Iteris, Inc.

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.

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.

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.