Iteris, Inc.

Good day and welcome to the Iteris Fiscal Second Quarter 2022 Financial Results Conference Call. Today's call is being recorded. At this time, I'd like to turn the conference over to Mr. Todd Curley, MKR Group. Please go ahead, sir.

Thank you. Good afternoon, everyone, and thank you for participating in today's conference call to discuss Iteris's financial results. for its fiscal 2022 second quarter, ended September 30th, 2021. Joining us today are Iteris' president and CEO, Mr. Joe Bergera, and the company's CFO, Mr. Doug Groves. Following their prepared remarks, we'll open the call for questions from the company's covering sell-side analysts. Following that, we'll answer questions that investors submitted to the company in advance of the call, per the instructions in our press release dated October 21st, 2021. Before we continue, we'd like to remind all participants that during the course of 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. 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. Highteris refers you to the documents of the company files from time to time with the SEC, specifically the company's most recent forms 10-K, 10-Q, and 8-K, which contain and identify important risk factors that could cause actual results to differ materially from those that are contained in any forward-looking statements. As always, you'll find a webcast link Replay of today's call on the investor section of the company's website at www.iteris.com. Now, I'd like to turn the call over to ITERIS's President and CEO, Mr. Joe Bejerra. Sir, please proceed.

Great. Thank you, Todd, and good afternoon to everyone. I appreciate all of you joining us today. Before we begin our regular earnings commentary, I want to comment on the status of the strategic review the board initiated in March 2021. The strategic review is focused on the identification and assessment of new opportunities to enhance our value and market position. This ranges from a potential sale of the business to a more aggressive M&A program to various strategic partnership opportunities and more. We don't have any material updates to share on this call, but I can say that we are confident that ITERIS participates in a large and dynamic market due to our focus on smart mobility infrastructure management. Antiterras is in a unique position with its market leading platform and digital ecosystem to capitalize on favorable secular trends, such as the advent of government data sharing as a service programs, adoption of cloud first or everything as a service initiatives at every level of government, and perhaps most importantly, the proliferation of connected vehicles, automated vehicles, electric vehicles, mobile commerce, and mobility as a service, all of which require significant investment in mobility infrastructure and or infrastructure to vehicle communication. We'll be conducting our second annual Investor Day in early December when we'll provide an update on various aspects of the business, including a further update on the strategic review. In the meantime, we don't have anything to say beyond what we've included in our prepared remarks. So we'd appreciate everyone keeping today's questions focused on our operational and financial performance. On a separate note, I want to remind everyone that we completed the sale of our agriculture and weather analytics segment to DTN LLC on May 5th, 2020. As such, we're reporting the results of that segment as discontinued operations for all periods presented in today's earnings announcement. I'll be discussing only our continuing operations for the remainder of this call. So with that background, let's discuss the results for the period ending September 30, 2021. The company reported fiscal 2022 second quarter total revenue of $33.2 million and fiscal 2022 first half total revenue of $67.3 million, which represents a 14% and 18% year-over-year increase, respectively. About $8.5 million, or 26%, of second quarter total revenue was recorded as annual recurring revenue and about 16.8 million or 25% of first half total revenue was recorded as annual recurring revenue. Additionally, we secured record second quarter total net bookings of 36.7 million and record first half total net bookings of 72.7 million. Due to our record net bookings, we ended the September 30 period with record total ending backlog of $83.4 million, which is a 14% increase year-over-year and a 4% increase on a sequential basis. The company's second quarter total revenue, net bookings, and ending backlog results reflect particularly strong performance by our family of intersection detection products. I'll take a few minutes to provide some more color on those products, as well as our service lines of business. including our family of commercial vehicle operations software that recorded a large write-off in the second quarter. Following my remarks, Doug will discuss our financial results in more detail. At this time, let's review our product lines. The company's product revenue is composed of two components. First, our intersection detection sensors, travel time sensors, and infrastructure to vehicle communication devices, and second, our third-party products that we distribute, deploy, and often integrate with our own products. Our fiscal 2022 second quarter product revenue was $17.7 million versus $16.3 million in the same prior year period, representing a 9% year-over-year increase. In the period, we saw a divergence in the sales performance of Iteris products, which increased 16% year-over-year, and third-party products which declined year over year due to factors such as the inability of certain third parties to meet critical delivery deadlines. We believe the sales performance of the third-party products in general and their delivery delays in particular will resolve itself over time. In the meantime, we have already started to deploy some of the products that were previously delayed, and we expect to recover the balance of delayed third-party revenue in future periods. With respect to iTera's product lines, the strong second quarter product sales performance was due to excellent sales execution, proactive actions to manage our supply chain, and continuous innovation across our product portfolio that enables us to continue to set the product performance standards for the industry. For example, during the second quarter, we launched our next generation intersection detection sensor, Vantage Apex. Advantage APEX is the industry's first 1080p high-definition video and four-dimensional radar sensor with integrated artificial intelligence algorithms. Advantage APEX identifies objects using ITERIS's artificial intelligence video analytics, extensive image library, machine learning, and neural network algorithms. This innovative application of artificial intelligence enables high precision and detailed classification of many different vehicle types and vulnerable world users, such as pedestrians and cyclists. In turn, this not only differentiates our product performance, but contributes rich new data sets to our clear mobility platform and enables various new applications that will drive growth in our annual recurring revenue. Additionally, Vantage APEX is connected vehicle ready, with the ability to provide critical infrastructure data through vehicle to everything, or V2X communications to connected and automated vehicles, including through Iteris's own connected vehicle communication devices, which we recently launched and brand as Blue Toad Spectra CV. Now let's discuss our service lines of business. We recognize two forms of services revenue. First, project-based revenue that is associated with our consulting activities, And second, annual recurring revenue from our software as a service solutions and from our managed services activities. Our fiscal 2022 second quarter services revenue was $15.5 million versus $13 million in the same prior year period, representing a 19% year-over-year increase. About $7 million or 45% of our services revenue was project-based, whereas about $8.5 million or 54% of our services revenue was annual recurring revenue. And as I mentioned earlier, 26% of our second quarter total revenue was annual recurring revenue. While it didn't impact revenue in the period, we did take a write-off in the second quarter of $2.8 million for one of our service lines related to nonrecurring engineering activity, most of which was performed in prior periods. More specifically, the write-off is related to a contract with the state of Iowa to develop and then co-market certain software capabilities that augment our existing commercial vehicle operations compliance and inspection software. The write-off effectively represents the accounting impact of the complexity associated with an innovative partnership we have with the state to develop and commercialize highly complex software. At this time, The state continues to use our commercial vehicle operations compliance and inspection software, and we've agreed with the state in principle on a path forward for completion of additional software functionality. At this time, we expect to release the new software capabilities in calendar year 2022. Additionally, I want to confirm that we do not have any other contracts with similar terms. This was a very unique contract, and we've certainly learned several lessons from this experience. I can assure you that we will not have this issue again in the future. Moving on, we continue to see especially strong demand for our specialized consulting services, software as a service, and managed service lines. In the second quarter, we recorded $16.3 million in net services bookings, with the following bookings being some of the more notable. Our $1.8 million systems integration and technical services contract with the Virginia Department of Transportation. About $1.5 million for several software as a service agreements for the use of our commercial vehicle operations compliance and inspection software. A $1.1 million traffic signal synchronization project for the City of Orange, California. Another $1.1 million project, this time with Caltrans District 7, to develop a framework for the deployment of advanced technology to improve accessibility to mobility for persons with disabilities, an $800,000 task order to manage a traffic operations center for the Florida Department of Transportation, and about $675,000 in software as a service agreements for the use of our Mobility Intelligence Solution ClearGuide. So in summary, the company's total second quarter revenue was constrained due to supplier issues. but our first half sales execution was solid, and we continue to make measurable progress executing our platform-based business strategy. Due to strong net bookings and a record-ending total backlog, we enter the second half of our fiscal year in a very strong position. Before I further discuss opportunities in front of Iteris, however, I'd like to turn the call over to Doug.