Iteris, Inc.

Good day, and welcome to the ITERIS Fiscal Second Quarter 2023 Financial Results Conference Call. At this time, all participants are on a listen-only mode, and the floor will be open for questions and comments after the presentation. Please note this event is being recorded. I would now like to turn the conference over to Todd Curley of MKR Investor Relations. Please go ahead.

Good afternoon everyone and thank you for participating in today's conference call to discuss Iteris's financial results for its fiscal 2023 second quarter ended September 30, 2022. Joining us today are Iteris's president and CEO, Mr. Joe Bergera, 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 events or 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 Becerra. Joe, go ahead.

Great. Thank you, Todd, and good afternoon to everyone. I appreciate all of you joining us today. For the fiscal 2023 second quarter, ITERIS reported record total revenue of of $39.3 million, representing an 18% increase year-over-year. This growth was due to the strong demand for our products and services, as well as the progress of our supply chain mitigation or improvement program that helped to unlock our quarterly Vantage sensor backlog. For reference, we reduced our fiscal 2023 second quarter unshipped Vantage backlog to $900,000. Because our supply chain management program enabled us to ship a record number of Vantage sensors, we were able both to continue to meet our customer commitments and to flush high-cost inventory items from our balance sheet through the P&L. This resulted in an extraordinary increase in the cost of goods sold in the second quarter. However, it will improve our inventory position going forward. Despite reports of a slowdown in the broader economy, customer adoption of our Clear Mobility platform remains very positive. In the second quarter, we reported total net bookings of 42.2 million, representing a 15% increase compared to the same prior year period. This brings our trailing 12-month total net bookings to a record 167.6 million, representing a 33% increase relative to the same prior period. As a reminder, our trailing 12-month bookings figure does not include the large opportunity in front of us with the Infrastructure Investment and Jobs Act or IIJA. IIJA funds will flow to local entities through either formula or grant funding. Formula funding is just beginning to show up in state and local budgets in the first fiscal year after the law went into effect which is October 1, 2022, for most state and local entities. With respect to grant funding, USDOT has not issued any Intelligent Transportation Systems-specific grant funding from the IIJA to date. The first wave of grants, which will start to be awarded early next calendar year, will be dedicated to USDOT's Safe Streets for All initiative. At this time, we've submitted Safe Streets for all grant applications with three cities and various other state and local entities have included pricing for my terrorists in their grant applications, even though we were not involved in the preparation of those grant applications. Additionally, we're beginning to work with customers to submit applications for the second wave of grants, which are designated for the Strength and Mobility and Revolutionize Transportation, or SMART, programs. Due to sustained strong total net bookings, we ended the September 30 period with a record total ending backlog of 111.8 million, representing a 34% increase year over year and a 3% increase on a sequential basis. As always, our reported total net bookings and ending backlog figures reflect firm customer orders. The total value of customer contracts which varies from quarter to quarter, averages on a historical basis about 200% of our total ending backlog. Fiscal 2023 second quarter product revenue increased 17% year over year to 20.8 million, even after 900,000 in shipments slipped out of the quarter due to global supply chain constraints. Otherwise, product revenue would have been $900,000 higher or $21.7 million for the quarter, representing a 22% increase relative to the product revenue in the same prior year period. Our January 1, 2022 Vantage Sensor price increase contributed an estimated 3% to 5% to product revenue, meaning that underlying unit demand was the primary driver of second quarter product revenue growth. Our sensor portfolio continues to take market share, primarily due to superior product performance. In the second quarter, we extended our performance lead with the release of enhancements to the artificial intelligence capabilities for our Vantage APEX sensors, introduction of new safety features for our NEXT sensors that will address important safe streets for all priorities, and completion of new connected vehicle sensor prototypes or a new connected vehicle sensor prototype that we intend to release to market in calendar year 2023. Because of our relentless focus on product performance, we continue to win virtually every large competitively sourced detection sensor, fixed travel time sensor, and cellular V to X sensor initiative across the country. For example, our sensors were recently selected for the following smart mobility initiatives. Hybrid video and radar sensors to support the I-4 Florida Regional Advanced Mobility Elements, or FRAME, program in the Florida Department of Transportation's, or FDOT's, District 7. Connected vehicle sensors to support an initial cellular V to X deployment for the I-4 FRAME program in FDOT's District 2. Radar detection at John F. Kennedy International Airport, which follows the recent announcement that our radar detection sensor RADIUS was certified for use in New York State. Video sensors for intersection detection across a large transportation corridor in the city of Irvine, California. Connected vehicle sensors along the Berlin Turnpike connecting New Haven and Hartford counties in the state of Connecticut. And hybrid video and radar sensors for highway detection collection and analytics across a section of US Highway 50 in the state of California. During our last Investor Day, we discussed our intent to expand the total addressable market for our intersection detection sensors by enhancing the product portfolio to address two adjacent categories. First, the fixed sensor highway analytics market, and second, the infrastructure to vehicle integration market. We believe the I-4 frame, Berlin Turnpike, U.S. Highway 50, and other recent new customer contracts validate the merits of our product strategy, and demonstrate our ability to continue to expand our total addressable market. While our long-term strategic objective is to maximize the penetration of our sensors, our current priority is to renormalize the financial model of our sensor portfolio. Therefore, we continue to devote substantial management attention to our global supply chain improvement program. In the quarter, we achieved the following program milestones. We released to manufacturing two alternative circuit boards that will begin shipping this month with semiconductors at normalized component costs. Refactored the prototype for a third alternative circuit board based on test feedback. The new prototype was subsequently released to manufacturing on November 7, 2022. Perform design validation for six alternative circuit board designs. And for your reference, we've prioritized the release of alternative circuit boards based on the degree of financial impact. And as mentioned earlier, we began to re-optimize our inventory by flushing certain high-cost product components through the P&L and replacing them with alternative components at normalized inventory costs. Now I want to review the performance of our service lines of business. Fiscal 2023 second quarter total service revenue was $18.5 million versus $15.5 million in the same prior year period, representing a 19% increase year-over-year. In addition to the strong service revenue growth, we recorded $20.8 million in net service bookings, representing a 24% increase over the same prior year period. Notable new customer agreements include A $4.9 million renewal from the Bay Area Metropolitan Transportation Commission for the continued use of our clear route software. A $3 million task order from the Federal Highway Administration for our continued development and support of the nation's ITS reference architecture, now known as Architect Reference for Cooperative and Intelligent Transportation, or ARCIT. A $2.8 million task order to provide technical services to the San Bernardino County Transportation Authority, or SBCTA, to support the implementation of corridor freight and express lanes on the I-10. A $2 million task order from the Virginia Department of Transportation to use our clear asset software and related asset management managed services. A $1.5 million task order to provide technical services to support the Los Angeles metro orange line extension. A $1.3 million task order with the SBCTA to support the development of a smart county transportation plan. And a $1 million task order with the Florida Department of Transportation District 5 to implement an integrated corridor management program. As with our sensor portfolio, we continued in the second quarter to enhance our software as a service, data as a service, and cloud-enabled managed service solutions to support sustained long-term bookings growth. Second quarter release milestones included enhancements to ClearAsset to support the management of transit signal prioritization assets, which expands the addressable market for this SaaS product. enhancements to ClearData that publish historical as well as real-time data feeds to address a variety of new use cases for both ClearData and ClearGuide, which provides the visualization front end for ClearData, and an integration of INRIX's real-time data feed with ClearMobility Cloud to further enhance and differentiate our uniquely curated mobility data sets. In summary, we are pleased with our second quarter's record total revenue, record trailing 12-month total net bookings growth, and record total ending backlog, all of which we believe demonstrate considerable progress we've made against our platform strategy. Additionally, our global supply chain management program achieved significant milestones that enabled us to start releasing alternative circuit boards, to production and re-optimizing our inventory to include newly qualified components at normalized component costs. These actions had a significant impact on net cash flows and gross profit margins in the second quarter. However, they positioned ITERAS for a critical inflection point in the second half of fiscal 2023. On that note, I'd like to turn the call over to Doug to provide more color on the second quarter financials. after which I'll further discuss our second half expectations.