage sensor price increase contributed an estimated 3% to 5% to product revenue, meaning that underlying unit demand was the primary driver of second quarter product revenue growth.
Our sensor portfolio continues to take market share primarily due to superior product performance.
In the second quarter, we extended our performance lead with the release of enhancements to the artificial intelligence capabilities for our vantage apex sensors introduction of new safety features for our next sensors that will address important safe streets for all priorities and completion of new connected vehicles sensor.
<unk> or <unk>.
New connected vehicle sensor prototype that we intend to release to market in <unk>.
Calendar year 2023.
Because of our relentless focus on product performance, we continue to win virtually every large competitively sourced detection sensor fixed travel time sensor and cellular V to X sensor initiative across the country.
For example, our sensors were recently selected for the following smart mobility initiatives.
Hybrid video and radar sensors to support the I four Florida regional advanced mobility elements are frame program in the Florida Department of Transportation's or F dots district seven.
Connected vehicle sensors to support an initial cellular V to X deployment for the I four frame program in <unk> District too.
Radar detection at John F. Kennedy International Airport, which follows the recent announcement that our radar detection sensor radius was certified for use in New York State.
Video sensors for intersection detection across a large transportation corridor and the city of Irvine, California.
Connected vehicle sensors, along the Berlin Turnpike, connecting New Haven, and Hartford counties in the state of Connecticut.
And hybrid video and radar sensors for highway detection collection and analytics across a section of U S. Highway 50 in the state of California.
During our last Investor day, we discussed our intent to expand the total addressable market for our intersection detection sensors by enhancing the product portfolio to address two adjacent categories first the fixed sensor highway analytics market and second the infrastructure to vehicle integration market.
We believe the I four frame Berlin Turnpike U S Highway 50, and other recent new customer contracts validate the merits of our product strategy and demonstrate our ability to continue to expand our total addressable market.
While our long term strategic objective is to maximize the penetration of our sensors. Our current priority is to re normalize the financial model of our sensor portfolio.
Therefore, we continue to devote substantial management attention to our global supply chain improvement program.
In the quarter, we achieved the following program milestones.
We released to manufacturing to alternative circuit boards, who will begin shipping this month with semiconductors at normalized component costs.
Re factored the prototype for third alternative Circuit Board based on test feedback. The new prototype was subsequently released to manufacturing on November seven 2022.
Perform design validation for six alternative circuit board designs and for your reference we've prioritized the release of alternative circuit boards based on the degree of financial impact.
And as measured earlier I mentioned earlier, we began to re optimize our inventory by Flushing certain high cost product components through the P&L and replacing them with alternative components at normalized inventory costs.
Now I want to review the performance of our service lines of business.
Fiscal 2023 second quarter total service revenue was $18 5 million versus $15 5 million in the same prior year period, representing a 19% increase year over year.
In addition to the strong service revenue growth, we recorded $20 8 million and net service bookings, representing a 24% increase over the same prior year period.
Notable new customer agreements include a $4 $9 million renewal from the Bay area Metropolitan Transportation Commission for the continued use of our clear route software.
$3 million task order from the Federal Highway administration for a continued development and support of the nation's Ics reference architecture now known as architect reference for cooperative and intelligent transportation or arent yet.
A $2 $8 million task order to provide technical services to the San Bernardino County, Transportation authority or SBC Ta to support the implementation of corridor freight and express lanes on the I 10.
$2 million task order from the Virginia Department of transportation to use our clear asset software and related asset management managed services, a $1 $5 million task order to provide technical services to support the Los Angeles Metro Orange line extension of $1 $3 million task order with the SBC.
Ta to support the development of a smart County transportation plan.
The $1 million task order with the Florida Department of Transportation District, five to implement an integrated corridor management program.
As with our sensor portfolio, we continued in the second quarter to enhance our software as a service data as a service and cloud enabled managed service solutions to support sustained long term bookings growth.
Second quarter release milestones included enhancements to clear asset to support the management of a transit signal prior up transit signal prioritization assets, which expands the addressable market for the SaaS product.
Enhancements to cleared data published historical as well as real time data feeds to address a variety of new use cases for both clear data and clear guide, which provides the visualization front end for clear data.
And integration of <unk> is real time data feed with clear mobility cloud to further enhance and differentiate our uniquely curated mobility data sets.
In summary, we are pleased with our second quarter as record total revenue record trailing 12 month total net bookings growth and record total ending backlog all of which we believe demonstrate considerable progress we've made against our platform strategy.
Additionally, our global supply chain management program achieved significant milestones that enabled us to start releasing alternative circuit boards to production and re optimizing our inventory to include newly qualified components at normalized component costs.
These actions had a significant impact on net cash flows and gross profit margins in the second quarter. However, they position <unk> for a critical inflection point in the second half of fiscal 2023.
On that note I'd like to turn the call over to Doug to provide more color on our second quarter financials, after which I'll further discuss our second half expectations.
Thank you Joe Good afternoon, everyone. As a reminder, please see the company's 10-Q filing and press release, which are posted on the IR website for further description of matters under discussion during the call today as Joe mentioned and as we expected we continue to face several supply chain challenges again this quarter that impacted both the top and bottom line.
<unk> results.
We anticipated these challenged and we continue to see certain components that were not available through our normal channels to that point, we spent approximately $8 4 million in inventory purchases from the secondary markets E brokers, which was up from $5 6 million in Q1, and this negatively impacted the cost of sales by seven.
$8 million in the current quarter from a revenue standpoint, the amount of unshipped backlog decreased from $4 9 million at the end of Q1 to $9 million in Q2, however, sourcing all the components we needed at reasonable prices continued to be a challenge with the cost of many components continuing to be two to 100 times there.
Normal costs.
If we had all the components, we needed a year over year revenue growth would have been almost 21% the orders that didn't ship in the quarter are expected to ship in Q3, and there were no order cancellations in the second quarter, which is why we expect the second half hardware revenue growth to be over 30% year over year.
As Joe mentioned, we have many ongoing initiatives to improve the situation, which is why we expect second half hardware gross margins to be in the mid 30% range compared to only 14, 8% in the first half of this year demand for our products and services continues to be strong as evidenced by our once again strong bookings of $42.
$2 million and record backlog of $111 8 million now I will move on to the details of our second quarter results.
Total revenue for the fiscal 2023 second quarter increased 18% to $39 3 million compared to $33 3 million in the same quarter a year ago, our gross margins in the second quarter decreased 1680 basis points to 16, 7% compared to 33, 5% in the same quarter.
Last year.
Adjusting for the increased component costs of $7 8 million gross margins would've been 36, 6%, we're up 310 basis points compared to the same prior year quarter.
As previously mentioned our revenue continued to be constrained due to the unavailability of certain components in the gross margin pressure was due to higher cost for those components that that would be purchased through the broker markets.
Turning to revenue mix, the product revenues increased 17% to $20 8 million compared to $17 7 million in the same quarter last year, taking into account the $9 million of revenue that was not recognized because of component shortages. The product revenue growth would have been 22% quarter over quarter.
Third revenue was a conscious decision made to meet our customers on time delivery expectations and take market share from competitors, but it did come at a significant cost to the gross margins. This strong demand underscores our market leading position in the sensor market and as Joe noted we continue to win on largest.
Sensor deals.
Product gross margins declined 4570 basis points and were three 7% compared to 49, 4% from the same quarter last year due to the supply chain cost issues mentioned previously.
Our service gross revenues increased 19% to $18 5 million compared to $15 5 million in the prior year quarter, primarily driven by stronger software and managed services revenues in the second quarter, 25% of total revenue.
Annual recurring revenue as a reminder, annual recurring revenue is comprised of our software and managed services revenues service gross margins increased 600 basis points to 31, 3% compared to 15, 3% from the same quarter last year.
As a reminder, Q2 of fiscal year 'twenty two included a onetime nonrecurring charge of $2 8 million. So after adjusting for this the gross margin decrease was 210 basis points, which was primarily attributable to increased labor cost and the timing of certain contract extensions and the contract mix.
Operating expenses in the second quarter were flat at $13 5 million.
General and administrative expenses were down $1 1 million or 18, 5%. While R&D was up 400000, driven primarily by the circuit board redesign efforts sales and marketing costs increased 800000, which was related to our sales and product support head count to support the higher sales going forward.
<unk>.
We reported a GAAP operating loss in the second quarter of $6 9 million compared with a GAAP operating loss of $2 4 million in the same quarter a year ago.
The operating loss was solely attributable to the higher component costs as previously mentioned.
Progress being made on the circuit Board Redesigns.
Anticipating spending less than $1 million in broker component components in Q3, which is down significantly from the $8 4 million spent in Q2.
The GAAP net loss from continuing operations in the second quarter was $7 4 million or loss of <unk> 17 per share, which compares with a net loss from continuing operations of $2 1 million or <unk> <unk> cents a share.
Same quarter a year ago.
Adjusted EBITDA for the second quarter was a loss of $5 2 million or 13, 1% of revenue, which compares to EBITDA of approximately $2 3 million or six 9% of revenue in the second quarter of last year. The GAAP operating loss GAAP net loss and adjusted EBITDA loss were driven by the supply chain issues as previously noted.
With the supply chain improvement plans outlined by Joe We anticipate a progressive improvement in our supply chain position in the second half of this year since it will take some time for the redesign of all of the circuit boards to shift through to our customers.
With the two new circuit board designs already shipping to customers in the third quarter and one more of that has already gone into production. This week. This will largely mitigate our need to procure components and the broker markets. As previously mentioned these key redesign activities should return the product gross margins to about 40% by the fourth quarter of this year.
Turning to liquidity and capital resources cash was $8 million at the end of the second quarter in networking capital was approximately 26 million to $6 $8 million decrease in cash quarter over quarter was a result of the net loss, which was driven by the higher component costs. As previously mentioned, we procured $8 $4 million in components from the second.
Dairy markets. So we were unable to get meaningful extended payment terms, which is a normal business practice in these markets to offset the inventory carrying cost and this also negatively impacted our working capital in the quarter.
With the expectation that third quarter parts purchased in the broker market will decrease to less than $1 million. This will substantially improve our working capital and we would expect to be cash flow positive in Q3 and continue to increase our cash position in Q3 and beyond as our circuit board redesign projects continue to progress.
Lastly, we spent 190000 in purchases of property and equipment in the second quarter, which was down from 269000 in the same prior year second quarter, and we still expect the full year capex to be less than 1% of revenues, reflecting our asset light business model.
So in summary, we continue to be laser focused on our supply chain challenges as Joe mentioned, our multi point plan is progressing well with the three new circuit board designs in production in the third quarter. We're confident that we will weather the supply chain storm and come out even stronger on the other side with multiple circuit board designs for our market leading vantage sensor.
<unk> and without sacrificing any features and functionality that our customers have come to rely upon with that I'll turn the call back over to Joe Joe.
Great. Thank you Doug.
Although COVID-19 and subsequent supply chain constraints may have obscured visibility in the last several quarters <unk> continues to strengthen its leadership position in the smart mobility infrastructure management market.
It is a large dynamic market that represent significant opportunities given favorable secular trends and historic new investment from the Iga, which among other benefits should provide a meaningful backstop should we enter a future recession.
Therefore, we are extremely optimistic about the opportunity in front of Vitaros and believe the current environment, even improves our clear mobility value proposition and competitive position.
To capture this opportunity <unk> is executing against an aggressive FY 'twenty three second half solutions roadmap to drive adoption of the clear mobility platform enhance the cross sell of our clear mobility offerings and improve the monetization of our mobility datasets planned releases include.
<unk>, a new connected vehicle safety alert for our spectra CV sensor that is targeted at both public and private sector markets.
New safety features for our vantage apex sensors that will further enhance our safe streets for all value proposition new scalability features for vantage apex that will enhance our ability to better price differentiate based on certain intersection characteristics.
New safety analytics and connected vehicle reporting features for clear guide our mobility intelligence application and new features that enable vantage fusion to stream connected vehicle and detection data to clear mobility cloud.
We believe our sales channels are the most productive in the industry. However, we continue to pursue additional opportunities to capitalize on the continuous enhancements to our platform capabilities and to maximize our market share gains.
In fiscal 2023, the second half of fiscal 2023, we will introduce an average 10% price increase for our vantage sensor portfolio, which actually went into effect on October one 2022.
Continue to optimize our distribution model, particularly in underserved regions, such as the inner mountain area and implement various new programs to increase the attach rate of our everything as a service or exit of service offers to detection.
We expect these and other ongoing initiatives to sustain strong bookings momentum, although typical seasonality due to the holidays may temper fiscal 2023 third quarter bookings.
Simultaneously, we will continue to execute our supply chain improvement program to drive further reductions in unshipped advantaged sensor backlog and accelerate overall backlog conversion for.
For example in the second half we plan to release to production the remaining alternative circuit boards that represent high components scarcity and associated costs.
As these alternative circuit boards come online, we will continue to further optimize our inventory, meaning will replace aftermarket components with comparable components sourced a normalized cost through traditional channels, which offer standard payment terms.
In turn this will re normalized our working capital structure and cost of goods sold for our vantage sensor portfolio.
Due to the combination of these various dynamics, we anticipate a dramatic positive improvement in the company's financial performance beginning in the fiscal 2023 second half.
More specifically, we anticipate second half revenue growth to be approximately 20% year over year due to sustained high levels of demand for our solutions and the benefits of <unk> supply chain improvement program.
Second half adjusted EBITDA to be in the range of three $5 million to $4 million or four 5% to 5% of revenue with the compounding benefits of our global supply chain improvement program, enabling the company to exit the fiscal year at a run rate of approximately 10% adjusted EBITDA.
And second half net cash flow to be in the range of 4 million to $6 million as we normalize our working capital structure and cost of goods sold for our vantage sensor portfolio.
Based on these second half expectations, we are raising the low end of our full year fiscal 2023 revenue guidance to a range of $150 million to $155 million.
And we are lowering our full year adjusted EBIT range to negative 1% to negative 3% our full year fiscal 2023 revenue to reflect the impact of global supply chain constraints on our fiscal 2023 first half results.
In closing we've experienced many challenges over the last several quarters due to COVID-19 and subsequent global supply chain constraints.
Nonetheless, we continue to execute against our platform centric business strategy and extend our leadership position in the smart mobility infrastructure management market.
Most recently, we made significant progress on our global supply chain improvement program, which will not only generate significant near term benefits, but lasting value for the company.
As a result of terrorists is positioned to realize a critical inflection point in our fiscal 2023 second half and deliver significant shareholder value creation as outlined by our vision 2027 operating model going forward.
So with that we'd be delighted to respond to your questions and comments. So operator, let's open up the line for that please.
Certainly ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star one on your phone at this time.
We ask that while posing your question you. Please pickup your handset listening on speaker phone to provide optimum sound quality. Please.
Please hold while we poll for questions.
Your first question for today is coming from Brian signal at Craig Hallum Capital Group.
Good afternoon.
And Joe Todd.
Hi, Ryan Ryan.
Yes.
Really.
Solid revenue bookings et cetera, So I wanted to dig into the cost side here.
Hi chain challenges circuit board costs, bringing in three new production circuit boards into production, although it sounds the same as last quarter. So I guess pretty material change in expectation on EBITDA and margins for the rest of the year.
Given those challenges so I guess what changed in the last few months relative to what seems like.
Similar challenges last quarter, knowing those challenges.
Well, Brian This is Joe why don't I front end that and then Doug I'll pass it over to you. So the one thing I wanted to clarify is that when we had our last earnings call. We.
<unk>.
Explain that we were the plan was too.
Complete the design and testing of three alternative circuit boards.
In each of the subsequent quarters, but.
Following each quarter, we would introduce are released to production three circuit boards.
So what that meant in terms of the September 30 period as we had initially expected that we would have three would have already been shipping three of the redesign circuit boards before the end of September .
September 30 quarter.
Due to <unk>.
Number of factors largely it was due to.
Testing feedback that required some further enhancements to the re factoring.
For those circuit boards the release States got extended.
And the.
And as a result, we didn't realize the benefit that we expected from those three circuit boards in the September 30 period now we will realize that in the December 31 period as well as will realize the benefit of additional boards that will be released to manufacturing and the December 31 period, but we did lose a couple of months in the September 30 period, but anyway.
Doug with that background do you want to provide any further.
Our response to Brian's question.
Sure I think the only thing I would.
Yes.
Ryan as you know.
Because it was a timing issue that we do still have about $5 million of that broker inventory in our inventory so that will flush through in the third quarter, so margins will be compressed.
Bounce all the way back until the fourth quarter when all of that inventory has been flushed. So.
I think it really just became a timing issue from what we were expecting to happen in Q3 to happen in excuse me happened in Q2 will happen in Q3, so everything just pushed to the right one quarter.
And then as you think about <unk>.
<unk>, 10% exit rate on the EBITDA margin. This year, I guess, how much visibility and confidence you have in that where the pinch points are things that we're talking about now that werent expected over the last couple of months, but where is there risk in that or I guess, how much confidence in that exit rate and improving from there next year.
What I would say if you look at our operating expenses, we've got a really good handle on those.
We're flat year over year as we exited the second quarter, and we're expecting that to be pretty similar for the remainder of this year. So.
No risk there its going to come down too.
The continued evolution of the supply chain and getting all the components, we need the software business the professional services business.
Pretty consistent.
With the visibility we have into the backlog that was referenced.
I think the only risk would just be is it.
We've talked about the last four quarters would be in the <unk>.
Hi chain, but we think with the redesign efforts that are completed and those that are ongoing that that risk is largely.
<unk> been managed to get us the confidence that we can hit a 10% EBITDA number exiting the year.
Last one for me so you terminated your credit agreement in September .
Which was was untapped, but had good liquidity option there $8 million in cash.
Some ongoing headwinds I know youre modeling and guiding to positive cash flow in the back half, but how much cash reserve do you think you need to operate this business just give yourself some flexibility.
Well, we certainly with the remix of the inventory that's going to be the biggest driver here because if you looked at the reason for the decline in the cash balance it's all been related to these <unk>.
We've had to purchase in the broker market, where we don't get any payment terms since we're not going to have.
Than a $1 million in the third quarter high degree of confidence, we'll build cash and we only need really I'll say $3 million to $4 million to operate the business and we're already seeing the cash balance start to build as of the end of October .
<unk> balance was back up to like $9 5 million. So I think it's going to <unk>.
Certainly get to that guidance that we outlined.
Prepared remarks.
Thanks, guys best of luck.
Thank you.
Your next question for today is coming from Jeff Van <unk> syndrome.
B Riley.
Hi, everyone. Thanks for taking my questions.
Just wanted to ask you about recurring revenue I think you said, 25% during the quarter I'm just wondering what that was in the prior quarter year over year, if you can remind us.
And then what was the growth of recurring revenues I'm not sure I caught that.
Doug do you want to take that.
Sure Yes.
It was pretty consistent as a percentage of total revenue year over year, So that was.
Not.
Significant growth year over year in the in the recurring revenue, but as Joe referenced we did have some some nice bookings that will be adding to that as we head into the second half. So we are expecting disease.
Some growth in the recurring revenue as a percentage of total revenue in the second half.
Yes, so Jeff this is Joe.
To add a little bit to that.
<unk>.
I think maybe the point that you are getting at is that as a percent of revenue recurring revenue was larger.
In the prior quarter then the most recent but of course, we saw a huge increase in the amount of product revenue in the September 30 period, which impacted the proportion of recurring revenue.
If you look at just the actual recurring revenue it was up somewhere I believe between 15% and 20% on a year over year basis, and also up on a sequential basis.
Okay. Good.
That's helpful consisting of 20% year over year growth in the current.
And what does the SaaS component of that.
Yes.
Yes, so we havent in the past and at some point, we will but we haven't in the past and we're not prepared to explicitly break that out but what we have said is that split between SaaS revenue and managed service, which is what constitutes our total recurring revenue is about 50 50.
I would say at this point that SaaS is probably about two if it hasnt already overtaken managed services, meaning thats, perhaps is in excess of 50% of the total annual recurring revenue at this time.
Okay good to know.
And then I wanted to ask you I wasn't sure I mean, we haven't had a chance to kind of go through our projections for second half but.
Consolidated gross margin for a second half what's implied in your guidance for that.
From a gross margin percentage.
Yes.
Mid low to mid 30% gross margins in the second half.
For both quarters or.
The second half, it's going to be lower in the third quarter for the reasons I just mentioned.
Meaning high cost inventory, we've got to flush through.
And then getting back to.
The more traditional margins in the fourth quarter. So the second half gross margin is in that.
Low to mid 30% range.
Okay. So look very interesting.
Got it and then SG&A.
I know I think you said holding kind of flat.
Are you, saying that in dollars you can keep the dollars close to what they were in Q2 for the remainder of the year.
Thanks Jana.
Yes, that's the plan and absolute dollar so as a percentage of revenue.
It would come down because the revenue is greater in the second half from the first half.
Okay, Okay, good and then.
Just I think Joe you mentioned.
Potential macroeconomic recession, and just any thoughts on how the business might be impacted by a recession.
Yes, well.
We've been in.
Very unusual period, the last couple of years.
You never know what could happen at this moment in time, but that being said generally.
That when we've gone through a recessionary cycles, we found that our end market has been less impacted than other sectors for a variety of reasons.
We've also found that the impact what impact there is tends to be not only muted but tends to show up.
Oftentimes later, approximately 12 to 18 months after other sectors.
Which are maybe more interest rate sensitive are impacted.
So all that being said.
They're the worst of circumstance when a standard circumstances, we'd expect there to be a modest.
Impact on our sector and as such potentially on on a terrace that being said.
We think that the Iga a provides a really strong backstop so even in the event of.
Recession.
Certainly the agency customers that we're talking to are projecting an increase in their budgets over the next five years.
Even after they're making some adjustment for potential reductions in tax revenues.
The extent to which they have.
Factory potential recessionary cycle into their budget estimates, but again net net they expect their budgets to remain the same or even to grow because of the iga a more than compensating for any potential recessionary cycle.
So again, we're in uncharted waters here, Jeff, but we would expect the impact of recessionary modest if any.
Okay. That's helpful.
Alright, I'll, let someone else jump in thanks.
Once again, if there are any questions or comments. Please press star one on your phone at this time.
Your next question for today is coming from Mike Latimore at Northland capital.
Hi, Mike.
Alright.
Mike If your line is on mute. Please UN mute your line is live.
Hi, this is <unk>.
Behalf of Mike Lattimore.
Hello.
Hello, So could you give some color on if you're seeing any demand fluctuations due to the price increases.
Yes, so it's a great question.
No.
Do when I, when I talk to our customers.
What I'm hearing from them is that.
Unfortunately because of.
Cost increases they are able to buy <unk>.
Less.
Meaning like fewer units of equipment, let's say from your number of sensors.
Fewer user licenses than they would have originally intended for the amount of budget that's available, but I haven't seen any reduction in the amount of budget or the amount of spending. So unfortunately, our customers are getting in some cases less but.
But we're not seeing any reduction in the amount of.
Budget that they're committing to smart mobility projects if that answers your question.
Alright got it thanks and also some color on.
What might be the operating cash flow for a second half of this year.
Sure Doug do you want to talk about that.
Sure, Yes, so yes, we would expect it to be in line with what we talked about 4% to $6 million of positive cash flow and the.
Half.
As we optimize our inventory and returned to profitability.
Alright.
Helpful. Thank you guys.
Of course.
There are no further questions in queue I would like to turn the floor back over to Mr. Gutierrez for any closing comments.
Great Super well, thank you operator, and as always I appreciate everyone's support and your thoughtful questions.
The Investor Relations front, one lets you would know that we will introduce a series of short investor updates starting this winter that will address a variety of business and technology topics.
Additionally, we plan to be participating in various investor outreach events and as always we're available to speak with investors should you have any follow up questions.
In the meantime, we look forward to updating you again on our continued progress when we report our fiscal 2023 third quarter results. So this concludes today's call. Thank you.
Okay.
Okay.
Yeah.
Okay.
[music].
[music].
[music].
Good day and welcome to the eye terrorists fiscal second quarter 2023 financial results Conference call.
At this time all participants are on a listen only mode and the floor will be opened for questions and comments after the presentation.
Please note. This event is being recorded I would now like to turn the conference over to Todd Curly of M. K R. Investor Relations. Please go ahead.
Good afternoon, everyone and thank you for participating in today's conference call to discuss like terrorism financial results for its fiscal 2023 second quarter ended September 32022.
Joining us today are terrorists as president and CEO , Mr. Joe Bush era, and the Companys CFO Mr. Doug grows.
Following their 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 may make forward looking statements regarding events or future performance of the company, which statements are based on current information are subject to change and are not guarantees of future performance or terrorist is not undertaking an obligation to prove.
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.
A 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 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 I terrorists dot com.
Now I'd like to turn the call over to <unk>, President and CEO , Mr. Joe <unk>.
Joe go ahead.
Great. Thank you Todd and good afternoon to everyone. I appreciate all of you joining us today.
For the fiscal 2023 second quarter.
<unk> reported record total revenue of $39 3 million, representing an 18% increase year over year.
This growth was due to the strong demand for our products and services as well as the progress of our supply chain mitigation. Our improvement program that helped to unlock our quarterly vantage sensor backlog for reference we reduced our fiscal 2023 second quarter unshipped advantage backlog to $900000.
<unk>.
Because our supply chain management program enabled us to ship a record number of vantage sensors, we were able both to continue to meet our customer commitments and to flush high cost inventory items from our balance sheet through the P&L.
This resulted in an extraordinary increase in the cost of goods sold in the second quarter. However, it will improve our inventory position going forward.
Despite reports of a slowdown in the broader economy customer adoption of our clear mobility platform remains very positive.
In the second quarter, we reported total net bookings of $42 2 million, representing a 15% increase compared to the same prior year period.
This brings our trailing 12 months total net bookings to a record 167 6 million, representing a 33% increase relative to the same prior period.
As a reminder, our trailing 12 month bookings figure does not include the large opportunity in front of us with the infrastructure investment and jobs Act, where I J a.
Iga, a funds will flow to local entities through either formula or grant funding Formula funding is just beginning to show up in state and local budgets in the first fiscal year. After the law went into effect, which is October one 2022 for most state and local entities.
With respect to grant funding USD Ot has not issued any intelligent transportation systems specific grant funding from the Iga to date. The first wave of grants, which will start to be awarded early next calendar year will be dedicated to USD Ot is safe streets for all initiatives.
At this time, we've submitted safe streets for all grant applications with three cities and various other state and local entities have included pricing for my Trs and their grant applications, even though we were not involved in the preparation of those grant applications.
Additionally, we are beginning to work with customers to submit applications for the second wave of grants, which are designated for the strength in mobility and revolutionize transportation or smart program.
Due to sustained strong total net bookings we ended the September 30 period with a record total ending backlog of $111 8 million, representing a 34% increase year over year, and a 3% increase on a sequential basis.
As always our reported total net bookings and ending backlog figures reflect firm customer orders.
The total value of customer contracts.
Which varies from quarter to quarter averages on a historical basis about 200% of our total ending backlog.
Fiscal 2023 second quarter product revenue increased 17% year over year to $28 million, even after 900000 shipments slipped out of the quarter due to global supply chain constraints.
Otherwise product revenue would have been 900000, higher or $21 7 million for the quarter, representing a 22% increase relative to the product revenue in the same prior year period.
Our January one 2022 vantage sensor price increase contributed an estimated 3% to 5% to product revenue, meaning that underlying unit demand was the primary driver of second quarter product revenue growth.
Our sensor portfolio continues to take market share primarily due to superior product performance.
In the second quarter, we extended our performance lead with the release of enhancements to the artificial intelligence capabilities for our vantage apex sensors introduction of new safety features for our next sensors that will address important safe streets for all priorities and completion of new connected vehicle sensor pro.
We're a new connected vehicle sensor prototype do we intend to release to market.
Under year 2023.
Because of our relentless focus on product performance, we continue to win virtually every large competitively sourced detection sensor fixed travel time sensor and cellular V to X sensor initiative across the country for.
For example, our sensors were recently selected for the following smart mobility initiatives.
Hybrid video and radar sensors to support the I four Florida regional advanced mobility elements are frame program in the Florida Department of Transportation's or F dots district seven.
Connected vehicle sensors to support an initial cellular Vida X deployment for the I four frame program in <unk> district too.
Radar detection at John F. Kennedy International Airport, which follows the recent announcement that our radar detection sensor radius was certified for use in New York State.
Video sensors for intersection detection across a large transportation corridor and the city of Irvine, California.
Connected vehicle sensors, along the Berlin Turnpike, connecting New Haven, and Hartford counties in the state of Connecticut.
And hybrid video and radar sensors for highway detection collection and analytics across a section of U S. Highway 50 in the state of California.
During our last Investor day, we discussed our intent to expand the total addressable market for our intersection detection sensors by enhancing the product portfolio to address two adjacent categories first the fixed sensor highway analytics market and second the infrastructure to vehicle integration market.
We believe the I four frame Berlin Turnpike U S Highway 50, and other recent new customer contracts validate the merits of our product strategy and demonstrate our ability to continue to expand our total addressable market.
While our long term strategic objective is to maximize the penetration of our sensors. Our current priority is to re normalize the financial model of our sensor portfolio.
Therefore, we continue to devote substantial management attention to our global supply chain improvement program.
In the quarter, we achieved the following program milestones.
The release to manufacturing to alternative circuit boards that will begin shipping this month with semiconductors at normalized component costs.
Re factored the prototype for third alternative Circuit Board based on test feedback. The new prototype was subsequently released to manufacturing on November seven 2022.
Perform design validation for six alternative circuit board designs and for your reference we prioritize the release of alternative circuit boards based on the degree of financial impact.
And as measured earlier I mentioned earlier, we began to re optimize our inventory by Flushing certain high cost product components through the P&L and replacing them with alternative components at normalized inventory costs.
Now I want to review the performance of our service lines of business.
Fiscal 2023 second quarter total service revenue was $18 5 million versus $15 5 million in the same prior year period, representing a 19% increase year over year.
In addition to the strong service revenue growth, we recorded $28 million and net service bookings, representing a 24% increase over the same prior year period.
Notable new customer agreements include a $4 $9 million renewal from the Bay area Metropolitan Transportation Commission for the continued use of our clear route software.
$3 million task order from the Federal Highway administration for our continued development and support of the nation's Ics reference architecture now known as architect reference for cooperative and intelligent transportation or arent yet.
At $2 $8 million task order to provide technical services to the San Bernardino County Transportation Authority, our SBC Ta to support the implementation of corridor freight and express lanes on the I 10.
A $2 million task order from the Virginia Department of transportation to use our clear asset software and related asset management managed services, a $1 $5 million task order to provide technical services to support the Los Angeles Metro Orange line extension.
One $3 million task order with the S V Cta to support the development of a smart County transportation plan.
And a $1 million task order with the Florida Department of Transportation District, five to implement an integrated corridor management program.
As with our sensor portfolio, we continued in the second quarter to enhance our software as a service data as a service and cloud enabled managed service solutions to support sustained long term bookings growth.
Quarter release milestones included enhancements to clear asset to support the management of <unk>.
Transit signal prior up transit signal prioritization assets, which expands the addressable market for the SaaS product.
Enhancements to clear data published historical as well as real time data feeds to address a variety of new use cases for both clear data and clear guide, which provides the visualization front end for a clear data.
And integration of <unk> is real time data feed with clear mobility cloud to further enhance and differentiate our uniquely curated mobility data sets.
In summary, we are pleased with our second quarter as record total revenue record trailing 12 month total net bookings growth and record total ending backlog.
All of which we believe demonstrate considerable progress we've made against our platform strategy.
Additionally, our global supply chain management program achieved significant milestones that enabled us to start releasing alternative circuit boards to production and re optimizing our inventory to include newly qualified components at normalized component costs.
These actions had a significant impact on net cash flows and gross profit margins in the second quarter. However, they position <unk> for a critical inflection point in the second half of fiscal 2023.
On that note I'd like to turn the call over to Doug to provide more color on our second quarter financials, after which I'll further discuss our second half expectations.
Thank you Joe Good afternoon, everyone. As a reminder, please see the company's 10-Q filing and press release, which are posted on the IR website for a further description of matters under discussion during the call today as Joe mentioned and as we expected we continue to face several supply chain challenges again this quarter that impacted both the top and bought.
Online results, we anticipated these challenge and we continued to see certain components that were not available through our normal channels to that point, we spent approximately $8 4 million in inventory purchases from the secondary markets E brokers, which was up from $5 6 million in Q1, and this negatively impacted the <unk>.
Cost of sales by $7 8 million in the current quarter from a revenue standpoint, the amount of unshipped backlog decrease from $4 9 million at the end of Q1 dollars 9 million in Q2, however, sourcing all the components we needed at reasonable prices continue to be a challenge with the cost of many components continue.
<unk> to be two to 100 times their normal cost if.
If we had all the components, we needed a year over year revenue growth would have been almost 21% the orders that didn't ship in the quarter are expected to ship in Q3, and there were no order cancellations in the second quarter, which is why we expect the second half hardware revenue growth to be over 30% year over year.
As Joe mentioned, we have many ongoing initiatives to improve the situation, which is why we expect second half hardware gross margins to be in the mid 30% range compared to only 14, 8% in the first half of this year demand for our products and services continues to be strong as evidenced by our once again strong bookings of $42.
$2 million and record backlog of $111 8 million now I will move on to the details of our second quarter results.
Total revenue for the fiscal 2023 second quarter increased 18% to $39 3 million compared to $33 3 million in the same quarter a year ago, our gross margins in the second quarter decreased 1680 basis points to 16, 7% compared to 33, 5% in the same quarter.
Last year.
Adjusting for the increased component costs of $7 8 million gross margins would have been 36, 6%, we're up 310 basis points compared to the same prior year quarter. As previously mentioned our revenue continued to be constrained due to the unavailability of certain components in the gross margin pressure was due to higher costs for those components that that would be <unk>.
<unk> through the broker markets.
Turning to revenue mix, the product revenues increased 17% to $20 8 million compared to $17 7 million in the same quarter last year, taking into account the $9 million of revenue that was not recognized because of component shortages.
Revenue growth would have been 22% quarter over quarter. The record revenue was a conscious decision made to meet our customers on time delivery expectations and take market share from competitors, but it did come at a significant cost to the gross margins. This strong demand underscores our market leading position.
In the sensor market and as Joe noted, we continue to win on large sensor deals.
Product gross margins decline 4570 basis points and were three 7% compared to 49, 4% from the same quarter last year due to the supply chain cost issues mentioned previously.
Our service gross revenues increased 19% to $18 5 million compared to $15 5 million in the prior year quarter, primarily driven by stronger software and managed services revenues in the second quarter, 25% of total revenue.
Annual recurring revenue as a reminder, annual recurring revenue is comprised of our software and managed services revenues service gross margins increased 600 basis points to 31, 3% compared to 15, 3% from the same quarter last year.
As a reminder, Q2 of fiscal year 'twenty two included a onetime nonrecurring charge of $2 8 million. So after adjusting for this the gross margin decrease was 210 basis points, which was primarily attributable to increased labor cost and the timing of certain contract extensions and the contract mix.
Operating expenses in the second quarter were flat at $13 5 million.
General and administrative expenses were down $1 1 million or 18, 5%. While R&D was up 400000, driven primarily by the circuit board redesign efforts sales and marketing costs increased 800000, which was related to our sales and product support head count to support the higher sales going forward.
<unk>.
We reported a GAAP operating loss in the second quarter of $6 9 million compared with a GAAP operating loss of $2 4 million in the same quarter a year ago. The.
The operating loss was solely attributable to the higher component costs as previously mentioned the progress being made on the circuit Board Redesigns we're in.
<unk> spending less than $1 million in broker component components in Q3, which is down significantly from the $8 4 million spent in Q2.
The GAAP net loss from continuing operations in the second quarter was $7 4 million or loss of <unk> 17 per share, which compares with a net loss from continuing operations of $2 1 million or five cents a share.
Same quarter a year ago.
Adjusted EBITDA for the second quarter was a loss of $5 $2 million or 13, 1% of revenue, which compares to EBITDA of approximately $2 3 million or six 9% of revenue in the second quarter of last year. The GAAP operating loss GAAP net loss and adjusted EBITDA loss were driven by the supply chain issues as previously noted.
With the supply chain improvement plans outlined by Joe We anticipate a progressive improvement in our supply chain position in the second half of this year since it will take some time for the redesign of our circuit boards to ship through to our customers with the two new circuit board designs already shipping to customers in the third quarter and one more of that has already gone into production.
This week this will largely mitigate our need to procure components and the broker markets as previously mentioned.
These key redesign activities should return the product gross margins to about 40% by the fourth quarter of this year.
Turning to liquidity and capital resources cash was $8 million at the end of the second quarter in networking capital was approximately $26 million to $6 8 million decrease in cash quarter over quarter was the result of the net loss, which was driven by the higher component costs. As previously mentioned, we procured $8 4 million and components from the secondary.
<unk> markets. So we were unable to get meaningful extended payment terms, which is a normal business practice in these markets to offset the inventory carrying cost and this also negatively impacted our working capital in the quarter.
With the expectation that third quarter parts purchased in the broker market will decrease to less than $1 million. This will substantially improve our working capital and we would expect to be cash flow positive in Q3 and continue to increase our cash position in Q3 and beyond as our circuit board redesign projects continue to progress.
Lastly, we spent 190000 in purchases of property and equipment in the second quarter, which was down from 269000 in the same prior year second quarter, and we still expect the full year capex to be less than 1% of revenues, reflecting our asset light business model.
In summary, we continue to be laser focused on our supply chain challenges as Joe mentioned, our multi point plan is progressing well with the three new circuit board designs in production in the third quarter. We're confident that we will weather this supply chain storm and come out even stronger on the other side with multiple circuit board designs for our market leading vantage sensor.
X and without sacrificing any features and functionality that our customers have come to rely upon with that I'll turn the call back over to Joe Joe.
Great. Thank you Doug.
Although COVID-19 and subsequent supply chain constraints may have obscured visibility in the last several quarters <unk> continues to strengthen its leadership position in the smart mobility infrastructure management market.
Which is a large dynamic market that represents significant opportunities given favorable secular trends and historic new investment from the Iia, which among other benefits should provide a meaningful backstop should we enter a future recession.
Therefore, we are extremely optimistic about the opportunity in front of Vitaros and believe the current environment, even improves our clear mobility value proposition and competitive position.
To capture this opportunity <unk> is executing against an aggressive FY 'twenty three second half solutions roadmap to drive adoption of the clear mobility platform enhance the cross sell of our clear mobility offerings and improve the monetization of our mobility data sets planned releases <unk>.
<unk>, a new connected vehicle safety alert for our spectrum CV sensor that is targeted at both public and private sector markets.
New safety features for our vantage APEC sensors that will further enhance our safe streets for all value proposition new scale ability features for vantage apex that will enhance our ability to better price differentiate based on certain intersection characteristics.
New safety analytics and connected vehicle reporting features for clear guide our mobility intelligence application and new features that enable vantage fusion to stream connected vehicle and detection data to clear mobility cloud.
We believe our sales channels are the most productive in the industry. However, we continue to pursue additional opportunities to capitalize on the continuous enhancements to our platform capabilities and to maximize our market share gains.
In fiscal 2023, the second half of fiscal 2023, we will introduce an average 10% price increase for our vantage sensor portfolio, which actually went into effect on October one 2022.
Continue to optimize our distribution model, particularly in underserved regions, such as the inner mountain area and implement various new programs to increase the attach rate of our everything as a service or <unk> service offers to detection.
We expect these and other ongoing initiatives to sustain strong bookings momentum, although typical seasonality due to the holidays may temper fiscal 2023 third quarter bookings.
Simultaneously, we will continue to execute our supply chain improvement program to drive further reductions in unshaped advantaged sensor backlog and accelerate overall backlog conversion for.
For example in the second half we plan to release to production. The remaining alternative circuit boards that represent high component scarcity and associated costs.
As these alternative circuit boards come online, we will continue to further optimize our inventory, meaning will replace aftermarket components with comparable components sourced a normalized cost through traditional channels, which offers standard payment terms.
In turn this will re normalized our working capital structure and cost of goods sold for our vantage sensor portfolio.
Due to the combination of these various dynamics, we anticipate a dramatic positive improvement in the company's financial performance beginning in the fiscal 2023 second half.
More specifically, we anticipate second half revenue growth to be approximately 20% year over year due to sustained high levels of demand for our solutions and the benefits of <unk> supply chain improvement program.
Second half adjusted EBITDA to be in the range of three 5 million to $4 million or four 5% to 5% of revenue with the compounding benefits of our global supply chain improvement program, enabling the company to exit the fiscal year at a run rate of approximately 10% adjusted EBITDA.
And second half net cash flow to be in the range of 4 million to $6 million as we re normalized our working capital structure and cost of goods sold for our vantage sensor portfolio.
Based on these second half expectations, we are raising the low end of our full year fiscal 2023 revenue guidance to a range of $150 million to $155 million.
And we are lowering our full year adjusted EBIT range to negative 1% to negative 3% of full year fiscal 2023 revenue to reflect the impact of global supply chain constraints on our fiscal 2023 first half results.
In closing we've experienced many challenges over the last several quarters due to COVID-19 and subsequent global supply chain constraints.
Nonetheless, we continue to execute against our platform centric business strategy and extend our leadership position in the smart mobility infrastructure management market.
Most recently, we made significant progress on our global supply chain improvement program, which will not only generate significant near term benefits lasting value for the company.
As a result, <unk> is positioned to realize a critical inflection point in our fiscal 2023 second half and deliver significant shareholder value creation as outlined by our vision 2027 operating model going forward.
So with that we'd be delighted to respond to your questions and comments. So operator, let's open up the line for that please.
Certainly ladies and gentlemen, the floor is now open for questions.
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Your first question for today is coming from Brian signal at Craig Hallum Capital Group.
Good afternoon, Joe Todd.
Hi, Ryan Ryan.
Yes.
Really solid revenue bookings et cetera, So I wanted to dig into the cost side here the supply chain challenges circuit board costs.
Bringing in three new production circuit boards into production all of that sounds the same as last quarter. So I guess pretty material change in expectation on EBITDA and margins for the rest of the year.
Given those challenges so I guess what changed in the last few months relative to what seemed like.
Similar challenges last quarter and knowing those challenges.
Well Ryan this is Joe why don't I front end that and then Doug I'll pass it over to you. So one thing I wanted to clarify is that when we had our last earnings call. We.
<unk> that we were the plan was too.
Complete the design and testing of three alternatives circuit boards.
In each of the subsequent quarters, but.
Following each quarter, we would introduce are released to production three circuit boards.
So what that meant in terms of the September 30 period as we had initially expected that we would have three we would have already been shipping three of the redesign circuit boards before the end of.
At September 30 quarter.
Due to <unk>.
Number of factors largely it was due to.
Testing feedback that required some further enhancements to the re factoring.
For those circuit boards the release dates got extended.
And the.
And as a result, we didn't realize the benefit that we expected from those three circuit boards in the September 30 period now we will realize that in the December 31 period as well as will realize the benefit of additional boards that will be released to manufacturing and the December 31 period, but we did lose a couple of months in the September 30 period.
Doug with that background do you want to provide any further.
Our response to Brian's question.
Sure I think the only thing I would add Ryan is.
Because it was a timing issue that we do still have about $5 million of that broker inventory.
Our inventory so that will flush through in the third quarter, So margins will be compressed and don't bounce all the way back until the fourth quarter when all of that inventory has been flushed. So.
It really just became a timing issue from what we were expecting to happen in Q3 to happen in excuse me happened in Q2 will happen in Q3, so everything just pushed to the right one quarter.
And then as you think about targeting.
Targeting 10% exit rate on the EBITDA margin. This year, I guess, how much visibility and confidence you have in that where the pinch points are things that we're talking about now that werent expected over the last couple of months, but where is there risk in that or I guess, how much confidence in that exit rate and improving from there next year.
What I would say if you look at our operating expenses, we've got a really good handle on those.
But were flat year over year as we exited the second quarter and we're expecting that to be pretty similar for the remainder of this year. So really no risk there its going to come down to just the continued evolution of the supply chain and getting all the components, we need the software business that.
Professional services business are all pretty consistent and.
With the visibility we have into the backlog that was referenced.
I think the only risk would just be is it.
We've talked about the last four quarters would be in the <unk>.
Fly chain, but we think with the redesign efforts that are completed and those that are ongoing that that risk is largely.
<unk> managed to get us the confidence that we can hit 10% EBITDA number exiting the year.
Last one for me so you terminated your credit agreement in September .
Which was was untapped, but had good liquidity option there is $8 million of cash.
Some ongoing headwinds I know youre modeling and guiding to positive cash flow in the back half, but how much cash reserve do you think you need to operate this business just give yourself some flexibility.
Well, we've certainly with the remix of the inventory that's going to be the biggest driver here because if you looked at the reasons for the decline in the cash balance that's all been related to these.
We've had to purchase in the broker market, where we don't get any payment terms since we're not going to have more than $1 million in the third quarter high degree of confidence, we'll build cash and we only need really ill say $3 million to $4 million to operate the business and we're already seeing the cash balance start to build as of the end of October and our <unk>.
<unk> balance was back up to like $9 5 million. So I think it is going to.
Certainly get to that guidance that we outlined in the prepared remarks.
Thanks, guys best of luck.
Thank you.
Your next question for today is coming from Jeff Van syndrome at B Riley.
Hi, everyone. Thanks for taking my questions.
Just wanted to ask you about recurring revenue I think you said, 25% during the quarter just wondering what that was in the prior quarter year over year, if you can remind us.
And then what was the growth of recurring revenues I'm not sure I caught that.
Doug do you want to take that.
Sure Yes.
It was pretty consistent as a percentage of total revenue year over year. So there was not.
Significant growth year over year in the in the recurring revenue, but as Joe referenced we did have some some nice bookings that will be adding to that as we head into the second half. So we are expecting disease.
Growth in the recurring revenue as a percentage of total revenue in the second half.
Yes, so Jeff this is Joe.
I'd, just add a little bit to that.
<unk>.
I think maybe the point that you are getting at is that as a percent of revenue recurring revenue was larger.
In the prior quarter then the most recent but of course, we saw a huge increase in the amount of product revenue in the September 30 period, which impacted the proportion of recurring revenue.
You look at just the actual recurring revenue it was up somewhere I believe between 15% and 20% on a year over year basis, and also up on a sequential basis.
Okay. Good.
Sure.
That's helpful consisting of 20% year over year growth in recurrent.
What does the SaaS component of that.
Yes.
Yes, so we havent in the past and at some point, we will but we haven't in the past and we're not prepared to explicitly break that out but what we have said is that split between SaaS revenue and managed service, which is what constitutes our total recurring revenue is about 50 50.
I would say at this point that SaaS is probably about two if it hasnt already overtaken managed services, meaning thats, perhaps is in excess of 50% of the total annual recurring revenue at this time.
Okay good to know.
And then I wanted to ask you I wasn't sure I mean, we haven't had a chance to kind of go through our projections for second half but.
Consolidated gross margin for a second half what's implied in your guidance for that.
From a gross margin percentage it yes.
<unk>.
Low to mid 30% gross margins in the second half.
For both quarters or.
Second half, it's going to be lower in the third quarter for the reasons I just mentioned.
Meaning high cost inventory, we've got to flush through.
And then getting back to.
The more traditional margins in the fourth quarter. So the second half gross margin is in that.
Low to mid 30% range.
Okay. So look there into second half.
Got it and then SG&A.
I know I think you said holding kind of flat.
Are you, saying that in dollars you can keep the dollars close to what they were in Q2 for the remainder of the year.
SG&A.
Yes, that's the plan and absolute dollars, so as a percentage of revenue.
It would come down because the revenue is greater in the second half from the first half.
Okay, Okay, good and then.
Just I think Joe you mentioned.
Potential macroeconomic recession, just any thoughts on how the business might be impacted by.
Recession.
Yes, well.
We've been in.
<unk>.
Very.
Unusual period, the last couple of years.
You never know what could happen at this moment in time, but that being said generally.
When we've gone through a recessionary cycles, we found that our end market has been less impacted than other sectors for a variety of reasons.
We've also found that the impact what impact there is tends to be not only muted but tends to show up.
Oftentimes later, approximately 12 to 18 months after other sectors.
Which are maybe more interest rate sensitive are impacted.
So all that being said.
Under the worst of circumstance when a standard circumstances, we'd expect there to be a modest.
Impact on our sector and as such potentially on on a terrace that being said.
We think that the Iga a provides a really strong backstop so even in the event of recession.
The agency customers that we're talking to are projecting an increase in their budgets over the next five years.
Even after they are making some adjustment for potential reductions in tax revenues I don't know the extent to which they have factored potential recessionary cycle into their budget estimates, but again net net they expect their budgets to remain the same or even to grow because of the iga a more than <unk>.
Compensating for any potential recessionary cycle.
So again, we're in uncharted waters here, Jeff, but we would expect the impact of recessionary modest if any.
Okay. That's helpful.
Alright, I'll, let someone else jump in thanks.
Once again, if there are any.
Any questions or comments. Please press star one on your phone at this time.
Your next question for today is coming from Mike Latimore at Northland capital.
Hi, Mike.
Right.
Mike If your line is on mute. Please UN mute your line is live.
Hi, This is <unk> on behalf of Mike Lattimore.
Hello.
Hello, So could you give some color on if you're seeing any demand fluctuations due to the price increases.
Yes, so it's a great question.
No.
I do when I, when I talk to our customers.
What I'm hearing from them is that.
Unfortunately because of.
Cost increases they are able to buy less.
Less.
Meaning like fewer units of equipment, let's say if your number of sensors.
Fewer user licenses than they would have originally intended for the amount of budget that's available, but I haven't seen any reduction in the amount of budget or the amount of spending. So unfortunately, our customers are getting in some cases less but.
We're not seeing any reduction in the amount of.
Budgets theyre committing to smart mobility projects if that answers your question.
Alright, alright, thanks, and also some color on.
It might be the operating cash flow for a second half of this year.
Sure Doug do you want to talk about that.
Sure, Yes, so yes, we would expect it to be in line with what we talked about 4% to $6 million of positive cash flow in the second half.
As we optimize our inventory and returned to profitability.
Alright Thats helpful. Thank you guys.
Of course.
There are no further questions in queue I would like to turn the floor back over to Mr. Gutierrez for any closing comments.
Great Super well, thank you operator, and as always I appreciate everyone's support and your thoughtful questions.
On the Investor Relations front, one lets you would know that we will introduce a series of short investor updates starting this winter that will address a variety of business and technology topics.
<unk>.
Planned to be participating in various investor outreach events and as always we're available to speak with investors should you have any follow up questions.
In the meantime, we look forward to updating you again on our continued progress when we report our fiscal 2023 third quarter results. So this concludes today's call. Thank you.