Iteris, Inc.

Good day and welcome to the ATARIS fiscal 2023 fourth quarter and full year financial results conference call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference 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 fourth quarter and full year ended March 31, 2023. Joining me today are Iteris' President and CEO, Mr. Joe Bruggera, and the company's CFO, Mr. Kerry Shiva. Following the 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 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 do not guarantee the 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. ITARIS 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 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 iteris.com. Now, I'd like to turn the call over to ITERIS's president and CEO, Mr. Joe Bruggiero. Joe, please proceed.

All right. 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 apologize for changing the date of our earnings announcement. During his remarks, Kerry will explain the reason for some additional closing procedures that led to this delay. In the meantime, I want to confirm that these additional procedures have resulted in no impact to the company's income statement for fiscal 2023 or fiscal 2022 comparisons. So let's turn to those results. A terrorist reported record fiscal 2023 fourth quarter total revenue of $42.4 million, and record fiscal 2023 full-year total revenue of $156.1 million, representing significant growth rates of 24% and 17% year-over-year, respectively. We attribute the significant growth to a strong demand for our products and services, as well as the progress of our supply chain improvement plan, which mitigated the shipment constraints we experienced in the first half of fiscal 2023 and continues to normalize the economics of our Vantage sensor product lines. Our fiscal 2023 fourth quarter product gross margins improved 172 basis points on a sequential basis as we began to shift Vantage sensors with the alternative circuit boards that we released to production in our fiscal 2023 third quarter. The product gross margin improvement would have been even greater However, we shipped more units with high purchase price variances to address customer requirements in the period. While this constrained gross margin improvement in the fourth quarter, it helped us flush more purchase price variance through our income statement, which improves our position as we enter fiscal 2024. As a reminder, the improvement in our fourth quarter follows a sequential improvement in product gross margins in our fiscal 2023 third quarter of 2,640 basis points. In a few minutes, I'll provide some more color on the status of our Supply Chain Improvement Plan, and of course, Kerry will address our service and product gross margin dynamics in more detail in his comments. Despite concerns about a possible economic slowdown, customer adoption of the Clear Mobility Platform remains very strong, based on key metrics including net bookings, competitive win rates, and instances of customers specifying the use of our solutions. For example, we reported record fiscal 2023 total net bookings of 44.4 million, as well as record fiscal 2023 full-year total net bookings of 170.3 million. Additionally, in fiscal 2023, our win rate in competitive procurements for our service offerings, which include consulting, managed services, and software as a service, hit a new record high of 82 percent, and our solutions were increasingly specified as requirements by various customers. While there are many examples of customers specifying ITERIS technology, we're particularly pleased to report that ITERIS is specified by five of 37 agencies who were awarded the first wave of Safe Streets for All implementation grants. These grants are funded through the Infrastructure Investment and Jobs Act, or IIJA. The total combined value of these grants is $94 million, or 16% of the total $600 million in initial implementation grants. It's unclear at this time how much of this funding ITERIS will receive, but this result clearly demonstrates a high level of customer preference for ITERIS solutions. Due to strong customer demand, we ended the March 31, 2023 period with a record total ending backlog of 114.2 million, representing a 14% increase year over year. As always, our ending backlog figures and net bookings reflect firm customer orders rather than total contract value. The total value of customer contracts, which varies from quarter to quarter, averages on a historical basis about 200% of our total ending backlog. Also keep in mind that our backlog excludes a portion which varies from period to period of our sensor bookings since these orders often convert to shipments within a single quarter. Speaking of our sensors, I'd like to share some detail about the performance of our product portfolio. For our sensors and third-party hardware that we refer to collectively as products, we reported fiscal 2023 fourth quarter revenue of $25.1 million and fiscal 2023 full-year revenue of $85.1 million, representing a 47 percent and 24 percent increase year-over-year, respectively. The performance of our sensor portfolio, which represents the majority of our product revenue, demonstrates significant share gains in market categories that we estimate grew at about a weighted average in the range of 6 to 8 percent over the past 12 months. This implies that revenue for our sensors grew more than three times the market growth rate. We believe our sensors continue to take market share at a significant rate due to both excellent sales execution and superior product performance. And in the fourth quarter, we continue to extend our superior performance with improvements to various detection algorithms, such as red light running, queue length, and delay algorithms. enhancements to the setup and ease of use of our video and radar sensors, and optimizations to our connected vehicle sensors process and publish connected vehicle data packets at massive scale to Clear Mobility Cloud, as well as directly to ecosystem participants. Due to the strong performance advantages of our sensors, we continue to win virtually every large competitively sourced detection, fixed travel time, and cellular vehicle-to-everything, or CVDX, sensor initiatives across the country. In the fourth quarter, our sensors were selected for the following representative smart mobility initiatives. An expanded deployment of CV-to-X sensors on the I-4 between Tampa and Orlando as part of the Florida Regional Advanced Mobility Elements or FRAME program. You may recall that on previous earnings calls, we discussed similar purchases of our Spectra connected vehicle sensors for this large multi-scale on this large-scale multi-year initiative, excuse me. Another initiative was a corridor-wide deployment in Richardson, Texas of high-definition AI-based detection sensors. This is the first large-scale deployment of our Vantage APEX sensor. A corridor deployment in Sunnyvale, California of our hybrid intersection detection sensors. In other words, our Vantage vector sensors using both our video and radar technology that was bundled with our ClearGuide Signal and Vantage Live Cloud software. A corridor deployment in Nashville, Tennessee of our travel time and cellular V2X sensors attached to our cloud-based Blue Argus software. A corridor deployment in Fredericksburg, Virginia of our Vantage Vector sensors that are connected by our Clear Mobility Cloud to the Virginia Department of Transportation Central Signal System. And a deployment across a segment of the Rio Grande Valley in Texas of our radar sensors, which we brand as Vantage Radius. These representative fourth quarter orders demonstrate our progress against the following three strategic priorities that we've talked about previously. First, it demonstrates our ability to win a disproportionate share of large-scale modernization initiatives. Second, to attach annual recurring revenue at the point of sale to our quarter-wide sensor deployments. And third, to leverage our leadership in intersection detection to penetrate adjacent categories, including the emerging CVDX category. For reference at this time, we have more than 3,100 intersections and 2,100 travel time and CVDX sensors that are connected or in the process of being connected to our Clear Mobility Cloud. As mentioned earlier, we continued in the fourth quarter to make excellent progress on our supply chain improvement plan. And recently, we released to production two additional alternative circuit boards, meaning we've now released a total of eight alternative circuit boards to production. With this achievement, we've now met all the primary goals of our supply chain improvement plan as outlined on our June 1st, 2022 earnings call. Besides mitigating supply chain constraints, the alternative circuit boards will improve our ability to source electronics components, optimize the cost of our electronics components, and enhance our ability to level load our manufacturing capacity. Due to the success of our supply chain improvement plan, We have discontinued the use of external resources to help develop alternative circuit boards, and we started to redeploy internal engineering resources to new product development and sustaining engineering activities. Now let's review the performance of our services portfolio. We reported record fiscal 2023 fourth quarter service revenue of $17.4 million, and record fiscal 2023 full full-year service revenue of $71 million, representing a 1% and 9% increase year-over-year respectively. As a reminder, about 45% of our service revenue line is comprised of project-based, in other words, consulting revenue, and 55% is now comprised of annual recurring revenue associated with our software-as-a-service, data-as-a-service, and managed services offers. In fiscal 2023, our annual recurring revenue increased 17% year-over-year. During fiscal 2023, labor capacity constraints hampered the growth of our consulting revenue and in some instances required us to subcontract activity due to a shortage of internal resources. Additionally, we experienced more moderate growth in the fourth quarter due to customer delays, which affected our ability to meet critical project milestones, pushing some service revenue recognition to the right. Despite the delivery delays, the level of demand for our service offerings is historic. In our fiscal 2023 fourth quarter, we reported net service bookings of 25.5 million, representing a 26% increase relative to the same prior year period. We estimate that roughly 16 million, or 62%, of our fourth quarter net service bookings will be recognized in the future as annual recurring revenue. In the fourth quarter, our more notable service bookings included a $6.6 million task order from the Virginia Department of Transportation to extend and expand the scope of activities related to our management of traffic operation centers across the Commonwealth, a $3 million task order from the Virginia Department of Transportation for ITERAS to manage critical activities for the agency's network operations center, a $1.3 million task order to complete a corridor-wide traffic signal synchronization project for La Habra, California, a $1.2 million task order from the Orange County Transportation Authority to develop a plan, specifications, and estimates to modernize traffic corridors in three cities in Orange County, a $1 million task order with the Florida Department of Transportation for integrated corridor management services for key I-94 and I-4 corridors, and an almost $1 million cloud-enabled managed service or process virtualization task order to support the design and construction of the I-494 improvement project in Minnesota. As demonstrated by the Minnesota project, we continue to increase the attach rate of annual recurring revenue to our consulting projects which is accelerating the mix of service bookings that will be recognized as annual recurring revenue going forward. To sustain strong customer adoption of our Clear Mobility platform, we continued in the fourth quarter to enhance our software as a service, data as a service, and cloud-enabled managed services solutions. For example, we released a new Clear Mobility cloud standard component library to improve the ability of our software applications to operate together in a seamless manner, and also enable various software development efficiencies. We began to roll out an enhanced security framework, which will create additional competitive differentiation for our cloud solutions. We continue to enhance our clear data, data feed, and integrated enhanced feed with our ClearGuide software to address new use cases. We released an innovative new feature in ClearAsset that uses artificial intelligence to predict the obsolescence of transportation assets. and we introduced a new application programming interface, or API, to publish travel time and connected vehicle data. So, in summary, we are very pleased with our record fiscal 2023 fourth quarter and full year revenue, as well as our record total ending backlog, particularly during a difficult and complicated operating environment. Also, we're pleased with our ability to deliver against an aggressive solutions roadmap while meeting the critical goals of our supply chain improvement plan. As a result, we successfully unlocked our product backlog, we continued to service our customers, and we managed to approach a full normalization of our product gross margins. With these financial metrics continue to trend in a favorable direction, we further demonstrated that Iteris has achieved an important financial inflection point. So on that note, I'd like to turn the call over to Kerry to provide some more color on our fourth quarter and also our full year financial results, after which I'll come back And I'll talk further about our fiscal 2024 expectations.