Q2 2024 Iteris Inc Earnings Call
Yes.
Good day and welcome to the eye terrorists fiscal second quarter 'twenty 'twenty four financial reserves results 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 conference is being recorded.
I would now like to turn the conference over to Todd Carley of M. K R Investor Relations. Sir 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 second quarter ending on September 32023.
Joining us today are terrorists as president and CEO, Mr. Joe <unk> and the Companys CFO, Mr. Kerry Shiba.
Following their remarks, we'll open the call for questions from the company's covering sell side analysts than.
And then we will answer investor questions that were submitted to the company in advance of the coal for the instructions in our press release dated October 26 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.
<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.
Hey, terrorists refers you to the documents the company files from time to time with the SEC specifically the company's most recent forms 10-K, 10-Q, and 8-K, which contain and identify important risk factors that could cause actual results to differ materially from those that are contained in any of the forward looking statements.
As always you'll find a webcast replay of today's call on the investors section of the company's website at Www Dot I terrorists dotcom.
Now I'd like to turn the call over to <unk>, President and CEO, Mr. Joe <unk> Joe. Please proceed.
Great. Thank you Todd and good afternoon to everyone. I appreciate all of you joining us today.
<unk> reported record fiscal 2024 second quarter total revenue of $43 6 million in fiscal 2024 first half total revenue of $87 1 million, representing an increase of 11% and 19% year over year, respectively.
We attribute the strong rate of growth to a high level of demand for our products and services and we also benefited from a handful of large consulting projects, which were previously delayed due to the dependencies on sub contractor deliverables, achieving key revenue milestones in our second quarter and our first half.
Our fiscal 2024 second quarter gross margins increased 2060 basis points in our fiscal 2024 first half gross margins increased 1510 basis points on a year over year basis, respectively.
The gross margin improvement further demonstrates that our supply chain issues are behind us.
Due to significant gross margin improvement and our continued focus on operating efficiency. We reported fiscal 2024 second quarter adjusted EBITDA of $2 9 million in first half adjusted EBITDA of $6 9 million, representing an $8 1 million and $14 6 million dollar Imp.
<unk> year over year, respectively.
In a few minutes Carol address our profitability dynamics in more detail.
Customer adoption of the clear mobility platform remains very strong we reported fiscal 2024 second quarter total net bookings of $43 8 million in first half total net bookings of $96 9 million, representing an increase of 4% and 14% year over year.
Actively.
Due to our strong bookings results. We ended September 32023 period with a record total ending backlog of $124 million, representing an 11% increase year over year.
As always our any backlog and our net bookings figures reflect firm customer orders rather than a total contract value the.
The total value of customer contracts, which will vary from quarter to quarter averages on a historical basis about 200% of our total ending backlog.
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 second quarter revenue of $23 4 million in first half revenue of $47 1 million, representing a 13% and 27% increase year over year, respectively.
When compared to a 6% to 8% average historical growth rate for the related market categories are sensors continue to take significant market share growing more than three times the average market rate of growth.
The strong rate of growth is due both to continued solid commercial execution and also the superior product features and performance.
Indeed in the fiscal 2020 for second quarter and first half our product teams continue to make solid progress against key business priorities. These priorities include winning a disproportionate share of large scale modernization initiatives leveraging our leadership in the intersection detection to penetrate adjacent categories, including.
The emerging cellular vehicle to everything or C V to X category and attaching annual recurring revenue to our advantage and our spectra connected vehicle sensors.
For example, some fiscal 2024 second quarter notable customer commitments include a new Master purchase agreement with America Op accounting in Arizona, which is the fourth most populous county in the nation to use our vantage next detection system or blue towed travel time sensors and our vantage lie.
I've been clear guide signal software for a multiyear comprehensive arterial modernization initiative, which will be executed over the next several years.
A new purchase agreement with the city of City Cedar Park, Texas to deploy our vantage apex detection system connected vehicle sensors, and vantage live and clear guide signal software for a comprehensive citywide intersection modernization initiative.
A purchase order for our vantage apex detection system and vantage live software from the Coachella Valley Association of governance governments in California for the second phase of a region wide intersection modernization initiative you May recall me speaking about the first Phase Award recently.
The purchase order from Richardson, Texas for the second phase of a citywide deployment of our advantaged apex system and purchase orders from the New York State Department of transportation for the first deployment in districts. One in two of our vantage radius plus detection system. As a reminder, the state of New York represents.
New geographic market fright terrorists as our vantage radius product was first added to the states qualified product list only last year.
Now I Wonder if you view the performance of our services portfolio, which includes our various consulting services managed services software as a service and data as a service offers.
We reported record fiscal 2024 second quarter service revenue of $20 2 million in first half service revenue of $40 1 million, representing a 9% and 12% increase year over year, respectively.
As noted earlier, our strong service revenue growth is attributable largely to strong customer demand with some timing benefit from a couple of large consulting projects with subcontractor dependencies that finally achieved revenue recognition milestones.
During our fiscal 2020 for second quarter and first half we continued to make progress on initiatives to improve our internal consulting labor capacity. We also improved our labor utilization and increasing average revenue per head count.
While the pace of improvement remains difficult to predict we expect the growth in labor capacity to contribute to revenue growth, while also improving our labor mix and our gross margins in the future.
As with our product portfolio the level of demand for our services portfolio remains very strong.
Ported net service bookings in our fiscal 2024 second quarter, a $22 8 million in first half of $57 1 million, representing an 8% and a 32% increase year over year respectively.
In the second quarter alone we recorded the following notable service bookings.
A new $9 $5 million contract with the U S Department of transportation to drive the development of the nation's architecture reference for cooperative and intelligent transportation, including the definition of standards for infrastructure to vehicle communication and for vehicle electrification.
A $2 $2 million task order to provide integrated corridor management services for district, five or the <unk>.
The department of transportation.
A $1 million plus data as a service and data analytics agreement with venture accounted California.
More than $1 million in software as a service agreements with various state and local agencies for the use of our clear guidance software and a new consulting agreement to develop a north American intelligent transportation systems market assessment for a confidential global automotive OEM.
These bookings illustrate the unique ability of our ecosystem to not only enable collaboration among mobility infrastructure owner operators or in other words, various public agencies, but between mobility infrastructure owner operators and mobility infrastructure users, including the traveling public and various commercial entities.
Due to sustained strong customer adoption of our clear mobility platform. We continue to introduce important new solutions and feature enhancements for example in our fiscal 2020 for second quarter and first half we released the Alpha version of our next generation travel time and connected vehicle data.
<unk> and presentation system as well as new transit signal prioritization features and clearer guidance signals.
In summary, we're very pleased with our fiscal 2020 for second quarter and our first half revenue adjusted EBITDA net bookings and ending backlog. Additionally, we.
We continue to make significant progress evolving to a platform based business model, which will enhance solution repeat ability collaboration scalability and growth.
Due to the very high degree of fragmentation and complexity in our end market. We continue to believe the progress of our platform strategy will bolster our position as a superior source of value in this industry.
On that note I'll pass the mic to Cary to provide more color on our fiscal 2020 for second quarter and first half financial results after which I'll come back to further discuss our expectations for the third quarter and for the full year.
Thanks, Joe and good afternoon or evening everyone.
Because Joe already has described our exciting commercial progress in some detail I only want to underscore that our strength in the market continues to be demonstrated by double digit revenue growth and a record backlog and fed by strong bookings.
Also as I noted last quarter I want to remind you that when you view our progress compared to last year. The shape of our fiscal 2023 revenue curve, which has especially impacted by supply chain shortages occurring in the first half of that year, which resulted in a back end loading of revenue.
This anomaly it was especially evident in our first quarter year to year comparisons, but also was evident when looking at first half results and fiscal 2023, only about 47% of total year revenue occurred in the first half with 53% occurring in the second half.
Normally our revenue is split roughly 50 50 between the two halves.
The prior year also did not exhibit typical seasonality.
Our our usual sequential design in I'm, sorry, a decline in the third quarter revenue did not occur in fiscal 2023, Joe will 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.
As Joe noted the impact of supply chain dynamics was reflected in our gross profit performance last fiscal year in the second quarter of fiscal 2023.
Expense to about seven $8 million of negative purchase price variance from aftermarket purchases of semiconductors, and other electronics components, which by far was the largest negative quarterly impact last year and was $7 $6 million worse than for the same quarter. This year.
Year.
Just to reiterate what Joe said, the negative cost and operational impacts of the fiscal 2023 supply chain issues are now behind us.
From a year over year perspective fiscal 2024 second quarter consolidated gross profit increased $9 $7 million, which is 148% higher than in the prior year products gross profit improved by 1253% with.
Approximately 80% of the improvement driven by supply chain improvement and the remainder are reflective of higher volume.
Services gross profit improved to 8% overall, increasing about $200000 due to higher revenue.
Looking at gross margins the second quarter of this year improved 2060 basis points in the aggregate, reaching 37, 3% in total the increase was driven by a 4040 basis point improvement for products, which more than offset a 180.
80 basis point decline for services.
Products gross margin reached 44, 1% for the current year second quarter and with last year's negative cost impact from supply chain issues clearly behind us ongoing fluctuations would be expected to reflect changes in product mix.
Gross margin for services was 29, 5% for the second quarter of this year with the decline, resulting primarily from a higher subcontractor labor mix than experienced in the same prior year period.
Operating expenses in aggregate were 17, 2% higher than the current year second quarter when compared to the same period last year, and 200 basis points higher measured as a percentage of revenue.
In general prior year cost levels reflect very tight spending controls imposed in the midst of the supply chain crisis.
The current year increase was most significant in the G&A category with 44% of the G&A increase due to litigation costs for a contract dispute with a competitor which is trying to re litigate. Some particular terms of our settlement agreement executed between the two companies nearly nine years.
<unk> ago.
In addition to the to get to the litigation costs, we experienced a temporary increase in contractor expenses and some adjustments to equity compensation cost increased.
Revenues were the primary driver for higher sales and marketing costs. While we also increased investment in R&D for software development.
The factors just discussed related to revenue gross profit and operating expense fundamentally explain the major comparison in operating income net income and adjusted EBITDA as Joe mentioned adjusted EBITDA was $2 9 million for the second quarter, an improvement of $8 1 million.
When compared to the prior or the same period last year.
This brings adjusted EBITDA to $6 9 million for the first half of fiscal 2024.
A turnaround of $14 $6 million over last year.
Total cash at the end of the second quarter. This year was $20 2 million, which was $12 $2 million above the balance at the same time last year and slightly higher than the balance at the end of last quarter, which was right at $20 million.
Cash flow for this year's second quarter included $3 $8 million in payments for annual performance bonuses normally paid out in the fiscal second quarter.
And a $1 million payment to a prime contractor for a product return that we discussed initially in the last quarters Form 10-Q.
The improvement from last year continues 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.
With that I now will turn the call back over to Joe who will discuss our fiscal 2024 guidance update and then provide some closing comments.
Great. Thank you Carrie.
The smart mobility infrastructure management market represents a significant long term opportunity due to the historic federal funding that's been committed by Congress through 2026, as well as positive technology trends that include the adoption of cloud infrastructure artificial intelligence and connected and autonomous.
Ms vehicles.
Additionally, the market is characterized by high switching costs and customer stickiness benefitting established companies with a broad portfolio of superior products and services.
Therefore, given the breath of our platform capabilities significant brand equity and extensive customer reach we remain extremely optimistic about the long term opportunity in front of HRS.
Over the balance of fiscal 2024 tariffs will continue to deliver against an aggressive solutions roadmap that includes the following major releases and next generation connected vehicle data collection and data presentation system that includes a suite of connected vehicle applications powered by clear mobility cloud Apis.
Our state of the industry cloud based international registration planning and international fuel tax administration system for commercial vehicles, which in addition to significant benefits for fleet operators and public agencies will capture a valuable new datasets for our clear mobility cloud.
The introduction of vantage fusion features in our vantage APAC sensor line, which will streamline our sensor portfolio and accelerate our connected vehicle strategy.
And the application of additional artificial intelligence at the edge and in our cloud that will enhance our ability 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 wallet share among existing customers and improve the monetization of our expanding mobility datasets.
Among other benefits these dynamics should support an above market rate of growth in our total bookings as well as continued to increase the average size of individual bookings.
In addition to focusing on our solutions portfolio will continue to pursue key operational priorities, including the productivity of our distributor network. The maturity of our customer success function and internal labor capacity of our consulting teams.
As a reminder, the tactics outlined on our prior earnings call have already produced a measurable improvement year to date in our internal labor capacity.
Before I address our guidance I want to emphasize two important dynamics.
And also which build on some of the points that carries made first our prior year's revenue curve did not reflect normal seasonality since supply chain constraints in the fiscal 2023 first half pushed some product shipments into the second half, making our second half year over year comparisons tougher than normal.
Second some service revenue that was anticipated to occur in the fiscal 2020 for second half moved forward into our first quarter of this year.
And Additionally, we're applying a degree of conservatism to our guidance due to some temporary federal budget uncertainty, but is unlikely to change long range funding levels, but certainly could cause some near term delays.
With this context, we are providing guidance for fiscal 2024 third quarter total revenue in the range of 41 million to $43 million representing growth of 3% year over year at the midpoint.
We're also providing guidance for third quarter adjusted EBITDA in the range of 4% to 6%, which continued to represent a significant year over year improvement and reflects normal seasonality product mix and related revenue expectations were.
With respect to our fiscal 2020 for full year revenue, we're raising the low end of our revenue range by $3 million, bringing our new range to $171 million to 175 million, which represents organic growth of 11% at the midpoint.
We're maintaining our guidance for an adjusted EBITDA margin in the range of 7% to 9% of fiscal 2020 for revenue as well as our fiscal 2024 net cash flow guidance 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 year.
Organic revenue CAGR of 14% at the midpoint.
With a substantial increase in annual revenue, we anticipate progressive benefits from scale to result in fiscal 2027, adjusted EBITDA margins in the range of 16% to 19%.
Additionally, we anticipate improvements in our liquidity will enable I terrorists to resume our acquisition program, which would be additive to our organic vision 2027 targets.
With that we would be delighted to respond to any questions and comments operator could you open up the line for that please.
Yes, indeed at this time, we will be conducting our question and answer session.
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One moment, please while we pull for questions.
Thank you.
Our first question is coming from Jeff I'm syndrome, with B Riley your line insights.
Yes, hi, everyone.
Everyone.
Joe maybe if we could just circle back to the federal budget uncertainty and I guess, how are you seeing that manifest in your business and customer activity or or customer bookings in.
When projects actually start or continue.
Sure so to be clear as we said overall the environment remains really strong and we're extremely bullish about our marketplace, but I will say that in the second quarter in anticipation of a federal government shutdown, we did see some delays and some task order execution.
And as a result, some projects did slipped to the right.
In light of the fact that we've yet to reach an agreement regarding the annual budget and it's unclear whether there'll be.
Or exactly what the nature of a continuing resolution might look like to extend funding we would anticipate that again.
Biden administration will advise federal agencies to begin to slow down processing certain activities in order to conserve budget and so that's likely to result in a couple things as we experienced in the second half slowing down and probably shifting to the right, but again no Congress has already.
Approved Iga, a which allows for funding over a five year period.
And as a result of that and then strong revenue collection that state and local level. We remain overall really positive about our environment, but we would expect that there could be some slowdowns, which at the margin it could have.
Slight negative effect in the second quarter I'm, sorry in the third quarter I apologize.
Okay. That's helpful and then.
Sure.
Yeah.
Hopefully we're through that as we get into the fourth quarter knock on wood.
So I guess my my question would be I know you gave guidance for the year, but.
Just sort of thinking about growth reacceleration.
What you feel needs to happen for that to manifest other than what we just talked about as far as the federal budget, yes.
So again for the year and based on our current guidance at the midpoint, we are anticipating a 11% growth and as I said now through 2027, we're anticipating an average rate of growth of about 14% again at the midpoint of our vision 2027 target now that clearly hasnt changed.
What is.
Packaging that comparisons.
If you look at the rate of growth in the first half of this year to the second half of this year.
Talking about year over year comparisons, it's the unusual prior year comps right and so I wanted to first of all just make very clear that we are not anticipating any kind of a deceleration in the second half. Although if you look at the year over year rate of growth, it's not going to be as strong, but again that was.
Due to the unusual prior year revenue curve.
But looking ahead.
Again, we think the market is going to remain extremely robust we continue to make what we think are smart investments and building out our clear mobility platform, which is.
I've already met with really strong market.
Except dense and we'd expect that to continue and even accelerate with some of the new capabilities that we're launching and we also continue to think that we have by far the most productive sales force our sales channel in the marketplace. So.
Absent any like.
Particularly unusual externality.
We think we really just need to execute in order to continue to grow it.
Right that we have over the last couple of years and the rates that we're projecting through 2027.
Okay, and then you just mentioned.
Product capabilities, maybe we can touch on that for a second.
The new sensors that you have and they are developing maybe you can just speak to the capabilities there.
Yeah sure. So one major focus for us across really all of our products, both our sensors and our software is an increasing focus on safety and.
There are a variety of things that we're doing but at some level a lot of it is exploiting the capabilities of artificial intelligence and again, we're using that both of the edge and our sensors as well as in the cloud and so that's something we're going to be talking about a lot and then Additionally Sunday we also discussed.
<unk> focused on is positioning the company to capitalize on.
The increasing.
Availability of connected vehicles and also over the longer term horizon, the expectation that drove that.
Increasing levels of autonomy will become increasingly prevalent and that creates an opportunity and frankly, a need for infrastructure to vehicle communication and because of our position in the infrastructure already we think we're in a really unique.
Positioned to be able to capitalize on that so again safety generally in connect and economists vehicle activity broadly.
Our two important themes for both our software and our sensors roadmap and we'll be talking more about.
Some of the specific capabilities that will be enabling with respect to both of those themes.
As we.
Launch some of the products that I referred to in my script.
Okay, great. Thanks for taking my questions I'll take the rest offline.
Yes.
Thank you.
Our next question is coming from Ryan <unk> with Craig Hallum. Your line is nice.
Yeah evening guys. This is Matt on for Ryan.
Got a question on the gross margin.
So on the product side, it's a little weaker quarter over quarter.
This improved outlook on the service side, but how do we think about gross margin for the for the rest of the year.
Kerry do you want to talk to that.
Oh sure.
I think that the.
The slate.
The downtick in the <unk>.
Second quarter sequentially was again basically product mix driven.
And I think we still may see some fluctuation going forward I don't think the second quarter is.
Exhibiting anything.
That is unexpected or unusual and I think is a fair baseline going forward a couple of things hitting the mix.
That happen Episodically, you would be certainly the amount of third party products that go through the.
The system.
We tend to be often times contractually.
Intersection.
<unk> integrator positions, so we buy and sell certain products that we don't manufacture and those have a very very small if any if.
If any markup on them and then secondarily, we are introducing a new line of our sensors are our apex sensors and there is still at relatively low volumes. So we still have not achieved the economy of scale.
That we would expect to see in the medium and longer term so depending on the mix goes between.
Some of our sensor products some of our in line the higher volume products in these third party items.
It'll unifem did not.
I'm not going to be big changes quarter to corner as a result of that but some relatively small fluctuations will occur.
Okay.
Okay, great. Thank you that's that's helpful.
And then on the labor capacity side.
I know last quarter, you guys talked about kind of exiting the year closer to that mid teens growth in capacity is that still kind of kind of the target that we're looking at or.
Is there kind of more subcontractor issue going on I know you guys called that out in a kind of a fair enough.
Call too so.
Yeah for sure so.
The labor market continues to be tight, particularly for highly technical transportation related disciplines.
And so.
We.
Continue to put a lot of energy against it as I mentioned on a year to date basis, we actually saw a pretty nice increase in our labor capacity, which probably got us about a third of the way to where we need so I'd say that we're more or less on track against the original expectation, but to be clear. There is more work that needs to be done in the second half.
Half.
And while overall, probably labor market conditions are all.
Probably a little bit.
Easier than maybe they were a year ago.
I can't do the same thing about the transportation market and some of these very specific technical disciplines. It does remain tight and it's something that we will remain focused on but I would say that we're not overly concerned I think we feel good about the plan that we outlined and I think we're making.
Progress against that plan in more or less as we had expected.
Okay, great. Thank you.
Okay.
Thank you.
Our next question is coming from Mike Latimore with Northland Your.
Your line is nice.
Hi, This is <unk> on behalf of Mike Lattimore.
Could you give some color around what percentage of your revenue at bookings that activity.
Yeah, Kerry do you want to talk to that.
I'm sorry could you could you repeat the question again what percent of revenue and bookings was reoccurring.
Let's see on a recurring.
Revenue basis, we ended up at.
Roughly about.
25%.
We're we're we're growing our recurring revenues nominally but as a percentage of total.
Very very high growth rate, we've been seeing in products tends to mask that when you look at it from that from a percent of revenues overall.
And then also but bookings were I believe that dead.
Recurring bookings growth was I think in the high 20, percents, maybe the low 30% for the quarter, but as a reminder, they were exceptionally high I think it was like 65% to 7% growth in the first quarter. So overall for the first half.
I believe that our bookings for our recurring revenue was well above the current 25% of total revenue, meaning that we are on track to continue to increase their contribution of recurring revenue to total revenue through 2027.
Got it.
Any color on the bike Lane group.
Yeah. The overall the sales pipeline, yes. So.
The demand environment remains extremely strong and as I've said before we think that you know.
Market interest and market adoption of career mobility platform is now consistent with our original expectations, perhaps even.
You know it exceeding that.
So when we look at our overall pipeline. It continues to grow remains overall extremely healthy our win rates remain exceptionally high I would say that they are probably best in class and our and our industry.
All that being said.
<unk>.
As I've said before as we continue to pursue more and more large transactions that does make us more susceptible.
Two the impacts of timing on any one or two of those big transactions.
The first quarter was a perfect example for US where we had a couple of extremely large transactions that closed in that period, and we had no historic bookings growth.
In the second quarter, we again had very strong bookings growth, but we.
We actually pulled some bookings that we had anticipated to occur in the second quarter into the first and as a result, the rate of bookings growth in the second quarter was lower than it was in the first but I think you should expect overall there'll be continue to be some degree of lumpiness, especially as we continue to pursue more and more of these.
<unk> transactions, but again on a medium term to long term basis, we feel very very confident about our continued bookings growth being in excess of overall market growth rates and of course that will drive continued backlog growth and ultimately superior revenue growth in our market.
Got it thank you.
Thank you once again, ladies and gentlemen, if you have any questions. Please press star one on your telephone keypad.
Our next question is coming from Tim Moore with E F Hutton.
Your line of sight.
Thanks, and congratulations on the top line beat both products and service sales and restaurant after the year I mean, a lot of companies not just you were facing a difficult lapping period of comps in the next six months so.
And then only boat.
And just wanted to follow up first maybe.
On a threat from a prior question.
Maybe a little bit more for carry from an operational perspective.
You know when you start you know now that you are pretty much done with the supply chain constraints and really not much of a headwind anymore you got there.
In House circuit boards, and eventually the subcontractors usage margins are actually mostly maybe mental mineralized.
Finished this internal hiring expansion and training so I know, you're not giving next year guidance, but.
Do you think a 40% gross margins not an unrealistic stretch call. When you kind of look out to next summer.
Quarter September quarter after the last lap the tough comps.
Tim.
Certainly we'll continue to see progression.
And.
For basically the factors that you mentioned first off obviously, the when you think of an EBITDA margin progression and continued revenue growth is going to help us get better leverage on.
Opex number one.
Number two we're continuing to work in our manufacturing and supply chain area too.
Improve our.
Our leverage.
That area also and I do think that there are some things that are in the works operationally, which should contribute to improvement in.
Margin progressively on the sensors side of our.
Business and then as we continue to I think improve our labor mix, obviously, that's going to that's going to point to a positive also so I think that there's wind in the sales clearly directionally.
With respect to what we would.
C going forward.
Okay. That's helpful color I appreciate it Gary.
Maybe for Joe I mean, how would you kind of rate.
Your internal labor hiring.
Unless need for more expensive subcontractors when you kind of get to January and February are you.
Thank you know by then it would be 65% two thirds of the way accomplished.
Yeah, I would expect that it is at that point.
We've actually.
Begun to see.
A higher level of impact if you will from the initiatives that we began to introduce in the first quarter because as you would expect there is some kind of a lag effect.
And so yeah.
Yeah, I would it would be my expectation that would be about two thirds of the way there by January.
And this is of course just to be clear, it's something we're gonna have to continue to focus on going forward.
We would expect for the foreseeable future that the.
Labor markets will remain relatively tight but I.
I don't want I want to make sure. This is not lost on people.
Terrorists has a fantastic.
Employee brand reputation and so as we make an effort to engage with more candidates and basically.
Stemmed our funnel, we're finding really really strong interest by those candidates and working with <unk> and again I want to make sure everyone understands that we have probably.
Usually.
High attrition rates.
Generally speaking and certainly within our industry, especially given what a tight labor market. It is because once we get people here.
Keep them around because we're doing a lot of exciting things a lot of employees want to be part of our story.
That's really helpful color.
Next question I have is.
If you kind of if you carry you kind of think back and maybe you know I've been watching the contract wins in recording them.
In the last nine months or so it's been very good but even the last 12 months.
No.
Yeah, I think topic vessels are really curious about is.
When you reach that scale, you know maybe that Tim more million dollars of recurring revenue you need from cloud based solutions our process virtualization.
To really get the gross margin step up given that you know I think software as a service side of it.
At least 65% gross margin.
So do you think you can maybe get to that kind of inflection point.
And maybe December next year, you may be still on track for that.
Well.
I'll offer some comments and then Carrie I'd like you to chime in.
And it seemed to be totally transparent we will continue to make progress between now and next December and I think it'll be notable I think it will flow through the financial statements. So you guys will be able to see the progress, we're making but I'm not sure whether we will hit that critical inflection point.
As early as next December I think it's more likely to be <unk> to be in the beginning of the subsequent fiscal year.
Which would be <unk>.
First half of that subsequent fiscal years, I'd say sometime probably between April and September of the following year.
But I don't think of anything.
To add to that or any more color to add to that too, but I do want to make sure timna. They understand I don't want people to think like where youre not going to see any benefit down until you get there. It's just not the case you will continue to see step improvements along the way.
No no I totally get it that's something we talked about in the.
Is this another step step on the ladder emphysema incremental gross margin improvement and then maybe a little more of a hockey stick push them.
And then lastly, you know for for you and carry I mean any update on the tuck in acquisition appetite your funnel, if youre not asking valuations of targets it become more reasonable over the last few months.
Yeah, Kerry do you want to take a crack at that.
Well, yes, I'm not sure if there's anything new to report right now Tim obviously.
We're in a position from a liquidity perspective, where are we.
We can start to actively search again.
Still in the process of trying to find candidates are that are a good fit for us for all the things that anybody looks for in any acquisition technology.
Culture fit cost leverage.
But as you know we want to be.
Carefully because we want our acquisitions to be accretive.
We have not had discussions as of late that would indicate that the.
Valuation expectations have.
Significantly changed from I think the last time, we talked but.
I would expect that to continue to start to.
Exhibit itself, but I think there is probably still a little bit more lag than I guess the reality.
Wake up in the from the sell side with these smaller companies.
So I think we remain on the.
With the same focus and the same expectations overall, but I would just reiterate that we're going to be we're going to be careful not to overpay awesome and Tim I guess, the one thing that I would add to that is it.
We.
I think it's probably accurate to say that we are seeing more.
Interest from sort of a certain profile of potential targets, you know who are beginning.
To exhibit.
More realistic expectations, but as you might expect some of those companies that.
Kind of reached that point.
Not necessarily the most attractive targets.
You know those companies that are in a stronger financial position and therefore able to kind of wait it out are probably the ones we're more interested in.
So there's a little bit of like you know some tug and pull going on there.
But to carriers point I think that.
We certainly continue to expand our funnel and to have increasingly more substantive conversations with various targets. So I do believe that we're going to get there probably before too terribly long, but I do want to just be really clear about the fact that.
You know that the opportunities that are arguably more actionable right now are not necessarily those that would be.
Be of greatest interest to us.
That makes sense I'm, starting to hear that across the industry. So thanks, a lot gentlemen, carry and thanks for those insights that's it for my questions great. Thanks, Tim Thanks.
Thanks, Tim.
Thank you Mr. Bush era, there are no more questions from covering analysts would you like to answer any investor questions before making your closing remarks.
Yes, Thank you I would like to do that.
We actually have two investor questions that I wanted to answer and then I will make some very brief closing remarks. So the first question from an investor is whether I terrorists has seen an increase in the number or the size of sales opportunities since formula funding has begun to flow to state and local agencies.
And the answer is that in general we have started to see an increase in state and local transportation infrastructure budgets due to that I I J, a formula funding that did start flowing into the system over the last four quarters.
In turn that has resulted in an overall increase in the number and size of opportunities in our sales pipeline, which is consistent with some of the questions that we just discussed.
That said.
However, the labor market remains really tie and that's not just impacting us. It's also impacting so many agencies that have not been able to add the internal resources necessary for them to program and then disperse the entire increase in the funding. So as a result, we've seen.
Contract Awards.
Come in waves, you know rather than a steady flow.
And due to the delay agencies are experiencing in dispensing I gave a funding.
It's not really our expectation that there's going to be a pretty long tail as state and local agencies continue to deploy IGF a funding even beyond that the large five year statutory lengths right. So to be clear they are going to be able to disperse money transfer money to state and local agencies about formula funding is non <unk>.
Pacific, It's highly fungible, and so state and local agencies will be able to continue to spend that after the term of the Iga a and that is our expectation that that's going to occur because there has been.
Some difficulty that we've seen by certain agencies in order to push all of these funds through the system as fast as they otherwise would have liked to do.
So the second question is whether <unk> could provide an update on the development of safe streets for all initiatives.
And so for those of you who don't know the same street thrall, our alts caught assets for a grant program supports the USD <unk> national roadway safety strategy.
And that strategy goal zero deaths in zero injuries on our nation's roadways.
D O T has defined two types of assets for a grant.
One type of grant is referred to as action or planning grants.
And the other type of grant is referred to as implementation grants.
U S D O teasing Nance the first tranche of assets for a grant in the first quarter of calendar year 2022.
And the initial tranche included 474 action or planning grants for a sum total of $212 million, which represents an average grant size of 447000, and then arguably more importantly, it included 37 implementation grants for a sum total of 500 and.
$19 million, representing an average grant size of $14 million, obviously, the implantation grants are substantially larger than the planet grants.
After reviewing the details of the initial words, because now that they're out there in the public domain, we're talking to agencies about these grants.
Terrorists as determined that about 70% of the implementation grants.
Focused on improvement to physical infrastructure, meaning that about 30% of the money that was awarded is going to be used for advanced technology to improve safety.
So as we noted in our Iga a white paper published in September It can take 12 to 24 months from USD Ts notice of a Grand award for an action or a planning grant before a local agency receives the federal funding and then issues a task order to a contractor and they can take.
<unk>, even longer 24 to 36 months before a local agency youll be able to issue a task order under an implementation grant and that's due to the fact that.
Because of the nature of the work there are some additional programming requirements that need to be executed.
So anyway as discussed in our white paper contractors, who performed work under an action or a planning task order may be precluded from performing work under an associated implementation task order. So in general it's not always the case, but in general I terrorist prioritizes task orders related to implementation grants over task orders.
Related to actual planning grants because somebody had grants are larger and we don't want to be precluded from pursuing those.
So the way, although we're very early in this process with local agencies, just beginning to issue assets for a task orders.
Can't say that <unk> already executed two action Grant task orders and been awarded an additional four task orders that are pending final contract execution.
And then additionally, as I mentioned, 30% of all the implementation grant funding went to technology.
I terrorists has already been specified on four of those implementation grants and the total value of the sum total of those grants of $75 million and that represents 48% of the total technology funding for all of the assets for a implementation grants awarded in the first tranche of such <unk>.
And that as those grants that had a focus on technology as opposed to physical infrastructure.
So anyway, we feel like we're doing extremely well.
With these assets for a grant and we expect to continue to receive more task orders from S. S. Four a and from other grant programs as competitive grant funding is finally, beginning to move through the system.
So anyway, having addressed.
Those two investor question that I hope, we've done so fully and completely.
I did want to offer a couple of closing remarks, and specifically I wanted to mention that in addition to the infrastructure investment and jobs Act White paper, which we published recently.
We've also published a recent update to our annual it environment, social and governance presentation in both of those documents are available on our investor site.
Additionally, we're going to be participating in artificial intelligence virtual conference hosted by Northland Securities on December 14, and 15, and if you're interested in attending we hope Youll contact Northland Security I'm sure there would be delighted to have you join.
And in the meantime, I want to say that we look forward to updating all of you again on our continued progress when we report our fiscal 2024 third quarter results and so with that we're going to conclude today's call. Thank you everyone.
Thank you ladies and gentlemen. This concludes today's conference and you may disconnect. Your lines at this time and we thank you for your participation.
Okay.