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spk01: 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.
spk05: 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.
spk02: 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.
spk04: Thank you, Joe. Good afternoon, everyone. As a reminder, please see the company's 10Q filing and press release, which are posted on the IR website for a further description of matters under discussion during the call today. As Joe mentioned, and as we expected, we continue to face several supply chain challenges again this quarter that impacted both the top and bottom line results. We anticipated these challenges and we continued to see certain components that were not available through our normal channels. To that point, we spent approximately $8.4 million in inventory purchases from the secondary markets, i.e. brokers, which was up from $5.6 million in Q1, and this negatively impacted the cost of sales by $7.8 million in the current quarter. From a revenue standpoint, the amount of unshipped backlog decreased from $4.9 million at the end of Q1 to .9 million in Q2. However, sourcing all the components we needed at reasonable prices continued to be a challenge with the cost of many components continuing to be 2 to 100 times their normal cost. If we had all the components we needed, the year-over-year revenue growth would have been almost 21 percent. The orders that didn't ship in the current quarter are expected to ship in Q3, and there were no order cancellations in the second quarter. which is why we expect the second half hardware revenue growth to be over 30% year-over-year. As Joe mentioned, we have many ongoing initiatives to improve the situation, which is why we expect second half hardware gross margins to be in the mid-30% range compared to only 14.8% in the first half of this year. Demand for our products and services continues to be strong, as evidenced by our once again strong bookings of $42.2 million and record backlog of 111.8 million. Now we'll move on to the details of the second quarter results. Total revenue for the fiscal 2023 second quarter increased 18% to 39.3 million compared to 33.3 million in the same quarter a year ago. Our gross margins in the second quarter decreased 1,680 basis points to 16.7% compared to 33.5% in the same quarter last year. Adjusting for the increased component costs of $7.8 million, the gross margins would have been 36.6% or up 310 basis points compared to the same prior year quarter. As previously mentioned, our revenue continued to be constrained due to the unavailability of certain components, and the gross margin pressure was due to higher costs for those components that had to be purchased through the broker markets. Turning to revenue mix. The product revenues increased 17% to 20.8 million compared to 17.7 million in the same quarter last year. Taking into account the 0.9 million of revenue that was not recognized because of component shortages, the product revenue growth would have been 22% quarter over quarter. The record revenue was a conscious decision made to meet our customers' on-time delivery expectations and take market share from competitors, but it did come at a significant cost to the gross margins. This strong demand underscores our market-leading position in the sensor market, and as Joe noted, we continue to win on large sensor deals. Product gross margins declined 4,570 basis points and were 3.7% compared to 49.4% from the same quarter last year due to the supply chain cost issues mentioned previously. Our service gross revenues increased 19% to 18.5 million compared to 15.5 million in the prior year quarter primarily driven by stronger software and managed services revenues. In the second quarter, 25% of total revenue was annual recurring revenue. As a reminder, annual recurring revenue is comprised of our software and managed services revenues. Service gross margins increased 1,600 basis points to 31.3% compared to 15.3% from the same quarter last year. As a reminder, Q2 of fiscal year 22 included a one-time non-recurring charge of $2.8 million, so after adjusting for this, the gross margin decrease was 210 basis points, which was primarily attributable to increased labor costs and the timing of certain contract extensions in the contract mix. Operating expenses in the second quarter were flat at $13.5 million. General and administrative expenses were down 1.1 million, or 18.5%, while R&D was up 400,000, driven primarily by the circuit board redesign efforts. Sales and marketing costs increased 800,000, which was related to our sales and product support headcount to support the higher sales going forward. We reported a gap operating loss in the second quarter of 6.9 million compared with a gap operating loss of 2.4 million in the same quarter a year ago. The operating loss was solely attributable to the higher component costs as previously mentioned. With progress being made on the circuit board redesigns, we're anticipating spending less than $1 million in broker components in Q3, which is down significantly from the 8.4 million spent in Q2. The GAAP net loss from continuing operations in the second quarter was $7.4 million or a loss of $0.17 per share, which compares with the net loss from continuing operations of $2.1 million or $0.05 a share in the same quarter a year ago. Adjusted EBITDA for the second quarter was a loss of $5.2 million or 13.1% of revenue, which compares to EBITDA of approximately $2.3 million or 6.9% of revenue in the second quarter of last year. The gap operating loss, gap net loss, and adjusted EBITDA loss were driven by the supply chain issues, as previously noted. With the supply chain improvement plans outlined by Joe, we anticipate a progressive improvement in our supply chain position in the second half of this year, since it will take some time for the redesign of all the circuit boards to ship through to our customers. With the two new circuit board designs already shipping to customers in the third quarter, and one more that has already gone into production this week, this will largely mitigate our need to procure components in the broker markets as previously mentioned. These key redesign activities should return the product gross margins to about 40% by the fourth quarter of this year. Turning to liquidity and capital resources, cash was $8 million at the end of the second quarter and networking capital was approximately $26 million. The $6.8 million decrease in cash quarter over quarter was a result of the net loss, which was driven by the higher component costs. As previously mentioned, we procured $8.4 million in components from the secondary markets, so we were unable to get meaningful extended payment terms, which is a normal business practice in these markets, to offset the inventory carrying cost, and this also negatively impacted our working capital in the quarter. With the expectation that third quarter parts purchased in the broker market will decrease to less than a million dollars, this will substantially improve our working capital, and we would expect to be cash flow positive in Q3 and continue to increase our cash position in Q3 and beyond as our circuit board redesign projects continue to progress. Lastly, we spent $190,000 in purchases of property and equipment in the second quarter, which was down from $269,000 in the same prior year of second quarter. And we still expect the full year capex to be less than 1% of revenues reflecting our asset light business model. So in summary, we continue to be laser focused on our supply chain challenges. As Joe mentioned, our multi-point plan is progressing well. With the three new circuit board designs in production in the third quarter, we're confident that we'll weather this supply chain storm and come out even stronger on the other side with multiple circuit board designs for our market-leading Vantage sensor products and without sacrificing any features and functionality that our customers have come to rely upon. With that, I'll turn the call back over to Joe. Joe?
spk02: Great. Thank you, Doug. Although COVID and subsequent supply chain constraints may have obscured visibility in the last several quarters, Iteris continues to strengthen its leadership position in the smart mobility infrastructure management market. which is a large dynamic market that represents significant opportunities given favorable secular trends and historic new investment from the IIJA, which among other benefits should provide a meaningful backstop should we enter a future recession. Therefore, we are extremely optimistic about the opportunity in front of ITERAS and believe the current environment even improves our clear mobility value proposition and competitive position. To capture this opportunity, ITERIS is executing against an aggressive FY23 second half solutions roadmap to drive adoption of the clear mobility platform, enhance the cross-sell of our clear mobility offerings, and improve the monetization of our mobility data sets. Planned releases include a new connected vehicle safety alert for our Spectra CV sensor that is targeted at both public and private sector markets. new safety features for our Vantage Apex sensors that will further enhance our safe streets for all value proposition, new scalability features for Vantage Apex that will enhance our ability to better price differentiate based on certain intersection characteristics, new safety analytics and connected vehicle reporting features for ClearGuide, our mobility intelligence application, and new features that enable Vantage Fusion to stream connected vehicle detection data to Clear Mobility Cloud. We believe our sales channels are the most productive in the industry. However, we continue to pursue additional opportunities to capitalize on the continuous enhancements to our platform capabilities and to maximize our market share gains. In fiscal 2023, the second half of fiscal 2023, We'll introduce an average 10% price increase for our Vantage sensor portfolio, which actually went into effect on October 1, 2022. Continue to optimize our distribution model, particularly in underserved regions such as the Intermountain area, and implement various new programs to increase the attach rate of our everything as a service or X as a service offers to detection. We expect these and other ongoing initiatives to sustain strong bookings momentum, although typical seasonality due to the holidays may temper fiscal 2023 third quarter bookings. Simultaneously, we'll continue to execute our supply chain improvement program to drive further reductions in unshipped advantage sensor backlog and accelerate overall backlog conversion. For example, in the second half, we plan to release to production the remaining alternative circuit boards that represent high component scarcity and associated costs. As these alternative circuit boards come online, we will continue to further optimize our inventory, meaning we'll replace aftermarket components with comparable components sourced at normalized costs through traditional channels which offer standard payment terms. In turn, this will renormalize our working capital structure and cost of goods sold for our Vantage sensor portfolio. Due to the combination of these various dynamics, we anticipate a dramatic positive improvement in the company's financial performance beginning in the fiscal 2023 second half. More specifically, we anticipate second half revenue growth to be approximately 20% year-over-year due to sustained high levels of demand for our solutions and the benefits of Iteris' supply chain improvement program. Second half adjusted EBITDA to be in the range of $3.5 to $4 million, or 4.5% to 5% of revenue with the compounding benefits of our global supply chain improvement program enabling the company to exit the fiscal year at a run rate of approximately 10% adjusted EBITDA. And second half net cash flow to be in the range of $4 million to $6 million as we renormalize our working capital structure and cost of goods sold for our Vantage Sensor portfolio. Based on these second half expectations, we are raising the low end of our full year fiscal 2023 revenue guidance to a range of $150 to $155 million. And we are lowering our full year adjusted EBITDA range to negative 1% to negative 3% of full year fiscal 2023 revenue to reflect the impact of global supply chain constraints on our fiscal 2023 first half results. In closing, we've experienced many challenges over the last several quarters due to COVID and subsequent global supply chain constraints. Nonetheless, we continue to execute against our platform-centric business strategy and extend our leadership position in the smart mobility infrastructure management market. Most recently, we made significant progress on our global supply chain improvement program, which will not only generate significant near-term benefits, but lasting value for the company. As a result, Iteris is positioned to realize a critical inflection point in our fiscal 2023 second half and deliver significant shareholder value creation as outlined by our Vision 2027 operating model going forward. So with that, we'd be delighted to respond to your questions and comments. And so, operator, let's open up the line for that, please.
spk01: Certainly. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold while we poll for questions. Your first question for today is coming from Ryan Sigdal at Craig Hallam Capital Group.
spk06: Good afternoon, Joe, Todd. Hi, Ryan.
spk04: Hi, Ryan.
spk06: Really, you know, solid revenue, bookings, et cetera. So I want to dig into the cost side here. So supply chain challenges, circuit board costs, bringing in three new circuit boards into production. All that sounds the same as last quarter. So I guess pretty material change in expectation on EBITDA and margins for the rest of the year. given those challenges. So I guess what changed in the last few months relative to what seemed like, you know, similar challenges last quarter or knowing those challenges?
spk02: Well, Ryan, this is Joe. Why don't I front-end that, and then, Doug, I'll pass it over to you. So one thing I wanted to clarify is that when we had our last earnings call, we explained that we were – the plan was to – complete the design and testing of three alternative circuit boards in each of the subsequent quarters, but following each quarter we would introduce or release to production three circuit boards. So what that meant in terms of the September 30 period is we had initially expected that we would have three, we would have already been shipping three of the redesigned circuit boards before the end of the September 30 quarter. Due to a number of factors, largely it was due to testing feedback that required some further enhancements to the refactoring for those circuit boards, the release dates got extended, and as a result, we didn't realize the benefit that we expected from those three circuit boards in the September 30 period. Now, we will realize that in the December 31 period, as well as we'll realize the benefit of additional boards that will be released to manufacturing in the December 31 period. But we did lose a couple months in the September 30 period. But anyway, Doug, with that background, do you want to provide any further response to Ryan's question?
spk04: Sure. I think the only thing I would add, Ryan, is because it was a timing issue that we do still have about $5 million of that broker inventory in our inventory. So that will flush through in the third quarter. So margins will be compressed and don't bounce all the way back until the fourth quarter when all that inventory has been flushed. So I think it really just became a timing issue from what we were expecting to happen in Q2 will happen in Q3. So everything just pushed to the right one quarter.
spk06: And then as you think about targeting 10% exit rate on EBITDA margin this year, I guess how much visibility and confidence do you have in that? Where are the pinch points of things that we're talking about now that weren't expected over the last couple months? But Where's their risk in that, or I guess how much confidence in that exit rate and improving from there next year?
spk04: Well, I'd say if you look at our operating expenses, we've got a really good handle on those. Those were flat year over year as we exited the second quarter, and we're expecting that to be pretty similar for the remainder of this year. So really no risk there. It's going to come down to just the continued growth evolution of the supply chain and getting, you know, all the components we need. The software business, the professional services business, you know, are all pretty consistent and, you know, with the visibility we have into the backlog that was referenced, I think the only risk would just be, as we've talked about the last four quarters, would be, you know, in the supply chain. But we think with the redesign efforts that are completed and those that are ongoing, that that risk, you know, has largely, you know, been managed to give us the confidence that we can hit, you know, a 10% EBITDA number exiting the year.
spk06: Last one for me. So you terminated your credit agreement in September, which was on tapped, but had good liquidity option there. You have $8 million of cash and some ongoing headwinds. I know you're modeling and guiding to positive cash flow in the back half, but how much cash reserve do you think you need to operate this business just to give yourself some flexibility?
spk04: Well, we've certainly, with the remix of the inventory, that's going to be the biggest driver here, because if you looked at the reason for the decline in the cash balance, it's all been related to these parts we've had to purchase in the broker market where we don't get any payment terms. Since we're not going to have more than a million dollars in the third quarter, high degree of confidence will build cash, and we only need really you know, I'll say $3 to $4 million to operate the business. And we're already seeing the cash balance start to build. I mean, as of the end of October, you know, our cash balance was back up to like $9.5 million. So I think it's going to, you know, certainly get to that guidance that we outlined in the prepared remarks. Thank you, guys. Best of luck. Thank you.
spk01: Your next question for today is coming from Jeff Van Sinderen at BRiley.com.
spk07: Hi, everyone. Thanks for taking my questions. I just wanted to ask about recurring revenue. I think you said 25% during the quarter. I'm just wondering what that was in the prior quarter, year over year, if you can remind us. And then what was the growth of recurring revenues? I'm not sure I caught that.
spk02: Doug, do you want to take that?
spk04: Sure, yeah. It was pretty consistent as a percentage of total revenue year over year, so there was not... significant growth year over year in the recurring revenue. But as Joe referenced, we did have some nice bookings that we'll be adding to that as we head into the second half. So we are expecting to see some growth in the recurring revenue as a percentage of total revenue in the second half.
spk02: This is Joe. I'll add a little bit to that. I think maybe the point that you're getting at is that As a percent of revenue, recurring revenue was larger in the prior quarter than the most recent. But, of course, we saw a huge increase in the amount of product revenue in the September 30 period, which impacted the proportion of recurring revenue. If you look at just the actual recurring revenue, it was up somewhere, I believe, between 15% and 20% on a year-over-year basis and also up on a sequential basis.
spk07: Okay, good. Good to know. It's helpful for 15% to 20% year-to-year growth and recurring. And what was the status component of that? Do you have that?
spk02: Yeah, so we haven't in the past, and at some point we will, but we haven't in the past, and we're not prepared to explicitly break that out. But what we have said is that that split between SAS revenue and managed service, which is what constitutes our total recurring revenue, is about 50-50. I would say at this point that SAS is probably about to, if it hasn't already overtaken, you know, managed services, meaning that perhaps is in excess of 50% of the total annual recurring revenue at this time.
spk07: Okay, good to know. And then I wanted to ask you, I wasn't sure, I mean, we haven't had a chance to kind of go through our projections for second half, but consolidated gross margin for second half, what's implied in your guidance for that?
spk04: From a gross margin percentage, it's kind of low to mid 30% gross margins in the second half.
spk07: For both quarters or... Well, that's the second half.
spk04: No, it's going to be lower in the third quarter for the reasons I just mentioned on, you know, this remaining high-cost inventory we've got to flush through and then getting back, you know, to the more traditional margins in the fourth quarter. So the second half gross margin is in that, you know, low to mid-30% range.
spk07: Okay, so low 30% is your second half. Got it. And then SG&A, you said... I know, I think you said holding kind of flat. Are you saying that in dollars, you can keep the dollars close to what they were in Q2 for the remainder of the year for SGA?
spk04: Yes, that's the plan, in absolute dollars. So as a percentage of revenue, you know, it would come down because the revenue is greater in the second half than the first half.
spk07: Right, okay, good. And then just, I think, Joe, you mentioned potential macroeconomic recession, just any thoughts on how the business might be impacted by a recession.
spk02: Yeah, well, we've been in a very unusual period the last couple of years, and so you never know what could happen at this moment in time. But that being said, generally, when... We've gone through recessionary cycles. We found that our end market has been less impacted than other sectors for a variety of reasons. We've also found that what impact there is tends to be not only muted, but tends to show up oftentimes later, approximately 12 to 18 months after other sectors, which are maybe more interest rate sensitive, are impacted. So all that being said, under the worst of circumstances, under standard circumstances, we'd expect there to be, you know, a modest impact on our sector and as such, you know, potentially on ITERAS. That being said, we think that the IIJA provides a really strong backstop. So even in the event of recession, you know, certainly the agency customers that we're talking to are projecting an increase in their budgets over the next five years, you know, even after they're making some adjustment for potential reductions in tax revenues. Now, I don't know the extent to which they have, you know, factored a potential recessionary cycle into their budget estimates, but again, you know, net-net, they expect their budgets to remain the same or even to grow, you know, because of the IIJA, you know, more than compensating for any potential recessionary cycle. So again, we're in uncharted waters here, Jeff, but we would expect the impact of recession to be modest, if any.
spk07: Okay, that's helpful. All right, I'll let someone else jump in. Thanks.
spk01: Once again, if there are any questions or comments, please press star 1 on your phone at this time. Your next question for today is coming from Mike Lattimore at Northland Capital.
spk02: Hi, Mike.
spk04: Hi, Mike.
spk01: Mike, if your line is on mute, please unmute it. Your line is live.
spk03: Hey, hi, this is Aditya on behalf of Mike Lattimore. Hello. Hello. So could you give some color on if you're seeing any demand fluctuations due to the price increases?
spk02: Yeah, sure. It's a great question. You know, I do, when I talk to our customers, what I'm hearing from them is that... Unfortunately, because of cost increases, they're able to buy less, meaning like fewer units of equipment, let's say, a fewer number of sensors, fewer user licenses than they would have originally intended for the amount of budget that's available. But I haven't seen any reduction in in the amount of budget or the amount of spending. So, unfortunately, our customers are getting, in some cases, less, but we're not seeing any reduction in the amount of budget that they're committing to smart mobility projects, if that answers your question. All right. All right. Fine.
spk03: And also some color on what might be the operating cash flow for second half of this year? Sure. Doug, do you want to talk about that?
spk04: Sure, yeah. So, yeah, we would expect it to be, you know, in line with, you know, what we talked about, $4 to $6 million of positive cash flow in the second half as we, you know, optimize our inventory and return to profitability.
spk03: All right, fine. That's helpful. Thank you, guys. Of course.
spk01: There are no further questions in queue. I would like to turn the floor back over to Mr. Bejarra for any closing comments.
spk02: Great, super. Well, thank you, operator. And as always, I appreciate everyone's support and your thoughtful questions. On the investor relations front, I want to let you know that we'll introduce a series of short investor updates starting this winter that will address a variety of business and technology topics. Additionally, we plan to be participating in various investor outreach events. And as always, we're available to speak with investors should you have any follow-up questions. In the meantime, we look forward to updating you again on our continued progress when we report our fiscal 2023 third quarter results. So this concludes today's call. Thank you.
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