Iteris, Inc.

Good day and welcome to the Iteris Incorporated Fiscal First Quarter 2023 Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Todd Curley of the MKR Group. Please go ahead.

Thank you, Operator. Good afternoon, everyone, and thank you for participating in today's conference call to discuss ITERAS's financial results for its 2023 first fiscal quarter ended June 30, 2022. Joining us today are ITERAS's President and CEO, Mr. Joe Ruggiero, and the company's CFO, Mr. Doug Groves. Following their remarks, we'll open the call for questions from the companies covering sell-side analysts. 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. 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 forward-looking statements. As always, you'll find a webcast 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 Bruggiero. Sir, please proceed.

Great. Thank you, Todd, and good afternoon to everyone. I appreciate all of you joining us today. As a reminder, we completed the sale of our agriculture and weather analytics segment to DTN-LLC. on May 5, 2020, therefore 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. The company reported fiscal 2023 first quarter total revenue of $33.7 million, representing a 1% decrease year-over-year. The decrease is fully attributable to supply chain challenges that prevented us from shipping and recognizing 4.9 million in first quarter revenue on Vantage sensor backlog. If not for the supply chain challenges, first quarter total revenue would have increased 13% year over year to 38.6 million. To avoid confusion, I want to be clear that we did not lose the 4.9 million in Vantage orders. Rather, these orders slipped to the right and we've already started to fulfill some of the $4.9 million of backlog in the second quarter of fiscal 2023. I'll discuss our supply chain exposure and the status of our supply chain mitigation program in more detail in a few minutes. Despite supply chain challenges, the customer adoption of our clear mobility platform remains very positive, and we continue to strengthen our leadership position in the highly fragmented smart mobility infrastructure management market. In the first quarter, we reported record total net bookings of 42.6 million, representing an 18 percent increase compared to the same prior year period. This brings our trailing 12-month total net bookings to a record 162.1 million, representing a 31 percent increase relative to the same prior period. For your reference, our trailing 12-month bookings figure does not include a very large opportunity in front of us with the Infrastructure Investment and Jobs Act, or IIJA. Under the IIJA, federal funds will flow to local entities through either formula funding or grant funding. As we've said since the IIJA was signed into law on November 15, 2021, Formula funding will begin to show up in state and local budgets in the first fiscal year after the law went into effect. For most state and local entities, that will be October 1, 2022. With respect to grant funding, U.S. DOT has not issued any Intelligent Transportation Systems-related grant funding under the IIJA to date. The first tranche of grants will be in support of the U.S. Department of Transportation's Safe Streets for All initiative meaning they must meet the criteria of this initiative. These grants won't be awarded until late this calendar year or early next. At this time, various state and local entities have included pricing from ITERAS in their grant applications. Due to sustained record total net bookings, we ended the June 30 period with record total ending backlog of 109 million, representing a 36% increase year over year and a 9% increase on a sequential basis. As always, our reported total net bookings and ending backlog figures reflect firm customer orders. Of our $33.7 million in fiscal 2023 first quarter total revenue, 49% was recorded as product revenue and 51% was recorded as service revenue. whereas in our fiscal 2022 first quarter, 53% was recorded as product revenue and 47% was recorded as service revenue. The mixed shift is largely attributable to our fiscal 2023 first quarter supply chain constraints. Fiscal 2023 first quarter product revenue was 16.4 million versus 18 million in the same prior year period, representing a 9% year-over-year decline. Again, if not for supply chain constraints, product revenue would have been $4.9 million higher or $21.3 million for the quarter, representing an 18% increase relative to the product revenue in the same prior year period. The impact of our January 1, 2022 Vantage Sensor price increase was de minimis in the first quarter due to the time lag from quote to order. Therefore, first quarter product revenue and unshipped sensor backlog reflect an increase in underlying unit demand. We continue to experience above the market levels of demand for our sensors, which have historically set the product performance standard for the industry. In the first quarter, we extended our product performance lead with the introduction of new artificial intelligence capabilities for our Vantage APEX sensors, as well as the introduction of a new health monitoring application for Iteris's Spectra connected vehicle sensors, and for third-party roadside units. Because of our relentless focus on superior product performance, we continue to win virtually every large competitively sourced intersection detection, fixed travel time sensor, and cellular V2X modernization initiative across the country. For example, in the first quarter alone, we were selected for the following notable modernization initiatives. A Mississippi DOT Phase I Hurricane Zeta Restoration Program, a Florida DOT Phase I Regional Intercity Integrated Corridor Management Program, a Colorado DOT Rural Intersection Modernization Program, an Arlington, Virginia Phase II Modernization Initiative, and a Pasadena, California Phase II Citywide Intersection Modernization Program. To maximize customer loyalty and consolidate our market share as much as possible in the first quarter, we had to source key components in the secondary market for a total of $5.6 million. The cost of these components ranged from two to more than 100 times their normal cost. To manage the impact of global supply chain challenges and renormalize our business model, we devoted substantial management attention in the first quarter to the implementation of our supply chain mitigation program, which you'll remember we reviewed on our prior earnings call. During the quarter, we made significant headway toward overcoming these issues. More specifically, we completed the design of three alternative circuit boards to reduce our dependency on specific chipsets going forward. All these boards are in different stages of testing at this time. We expanded our broker network from three to 10 partners giving us direct access to major brokers in every major electronics market worldwide. We moved the reporting line for supply chain and manufacturing under Doug Groves to create various efficiencies and accelerate lean process automation and improvement. We sourced and appointed a new strategic hire to lead and enhance our supply chain and manufacturing organization, as well as reduce our reliance on outside consultants that you'll remember we engaged earlier this calendar year. This strategic hire reports directly to Doug Rose. And we continue to build buffer inventory for key components that drove a planned $5.3 million increase in inventory and will help to unlock our Vantage sensor backlog in future quarters. As Doug will further discuss, we expect inventory levels to normalize as we complete the related supply chain mitigation plan. I'll discuss the next stages of our supply chain program in a few minutes. And in the meantime, I want to review the performance of our service lines of business. Fiscal 2023 first quarter service revenue was $17.3 million versus $16.1 million in the same prior year period, representing a 7 percent increase year over year. As a reminder, we recognize two forms of service revenue. First, there's annual recurring revenue from our software as a service data as a service, platform as a service, and managed services offerings. And second, we have project-based revenue that is associated with our consulting activities. Our first quarter annual recurring revenue was $9.4 million, representing an increase of 14% year-over-year and representing 58% of our total service revenue. The growth in ARR is mostly attributable to adoption of our SaaS product lines, such as ClearGuide, which substantially outpaid the rate of growth for our managed services portfolio in the period. While our ARR revenue line experienced solid growth, our first quarter project-based revenue was flat year over year due to indirect supply chain constraints. For example, some large projects for which we function as a systems integrator or the program manager were delayed because certain third parties could not deliver critical equipment per the project schedule due to their own supply chain challenges. While this is frustrating and may continue for the next few quarters, our exposure is limited to a small number of projects, and we have identified and are taking actions to mitigate these disruptions. In the first quarter, we recorded $22.1 million in net service bookings, of which 71 percent of the net service bookings will be recognized in the future as annual recurring revenue. Again, 71% of the net service bookings will be recognized in the future as annual recurring revenue. Additionally, we executed several large contracts that will convert to future bookings. Some notable recent customer agreements include a multi-year contract with the Virginia Department of Transportation for traffic, traveler, and road infrastructure program, or what we call T-TRIP services. This contract has a minimum value of $20 million but we expect the actual value will be approximately $70 million. We recorded a $1.8 million booking against this contract in our first quarter. Secondly, we received a $4.2 million task order from the San Francisco Bay Area Metropolitan Transportation Commission to extend the use of our advanced traveler information system clear route. Third, we recorded a multi-million dollar contract extension provide clear data to a large U.S.-based broadcasting company. Fourth, we received a $2.7 million task order from the Bay Area MTC to extend our managed services activities. Additionally, we received more than $1.2 million in combined task orders for ClearGuide and more than $1.1 million in combined task orders for our commercial vehicle operations software. And finally, we received a contract with a large multi-line insurance company to transition a clear data proof of concept into a production deployment for four states. To support our platform-centric business model and our aggressive solutions roadmap, we completed restructuring in the first quarter to drive better alignment across our software and sensor portfolio, to enhance our resource utilization, accelerate the development of Clear Mobility Cloud, and support our continued organic and inorganic growth. In addition to the aforementioned benefits, this reorganization will produce an annualized cost savings of approximately $1.2 million to help offset materials cost increases until we begin to realize the full benefit of our supply chain mitigation plan. In summary, Customer response to our Clear Mobility Solutions roadmap continues to be very strong, resulting in record first quarter total net bookings, as well as record total ending backlog. Although supply chain constraints prevented us from shipping 4.9 million of our first quarter advantage sensor backlog, we believe that Iteris continued to outperform our competitors in a difficult environment, and we made good progress implementing our supply chain mitigation program. which will begin to produce financial benefits in our second quarter. Before I elaborate on those forward expectations, I'd like to turn the call over to Doug to provide some more color on our first quarter financials.