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spk00: Good day and welcome to the ITARIS Fiscal Third Quarter 2024 Financial Results Conference Call. At this time, all participants have been placed on a listen-only mode. 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.
spk05: Thank you, Operator. Good afternoon, everyone, and thank you for participating in today's conference call to discuss Iteris' financial results for its fiscal 2024 third quarter, ending December 31, 2023. Joining us today are Iteris' President and CEO, Mr. Joe Bergera, and the company's CFO, Mr. Kerry Shiba. Following the remarks, we'll open the call for questions from the company's covering sell-side analysts. Then we will answer investor questions, if any, that were submitted to the company in advance of the call for the instructions in our press release dated January 25, 2024. Before we continue, I'd like to remind all participants that during the 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 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 Bergera. Joe, please proceed.
spk07: Great. Thank you, Todd, and a good afternoon to everyone. I appreciate all of you joining us today to learn more about the company's significant progress. As a reminder, the concentration of holidays and inclement weather depressed third and fourth quarter sales relative to our first and second quarters. However, in fiscal 2023, supply chain constraints pushed product shipments from our fiscal 2023 first half to our fiscal 2023 second half, inverting normal seasonality and creating unusual prior period comparisons. Therefore, I'll reference both our third quarter and our nine-month results throughout today's prepared remarks to adjust for some distortions in the prior period comparisons. ITERIS reported total revenue in our fiscal 2024 third quarter of $42.1 million and first nine months of $129.2 million. representing an increase of 4% and 14% year-over-year respectively. Due to the improvement in our supply chain position and the higher volume, we also experienced an increase in gross margin in the fiscal 2024 third quarter and nine months of 780 basis points and 1,250 basis points year-over-year respectively. In turn, our fiscal third quarter adjusted EBITDA of $3.1 million and nine-month adjusted EBITDA of $10 million, improved $3.5 million and $18.1 million year-over-year, respectively. In addition to the significant improvements in our income statement for the fiscal year to date, we continue to experience strong demand for our clear mobility platform. For example, our total qualified sales pipeline now exceeds $650 million. And our third quarter and year-to-date win rates were 66% and 67%, respectively. As context, a win rate of 66% to 67% is exceptional, given there are often three or more bidders in any competitive procurement. Despite the high level of demand for our clear mobility platform, we did experience some bookings lumpiness, which is common in our industry during our third quarter. These delays included an almost $10 million signal timing order originally expected to occur in the third quarter that pushed to the right. Last week, we did receive official notice from the agency of its intent to award this contract to ITERAS, but the order and associated booking is now not expected to occur until late in our fourth quarter or early in the first quarter of our next fiscal year. Due to these customer delays, we recorded fiscal 2024 third quarter total net bookings of 31.4 million, resulting in total ending backlog of 113.3 million, which was up 1% year over year. Based on our expected fourth quarter bookings forecast that includes some orders that were previously forecast to occur in our fiscal 2024 third quarter, we expect fiscal 2024 fourth quarter bookings to reflect significant sequential and year-over-year bookings growth. In turn, this will drive further improvements in our total ending backlog. As a reminder, our reported net bookings are comprised of firm customer orders, meaning net bookings represent only a portion of the total value of all contracts in hand. Historically, total contract value averages about 200 percent of our total ending backlog. Based on this math, total contract value as of December 31, 2023, was approximately $225 million, despite the softness in third-quarter net bookings. To help you better understand our consolidated results, I'd like to share some details about the performance of our product portfolio. As noted previously, product revenue includes sales of our sensors as well as certain third-party hardware. In fiscal 2024, third-quarter product revenue was $23.1 million, and nine-month product revenue was $70.2 million, representing a 1 percent and 17 percent increase year-over-year, respectively. As a reminder, these year-over-year comparisons are distorted by unusual prior period shipping patterns. In addition to our continued product revenue growth, we realized significant improvements in product gross margin as we moved beyond last year's global supply chain issues. Our product gross margin in the fiscal 2024 third quarter was 43.9%, and first nine months was 45.6%, representing a 1,380 and 2,500 basis point improvement year-over-year, respectively. Despite some customer delays that occurred across our industry, we continue to win virtually every large-scale intersection modernization initiative in the market. leverage our leadership in video detection to penetrate adjacent categories, including the emerging cellular vehicle to everything or CV to X category, and attach annual recurring revenue to our Vantage and Spectra connected vehicle sensors. To maintain this market leadership, we released important new capabilities in the fiscal 2024 third quarter that will continue to expand our qualified sales pipeline and drive above market growth rates going forward. For example, on December 6, 2024, we announced that Vantage Care is available with all Vantage sensors as a managed service. Vantage Care is a comprehensive program that helps transportation agencies optimize their ITERIS traffic detection technology to improve overall intersection performance. We believe this program will help agencies better maximize their traffic detection investments and ensure more efficient, safe, and reliable travel through intersections. Then on December 13, 2024, we launched Vantage CV, which is an integrated detection and connected vehicle system for safe intersections. Vantage CV combines traffic detection, cellular vehicle-to-everything communication, and connected vehicle safety applications into a single system. With this release, our Vantage Next and Vantage Apex product families will now support certain sensor fusion capabilities we developed in partnership with Continental AG, in which we've talked about previously. Vantage Next and Vantage Apex will inherit additional sensor fusion capabilities in our fiscal 2024 fourth quarter. Now I'd like to provide some more color on our services portfolio, which includes our consulting services, managed services, software as a service, and data as a service offers. We reported fiscal 2024 third quarter service revenue of $19 million and nine-month service revenue of $59 million, representing a 7 percent and 10 percent increase year-over-year, respectively. Due to an improvement in our internal labor capacity in the fiscal 2024 third quarter, we also realized a 60 basis points improvement in our services gross margin. However, our nine-month services gross margin was 210 basis points below the same prior year period due to a particularly high mix of subcontract labor in our fiscal 2024 first half. As with our product portfolio, the demand for our services portfolio remains very strong, whether measured by our historic sales pipeline or our nine-month services net bookings of $70.6 million, which are up 19% year over year, despite the bookings delays we encountered in our fiscal 2024 third quarter. To sustain strong demand for our services portfolio, we continue to introduce important new enhancements to our clear mobility platform and extend the platform's ecosystem. For example, in the fiscal 2024 third quarter, we released Vantage Argus CV, a next-generation travel time and connected vehicle data collection and presentation system. We also announced a new partnership with Arity, which is a mobility and data analytics company owned by the Allstate Corporation. This partnership further enriches our mobility data sets and improves our ability to address various new end markets. As a result of our significant traction in North America, we continue to experience inbound demand from various international markets, which we'll continue to evaluate opportunistically. For example, in the fiscal 2024 third quarter, we signed a contract to develop an intelligent transportation systems master plan for the metropolitan area of Cebu, which is a major domestic and international port in the Philippines. In summary, we're pleased with our fiscal 2024 third quarter and first nine-month revenue, our gross margin, and adjusted EBITDA improvement. We continue to deliver against our clear mobility platform roadmap, and our commercial execution remained very strong, especially as measured by our qualified sales pipeline and competitive win rate. Therefore, we continue to believe our platform strategy will drive significant customer value, resulting in sustained above-market growth rates going forward. So on that note, I'm going to pass the mic to Kerry to provide more color on our fiscal 24 third quarter and nine-month financial results, after which I'm going to come back and I'll discuss our expectations for the fourth quarter and full year.
spk02: Thanks, Joe, and good afternoon, everyone. As you review our third quarter results, I encourage you to consider Joe's comments regarding our nine-month revenue results when assessing the overall momentum of the business. You may recall that I talked about the seasonality dynamic on last quarter's call. Because Joe provided this context already on this call, I'll focus my current comments primarily on third quarter results. As Joe also described, we continue to make exciting commercial progress. I only want to underscore that our strength in the market continues to be demonstrated by strong double-digit revenue growth for the first nine months, a significant sales pipeline, and an expectation for strong fourth quarter bookings. Because Joe already addressed revenue results, I will move down the income statement to the gross profit line. and expand some on the commentary Joe provided. As Joe noted, the impact of improved supply chain dynamics was reflected in our gross profit performance. In the third quarter of fiscal 2023, i.e. last year, we expensed about $3.9 million of negative purchase price variance, which compares to only $400,000 in the current year third quarter. As you may recall, last year's negative purchase price variance resulted from aftermarket purchases of semiconductors and other electronics components. On a consolidated basis, fiscal 2024 third quarter consolidated gross profit reached $15.5 million, an improvement of 32% over last year. Products gross profit drove about 88% of the total improvement, increasing 48%, while our services gross profit grew 9%. The products gross profit growth basically reflects supply chain improvement with the benefit of a 1% revenue growth offset by a slightly weaker product mix. The services gross profit improvement reflects higher sales as well as a stronger labor mix resulting from increased internal labor capacity when compared to last year. Looking at gross margins, the third quarter of this year improved by 780 basis points in the aggregate, reaching 36.9% in total. The increase was driven by a 1,380 basis point improvement for products, which was augmented by a 60 basis point increase for services. Product gross margin was 43.9% for the current year third quarter, And as I just mentioned, the benefit of having last year's negative cost impact from supply chain issues clearly behind us was offset slightly by a weaker product mix. Gross margin for services was 28.4% for the third quarter of this year, with the increase due to the improvement in labor mix relative to the same period last year. Operating expenses in aggregate were 8% higher in the current year third quarter than when compared to the same period last year, and 162 basis points higher measured as a percent of revenue. In general, prior year cost levels reflect very tight spending controls imposed in the midst of the supply chain crisis. The current year increase was most significant in the research and development category and reflects increased activity focused on improving our software products. Sales and marketing expense also was higher due to increased commissions. And G&A expense declined when compared to last year as lower salaries and wages cost and professional services cost declines were offset partially by higher litigation costs. The factors just discussed related to revenue, gross profit, and operating expense fundamentally explain the major comparisons in operating income, net income, and adjusted EBITDA. As Joe mentioned, adjusted EBITDA was $3.1 million for the third quarter, an improvement of $3.5 million compared to the same period last year. This brings adjusted EBITDA to $10.0 million for the first nine months of fiscal 2024, a turnaround of $18.1 million over last year. Total cash and cash equivalents at the end of the third quarter this year was $21.2 million which was $11 million above the balance at the same time last year and $1 million higher than the balance at the end of last quarter. Cash flow for this year's third quarter included a variety of items, including $200,000 for share repurchases and $900,000 for capital investments, primarily in new software developments. as well as $800,000 in fees relayed to a non-routine legal matter that we discussed on our prior earnings call. And finally, a $700,000 increase in inventories. The improvement from last year continues to reflect the combination of higher income and strong balance sheet management. While cash trajectory can always be affected in the short term around balance sheet cutoffs, future earnings improvement and good balance sheet management provide the foundation for continued liquidity improvement going forward. I now will turn the call back over to Joe, who will discuss our fiscal 2024 guidance update and provide closing comments.
spk07: Great. Thank you, Kerry. The smart mobility infrastructure management market, in our opinion, represents a significant long-term opportunity due to historic federal funding that's been committed by Congress through 2026, but should have a multi-year funding tail as state and local agencies will continue to spend obligated funds well past the legislation's statutory end date. Additionally, technology trends that include the adoption of cloud infrastructure, artificial intelligence, and connected and autonomous vehicles will continue to drive significant investments from state and local agencies as well as various private sector entities. Given the breadth of our platform capabilities, significant brand equity, and extensive customer reach, we're very optimistic about Iteris's ability to capture a disproportionate share of this revenue stream. Iteris will continue to deliver against an aggressive fiscal 2024 roadmap with the following major releases in our fourth quarter. The release of a new state of the industry software as a service solution We'll use both probe and infrastructure-based data sets to characterize and optimize the performance of individual intersections and entire transportation corridors. We believe this new solution, which can be provisioned dynamically, will further expand our addressable market. Second, the introduction of an integrated communication module to facilitate more efficient communication between our vantage sensors, and our Clear Mobility Cloud, which we expect to drive more Vantage Care upsell revenue and accelerate detach rate of ARR to our sensor install base. And third, the application of additional artificial intelligence capabilities at various levels of the Clear Mobility Platform will further enhance our ability to identify, verify, and predict certain transportation events. As noted on previous calls, we believe our fiscal 2024 release plan will continue to drive further adoption of the Clear Mobility platform, increase our wallet share among existing customers, and improve the monetization of our expanding mobility data sets. Over the long term, we believe these dynamics will support an above-market rate of growth in our total bookings, as well as continue to increase the average size of individual bookings. In addition to focusing on our solutions portfolio, In the fiscal 2024 fourth quarter, we'll continue to pursue key operational priorities, including the productivity of our distributor network, the maturity of our customer success function, and the internal labor capacity of our consulting teams. As a reminder, the tactics outlined on our prior earnings call are already producing a measurable improvement year-to-date in our internal labor capacity. Based on recent market feedback, we've also made an operational decision to to continue to reduce our lead times to ship certain sensor product lines, which we've determined to be a significant point of competitive differentiation. Before I address our guidance, I want to reiterate that supply chain constraints in fiscal 2023 pushed product shipments from our fiscal 2023 first half to our fiscal 2023 second half, inverting normal seasonality and creating unusual prior period comparisons. Additionally, the fiscal 2024 third quarter bookings delays, which are only temporary, may shift some revenue recognition from our fiscal 2024 fourth quarter to subsequent periods. With this context, we're tightening our full-year revenue guidance to a range of $171 to $173 million, representing organic revenue growth of 10% at the midpoint of our range. We're reiterating our full-year adjusted EBITDA margin guidance of 7 to 9 percent, representing a significant improvement year-over-year. And we're adjusting our full-year net cash flow guidance to a range of 8 and 12 million. This adjustment is due largely to a recent operational decision to build and maintain higher inventory to further reduce lead times to ship certain sensors, and also due to the timing of expenses for the unplanned litigation that we referenced on our prior earnings call. Despite the adjustment to our net cash flow guidance, the new range would represent a $17.1 million increase year-over-year at the midpoint. Looking beyond fiscal 2024, we believe ITERIS remains on track to achieve our Vision 2027 targets. In other words, we continue to estimate fiscal 2027 revenue in the range of 245 to $265 million before any additional acquisitions. This represents a five-year organic revenue CAGR of 13.7 percent at the midpoint, which I would point out is consistent with the average of our fiscal 2023 actual growth rate in the midpoint of our fiscal 2024 revenue range. With the substantial increase in revenue over the five-year period, we anticipate progressive benefits from economies of scale to result in fiscal 2027 adjusted EBITDA margins in the range of 16 to 19 percent. Additionally, we anticipate that further improvements in our liquidity will enable ITERAS to resume our acquisition program, which would be additive to our organic vision 2027 targets. So, with that in mind, I would be delighted to respond to any questions and comments. So, I'll pass it back to you, operator.
spk00: Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star keys. Once again, please press star 1 if you wish to ask a question at this time. And please hold while we poll for questions. And the first question today is coming from Jeff Van Sinderen from B. Reilly. Jeff, your line is live.
spk01: Hi, everyone. Joe, the numbers you just gave, those were the FY27 targets. Did I get that right? The 245 to 265 in revenues and the 16 to 19 in EBITDA. Is that right? Correct.
spk07: Yeah, correct.
spk01: Okay. Just want to clarify that. And then maybe just kind of shifting and realize there can always be things that kind of move around in bookings and so forth, just kind of nature of the beast. But just kind of best guess you have at this point as far as business mix in Q4. And then I don't know if Terry wants to weigh in on this, but consolidated gross margin that we might expect for Q4. And then I guess any guidance you could give us for Q4 on OPEX, and realize you're not giving guidance on this, but maybe early thoughts on revenue growth, gross margin, OPEX for the fiscal year that's about to begin. I realize there's a lot of questions packed in there.
spk07: It's hard to keep track of all those questions within questions there, but I guess I'll just start off, and I'm going to pass it to Kerry. But I would say that we, as I already mentioned, in our industry, bookings tend to be very lumpy. Actually, as you'll recall, for the last several quarters, our bookings have fallen within a fairly small range, which has actually been very unusual. So the experience that we had in the third quarter is much more typical of what we'd expect to see across the industry. And there were a couple large bookings. which we didn't receive and didn't record in the December 31 period that will fall into the fourth quarter. One or two of them may also fall into the first quarter of our new fiscal year. So, again, we're not going to provide any guidance, but we expect to have very strong bookings in both the fourth and the first quarter. And I think just talk at a really high level regarding mix. We would expect to see healthy bookings of both a services nature and and then also a product, Nature. And I'd further add that we would expect to see a lot of the services bookings to have a high annual recurring revenue content to them. But anyway, with that, I'm going to, Kerry, if you don't mind, I'm going to pass it to you to respond to Jeff's kind of more specific financial questions.
spk02: Sorry, come off mute. Hi, Jeff. And I may have missed some of them, so repeat if I don't respond to something. With regard to the gross margin expectation for the fourth quarter, it should be stronger than what we saw in Q3, and I would say somewhere in the range of a couple hundred basis points improvement. And I think we would expect for that to be primarily product mix driven and then continued improvement of our – labor utilization and labor capacity and utilization in contrast to, you know, subcontractor labor where we don't really get a markup on it. I think you asked about some expense guidance. And in the G&A category, I'd expect us to be, by the time we finish the year, we ought to be in the 13 to 15 percent of revenues range. This would be primarily normal inflationary increases, and then that's the line item where the litigation, the unique litigation cost comes through. Also, by the time we finish the year, we expect sales and marketing to be in the range of 14 to 15 percent of revenues, and then R&D, again, would be in the 5 to 7 percent of revenues range for the entire year. Kind of you'd have to come back and back calculate the fourth quarter itself, but that's how we would look at the year finishing out.
spk01: Okay, great. And then, sorry, go ahead.
spk07: Yeah, Jeff, I was also just going to say before you leave us, I was just reflecting on your initial question about our Vision 2027 targets and And I just wanted to confirm that the expected revenue range in our fiscal 27 would be between $245 and $265 million in revenue. And that's on a strictly organic basis. But I think you also made a reference to EBITDA. And I wanted to make sure that I was clear. that our expectation would be EBITDA margins in the range of 16% to 19% as opposed to absolute EBITDA in the range of $16 million to $19 million. I just wanted to make sure that was very clear.
spk01: Okay, thank you. Good point. I'm glad you clarified that. And then just any early thoughts, and again, I realize you're not giving guidance on this, but any early thoughts on the fiscal year that's about to begin today in terms of, I know you spoke to sort of above industry growth rates. Is the next fiscal year a year in which you think you would be running an above industry growth rate? And then maybe, you know, should we anticipate gross margin improvement, further incremental gross margin improvement in the new year and then leverage on OPEX to get to substantially higher adjusted EBITDA margins?
spk07: So, Jeff, we go through this every year and I appreciate your tenacity, but, you know, we obviously don't want to provide fiscal 25 guidance at this point. We'll certainly do that on our next earnings call. But with respect to just kind of baselining on kind of industry growth rates, I do want to remind everybody that, you know, we believe that historic average growth rates in our industry are in the range of about 8% to 9%. And so I just want to be clear that even at the midpoint of our current guidance, which is 10%, we would be growing above growth rates. And again, the average growth rate, if you consider last year's actuals and the midpoint of our current range, over the two years, we're averaging about 13.5%, 13.6% rate of revenue growth, which is, you know, more than 50%, you know, higher than the historical average growth rate. So I want to be very, very clear about that. But anyway, I think you're bigger. The other part of your question is, do you expect to see some kind of a step up in your rate of growth in FY25? And again, we'll go through our guidance, you know, on our next call. But overall, you know, we feel very optimistic about, you know, our fourth quarter and first quarter bookings, which should set us up for some kind of a step up year over year in terms of our annual growth rate.
spk01: Okay, great. That's really helpful. I appreciate you taking all my questions. I'll take the rest offline. Thanks. Thanks, Jeff.
spk00: Thank you. The next question is coming from Mike Lattimore from Northland Capital Markets. Mike, your line is live.
spk06: All right. Thanks, Jeff. Good to see the strong profits here. I guess on the fourth quarter bookings, it sounds like you're expecting strong bookings there. If this $10 million deal ends up in the first quarter, will you still see strong sequential bookings?
spk07: Yes, we would expect to have strong bookings in the fourth quarter regardless. And to be clear, it wasn't only that one order that slipped from the third quarter into the fourth quarter. There were actually a handful of relatively large ones. That particular one is not only large, but we wanted to offer that additional commentary because it's very clear that we'd expected originally to receive that order in the December 31 period, and then subsequently we got the notice of intent to award even just last week. So I just thought it was a very specific thing that we could reference to help people understand how some of these things tend to slip. Even a few weeks makes a big difference. But again, I want to be clear that was not the only order that pushed from the third quarter into the fourth.
spk06: Yeah. The pipeline sounds strong. I don't have a number from last year. Do you know, like, is that up materially from last year, that $650 million pipeline?
spk07: Yes, it'd be up substantially.
spk06: Okay. And then on the service attach rate on the sensor deals, how is that trending? What are you seeing there?
spk07: Yeah, it continues to be really strong. I don't have that number at hand. I'd be happy to get it to you following the call. But my expectation is that it would be consistent with what we've been experiencing over the last couple quarters, which has been in the 20% to 30% range. Yeah. And then...
spk06: is the labor availability, um, is labor availability loosening generally? It sounds like you guys are at least being able to hire internally, but what about just kind of among your subcontractors and customers and so forth?
spk07: Yeah, that's a good question. So, um, you know, as I talked about, uh, the late on our last call, you know, our impression is that generally the labor market does seem to be loosening. Um, We had, for some period of time, had a very difficult time hiring software developers, for example. There have been a lot of publicized stories about big tech and small and medium-sized technology companies. In some cases, some reorganizations. which has resulted in some job elimination, and also just kind of reducing their hiring plans. And that's certainly benefited us. We've definitely seen the availability of that kind of talent improve. The area where things still remain tight is traffic engineers, which is something we talked about previously. And if you look at the USDOT's research, there's still particular shortage of talent broadly in the transportation market, and then more specifically with respect to traffic engineers and civil engineers, because we're just simply not seeing as many people graduating from those programs today as we did 5 and 10 and 15 years ago. So you have more people competing for a relatively small pool. But one of the things that we've introduced and we talked about on a prior call was the it's various activities to try to source that kind of talent from international markets. And we're definitely finding that to be successful. And as I mentioned, I didn't go into a lot of detail, but we did see an improvement in our labor capacity in the December 31 period. And we have a very healthy pipeline of applicants with, you know, and we have obviously internal expectations in terms of how many of those we're going to be able to convert to new employees. And so our expectation is we'll continue to see an improvement in our labor capacity in our fourth and our first quarter and even beyond. So to answer your question, in some respects, we see the market loosening. In other respects, we actually just think it's, you know, certain tactics that we've, you know, undertaken are starting to bear fruit, and that's improving our position, even though I do think that the The availability of traffic engineering talent in particular remains very tight.
spk06: Okay. Makes sense.
spk00: Thanks very much. Thank you. And once again, it is star one if you wish to ask a question today. And the next question is coming from Ryan Sigdahl from Craig Hallam Capital Group. Ryan, your line is live.
spk03: Hey, guys. Good afternoon. Not to beat a dead horse here, but on the deferrals with the bookings, I guess, what's the underlying reasons for the delays? Because I just went back many, many years and kind of skipped COVID years. But it seems like there's always kind of some that slip, some that come in. And it's usually pretty consistent from a booking standpoint, quarter to quarter. So I guess, here's the underlying reasons. And then second to that, any impact from kind of uncertainty with federal government funding bill and getting the stopgap and not a real permanent one yet?
spk07: Yeah. So I think that's kind of interesting, Ryan, because I don't think that we've historically reported enterprise-level bookings. I think that if you went back through prior periods, we did talk about our services bookings, but I'm not sure whether we provided a combined, a consolidated bookings figure. So I think it might be hard for you to compare those things, but perhaps I'm wrong. But anyway, our internal view is that particularly, you know, we've seen a high degree of variability in like our product bookings. It's associated with our sensor bookings and some of our third-party products. And so our experience in the December 31 period wasn't really different than what we saw pre-COVID. But anyway, as I said, there were a couple of large bookings that were delayed for various reasons, and because of their relative size, it had a big impact on the total bookings number. And there are very specific things that I won't belabor regarding each of those individual bookings, but I think to your broader point is that some degree of budget uncertainty, you know, has that had any sort of an impact? And I would say that probably at the margins it has. I mean, if I were to go, I could walk you through each individual instance, there are like, again, particular things that occurred. But, you know, if you try to distill that down to sort of what's happening, I'd say that, you know, at the margins, there's a slight degree of hesitation at the state and local level as they're trying to understand, you know, what the federal budget landscape looks like. Again, if you look at the total amount of spending in the country, over 80% of it is coming from state and local revenue sources. So it's not like the federal government represents the majority of the funding. But that being said, some of these state and local agencies not knowing what the status is of some of these federal funds, you know, that can cause you know, at the margins, you know, some hesitation. And so we did see that. But I think that the bigger issue is it really goes back to the staffing point that, you know, we talked about previously. It's simply there's a shortage generally of transportation labor, and then more specifically traffic engineering, civil engineering, talent, some of which would logically be playing program management roles for these various state and local agencies. And so what's kind of broadly happened is the federal government's increased the amount of federal funding substantially by 50 in some cases, depending on the specific category, as much as 100% from what the historical level has been. But state and local agencies were not able to increase their employee base by 50 to 100% in order to be able to move all those funds through the pipeline. And so there are delays, and to some degree it has to do with the uncertainty, but I think the bigger factor is like right now there just aren't enough program management staff, most of whom would typically have traffic engineering backgrounds, to be able to program that funding and then distribute it to third parties like ITERAS. As much as the agencies are attempting to do that, we do continue to see that there are delays and they sometimes are not able to deliver against their best estimates that they provide us in terms of when to expect orders.
spk02: Joe, one other thing for Ryan as far as the unevenness or the lumpiness in the bookings. I think over time, the company has focused more and more on the large companies. contract opportunities. And so as a result of just having a population of collection of all smaller deals, there's bound to be more volatility based on the timing of these specific large projects. And as the company continues its focus on that end of the opportunity scale, it's also going to result in some of the volatility quarter to quarter.
spk07: Agreed, Kerry. I appreciate bringing that up. And Ryan, that is something that we have, I think, talked about routinely on these calls, that as we focus more and more on some of these large deals and we have more exposure to a relatively small number of very large transactions, we've tried to tell people that they should expect to see some degree of lumpiness, which is what occurred in the December 31 period.
spk03: Yep, makes a lot of sense. Just hadn't been as evident until this quarter, but makes sense. Switching over, curious on the Philippines, I guess, how that contract culminated and what the international strategy is going forward for Iteris.
spk07: Yeah, sure. So we've, as I mentioned, it kind of has to do broadly with just the amount of market visibility that we have in the North American market. And so to be clear, there isn't somebody in like Cebu, Philippines that necessarily knew about us. But what is happening is international development banks and global construction firms. that operate on a worldwide basis, and obviously like the World Bank, which is based in Washington, D.C., and other global construction firms that have a big presence in North America, we're on their radar screen. And so it's those entities that are bringing us into these kinds of opportunities. With respect to the Cebu opportunity, that is partially funded by the World Bank, and there's someone in Washington, D.C. aware of the work that we've been doing in North America that approached us about this opportunity. And, you know, we thought it made strategic sense and also we're glad to help the Philippines.
spk03: Good. Last one for me, uh, the all state partnership, anything you can comment from, I guess, uh, financials or impact to Iteris.
spk07: Yeah. So, um, It's an interesting partnership. We're obviously super excited about it. So in the initial phase, what we're doing is we're getting access to certain data sets that the Allstate company has. We use that to enhance our analytics, supplement our own existing data sets. And actually, it's Some of that data is critical to the probe-based SPM product. That's a product release that I mentioned is going to be available this quarter, actually, we're introducing to the market. And so the all-state relationship was essential to being able to launch that on time. Additionally, this relationship and the underlying data sets, we think, is going to provide access to other markets beyond the the public sector. And as we've mentioned previously, you know, some of those markets include the insurance sector. And, you know, we do believe that the combination of, you know, these various data sets, including the Allstate or Arity data, in combination with some of our data science expertise and other domain knowledge, will allow us to be able to package some of the this data and produce insights that we think will have value, again, to various markets beyond the public sector, including the insurance market. Great. Thanks, guys. Good luck. Thanks.
spk00: Thank you. The next question is coming from Tim Moore from EF Hutton. Tim, your line is live.
spk04: Thanks, and half of my prepared questions were already answered, but I really kind of want to just delve in a little bit more to – what you're maybe noticing with customer conversion timing and their behavior and implementation. I'm just wondering, do you think it's a slower start to this calendar year, or do you think it's maybe because some of the agencies are taking longer because you're cross-selling them a larger ticket order value than a few years ago?
spk07: Those are great questions. I do think, and we've tried to kind of make this point maybe not very well, but As we do pursue more and more of these large transactions, by definition, they're more complex. And to your point, Tim, you're right. Being more complex, the evaluation process gets extended. So that is a phenomenon that's occurring, and it is impacting the business. So I think that that point is correct.
spk04: Good. That's helpful. And, um, you know, I know Kerry started addressing, um, some of my next question earlier. And I know Joe, you mentioned the traffic engineers, uh, shortage, but, um, you know, something I've always kind of watched you in just having been on the buy side, knowing that, you know, outsourced labor and subcontractors are usually a margin drag, but, um, you guys have been making great progress on that with the consulting labor capacity. Um, you know, I know it was a drag, you know, last winter and then even the spring this year on your gross margin, but, um, Any way, you know, to just ballpark or give us a rough estimate of maybe what inning you're in or percentage-wise and maybe getting fulfilled with the internal consultants, you know, talented element they've been working on. You know, you're always going to have some contractor, you know, work every quarter, but just maybe are you like two-thirds of the way there to be pretty happy and fulfilled on that? Or you think it's another quarter or two to kind of nail that down and not need to be as reliant on the subcontractors?
spk07: Yeah, so I'll – and then, Kira, maybe you can talk about it. And I guess there are two points that I want to make. One is that, you know, we expect our consulting business to continue to grow. And as a result, you know, we not only need to solve for the current labor capacity requirements, but for future labor capacity requirements, right, as the business continues to scale. So, you know, therefore, this effort is going to continue for probably at least the next two to three four quarters until I think we do get to a point where hopefully there'll be some broader loosening in the labor market and it'll get a little bit easier. So, you know, just to sort of manage expectations, I think we'll continue to talk about this for at least the next four quarters. But the other bigger point that I want to make is when you look at our services gross margin, the bigger opportunity, you know, for material improvement is actually going to be as our software-as-a-service and our data-as-a-service revenue increases because the fixed costs for those services are fixed. And we expect to see significant cost leverage as we add every sort of incremental million dollars in SAS and DAS revenue. And so that's what's going to really drive a change in our services gross margins. But, Kerry, I don't know if you want to add anything additional.
spk02: I don't think so. I think You know, your comment that you just offered on the SAS business is probably the most important one with regard to future trajectory of margin growth on the services business. The labor capacity, the internal labor capacity, I would agree with Joe. This is going to be an ongoing effort, and I think it's going to be an effort that continues, you know, throughout probably at least the next four quarters before we can say we've reached a point where we're more satisfied with the staffing level that we're at. There's going to be some investment in these people up front also, Tim, so they're not going to hit the ground with as much productivity as they will be after they've had a little bit of time under their belt with us. But nonetheless, even at the beginning as you're displacing subcontractor labor, there's still going to be some margin upside for us there.
spk04: Thanks for that timing update on the talent development. That's really good. I know I've asked about that a couple quarters ago, but this is a really helpful update, and it's a great reminder of the incremental staff margin mix, I mean, because it's such a step-up incremental margin, almost a hockey stick as you get to the operating scale and revenues there. So my last question is really around the acquisitions update and, you know, the funnel update, and just related to, you know, the international growth comments you kind of gave earlier today in the Philippines. Do you think that the target to do any acquisitions is still going to be solely in the United States near term?
spk07: So I'll start out by saying we're only looking at international opportunities opportunistically, as I said, or situationally. It's not to say that we would never do an international acquisition, but the opportunity in front of us in the North American market is so... substantial, that that's really what we're focused on. And most all of the acquisition opportunities, they're currently on our radar or in North America. Kerry, I don't know if you want to offer any additional comments with respect to the status of our acquisition activities.
spk02: Well, I think, and this is really a continuation, I think, of Comet's last quarter to the pipeline of opportunities. you know, continues to be fairly rich. And so I think that our view of kind of overall of the business accomplishing or closing a transaction kind of once every 12 to 18 months is probably still a fair target. I think the We've talked about kind of the mix of businesses that are out there and some of the challenges. The SaaS businesses still have a challenge with regard to valuation or pricing relative to what our multiples are at, so we have to be very cognizant of that. And they tend to be much smaller, and therefore time-consuming. And even if they can augment our IP in some way, it's still pretty typical. These are small, typically small, kind of venture capital-backed businesses, pre-revenue or early revenue stages, and therefore still relying some cash support along the way. So we're still focused on trying to ensure that whatever deals we do, that they will be immediately accretive. And the marketplace of potential opportunities really hasn't changed a whole lot from that perspective. But nonetheless, The pipeline of possibles continues to be, I think, pretty full, and so we're actively looking at things as we sit here today.
spk04: Great. Well, thanks, Joe and Kerry, and that's it for my questions.
spk00: Thank you. That concludes today's Q&A. I would now like to turn the call back to Joe Bergera for pre-submitted investor questions.
spk07: Super. Thank you, operator. Yeah, I'd like to address two questions, sort of, that we received prior to today's call. The first question from an investor was, what steps is ITERIS taking to assure and show meaningful progress towards achieving the company's Vision 2027 target of 16 to 19 percent adjusted EBITDA margins? And in response to that question, I want to reconfirm, you know, the management, we are extremely focused on delivering EBITDA margins and improvements. And of course, we just announced that our nine-month adjusted EBITDA represents an $18.1 million improvement year over year. As we look to 2027, we're pursuing many initiatives to expand our adjusted EBITDA margins. But I want to share some specific color on four drivers that, in our opinion, represent meaningful levers for adjusted EBITDA margin improvement. Some of these we've already talked to in response to some of the analyst questions. But first, one area for improvement is related to cloud infrastructure and data acquisition costs for our software as a service and data as a service solutions. As I noted just a moment ago, those costs are largely fixed, resulting in gross margins that are currently suboptimal because we've got the fixed costs on relatively low revenue. But as that revenue steps up, every million dollars would expect to realize significant cost leverage and associated margin expansion, which, you know, will flow through and you'll begin to see in the income statement. Second, as we've mentioned on various calls, including today's, you know, and even just a couple seconds ago, our current project-based services gross margin or our consulting gross margin has been depressed by, you know, the fact that our internal labor capacity is not at the level that we'd like. We're continuing to make progress on that, and that's going to bear some fruit, obviously not to the same degree as we'll see with respect to the SAS and DAS solutions for the reasons I mentioned. But then the third driver that I did want to also note, we previously talked about, we didn't discuss yet on this call, is that our Vantage Apex product, which is our newest sensor product line, is still relatively new, and the volume on it is relatively low. And that's because it takes agencies time to review and qualify these new products before they can be installed within their respective jurisdiction. And as the volume of the Apex shipments continues to climb, we'll realize various internal efficiencies and begin to capture better volume pricing for certain electronics components that we only use on our Vantage Apex product line. And then there are also process benefits that we'll realize with respect to assembly, test, and shipping of that product line. And then, fourthly, and just broadly, an increase in revenue from various other service and product lines will, of course, improve our overhead absorption. and yield operating expense leverage. So all four of those factors are going to drive significant improvements in EBITDA margins through the 2027 horizon. I'm not going to go into all the specific actions that we're taking to improve our adjusted EBITDA margins, but I do hope that that will give you a view of some of the structural dynamics that we expect to benefit us over the next couple of years. The second question, as I said, I'm going to kind of address that, was can you provide some general comments on Iteris's thinking on M&A, especially given Iteris has a clean balance sheet? And I feel that we kind of addressed that in responding to Tim's question, so I'm not going to belabor that. Anyway, having addressed those two investor questions, and I do want to provide some brief comments about our overall investor relations program. So on that front, before we wrap up, I wanted to just make sure everyone knows that we'll be engaged in various investor outreach activities over the next few months. For example, we will participate in a fireside chat hosted by SumZero on February 14, 2024. Thank you, SumZero, for inviting us. If you're a member of the SumZero community, we hope that you will attend. And then on March 14th, we'll be traveling to New York City for a non-deal roadshow hosted by B. Reilly. And on March 2024, we'll participate in a fireside chat hosted by EF Hutton. And if any of you would like to join us in either of those venues, please contact your B. Reilly or EF Hutton representative. And then on May 15, 2024, we'll participate in the EF Hutton Annual Global Conference in New York City. And on May 22nd and 23rd, 2024, we'll participate in the B. Reilly 24th Annual Institutional Investor Conference in Beverly Hills. Obviously, if you plan to attend either of those conferences, we hope you'll schedule time to meet with us. We'd love the opportunity to talk to you in person. So anyway, one other thing I wanted to share with you, if you didn't already see it, is that on January 10, 2024, we published a white paper on the use of AI in transportation. And if you'd like a copy of that white paper and you don't already have it, It's available for download from our investor site, or you can also contact Todd Curley at Todd at MKRIR.com for a copy. So anyway, with that, I wanted to just say that we're always available to speak with investors. Do you have any follow-up questions after today's call? And if not, we look forward to updating you again on our continued progress when we report our fiscal 2024 fourth quarter and our full year results. So with that, we'll conclude today's call. Thank you.
spk00: Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
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