Q4 2023 Iteris Inc. Earnings Call
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If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
The terrorists fiscal 2023 fourth quarter and full year financial results conference.
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Mode, a question and answer session will follow the formal.
We wanted to thank you for participating in today's conference.
Patient, France, Please press star zero on your telephone key.
So 2023 fourth quarter.
Pat.
The full year ended.
And the conference over to Todd currently of MK, our investor.
Most of the terrorists as president and CEO , Mr. Joe <unk>.
Good afternoon, everyone and thank you for participating in today's conference call to discuss <unk> terrorists as financial results for its fiscal 2023 fourth quarter.
We'd like to remind all participants that during this call. We may make forward looking statements regarding future events or the future performance of the company.
And the companies.
So based on current information are subject to change.
Yeah.
Any discussions from the companies covering sell side.
We undertake no obligation to provide updates to these forward looking statements.
Forward looking statements regarding future events or the future performance of the company.
No one should assume that at a later date.
Company information are subject to change and are not guarantees of.
Specific to the documents the company files from time to time with the SEC's specifically.
Future updates to these forward looking statements.
In Q and 8-K.
Future may differ substantially from what.
Important risk factors.
Does this assume that at a later day.
It's just not materially from those that are contained in any forward looking.
She refers you to the documents the company files from time to time with the SEC specifically the company's most recent.
The terrorists.
Our 10-Q and 8-K.
Oh tighter spreads.
Important risk factors that could cause actual results.
With that.
Alts to differ materially from those that are contained in any of the forward looking.
Everyone I appreciate all of you joining us today.
See you all on the investors section of.
Before we begin our regular earnings commentary I wanted to apologize for changing the date of our earnings announced.
The company delivers.
During his remarks Cary will explain the reasons for some additional closing features.
Everyone I appreciate all of you joining us today.
I want to confirm that these additional procedures.
Earnings commentary I wanted to apologize for changing the date of our earnings announcement.
For 2023.
Cary will explain the reason for some additional closing procedures.
Those results.
To this delay.
<unk> reported record fiscal 2023 fourth quarter total revenue.
No.
$4 million.
So do the company's income statement.
For fiscal 2023.
$156 1 million.
Comparisons.
Significant growth rate of 24%.
Yeah.
At 17% year over year effect.
Three fourth quarter total revenue.
But then growth strong demand for our products and services.
23.
There's progress of our supply chain improvement plan.
$6 1 million.
Shipment constraints.
Significant growth rates of 24%.
It's free.
17% year over year respective.
Thanks of our vantage sensor product.
<unk> growth strong demand for our products and services.
Product gross margins improved 172 basis points.
Mitigated the shipment constraints.
As we began to ship vantage sensors with the alternative circuit boards.
And continues to normalize the economics of our vantage sensor product lines.
The product gross margin improvement would have been even greater.
Margins improved 172 basis points.
Variances.
<unk> basis.
There's some requirements in the period.
Sensors with the alternative circuit boards.
Or even in the fourth quarter.
<unk> fiscal 2023 third quarter.
Our price variance to our income statement.
<unk> improvement would have been even greater.
For our fourth quarter follows a sequential improvement in product gross margins in our fiscal 2023 third quarter.
As such flush more purchase price variance through our income statement.
Which improves our position as we enter fiscal 2020.
Improvement plan.
As a reminder, the improvement in our fourth quarter follows a sequential improvement.
In more detail in his comment.
2023 third quarter.
And that's by concerns about a possible economic slowdown customer adoption of the clear mobility platform remains very strong.
Our improvement plan.
<unk>, including net bookings.
<unk> for service and product gross margin dynamics.
The customer is specifying the use of our solutions for.
For example, we reported record fiscal 2023 total net bookings.
<unk> adoption of the clear mobility platform remain.
<unk> always record fiscal 2023 full year total net bookings of 173 million.
And in instances of customers specify the use of our.
The procurements for our service offerings.
Good fiscal 2023 total net bookings.
<unk> is in software as a service.
Thanks.
This new record high of 82%.
Total net bookings of 173 million.
Iron man by various customers.
Till 2023, our win rate in competitive procurements for our service offering.
<unk> technology.
<unk> thing.
I'm really pleased to report that our terrace as specified by five of 37 agencies.
10%.
As part of the first wave of safe streets for all implementation grants.
Sent by various customers.
Since our fund it through the infrastructure investment and jobs after Iga.
<unk> terrorists technology.
Find value of these grants is 94 million.
<unk> five of 37% agencies.
100 million.
The first wave of safe streets for all implementation group.
Clear at this time, how much of this funding I'd tariffs will receive.
R&D hubs after Iga.
<unk> commenced rates a high level of customer preference rideshare solutions.
94 million.
Due to strong customer demand. We ended March 31, 2023 period with a record total ending backlog of $114 2 million.
Tariffs will receive.
<unk> percent increase year over year.
We've demonstrated a high level of customer preference right tariffs salute.
Air bookings reflect firm customer orders rather than total contract value.
<unk> 'twenty three period.
Total value of customer contracts, which varies from quarter to quarter.
Ed.
Our averages on a historical basis about 200% of our total ending backlog.
Our ending backlog figures in net bookings.
Log excludes a porsche.
<unk> orders rather than total contract.
Their bookings.
The total value of customer contracts, which varies from quarter to quarter averages on a historical basis about 200% of our total ending backlog.
<unk> of our product portfolio.
<unk> in mind that our backlog excludes a portion.
Party hardware that we referred to collectively as products, we reported fiscal 2023 fourth quarter revenue of $25 1 million in fiscal 2023 full year revenue of $85 1 million, representing a 47% and 24% increase year over year, respectively.
Eric that we referred to collectively as.
Ohio, which represents the majority of our product revenue.
$25 1 million.
Share gains and market categories.
Of $85 1 million.
About.
47%.
<unk>, 6% to 8%.
An increase year over year, respectively.
This implies that revenue for our sensors grew more than three times the market growth.
Okay demonstrates significant share gains and market categories.
Significant rate.
<unk> grew at about.
But execution and superior product performance.
Over the past 12.
So we continue to extend our superior performance with improvements to various detection algorithms.
Months.
Such as Red light running.
We believe our sensors continue to take market share at a significant rate.
Good afternoon ease of use of our video and radar sensors.
Fair product performed.
We can sell our connected vehicle sensors process and published connected vehicle data package.
<unk> to various detection algorithms.
So the cloud.
By running.
Good ecosystem participants.
Rhythms.
Once.
Ams enhancements to the setup and ease of use of our video and radar sensors.
Turning to win virtually every large competitively sourced detection.
Our southwest connected vehicle data packet.
Vehicle to everything or Cvs.
At.
<unk> initiatives across the country.
Participants.
Sorry in the fourth quarter, our sensors were selected for the falling representative smart mobility initiatives.
Once you need to win virtually every large competitively sourced detection.
It is by four between camp.
Cellular vehicle to everything.
Further our regional advanced mobility element.
It is across the country.
You may recall that on previous earnings calls, we discussed similar purchasers of our spec correct.
Okay vehicle sensors for this large mol.
There's a C V to X sensors on the I four between Tampa and Orlando.
Another initiative was the quarter wide deployment in Richardson, Texas are by definition AIP.
In previous earnings calls, we discussed similar purchases of our spectrum.
Ex sensor.
This large multi scale.
In Sunnyvale, California of our hybrid intersection detection sensors.
Another initiative was a quarter wide deployment in Richardson, Texas of high definition AI based detection sensor.
And vantage live cloud software.
Our deployment of our vantage apex sensor.
So Tennessee of our travel time and cellular Vida acts sensors.
Our hybrid intersection detection sensors.
<unk>.
<unk> towards our vantage vector sensor is using both our video and radar technology.
Our sensors.
<unk> built with our clear guide signal and vantage live cloud software.
And the transportation central signal system.
Sure, Phil Tennessee of our travel time and cellular Vida acts sensors.
Play in Texas.
<unk> based Blue Argus software.
<unk> brand is vantage radius.
Sure, Matt in Fredericksburg, Virginia of our vantage vector sensor.
Demonstrate our progress against the falling three strategic priorities that we've talked about previously first it demonstrates our ability to win a disproportionate share of large scale modernization initiatives.
<unk> sensor so to your brand as vantage radius.
Revenue at the point of sale to our quarter wide sensor deployment.
Yes demonstrate our progress against the falling three strategic priorities that we've talked about previously.
Great.
First it demonstrates our ability to win a disproportionate share of large scale modernization initiatives.
He has more than 3100 intersections.
Revenue at the point of sale to our quarter wide sensor deployment.
<unk> are connected.
To leverage our leadership in intersection detection to penetrate adjacent categories.
<unk> mentioned earlier, we continued in the fourth quarter to make excellent progress on our supply chain improvement plan.
He has more than 3100 intersections.
<unk> production to additional alternatives circuit boards.
<unk> sensors that are connected.
<unk> eight alternatives circuit boards to production.
<unk> cloud.
With this achievement, we have now met all the primary goals.
Quarter to make excellent progress on our supply chain improvement plan.
<unk> <unk> 2022 earnings call.
Plant production to additional alternatives circuit boards.
And constrained.
<unk> released a total of eight alternatives circuit boards to production.
Mike's components.
Achievement, we have now met all the primary goals.
And enhance our ability to level load our manufacturing capacity.
May 'twenty two earnings call.
City SaaS of our supply chain improvement plan.
Paul I'd say constraints.
And the use of external resources to help develop alternative circuit board.
<unk>.
We started to redeploy internal engineering resources.
And enhance our ability to level load our manufacturing capacity.
Due to the success of our supply chain improvement plan.
As this portfolio.
The use of external resources to help develop alternative circuit boards.
First revenue.
<unk> to redeploy internal engineering resources.
23.
As <unk> and sustaining engineering activity.
$1 million, representing a 1% and 9%.
Year over year, respectively.
<unk>, we reported record fiscal 2023 fourth quarter service revenue.
Project based in other words.
Sure.
Revenue.
Fiscal 2023.
That is now comprised of annual recurring revenue.
Representing a 1% and 9% increase year over year, respectively.
Versus off.
As a reminder, about 45% of our service revenue line is comprised of project based in other words consulting revenue.
Yeah.
And 55% is now comprised of annual recurring revenue.
Strength.
Our software as a service.
<unk> bolting revenue.
And managed services offer.
Our debt to subcontract activity.
<unk> III, our annual recurring revenue increased 17%.
The variance more moderate growth in the fourth quarter due to customer delays.
<unk> labor capacity constraints hampered the growth of our consulting revenue.
<unk> service revenue recognition to the <unk>.
As to subcontract activity.
Right the delivery delays the level of demand for our service offerings is historic.
It's more moderate growth.
2023 fourth quarter, we reported net service booking.
Our ability to meet critical project milestones.
<unk> got 26% increase relative to the same prior year period, we estimate the roughly.
The level of demand for our service offerings is.
At service bookings will be recognized in the future.
Earlier, we reported net service bookings of $25 5 million.
Notable service bookings included a $6 6 million task order from the Virginia Department of transportation to extend and expand the scope of activities.
Net service bookings will be recognized in the future is annual recurring revenue.
It is a $3 million task order from the Virginia Department of transportation fried tariffs to manage critical activities.
Florida.
These network operations Center.
Our patient.
Our $1 $3 million task order to complete a quarter wide traffic signal synchronization project for La Habra, California.
A $3 million task order from the Virginia Department of transportation Fright terrorists to manage critical activities.
Occasions, and estimates to modernize traffic corridors in three cities in Orange County.
<unk> ask order to complete a quarter wide traffic signal synchronization project for La Habra, California.
Services.
$2 million task order from the Orange County Transportation authority to develop a plan.
Is cloud enabled managed service or process virtualization task order.
<unk> and Orange County.
Our high and in construction.
And in Minnesota project, we continue to increase the attach rate of annual recurring revenue to our consulting projects.
It is a process virtualization task order.
<unk>.
<unk> four at the design and construction.
And going forward.
For improvement project in Minnesota.
And customer adoption of our clear mobility platform. We continued in the fourth quarter to enhance our software as a service.
Bring revenue to our consulting projects.
Managed services solutions for example, we released a nuclear mobility cloud standard component library to improve the ability of our software applications to operate together in a seamless manner.
Next quarter.
It will various software development efficiency.
It is a service.
We began to rollout an enhanced security framework, which will create additional competitive differentiation for our cloud solutions.
As Barry to improve the ability of our software applications to operate together in a seamless manner.
Our clear guidance software to address new use cases.
<unk>.
As released an innovative new feature and clear asset to us as artificial intelligence.
These additional competitive differentiation for our cloud solutions.
And we introduced a new application programming interface or API.
Feed.
Apple time and connected vehicle data.
<unk> use cases.
So in summary, we are very pleased with our record fiscal 2023 fourth quarter and full year revenue.
As to obsolescence of transportation assets.
Particularly during a difficult and complicated operating environment.
<unk>.
Also we're pleased with our ability to deliver against an aggressive solutions roadmap.
We are very pleased with our record fiscal 2023 fourth quarter and full year revenue.
We unlocked our product backlog.
<unk>.
To service our customers.
And complicated operating environment.
<unk> of our product gross.
<unk> to deliver against an aggressive solutions roadmap.
<unk> in a favorable direction.
For our supply chain improvement plan.
<unk> achieved an important financial inflection point.
<unk> backlog.
So on that note I'd like to turn the call over to Kerry to provide some more color on our fourth quarter.
<unk> of our product gross.
The results after which I'll come back.
<unk> continued to trend in a favorable direction.
Our expectations.
In Australia that <unk> achieved an important financial inflection point.
Or evening everyone.
Point to note I'd like to turn the call over to Kerry to provide some more color on our fourth quarter.
Terry.
Our full year financial results after which I'll come back.
But in a business environment.
<unk> 2024 expectation.
<unk> to meet.
<unk>.
It gives me thank you, Joe and good afternoon or evening everyone.
Coupled with our solid mark.
Fourth quarter and full year results I wanted to say that I'm very excited to have joined <unk>.
From our foundation.
Louis Fed in a business environment that is growing and developing technologically.
<unk>.
Meet evolving needs in the intelligent transportation space.
Rest of the <unk> team Hasnt been my pleasure.
<unk> breadth of value propositions.
<unk>, Hello, our shareholders and the analysts.
Firm Foundation.
This.
And a significant opportunity.
Speak to what is happening with respect to our year end reporting cycle.
Joe Our board of directors and the rest of the <unk> team Hasnt been my pleasure.
Our fiscal year end closing process has been.
<unk> holders and the analysts.
Access of evaluating previously recorded amounts.
Just speak to what is happening with respect to our year end reporting side.
For years.
As we just described in our form 8-K, we filed before convening this call.
Sure.
<unk> fiscal year end closing process has been.
Jim.
Yeah.
And the evaluation is not yet complete.
And previously recorded amounts in the balance sheet.
<unk> or may be affected by.
<unk>.
Data conversion process that began.
It's possible adjustments that May result from this evaluation.
<unk> migrated to our new cloud based ERP systems at the start of fiscal year 2009.
But we are focusing on transactions that occurred or may be affected by.
The report on Form 10-K on or before June 29.
Fiscal year 2018, before the company migrated to our new cloud based ERP systems at the start of fiscal year 2019.
325, with the SEC later today or tomorrow.
<unk> and file our annual report on Form 10-K on or before June 2009.
Our balance sheet related to activity.
Grace period.
The current result.
Could be 25 under the exchange.
<unk>.
Our financial health.
From <unk> 25, with the SEC later today or tomorrow.
I want to stress again that our evaluation is focused on amounts on the balance sheet related to activity.
The physical.
These current results.
<unk> quarter and full year.
<unk> cash balance.
<unk> noted we made significant commercial progress in fiscal 'twenty three.
<unk> adjustments.
I don't want to repeat the various accomplished.
Now on to address some of the underlying details.
Strength in the market is reflected both in the rate of growth.
23 fourth quarter and full year.
Backlog and bookings.
He made significant commercial progress in fiscal 'twenty three.
The line now we'd like to expand some on the commentary Joe provided.
Hi.
Particularly related to the impact of supply chain dynamics on our gross profit performed.
And the nominal value of our revenue.
<unk>, three we incurred almost $16 million.
And down the income statement to the gross profit line now we'd like to expand some on the commentary Joe provided.
Electronic components.
The impact of the supply chain dynamics on our gross profit performance.
As we began to incur.
<unk> 2023, we incurred almost $16 million.
Two.
Negative purchase price variance from aftermarket purchases of semiconductors.
And in fiscal 'twenty, three as we sold product incorporating those components.
<unk> of negative purchase price variances that we began to incur on purchases made in the back half of fiscal 'twenty two.
We're able to progressively and significantly reduce our aftermarket purchases as the year progressed due to our introduction of alternative circuit boards as Joe described from a high of almost $5 million per quarter over the first six months negative purchase price variances occurred for new purchases.
To reduce our aftermarket purchases as the year progressed due to our introduction of alternative circuit boards as Joe described.
From a high of almost $5 million per quarter over the first six months.
The margins on both the year over year and a sequential base.
<unk>.
Fell to just over 600000.
In Q4 of fiscal 'twenty, four or I'm, sorry fiscal 'twenty three.
<unk> 4 million.
And dramatic impact of these.
Due to the increase in the fourth quarter product.
<unk> on both the year over year and a sequential basis.
<unk> fourth quarter gross profit margin of 31, 8%.
This quarter consolidated gross profit increased $2 4 million.
<unk> specific shift in mix between direct labor.
The increase in fourth quarter product revenue.
<unk> content that impacted our service gross margins.
Fourth quarter gross profit margin.
Purchase data.
8%.
We do not believe the labor mix shifts the systemic in the long run, but it may persist for two to three quarters.
<unk> and subcontractor content.
Acquisition.
That impacted our service gross.
<unk> will touch on in more detail a few minutes.
<unk> purchase data.
That's why we expect to demonstrate impressive leverage on our data acquisition agreements is our software as a service and data as a service revenue continues to grow.
The sequential gross margin trend also what's important to understand AG.
Aggregate gross margin for fourth quarter of fiscal 'twenty three of 31, 8% improved 270 basis points over the 29, 1% for the prior quarter.
Improvement reflects a $2 million decline in the amount of negative purchase price variance hitting the income statement, which also was reflected in the sequential gross margin improvement for the products portfolio.
Offsetting this improvement was the 610 basis point decline in gross margins for the services portfolio, which while more pronounced and for the year to year comparison resulted primarily the same factors that I just quoted.
As Joe mentioned, the amount of negative purchase price variance hitting the income statement in the fourth quarter of fiscal 'twenty three was higher than originally expected as the mix of sensor products sold.
Comparison.
Re pivoted to meet very strong market demand.
Noted.
The offsetting good news is that negative.
Purchase price variance hitting the income statement in the fourth quarter of fiscal 'twenty three.
Our approximate only $600000.
<unk> sold.
To reiterate a comment I made previously.
Strong market demand.
Is that the rate of incoming variance on new purchases has abated significantly.
And meaning on the balance sheet.
And currently is expected to remain at levels the range between 200 to $300 per quarter.
Based on current market conditions.
Equally important is that the rate of incoming variance on new purchases has abated significantly.
<unk> gross margins to improve progressed with data.
<unk> levels.
Fiscal 'twenty four.
<unk> to $300000 per quarter.
<unk> negative purchase price variance.
Market conditions.
John data costs.
So we look at all of it excuse me at all the factors involved.
Cost to better labor mix on consulting project.
<unk> progressively.
Our gross margins.
24.
Approximating or slightly exceeding.
Negative purchase price variance.
<unk> half of the year.
At a cost.
Operating expenses.
<unk> related revenues grow.
Is it lower in the current year fourth quarter when compared to the prior year.
That our overall gross margins.
<unk>.
Should return to levels approximating or slightly exceeding.
Significantly improved leverage.
<unk> half of the year.
Kris.
<unk>.
The aggregate decline reflects lower G&A expense spending controls implemented earlier in the fiscal year and <unk> in the fourth quarter.
<unk>.
The G&A reduction.
Excuse me again was largely offset it offset by higher sales and marketing costs, primarily due to higher sales.
The significant increase in sales to the product portfolio.
R&D costs incurred were relatively flat nominally for the small increase and some continuing expense to reengineer engineered product circuit boards, albeit at a lower rate occurred in the third quarter as well as continuing development of various ongoing product enhancements.
Occurred were relatively flat nominally.
Revenue gross profit and operating expense.
To reengineer engineered products circuit boards.
And income.
Right that incurred in the third quarter.
<unk>.
Let's continuing development of various ongoing product enhancements.
The fourth quarter of this year, which represents a $1 $8 million sequential.
<unk>.
Two $5 million year over year improvement.
<unk>.
The sequential improvement.
EBITDA.
Or is that <unk> is poised for adjusted EBITDA and related margin improvement going forward.
Here, which represents a $1 $8 million sequential.
23 was $16 6 million, which was $6 $4 million higher sequentially, and seven 1 million lower compared to last year, while the year to year decline reflects the negative impact of the difficult supply chain conditions encountered during fiscal 'twenty three the sequential improve.
<unk> as a result of a combination of higher income.
Mutually.
Balance sheet management.
<unk> million dollars lower compared to last year.
And reduced inventory investment for key contributors contributors through past cash position.
<unk> three the sequential improvement is a result of a combination of higher income.
Balance sheet cut off.
<unk> management.
Sure earnings improvement and good balance sheet management provide the foundation for continued liquidity improvement going forward.
<unk> cash position.
Now I'll turn the call back over to Joe who will discuss our fiscal 2020 guidance and provide those.
<unk>.
<unk>.
Great. Thanks, Gary.
And good balance sheet management.
The infrastructure management market in our opinion represent significant long term opportunities due both to a favorable secular trends and also the historic Iga funding that has been committed by Congress through 2026.
In our opinion the transportation infrastructure sector is largely insulated from current political machinations, though we do expect some temporary market confusion to occur this summer when Congress negotiates how to apply the budget targets established by the recent debt ceiling agreement.
As a result, we remain very optimistic.
About the long term growth prospects in front of <unk> and we're very excited with our supply chain challenges largely behind us to be redirecting management attention and engineering resources back to strategic initiatives.
To that end tariff plans to deliver an aggressive fiscal 2024 solutions roadmap that includes the following major releases.
First our next generation travel time and connected vehicle data collection and data presentation system powered by clear mobility cloud Apis.
Second our suite of connected vehicle software applications that will leverage our enhanced connected vehicle data collection and presentation capabilities.
Third a state of the industry cloud based international registration planning in international fuel tax administration system for commercial vehicles, which among other benefits will capture valuable new data sets for clear mobility cloud for the new form factor for vantage apex to secure additional technical specifications.
And expand the addressable market for apex and fifth various releases to enhance our video and radar fusion algorithms.
We believe our fiscal 2024 release plan will accelerate the adoption of the clear mobility platform increase the cross sell of clear mobility offerings and improve the monetization of our expanding mobility data sets.
To capitalize on our release plan will continue to improve the productivity of our various sales channels. For example will further optimize the distribution network for our sensor portfolio create a small dedicated enterprise sales team focused on private sector segments and expand our customer success function to maintain a <unk>.
The 95% retention rate and drive more up sell revenue.
In addition to channel sales channel improvements in fiscal 2024 will implement various talent acquisition and talent development initiatives to improve the labor capacity of our consulting teams will focus on the supply of civil and traffic engineering talent, which remains very tight even though we've seen some improvement in the software.
Where supply of software engineering and data science talent.
Our taxes will include enhancing our employer brand presence on select campuses expanding our existing internship programs improving our capabilities to source international job candidates, increasing the number of generalist, we hire and increasing the level of technical and professional training that we provide all employees.
These initiatives of course going to acquire some short term investment, but they should accelerate the pace of conversion of our historic consulting backlog and perhaps more importantly create operational efficiencies in certain competitive advantages for us going forward.
Given these dynamics, we expect fiscal 2020 for revenue to be in the range of $168 million to $175 million, representing organic growth of 10% year over year at the midpoint.
And with the increase in revenue and the normalization of our supply chain, we expect a significant improvement in adjusted EBIT dollars, even after some investments in talent acquisition and talent development. As a result, we forecast an adjusted EBITDA margin in the range of 7% to 9% of fiscal 2020 for revenue.
And we anticipate a continued improvement in liquidity with fiscal 2024 net cash flow in the range of $12 million to $16 million.
Looking beyond fiscal 2024, we believe <unk> remains on track to achieve our vision 2027 targets in other words, we continue to estimate fiscal 2027 revenue in the range of 245 million to $265 million before any additional acquisitions, representing a five.
Five year organic revenue growth rate of 14% at the midpoint.
With this substantial increase in annual revenue. We also anticipate progressive benefits from scale to result in fiscal 2027, adjusted EBITDA margins in the range of 17% to 19%.
Additionally, we anticipate improvements in our liquidity to enable <unk> to resume our acquisition program, which would of course be additive to organic division 2027 targets.
So in closing fiscal 2023 was a difficult period due to Covid and then the subsequent global supply chain constraints.
Still we demonstrated significant agility in the face of those challenges achieving the objectives of our supply chain improvement plan and continuing to develop our platform centric business model at the same time.
As a result, we now in our fiscal 2024 positioned to extend our leadership in the smart mobility infrastructure management market and we are poised to create significant shareholder value through achievement of our vision 2027 operating targets.
So with that we'd be delighted to respond to any questions and comments and operator.
I'd like to open up the line and see if you have any questions for us.
Absolutely. Thank you at this time, we will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue.
For participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Yes.
Yes.
The first question is from Jeff Van syndrome, with B Riley Jeff. Please proceed.
Hello. This is Richard Magnuson input Geofence syndrome. Thank you for taking our call and gave US some color I believe on gross margin percent, but what other additional color can you give us on expectations around opex quarterly revenue progression any lumpiness of converting backlog to revenue as we progress through the fiscal year.
So maybe I'll just kind of talk about.
Of course, our quarterly revenue progression and sort of Lumpiness to use your term Richard and then I'll turn it over or carry you to talk about the gross margin percentage operating expense if that's okay. So.
In terms of quarterly revenue.
I said, we're providing guidance for the full year.
10% growth at the midpoint.
We would expect that to look.
Sure.
Fairly consistent over the fiscal year from quarter to quarter that being said, we are anticipating the possibility of some initial confusion.
Modest, but potentially some confusion in the first half of the fiscal year due to that debate that we expect to occur between Congress and administration, which has can create some confusion at the state and local level. Additionally for.
For our first and second quarter, we expect to have some modest not significant but some modest impact from limitations in terms of our labor capacity. So aside from that we expect that.
Year over year growth in each quarter should be approximately similar now as we progressed through the year and again, we're guiding to 10% growth for the fiscal year at the midpoint of our range.
In terms of.
Bookings, which I think perhaps what is the point about lumpiness.
We do from time to time have like some difficult comparisons. So for example in the fourth quarter.
For which.
We're currently reporting as a reminder, prior fourth quarter fiscal 2022, we had almost a 10 million dollar order for our detection products from Miami Dade. So that represented a challenge for us in terms of product bookings and the.
Fourth quarter of fiscal 'twenty, three and of course there'll be certain difficult.
Harris <unk> going forward that could result in some in terms of year over year comparisons some fluctuations in terms of the rate of bookings growth, but overall at this point, we've been standard reporting bookings and that sort.
Sort of mid $40 million range, we would expect that to continue to increase as.
As we progress on a nominal basis to have substantial bookings.
We were able to report substantial bookings growth in each quarter.
As we progress through fiscal 'twenty four.
And Kerry do you want to talk about gross margins and expenses I think directionally Richard of course.
We're not releasing quarterly guidance, specifically, however, as far as the trajectory we would expect.
Steady progress, particularly in the second half of this year when you look at margin projections.
And.
I think as I had discussed some some of thats going to clearly be evident with regard to increasing leverage on our software business as the revenues continue to grow so that should start to show through also is as we progress operating expenses I think that.
We will show a little bit of inflation as the year goes on but it should be somewhat steady and not anything unusual standing out quarter by quarter or in the trajectory as we go forward, but again I think the margin is going to reflect continued sequential progression, particularly in the back half of the year.
Year over year comparisons of course, theyre going to be clouded by.
What came through the.
The cost of sales with regard to all of the purchase price variance.
Hit us as the as the year went on.
Alright, thank you.
Any additional questions Richard.
No that's it for now thank you.
Thank you.
Okay. The next question is from Mike Latimore with Northland Capital markets. Please proceed.
Great. Thanks very much.
On the on the services business.
<unk> had some revenue has moved to the right. There. So can you quantify that level of deadline.
Let's stay on acquiring you incur the cost in the quarter, but didn't recognize the revenue in the quarter on a project or projects, yes correct.
I don't have the precise number in front of me, but I think it's.
Probably.
Around 1 million, maybe one between 1 million and $1 4 million in revenue and yes. It was a situation where we did incur that expense, but we werent able to take the associated revenue.
Got it okay.
And by the way I think that translated to about a two or 300 basis point impact on our EBITDA.
Okay. Okay.
And the thought that the service gross margin would improve in the first quarter here and then improve every quarter after that.
Yes.
Yes, that's generally true what I was trying to say previously is that I think will do a better job of unlocking our services backlog as we were able to overcome some of the labor capacity constraints, but.
Gross margin.
Underperformance, if you will in the fourth quarter. We think is largely isolated it's really driven more by the timing of some specific projects.
And yes at revenue did just slipped to the right and we expect to recover.
Both the.
Revenue and then we'll also see a benefit from a gross margin and EBITDA perspective, Mike is our labor mix improves and we begin to staff up it will not only help to unlock revenue, but also the mix between contract and.
In our own labor will.
We will improve the margin also now to the great point, thanks for pointing that out yet because Mike in some instances in order to deal with our own labor capacity constraints.
Subcontractors to perform some other work and we don't realize the same kind of margin on that revenue that we do our direct labor.
Yes.
And then just on the 10-K analysis. So can you provide a little more clarity there which balance sheet items are you thinking about it and then with shares.
Yes.
So.
I clearly expect Mike that we're going to have some balance sheet adjustments that are going to flow through you may have noticed we didn't include a balance sheet for example, and when we put the earnings release out because those are going to be subject to change.
It gives me the focus is really around deferred items that relate to our.
Our contracts.
And the services part of our business really has nothing to do with the hardware business, which is much more straightforward. So.
We're poking at the deferrals I guess I'll reiterate that this is.
Our balance sheet analysis. It does go back years into the past.
<unk>.
I wish I had the evaluation complete, but we're going back in time, and there's a lot of contracts to look at and there's a lot of detail to sift through so.
Primarily rather differed deferred items on the balance sheet.
Okay great.
Okay.
Joe you mentioned a terraces.
Specified in.
So overall I think proposals from the.
States cities actively.
Is that any seen that before.
I mean, it sounds like Youre basically.
Not doing an RFP and entertain this is why we wanted to spend money on or can you just clarify that.
Well specification happens at multiple levels. So for example, we work with a lot of states to help them set.
Set the specifications for detection devices that are sold and deployed in their jurisdictions.
To the extent that we're able to influence that that can obviously be beneficial for rytary. So that's one thing that happens.
To the extent that we're able and certain competitive procurements to influence the specifications of the request for proposals or the technical evaluation criteria, that's obviously beneficial to us and so as appropriate.
And attempt to.
Influence those specifications, but in this particular instance, we were talking about something different these are instances where.
Several agencies submitted and received grants from the U S Department of transportation.
For <unk>.
Initiatives that are going to be funded through the Iga.
Funding.
And in those particular instances the way that the grant proposals were written the agency's specified I terrorist technology software or services.
In some instances that could be because.
They are required to use us because the state has already stipulated that we must be is because we've managed to influence the states specifications, but in other instances as states just.
Felt that we were appropriate technical solution for the.
Project that was envisioned when they submitted a grant but in any event through either one of those mechanisms. We are the specified solutions and then they subsequently received funding from the U S. D O T. When Theyre grants were selected.
Okay, great. Thanks, a lot.
Now just to be clear, though.
That does not mean necessarily that we represent 100% of all the activity that's been funded.
We're now working with the agencies to get clarification as to.
What what our scope is going to be in those projects, but again the sum total of all of that activity that was funded through those grants represents about $94 million, which is almost 20% of all the I think it's like 60% to 70% of all of those phases for all grants that were awarded in the most recent cycle.
<unk>.
Yes.
Should help keep the win rates higher as well.
Absolutely and we're obviously super focused on that and as I mentioned, we're really excited that our competitive win rate. This is for our services business I'm setting aside the hardware was 82% in the fourth quarter.
Yes.
Alright, thank you.
The next question is from Tim Moore with Es Hutton. Please proceed.
Thanks.
And congratulations on the strong sales growth for the year.
It's also nice to see the addition of carrying his expertise on supply chain ops and service based business models and it was good to talk to him last month at our conference.
So just starting off with my first question about services.
I'm, just wondering to reach more of an inflection point increments.
Incremental gross margin acceleration and step up there specifically.
Specifically for your cloud based solution, the direct licensing subscriptions or with partners virtualization do you estimate that you need about $10 million more in revenue from those combined businesses to really move the needle more to get the gross margin up significantly more.
Yes, Tim I think you're right I do think that we reached a critical inflection point, when we add an incremental $10 million.
Recurring revenue, so you're absolutely right.
But I don't want people to think that we're not going to see any incremental improvement I mean, we definitely will we would expect to see I mean, it may not be obvious when we report our enterprise results yet, but we do feel like we're seeing some improvement every quarter and we would expect to continue to see that as a <unk>.
Regress through fiscal 'twenty, four and as Carey mentioned I mean that is driving some of the expected.
Margin EBITDA margin improvement in the second half of the current fiscal year. It is absolutely coming from.
The growth in our services revenue lines.
Great now that makes sense, we'll expect obviously gross margin to improve and then get the extra super boost.
When you get to maybe that the 10 million of extra revenue also just to provide a little bit more clarification people are wondering like well what does that inflection point look like so in terms of our SaaS product lines. As we've said previously we believe that at scale, we should be able to realize 70 plus percent gross margins.
On our SaaS product lines, when I was saying, we need and probably an additional $10 million in revenue I was meaning like more specifically as it relates to the SaaS products, and Thats, where youre going to see like a big step up from like gross margins in the mid 40% to mid 50% moving to 70 plus percent that we will.
Incremental improvement as we move towards that incremental $10 million in revenue.
That's great thanks for that color and that.
That elaboration, maybe just switching gears you had positive adjusted EBITDA in the quarter and pretty much nearly breakeven operating income ignoring that one off expense.
I was just trying to wrap my head around maybe the SG&A expense timing it sounds like theres going to be some labor hiring and training investments you want to get away from that higher cost labor subcontractors. So if we just take it to another level I know, we talked about incremental gross margin sequentially as the quarters unfold.
This year, how do you think about it.
Achieving positive adjusted EBITDA.
And maybe the magnitude of that do you think the September quarter will still be a positive EBITDA or will it be a drag from that that labor hiring and training and so I'll just kind of provide some context on the carrier.
But absolutely we expect positive adjusted EBITDA in our fiscal first quarter and second quarter and also just to make sure that everybody understands that.
The mix of product that we shipped in the fourth quarter was different than what we had expected because we were responding to customer requirements, which are fluid and that resulted in about a <unk>.
300 basis point negative impact if you will against what the original expectation was.
In terms of our EBITDA margins and then the service.
Revenue, which was a function of two things some delays and then also the labor capacity constraints resulted in another approximate 300 basis point impact. So just wanted to make sure you guys understood. Both links those are both temporary issues that we've put behind us So we would.
If we do not expect to see.
That kind of impact going forward.
But anyway with that Kerry do you want to talk more specifically about what the expectation should be well I think.
And Tim you you touched on this but the investments Joe.
Tune in.
Labor related initiatives for training and recruiting are really focused on.
Improving our.
Our ability to access.
People skills related to our services business. So you have to think about the fact that these are really customer facing and revenue producing.
Producing positions, so while there'll be a little bit of.
Cost increase that will probably precede converting these resources into producing revenue and margin.
By and large you should think of it from that perspective with regard to other types of costs that are more fixed in nature.
We would hope to continue to improve our leverage on those aspects of operating expenses is as the revenue continues to grow at a double digit pace.
Great. Thanks for quantifying those two sets of the.
300 basis point drag each in the March quarter, that's very helpful.
It seems like the bottom there easily the bottom but yes.
And then maybe just switching gears can you elaborate maybe on how some of the Dod agencies or Mike.
Migrating to letting you handle your service remotely from your office.
And new customers.
Really.
Overlaying benefit from the centers of excellence that you have in California.
Rather than having people in the office at the agencies, just kind of a remote remote migration.
Yes so.
Every customer account is different but in general we're seeing a really high receptivity. This is a model that we're actually evangelizing I'd say that we're probably on the bleeding edge.
And we when we embarked on this we were uncertain how quickly it would begin to resonate with agencies, but we believe it's actually yeah.
Beginning to resonate.
Resonate at a meaningful level and actually kind of ahead of our original expectations. So I think that we're tapping into sort of this late in demand which is fantastic.
The thing that we need to work through however is working with agencies to get from a position where they are interested in procuring the services on that basis as we've been trying to outline for them and figure out how that can fit into their procurement practices and work within there.
Jet frameworks and so there is still some more work to be done there, but what we're finding is that those.
Sort of a more progressive agencies are very eager to work with us to get through those kind of that next level of hurdles.
And as we get more and more success with that then we'll be able to take those best practices and migrate them to other agencies, who are perhaps less forward thinking.
That being said in terms of like tapping into like the basic underlying demand I think that we feel very confident.
We've identified a gold vein here.
And we are increasingly tapping into that market interest in capitalizing on this alternative delivery.
Form and I think Tim to some degree you kind of hit on maybe one of the primary reasons why that's the case as a result of COVID-19.
As everybody knows there was like a huge loss and.
Alright labor right at kind of evaporated and a lot of that labor that was loss happened to be boomers.
And as you may or may not know.
If you look at the public sector Labor force they had a particular high exposure to.
Employees that are paid.
That generation, the baby Boomer generation, meaning that theres been a tremendous drain on labor capacity. Among these agencies and so they are desperate to try to figure out how do we plug that gap and our ability to offer cloud enabled managed services and process virtualization and just generally.
Automation is a great answer for them and I think that's why we're seeing such a high level of interest and again the only issue for US now not to the only issue, but the primary issue for US now is to help agencies get from like that level of interest to a point, where it's easy for them to now procure these services and we're starting to work through that with.
Agencies frankly across the country.
Although we are seeing probably more interest in this model and some of the bigger states, which would include California, Texas and Florida.
When you think about flexibility scalability.
And in time to ramp up our model all I think enhances outcome in all those cases, it's a great return on investment also because youre now looking at some.
Porting.
Fixed cost operations underneath all of that too.
Oh, great. Thanks for sharing that that's very helpful color and that's it for my questions great. Thanks, Jeff.
The next question is from Ryan signal with Craig Hallum. Please proceed.
Hey, guys. All my operational questions have been answered, but just two clarifications one what was cash as at the end of the quarter, if you're willing to give that one balance sheet metric and then two any internal control deficiencies of our material weaknesses related to.
The potential restatements.
Yes right.
Both points.
Unrestricted cash and the restricted cash is very very nominal as you've seen really from period to period, but we were at $16 $6 million is where we ended up the quarter.
So that was a very nice improvement.
Sequentially the year over year cash comparison again as I know you realize it was affected by the.
The excess costs were incurred due to the supply chain issues. During this span of.
Most of.
'twenty fiscal 'twenty, three, especially in the first six months, but.
A nice turn from the end of Q3 to Q4.
And we will expect again to continue to enhance our cash position is.
As the year comes to a.
Close in 24 on the material or the controls assessment, we're still going through that right now right I think.
The first part of the evaluation is to get the numbers correct quite honestly.
The fact that the.
Activity, we're focusing on goes years into the past I can tell you that.
Certainly since I've been here and as I've looked back kind of sequential year by year.
I'm very comfortable with the controls that have been.
Looking at in measuring activities for really the last in the last three fiscal years certainly.
The issue that arose again goes back to a time when.
The culprit that we're looking for is really related to the ERP conversion.
I would like to say that.
We could be immunized from that but I've seen a lot of companies that have had struggles in maybe different ways that has manifested but related to large scale conversions like that so I'm not worried about her controls at all.
And.
The controls assessment that goes back appears in the past is something we really havent come to a conclusion on yet.
Great. Thanks, guys. Good luck.
Thanks.
So there are any.
Yes.
We have no further questions in queue. We have reached the end of the question and answer session and I will now turn the call back over to Joe <unk> for closing remarks.
Great well, thank you operator.
So as always I really appreciate everybody's support and your thoughtful questions.
On the Investor Relations front I want to let everybody know that we plan in our fiscal 'twenty.
For second quarter to provide.
And.
Update you may recall that we had talked about that in the past we plan to organize a virtual event to present this information.
But just in full transparency, we continue to run into schedule complex and thats become increasingly difficult to pull that off and therefore, we've decided instead to publish a white paper. They will describe various aspects of the IHA a such as a breakdown of the budget line items and the status of new programs will be created due to the legislation.
And we will map that to our lines of business you have an understanding of the points of intersection.
Additionally, we will conduct various investor outreach activities and as always we are available to speak with investors. So that you guys have any follow up questions.
In the meantime, we look forward to updating you again on our continued progress when we report on our fiscal 2024 first quarter results and with that we're going to go ahead and conclude today's call. Thank you everyone.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
Okay.