Iteris, Inc. (NASDAQ:ITI) Q2 2024 Earnings Call Transcript

Iteris, Inc. (NASDAQ:ITI) Q2 2024 Earnings Call Transcript November 9, 2023

Iteris, Inc. misses on earnings expectations. Reported EPS is $0.01 EPS, expectations were $0.02.

Operator: Good day, and welcome to the Iteris Fiscal Second Quarter 2024 Financial Results Conference Call. [Operator Instructions] Please note, this conference is being recorded. I would now like to turn the conference over to Todd Kehrli of MKR Investor Relations. Sir, please go ahead.

Todd Kehrli: Thank you, operator. Good afternoon, everyone, and thank you for participating in today’s conference call to discuss Iteris’ financial results for its fiscal 2024 second quarter ending on September 30, 2023. Joining us today are Iteris’ President and CEO, Mr. Joe Bergera; and the company’s CFO, Mr. Kerry Shiba. Following their remarks, we’ll open the call for questions from the company’s covering sell-side analysts. Then we will answer investor questions that were submitted to the company in advance of the call, per 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 of the future performance of the company, which statements are based on current information, are subject to change and are not guarantees of future performance.

Iteris 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. Iteris refers you to the documents that 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.iteris.com. Now I’d like to turn the call over to Iteris’ President and CEO, Mr. Joe Bergera.

Joe, please proceed.

Joe Bergera: Great. Thank you, Todd, and good afternoon to everyone. I appreciate all of you joining us today. Iteris reported record fiscal 2024 second quarter total revenue of $43.6 million and 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 dependencies on subcontractor deliverables, achieving key revenue milestones in our second quarter and our first half. Our fiscal 2024 second quarter gross margins increased 2,060 basis points, and our fiscal 2024 first half gross margins increased 1,510 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 and first half adjusted EBITDA of $6.9 million, representing an $8.1 million and $14.6 million improvement year-over-year, respectively. In a few minutes, Kerry will address our profitability dynamics in more detail. Customer adoption of the ClearMobility Platform remains very strong. We reported fiscal 2024 second quarter total net bookings of $43.8 million and first half total net bookings of $96.9 million, representing an increase of 4% and 14% year-over-year, respectively. Due to our strong bookings results, we ended that September 30, 2023 period with a record total ending backlog of $124 million, representing an 11% increase year-over-year.

As always, our ending backlog and our net bookings figures reflect firm customer orders rather than total contract value. 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 refer to collectively as products, we reported fiscal 2024 second quarter revenue of $23.4 million and 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, our sensors continue to take significant market share, growing more than 3x 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 2024 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 intersection detection to penetrate adjacent categories, including the emerging cellular vehicle to everything or CV2X category, and attaching annual recurring revenue to our Vantage and our Spectra connected vehicle sensors. For example, some fiscal 2024 second quarter notable customer commitments include: a new master purchase agreement with Maricopa County in Arizona, which is the fourth most populous county in the nation, to use our Vantage Next detection system, our [Bluetooth] travel time sensors and our Vantage Live and ClearGuide 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 Cedar Park, Texas to deploy our Vantage Apex detection system, connected vehicle sensors and Vantage Live and ClearGuide 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 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. A purchase order from Richardson, Texas for the second phase of a citywide deployment of our Vantage Apex system, and purchase orders from the New York State Department of Transportation for the first deployments in districts one and two of our [VantageRadius Plus] detection system. As a reminder, the State of New York represents a new geographic market for Iteris, as our VantageRadius product was first added to the state’s qualified product list only last year. Now I want to review 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 and 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 2024 second quarter and first half, we continue to make progress on initiatives to improve our internal consulting labor capacity. We also improved our labor utilization, increasing average revenue per headcount. 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.

We reported net service bookings in our fiscal 2024 second quarter of $22.8 million and 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; the $2.2 million task order to provide integrated corridor management services for District 5 or the Florida Department of Transportation; a $1 million-plus Data as a Service and data analytics agreement with Ventura County in California; more than $1 million in Software as a Service agreements with various state and local agencies for the use of our ClearGuide 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. To sustain strong customer adoption of our ClearMobility platform, we continue to introduce important new solutions and feature enhancements. For example, in our fiscal 2024 second quarter and first half, we released the Alpha version of a next-generation travel time and connected vehicle data collection and presentation system, as well as new transit signal prioritization features and ClearGuide signals. In summary, we’re very pleased with our fiscal 2024 second quarter and our first half revenue, adjusted EBITDA, net bookings and ending backlog.

Additionally, we continue to make significant progress evolving to a platform-based business model, which will enhance solution repeatability, 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 Kerry to provide more color on our fiscal 2024 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.

Kerry Shiba: 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 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 was especially impacted by supply chain shortages occurring in the first half of that year, which resulted in a back-end loading of revenues. This anomaly was especially evident in our first quarter year-to-year comparisons, but also was evident when looking at first half results.

In fiscal 2023, a 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, where a usual sequential design – I’m sorry, decline in the third quarter revenue did not occur in fiscal 2023. And 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, we expensed about $7.8 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.

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 1,253%, with approximately 80% of the improvement driven by supply chain improvement and the remainder reflective of higher volume. Services gross profit improved 2.8% overall, increasing about $200,000 due to higher revenue. Looking at gross margins. The second quarter of this year improved 2,060 basis points in the aggregate, reaching 37.3% in total. The increase was driven by a 4,040 basis point improvement for products, which more than offset a 180 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 in the current year’s 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 relitigate some particular terms of a settlement agreement executed between the two companies nearly nine years ago.

In addition to the litigation costs, we experienced a temporary increase in contractor expenses and some adjustments to equity compensation costs. 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 – 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 quarter’s Form 10-Q. The improvement from last year continues to reflect a 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.

Joe Bergera: Great. Thank you, Kerry. 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 vehicles. Additionally, the market is characterized by high switching costs and customer stickiness, benefiting established companies with a broad portfolio of superior products and services. Therefore, given the breadth of our platform capabilities, significant brand equity and extensive customer reach, we remain extremely optimistic about the long-term opportunity in front of Iteris.

Over the balance of fiscal 2024, Iteris will continue to deliver against an aggressive solutions road map that includes the following major releases: a next-generation connected vehicle data collection and data presentation system that includes a suite of connected vehicle applications powered by ClearMobility cloud APIs; a 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 valuable new data sets for our ClearMobility Cloud; the introduction of Vantage Fusion features in our Vantage Apex 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 ClearMobility Platform, increase our wallet share among existing customers and improve the monetization of our expanding mobility data sets. Among other benefits, these dynamics should support an above-market rate of growth in our total bookings as well as continue to increase the average size of individual bookings. In addition to focusing on our solutions portfolio, we’ll 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 Kerry has 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 2024 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’re 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 continues to represent a significant year-over-year improvement and reflects normal seasonality, product mix and related revenue expectations. With respect to our fiscal 2024 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 2024 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 Iteris remains on track to achieve our Vision 2027 target. 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 5-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 Iteris 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?

Operator: Yes, indeed. [Operator Instructions] Our first question is coming from Jeff Van Sinderen with B. Riley. Your line is live.

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Q&A Session

Jeff Van Sinderen: Yes, hi everyone. Joe, maybe 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 customer bookings and when projects actually start or continue?

Joe Bergera: 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 in some task order execution. And as a result, some projects did slip 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 will be – or exactly what the nature of a continuing resolution might look like to extend funding, we would anticipate that, again, the 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 of things, as we experienced in the second half, slowing down and probably shifting to the right.

But again, Congress has already approved the IIJA, which allows for funding over a 5-year period. And as a result of that and then strong revenue collection at the 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 could have a slight negative effect in the second quarter – I’m sorry, in the third quarter, I apologize.

Jeff Van Sinderen: Okay. That’s helpful. And then I mean, hopefully, we’re through that as we get into the fourth quarter. Knock on wood. So I guess my question would be – and 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?

Joe Bergera: Yes. So again, for the year, based on our current guidance at the midpoint, we’re anticipating 11% growth. And as I said, 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 hasn’t changed. What is impacting the comparisons – if you look at the rate of growth in the first half of this year to the second half of this year, I’m talking about year-over-year comparisons, it’s the unusual prior year comps, right? And so I want to, first of all, just make very clear that we are not anticipating any kind of 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 in building out our ClearMobility Platform, which has already met with really strong market acceptance, 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 or 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 at the rate that we have over the last couple of years and the rates that we’re projecting through 2027.

Jeff Van Sinderen: Okay. And then you just mentioned product capabilities. So maybe we can touch on that for a second. The new sensors that you have and that you’re developing, maybe you can just speak to the capabilities there.

Joe Bergera: Yes, 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 at 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, something that we also discussed and we remain focused positioning the company to capitalize on the increasing availability of connected vehicles and also over the longer-term horizon, the expectation that the 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 position to be able to capitalize on that. So again, safety generally and connected autonomous vehicle activity broadly are two important themes for both our software and our sensors road map. And we’ll be talking more about some of the specific capabilities that we’ll be enabling with respect to both of those themes as we launch some of the products that I referred to in my script.

Jeff Van Sinderen: Okay, great. Thanks for taking my questions. I’ll take the rest offline.

Joe Bergera: Thanks.

Operator: Thank you. Our next question is coming from Ryan Sigdahl with Craig-Hallum. Your line is live.

Unidentified Analyst: Yes, good evening guys. This is [Matthew Robb] on for Ryan. I got a question on the gross margin. Just on the product side. It’s a little weaker quarter-over-quarter, nicely improved on the service side, but how do we think about gross margin for the rest of the year?

Joe Bergera: Kerry, do you want to talk to that?

Kerry Shiba: Sure. I think that the slight downtick in the 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 it’s a fair baseline going forward. A couple of things hitting the mix that happened episodically would be certainly the amount of third-party products that go through the system. We tend to be, oftentimes, contractually in an intersection kind of integrator positions. So we buy and sell certain products that we don’t manufacture, and those have a very, very small, if any, markup on them. And then secondarily, we are introducing a new line of our sensors, our Apex sensors.

And they’re 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 how the mix goes between some of our sensor products, some of our in-line higher-value products and then these third-party items, it will get affected. Not going to be big changes quarter-to-quarter as a result of that, but some relatively small fluctuations will occur.

Unidentified Analyst: Okay. Great. Thank you. 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 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 the call, too. So…

Joe Bergera: Yes, 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 1/3 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. And while overall, probably labor market conditions are probably a little bit easier than maybe they were a year ago, I can’t say the same thing about the transportation market and some of these very specific technical disciplines.