Q1 2024 Iteris Inc Earnings Call
Good day and welcome to the eye terrorists fiscal first quarter 2024 financial result conference call.
At this time, all participants have been placed on a listen only mode and we will open the floor for your questions and comments. After the presentation. Please note. This event is being recorded I would now like to turn the conference over to Tom Kelly of MK, All Investor Relations. Please go ahead.
Thank you operator, good afternoon, everyone and thank you for participating in today's conference call to discuss I terraces financial results for its fiscal 2024, our first quarter ended June 32023, joining us today are terrorists as president and CEO , Mr. Joe <unk> and the company's C.
So Mr Kerry Shiba.
Following their remarks, we'll open the call for questions from the company's covering sell side analysts.
We will answer investor questions that were submitted to the company in advance of the call per the instructions on our press release dated July 27 2023.
Before we continue 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, which statements are based on current information are subject to change and are not guarantees of future performance.
Terrorists is not undertaking an obligation to provide updates to these forward looking statements in the future.
Actual results may differ substantially from what is discussed today and no one should assume that at a later date the company's comments from today will still be valid.
<unk> refers you to the documents the company files from time to time with the SEC specifically the Companys. 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 will.
The webcast replay of today's call on the Investor section of the company's website at Www Dot I terrorists Dot com now I would like to turn the call over to <unk>, President and CEO , Mr. Joe <unk>. Sir Please proceed.
Great. Thank you Todd and good afternoon to everyone. I appreciate all of you joining us today.
<unk> reported record total revenue of $43 5 million and our fiscal 2024 first quarter, representing an increase of 29% year over year.
We attribute the strong rate of growth to a high level of demand for our products and services.
And we also had some consulting projects, which had been delayed due to the dependencies on sub contractor deliverables achieved key revenue milestones.
As of our last earnings call, we were not expecting the sub contractors to be able to achieve these revenue milestones until our fiscal 2020 for second half.
Our fiscal 2024 first quarter gross margins rose 840 basis points on a year over year basis, and 680 basis points on a sequential basis, demonstrating the high purchase price variance associated with our prior supply chain issues are now behind us.
As a result of the gross margin improvement and our continued focus on operating efficiency, we reported record adjusted EBITDA of $3 7 million, representing a $6 1 million dollar improvement year over year.
In a few minutes Cary will address our profitability dynamics in more detail.
Customer adoption of the clear mobility platform remains very strong and our fiscal 2020 for first quarter. We reported record total net bookings of $53 1 million, representing an increase of 25% year over year.
Due to strong bookings results. We ended the June 32023 period with a record total ending backlog of $123 8 million, representing a 14% increase year over year.
As always our ending backlog and net bookings figures reflect firm customer orders rather than total contract value.
The total contract value, which varies from quarter to quarter averages on a historical basis about 200% of our total ending backlog.
Also keep in mind that our backlog excludes a portion which varies from period to period of our sensor bookings since these orders often convert to shipments within a single quarter.
At this point I'd like to share some details about the performance of our product portfolio.
For our sensors and third party hardware, which we referred to collectively as products. We reported fiscal 2024 first quarter revenue of $23 7 million, representing a 44% increase year over year.
The strong year over year comparison is due both to continued solid commercial execution.
And a relatively soft prior year comparison was impacted by limited component availability, resulting from last year's supply chain issues.
If you look at product performance on a trailing 12 month basis to adjust for the prior year comparison. It products revenue is still up 38% compared to the same prior period.
Given the weighted average historical growth rate for the associated market categories is in the range of 6% to 8% our sensors continue to take significant market share growing more than four times the average market rate of growth.
Additionally, our commercial teams continued to make solid progress against key commercial priorities that include winning a disproportionate share of large scale modernization initiatives leveraging our leadership in intersection detection to penetrate adjacent categories, including the emerging cellular V to X category and.
Catching annual recurring revenue to our vantage Inspector CV sensors.
In the fiscal 2020 for first quarter, we attached annual recurring revenue to 29% advantage next sensor unit sold which represents another record for <unk>.
Now I want to review the performance of our services portfolio, which includes our various consulting service managed service software as a service and data as a service offerings.
We reported record service revenue of $19 9 million and our fiscal 2024 first quarter, representing a 15% increase year over year.
As noted earlier this growth is attributable to continued strong demand as well as some previously delayed consulting projects with subcontractor dependencies, which occurred ahead of the revised completion date.
During our fiscal 2020 for first quarter, we also experienced some improvement in our internal labor capacity due to the initiatives that we discussed on last quarter's earnings call.
While the additional labor capacity had only a nominal impact on first quarter revenue and the pace of improvement is still difficult to predict we expect to realize both revenue and gross margin benefits from the additional labor capacity in future quarters.
The level of demand for our service offerings continues to hit new record levels in our fiscal 2020 for first quarter. We reported net service bookings of $34 3 million, representing a 55% increase relative to the same prior year period.
We estimate that roughly $24 4 million or 71% of our first quarter net service bookings will be recognized in the future is annual recurring revenue.
In the first quarter, our more notable service bookings included a four year data as a service agreement with a total value of more than $15 million to provide clear data to a confidential private sector entity.
And almost $4 million data as a service agreement to provide clear data to an undisclosed media company.
Combined $3 6 million in task orders to provide hosted software and related services in Virginia Department of transportation or <unk>.
And by $3 $5 million in task orders to provide managed services to operate high occupancy vehicle toll lanes for the San Francisco Bay area Metropolitan Transportation Commission.
$1 $2 million task order with the city of Europe , Linda, California to develop and implement a traffic signal synchronization plan.
And a $1 million cloud enabled managed services task order with the city of San Mateo, California for Smart Corridor network monitoring.
To sustain strong customer adoption of our clear mobility platform. We continued to introduce important new solutions and feature enhancements for example in the first quarter. We released the Alpha version of our next generation travel time and connected vehicle data collection and presentation system as well as new transit signal signal priority.
<unk> features and clear guidance signals.
In summary, we are very pleased with our fiscal 2024 first quarter record revenue record adjusted EBITDA record net bookings and record ending backlog additions.
Additionally, we believe <unk> continues to demonstrate significant progress evolving to a platform based business model associated with improvements in solution repeatability collaboration scalability and growth.
In light of the very high degree of fragmentation and complexity and our end market. We believe this progress is both notable and superior to other companies trying to pursue a similar strategy.
So on that note I'm going to pass the mic to Cary to provide more color on our fiscal 2024, our first quarter financial results after which I'll come back and further discuss our expectations for the second quarter and full year.
Thanks, Joe and good afternoon to everyone.
Joe already described our commercial progress and I want to avoid being repetitive. However, I want to underscore that our strength in the market as reflected in both the rate of growth in nominal value of our revenue backlog and bookings all of which were at record levels also keep in mind that when you view.
<unk> progress compared to last year, the shape of our fiscal 2023 revenue curve was especially impacted by supply shortages occurring in the first half of that year, which resulted in a degree of backend loading of revenues. This also is reflected in the ratio of products revenue when compared to total company revenue.
The first quarter of this year products revenue was approximately 54% of total company revenue versus only 49% in total.
Total in Q1 of last year, Joe is going to address this point again later when he discusses guidance.
Moving down the income statement to the gross profit line I would like to expand some on the commentary Joe provided particularly related to the impact of supply chain dynamics on our gross profit performance.
In the first quarter of fiscal 2003, we experienced about $2 4 million of negative purchase price variance from aftermarket purchases of semiconductors, and other electronics components, which was $1 $7 million worse than the $656000 expense in the first quarter.
For fiscal 2020 for.
Demonstrating the high component costs that we incurred in fiscal 2023 have largely flushed through from the balance sheet to the income statement.
To give you a further sense of the state of the supplier market last year, the negative price variance incurred on purchases coming in the door in Q1 of fiscal 2023 was $5 $8 million as parts shortages escalated dramatically, reaching its apex in Q2 of fiscal 2023.
At $7 $8 million of negative price price variance as I. Just noted this pattern tends to also reflect.
Excuse me the degree of parts shortages that constrained sensor revenue in the first half of fiscal 2023.
From a year over year perspective fiscal 2024 first quarter consolidated gross profit increased $6 6 million or 65% Prada.
Products gross profit improved by about 145% bolstered primarily by the significant sensor volume growth low unit product cost and the benefit of prior price increases implemented last year services gross profit was down slightly overall falling about 200000.
Or three 5% as Joe indicated a much of the revenue increase in the first quarter of this year was driven by subcontractor expenses, which carry very little associated margin.
Aggregate gross profit improved 840 basis points, driven by a 2000 basis point improvement for products, which more than offset a 500 basis point decline for services due to the product mix and higher third party costs.
I believe the principal drivers of the overall gross profit change are reflected in my previous comments regarding gross profit.
Products revenue typically will carry a higher gross margin than the overall aggregate now that the highest cost impact of the supply chain issues of last year are behind us.
The sequential gross margin trend also continues to improve increasing 600 basis point basis points overall in the first quarter of this year. The principal drivers of this improvement reflects lower sensor product costs due to lower negative purchase price variance and the positive impact of sensor price increase.
Yes.
Operating expenses in aggregate were 2% lower in the current year first quarter, when Kim when compared to the same period last year, reflecting about $700000 in restructuring costs that we incurred in the prior year <unk>.
Excluding the prior year as the restructuring costs operating expenses up approximately 400000 or 3% nominally however, as a percentage of revenue current year operating expenses declined 10, eight percentage points as reported and were down eight seven percentage points.
<unk>, excluding the impact of restructuring costs in the prior year. So you are aware year over year line item comparisons for the quarter are affected by a reorganization implemented at the end of the first quarter of last year. The reorganization fundamentally established a more focused functional based structure, which resulted.
And about $900000 of costs being re categorized and move from G&A expense to sales and marketing costs beginning in Q2 of last year.
As a result, it's more straightforward to look at cost changes more broadly the most significant item driving the overall cost increase would be year to year wage inflation with numerous other pluses and minuses occurring in the detail.
The factors just discussed related to revenue gross profit and operating expense fundamentally explain the major comparisons in operating income net income and adjusted EBITDA for adjusted EBITDA, We delivered $3 7 million in the first quarter of 2024, which represent.
A $2 $3 million sequential and a $6 $1 million year over year improvement to sequential improvement further underscores the trend of improvement that began in Q3 of last year.
Total cash at the end of the first quarter was $20 million, which was $3 $4 million higher sequentially and $5 $2 million above the balance at the same time last year.
These improvements continued to reflect the combination of higher income and strong balance sheet management, while cash trajectory can always be affected in the short term around balance sheet cutoffs future earnings improvement and good balance sheet management provide the foundation for continued liquidity improvement going forward.
Yeah.
Now I will turn the call back over to Joe who will discuss our fiscal 2020 for guidance and provide closing comments.
Super Thank you Carrie.
The smart mobility infrastructure management market is highly fragmented and it's complex. However represents significant long term opportunities due to a favorable secular trends and historic federal funding that's been committed by Congress through 2026.
Additionally, the market is characterized by high switching costs and customer stickiness benefitting established companies.
Therefore, given the breath of our platform our brand equity and customer reach we remain extremely optimistic about the long term opportunity in front of Vitaros.
Over the balance of fiscal 2024 tariffs will continue to deliver against an aggressive solutions roadmap that includes the following major releases.
Our next generation connected vehicle data collection and data presentation system that includes a suite of connected vehicle applications powered by clear mobility cloud API.
Our state of the industry cloud based international registration planning and international fuel tax administration system for our commercial vehicles, which among other benefits will capture a valuable new datasets for our clear mobility cloud.
The introduction of advantaged fusion features in our vantage apex sensor line, which will streamline our sensor portfolio and accelerate our connected vehicle strategy.
And the application of artificial intelligence to identify verify and predict certain transportation events.
We expect our fiscal 2024 release plan to drive further adoption of the clear mobility platform increase our customer penetration and improve the monetization of our expanding mobility datasets.
Among other benefits these dynamics should sustain an above market rate of growth in our total bookings as well as continue to increase the average size of individual bookings.
Given this trend I do want to remind everyone that the timing of one or two large orders may cause some bookings lumpiness from quarter to quarter.
In addition to the focus on our solutions portfolio will continue to pursue key operational priorities, including the productivity of our distributor network and maturity of our customer success function and the internal labor capacity of our consulting teams.
As a reminder, the tactics outlined on our prior earnings call of already produced a measurable improvement in our internal labor capacity.
Next I want to address our guidance, our first quarter results demonstrate the significant progress of our product roadmap and operational initiatives. However, I want to emphasize two important dynamics that carry also touched on first our prior year revenue curve does not reflect normal seasonality.
Since supply chain issues in the first half of fiscal 2023 pushed some product shipments into the second half of the fiscal year.
And second as I mentioned earlier, some service revenue that was anticipated to occur in the fiscal 2020 for a second half moved forward into our first quarter.
Therefore at this time, we are maintaining our guidance for fiscal 2020 for revenue in the range of $168 million to $175 million, representing organic growth of 10% at the midpoint.
And we are maintaining our guidance of an adjusted EBITDA margin in the range of 7% to 9% of fiscal 2020 for revenue in fiscal 2024, net cash flow in the range of $12 million to $16 million.
For similar reasons, we're also providing second quarter total revenue guidance that guidance is in the range of $41 million to $42 million on a revenue basis.
This revenue this revenue would represent growth of 6% year over year at the midpoint and accounts for some customer deployment and revenue recognition moving forward into our first quarter.
We're also providing guidance for second quarter adjusted EBITDA in the range of 5% to 7%, which continues to represent a significant year over year improvement.
Our combined first quarter results.
And the second quarter revenue and adjusted EBIT guidance points to a very strong fiscal 2020 for first half.
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.
Presenting a five year organic revenue CAGR of 14% at the midpoint.
With the substantial increase in annual revenue, we anticipate progressive benefits from scale to result in fiscal 2027, adjusted EBITDA margins in the range of 17% to 19%.
And Additionally, we anticipate improvements in our liquidity to enable <unk> to resume our acquisition program, which would of course be additive to our organic vision 2027 targets.
So with that.
We will conclude our prepared remarks, and we'd be delighted to respond to any questions and comments.
Operator, do we have any questions at this point.
Yes, we do we are opening the floor up for questions. If you would like to ask a question. Please press star one on your keypad now confirmation tone will indicate your line is in the queue. You May press star two if you would like to remove your question from Nicky anyone using speaker equipment might be necessary to pick up your handset before your question.
Yes.
Okay. Our first question is coming in from Mike Latimore of Northland Capital markets. Mike Your line is live.
Hey, Thanks, and congrats on all the records here.
So the data as a service wins were interesting it sounds like we might be confidential customers, but can you give a little more clarity on the use case, there and maybe also just the pipeline for it as a service.
Yes, Mike Unfortunately.
It's hard to provide too much commentary on new use cases, because of the confidentiality of the agreement.
However, I would say that we have a unique highly curated mobility data set and obviously various entities, both public sector and private sector entities see a lot of value in that data.
But unfortunately, I'm not really able to provide any additional liberty on those particular contracts at this time.
Okay.
I would imagine the gross margin is pretty good there or is it above or below corporate.
Yes, we would expect the gross margins.
These data as a service contracts to be.
Better than our overall average gross margins and obviously as we continue to grow our software as a service and our data as a service revenue.
Continue to see progressive improvements in our gross margins.
Yes.
Obviously, great great bookings and backlog.
Have you seen.
It needs to reflect the bank.
Sure.
<unk> infrastructure act, yet or is that still does that benefit still really going to be in the future sometime.
Yeah, Great question. So as we've said in the past, it's really important for people to understand that.
IHA a funding at the infrastructure investment and jobs Act funding.
As will flow through the system through at least three different mechanisms differ.
First mechanism, which represents the majority of the total funding will be formula grants or what mandatory spending that is already in the system.
It is not specific to any particular projects and therefore that funding gets mixed in with other revenue sources.
<unk>.
State and local agencies.
<unk> utilized and therefore, it's difficult for us to tie any particular bookings back.
May have received back specifically to IHA funding the other form of funding is going to be.
Competitive or discretionary grant money.
That is awarded on a project by project basis, It represents substantially less in the formula funding.
We've mentioned on prior calls the U S.
<unk> has begun to announce various awards will be publishing a whitepaper on explaining the mechanics in more detail.
Later this month, however, what youll see us foreshadowed hat when you when you get the Whitepaper will walk you through all the steps that need to transpire from the time that ESD Ot Award season, a grant to the time that the agency state or local agency actually received the funds and is able.
To begin dispersing that to vendors and in general that's going to be at least 12 months from the time of the initial Grant award and it can be as long as 36 months. So to answer your question, Mike We're definitely seeing benefits from the formula and the mandatory spending which is <unk>.
Already in the system, but we're not yet seeing any benefit in terms of bookings or revenue from any discretionary or competitive brands and we would not expect that for at least another six to 12 months.
Okay.
Thanks, Congrats again, thank you.
In terms of projects and deployment visibility then.
It could be you know pretty different.
Magnitude of gross margin in the.
In the December and the.
March quarters.
Expect some progression to occur.
I wouldn't say that there's you know a single lightening Rod Tim.
I think you've latched onto some of the keys, which would be continued growth in the software platform, which will provide.
Later leverage for us as we go forward.
And.
As always the sensors mix versus services mix will have an impact on our aggregate gross margins and EBITDA margins.
But based on what we're seeing right now we would expect some progression.
But again not a single lightning rod standing out thats going to cause any kind of.
<unk>.
Spike if you will along the way.
No fair enough.
Tim again, I just wanted to reiterate that we still have a high level of confidence in achieving our vision 2027 target, which would be <unk>, 17% to 19% EBITDA margins by 2027, and a lot of that is going to be driven by improvements in gross margins.
Okay. Thank you.
Extra credibility to that with the <unk>.
4% already in the June quarter.
You still have three and a half years left.
So maybe just switching gears I know you spent a lot of commentary in June .
On the subcontractors headwind and how it was a drag on margins and then you were doing internal labor hiring and training that seem like that would have been a near term headwind.
But are you seeing an inflection point now that you have enough.
Internal development and training done and it could actually become a <unk>.
<unk> as you get out to maybe October November and everyone's up to see there.
You don't have to rely as much on subcontractors.
Yes, so thats a great.
Great question.
So as I mentioned, we did see an improvement in our internal labor capacity. It actually grew by 7% now just to be clear that does not mean, our total head count grew 7%. While we're talking about is our consulting labor capacity factors and 7% sequentially in the quarter, which was certainly helpful.
We still have farther to go we'd like to see that get to something more in the mid to see by the end of the year.
Growth in sort of the range is like mid teens. So we're about halfway there.
So there's more work to be done, but we definitely feel good about the initial tactics that we introduced and we're starting to see benefits from those already.
Okay. That's helpful. Joe and then my last question to completely change the subject.
You have accomplished so much last year, you know Carrie came on board I enjoyed meeting them in person in May and it seems to have a very good grip on the operations.
Circuit boards and the supply chain is better not solve subcontracts youre getting better I mean, you're checking a lot of the boxes on things that were impediments for you 12 months ago, now that you're kind of at that point and seeing the margin expansion come through and Theres a lot of confidence in your EBITDA margin guidance.
Do you think acquisitions are back on the radar they might have been back burner.
Do you have any time to look at them and how is that pipeline.
Absolutely you want to talk to that.
Yes.
I think clearly we're able to refocus on our acquisition acquisition strategy now Tim.
Okay well.
Well on track again, so that's it for my questions and thanks again, yeah. Thank you too thanks to [noise].
Thank you very much just as a reminder, if there are any remaining questions or comments. Please press star one on your telephone keypad now.
Okay.
Mr. Bush era, there are no more questions from covering analysts would you like to address any investor questions. Prior to your closing remarks.
That's great. Thank you offer I would we actually received three questions some of which were.
Partially perhaps answered already but I want to go through each of these three questions.
Because I appreciate the time and effort and then the investors took to submit these specific questions. The first investor question relates to our share repurchase program and specifically the investor asked how much of that $10 million, which has been authorized for repurchase has been repurchased today.
And the answer that question is.
First of all by way of background I want to remind everyone that on May 12th 2000, 2022, The board approved a plan to repurchase up to $10 million of our outstanding common stock for an unspecified amount of time.
During the first quarter of fiscal 2023, so right. After the program was approved we repurchased.
300000 shares for an aggregate price of approximately $900000 at an average price of $2.90 per share.
Subsequent we obviously experience this severe increase in purchase price variances, which you're all familiar with and Carrie talk too.
That was of course due to global supply chain constraints, which impacted virtually every company with any kind of exposure to electronics components.
And because of that impact, it's certainly began to consume a significant amount of our own cash and as a result, we decided not to repurchase any stock since July 2022.
Obviously, our cash position continues to improve it provides for optionality and we will certainly reevaluate whether and when to resume any repurchasing activity will obviously look at that in the context of a broader capital allocation strategy.
The second Investor question relates to our advantage fusion product line and specifically the Investor asked the company to provide an update on the status of the advantage fusion program.
So in response I want to remind everyone that on December 7th 2021, we announced a joint development effort with Continental a G to introduce a vehicle to everything or via X enabled censor branded as vantage fusion.
At the time, we did that because.
<unk> intended to differentiate advantage fusion system from our other sensor systems such advantage apacs.
To a large degree to minimize various roadmap dependencies.
And then subsequently we've received valuable market feedback regarding the benefits of this capability, but we've also implemented various measures as part of our supply chain improvement program to rationalize our circuit Board design, and our manufacturing processes and so as a matter of all those lessons.
Learn.
As I mentioned in my prepared remarks will be merging the advantage fusion features that into our vantage APEC sensor line. This fiscal year and this has a number of benefits first it will simplify and streamline our sensor portfolio that we also believe because there are some other moves that will be making.
<unk>, which we have not we're not prepared to disclose at this point that we believe is will.
It will be helpful. As a as a step to a broader strategy and accelerating our overall connected vehicle strategy. So again. The answer is that we are working to incorporate advantage fusion feature set into vantage apacs and it does feature should be in market by the end of the current fiscal year.
So the third question relates to internal Labour capacity, which was a question that Tim asked.
And liked him the investor asked us to comment on the activity to progress in the results of our efforts to increase internal labour capacity.
And in response I want to reiterate that on our first quarter or consulting teams as we talked about.
Experienced some improvement more specifically about a 7% improvement internal labour capacity, and we attribute that improvement to a general increase in our recruiting activity as well as also to some enhancements in our processes are capabilities to source source international job candidates.
Looking ahead, we expect to continue on those activities in the second quarter and then as students get back to campus in the third quarter will be initiating our expanded on campus recruiting activity looks like touched on on our last call.
So anyway I hope that those responses were helpful to investors, who submitted their questions and as always we appreciate the questions from all of our covering analysts as well as from individual investors and we hope you will continue to submit your questions to us.
So anyway before we wrap up I want to share that will be participating in the Sidoti Microcap virtual conference.
17, 2023, and the Northland capital markets institutional investor confidence in Minneapolis on September 19th 2023.
If you'd like to meet with us and.
Either of those venues. Please request some time on our schedule, we would love the opportunity to speak with you.
Additionally, we will be conducting various investor outreach activities and as always we are available to speak with investors should do you have any follow up questions.
In the meantime, we look forward to updating you again on our continued progress and we report our fiscal 2024 second quarter results and so with that will conclude today's call.
Thank you everyone.
Thank you very much. This does conclude today's conference call you may disconnect.
And have a wonderful day.
[noise].