Iteris, Inc.

Thank you. Good day and welcome to the ITERAS Fiscal Third Quarter 2023 Financial Results Conference Call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your 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.

Thank you, Operator. Good afternoon, everyone, and thank you for participating in today's conference call to discuss Iteris' financial results for its fiscal 2023 third quarter ended December 31, 2022. Joining us today are Iteris' President and CEO, Mr. Joe Brugera, and the company's CFO, Mr. Doug Groves. Following their remarks, we'll open the call for questions from the company's 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 are statements 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 materially from what is discussed today, and no one should assume but at a later date, the company's comments from today will still be valid. Hyteris refers you to the documents the company files from time to time with the SEC, specifically the company's most recent forms 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 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 Pugera. Joe, please proceed.

Super. Thank you, Todd, and a good afternoon to everyone. I appreciate you joining us today. Before we begin our regular earnings commentary, I want to make some remarks about today's announcement that Keri Sheba will be joining ITERIS as SVP and Chief Financial Officer effective February 3rd, 2023. Kerry brings significant, highly relevant experience that we believe will be particularly valuable with Iteris having achieved a critical inflection point and now poised for its next stage of growth. I look forward to Kerry joining our team tomorrow and working with him to execute our business strategy and, of course, to increase shareholder value. Unfortunately, with Kerry's arrival, we'll be saying goodbye to Doug Groves. Doug has made a huge contribution to Iteris over the past three years, which have been extremely challenging due to unanticipated global events, largely outside our control. And I cannot imagine a better partner than Doug to navigate the complexities of COVID-19 and the associated global supply chain crisis. To ensure an orderly transition, Doug is committed to serve as a senior advisor for four months, which will allow him to contribute to the preparation of our 10K and other critical projects. Of course, I wish Doug the very best in his future endeavors. Now, let's turn our attention to our third quarter results. For the fiscal 2023 third quarter, ATERIS reported record total revenue of $40.7 million, representing a 27% increase year over year. The growth was due to strong demand for our products and services and the progress of our supply chain improvement program, which began to normalize the underlying economics of our Vantage sensor product lines. More specifically, our product gross margins improved 2,640 basis points on a sequential basis as we began shipping products with the alternative circuit boards that were released to production in our second quarter. In a few minutes, I'll provide more color on our supply chain initiatives. Despite concerns about a potential slowdown in the broader economy, customer adoption of the Clear Mobility Platform remains very positive. In the third quarter, we reported strong total net bookings of 41.1 million, representing a slight increase over the prior year. We were pleased with the result given the combination of an unusual prior period comparison and the impact of seasonal holidays, which tend to cause procurement delays. This is the fifth quarter in a row that we've reported bookings of more than $40 million. Although not included in our third quarter bookings results, I'm pleased to share that ITERIS has received a notice of intent to award a multi-year, multi-element contract from a public agency in Southern California. We do not normally comment on notices to award However, this award is unique for two reasons. First, it includes a healthy mix of both products and services, demonstrating the progress of our cross-sell efforts. And second, we expect at least a portion of this project to be funded by the Infrastructure Investment and Jobs Act, making this our first notable award to include IIJA funding. It is likely to take a couple quarters before this opportunity progresses from notice of award to signed contract, at which time we'll provide additional information. Due to our sustained strong sales pipeline velocity and total net bookings, we ended the December 31 period with a record total ending backlog of 112.2 million, representing a 22% increase year over year. 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. In the fiscal 2023 third quarter, product revenue increased 44% year over year to a record 22.9 million, demonstrating continued market share gains. We believe our sensor portfolio continues to take market share due to excellent sales execution and superior product performance. And in the third quarter, we extended our product performance lead with further enhancements to our AI-based object classification, detection system scalability, and security framework. Due to our strong market position, we continue to win virtually every large competitively sourced detection sensor, fixed travel time sensor, and cellular CV to X sensor initiatives across the country. For example, in the third quarter, Our sensors were selected for the following representative smart mobility initiatives. Full high-definition AI-based detection for phase two of the Coachella Valley Smart Region Program with an order value of 4.5 million. This is likely the largest single deployment of this form of detection technology in the nation to date. Cellular V2X or C-V2X sensors to extend coverage on the I4 between Tampa and Orlando as part of the Florida Regional Advanced Mobility Elements or FRAME program. This is another in a series of ITERA sensor purchases related to the I-4 FRAME program. Travel time and CV-to-X sensors will be deployed as part of an I-275 design build project near Tampa, Florida. Video-based sensors for intersection detection to replace in-ground wired loops throughout the city of Meridian, Mississippi. and video-based sensors for intersection detection to replace the prior implementation of our competitors' video sensors across the traffic corridor in Richmond, Virginia. These representative third-quarter orders demonstrate ITERAS's ability, as we've discussed previously, to successfully execute on the following five dimensions to expand our market footprint. First, we are executing on our strategy to maximize our win rate of large-scale modernization initiatives like CVAG that drive region-wide standardization of our sensor portfolio. Second, we are leveraging our leadership in intersection detection to penetrate adjacent categories, including the emerging CV to X category, as we did with the I4 frame and I275 deals in Florida. Third, we're attaching annual recurring revenue to each new VANTAGE APEX system and Spectra CV sensor as occurred with the CVag and Florida orders. Fourth, we're capturing a disproportionate share of migration revenue as customers similar to Meridian continue to replace legacy in-ground detection with advanced sensors. And fifth, we continue to displace above-ground detection vendors such as we did in Richmond due to our superior product performance, total cost of ownership, and customer success model. Since our last earnings call, we released to production four more alternative circuit boards that will enable further reductions in our aftermarket component purchases, better optimization of our component inventory, additional improvements in our manufacturing linearity, and enhanced purchasing power with traditional supply sources. This brings us to a total of six alternative circuit boards released to production from the inception of our supply chain improvement programs. In a moment, Doug will comment on the implications of these new alternative circuit boards on our fourth quarter purchase price variance and product gross margins going forward. Now I want to review the performance of our service lines of business. Fiscal 2023 third quarter total service revenue was $17.8 million, representing a 10.5% increase year over year. In addition, we recorded $16.1 million in net service bookings, of which 41% will be recognized in the future as annual recurring revenue. Notable new customer agreements include a combined $1.8 million in orders to extend our managed services activities for the Virginia Department of Transportation, a $1.3 million subscription agreement for clear data from the Utah Department of Transportation, a $1.3 million task order for the second phase of a project to develop and support a SMART County plan for the San Bernardino County Transportation Authority, a $1 million task order from the Florida Department of Transportation District 7 for arterial performance monitoring and management activities, a $1 million combined, a series of awards worth a combined $1 million for a subscription agreement for ClearGuide, including ClearGuide SPM, from various agencies in the US and Canada, and a clear data subscription for a non-disclosed value from a confidential commercial customer. Additionally, we saw an acceleration in the attach rate of connected services or annual recurring revenue to our infrastructure sensors. At this time, we have over 3,000 intersections and 2,000 travel time and CV to X sensors, which are either connected or in process of being connected to our Clear Mobility Cloud. To sustain market share growth, we continued in the third quarter to enhance our software as a service, data as a service, and cloud-enabled managed service solutions. For example, we introduced a new safety-related data set that customers can access on a subscription basis through our clear data application programming interface. And we integrated this new data set into our mobility intelligence software ClearGuide to address new Vision Zero and safe streets for all use cases. Given the strength of our value proposition, we also began to introduce strategic price increases on certain of our software as a service offers. So in summary, we are pleased with our third quarter record total revenue and record total ending backlog, as well as the progress we made on our supply chain improvement program and the associated sequential improvement in cost of goods sold and adjusted EBITDA. With various financial metrics trending in a favorable direction, We believe ITERA has achieved an important financial inflection point in the third quarter, consistent with our prior expectations. On that note, I'd like to turn the call over to Doug to provide more color on our third quarter financials, after which I will further discuss our fourth quarter expectations.