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spk06: by a number of variables, we are evaluating various options to enhance shareholder value, including share repurchases to return excess liquidity to ITERAS shareholders. Looking beyond fiscal 2025, we believe ITERAS remains on track to achieve our Vision 2027 targets, especially given the significant progress on our key solutions roadmap and labor capacity initiatives that will support further revenue growth. Therefore, we'll continue to estimate fiscal 2027 revenue in the range of $245 million to $265 million before any additional acquisitions, which would represent a five-year organic revenue CAGR of approximately 14% or more specifically 13.7% at the midpoint. With a substantial increase in annual revenue, we also anticipate progressive benefits from scale to result in fiscal 2027 adjusted EBITDA margins in the range of 16% to 19%. So with that, we'll conclude the prepared remarks and would be delighted to respond to any questions or comments. Operator, do you have any questions from our analysts?
spk01: Certainly. Everyone at this time will be conducting a question and answer session. If you have any questions or comments, please press star 1 on your phone at this time. We do ask that while posing your question, please pick up your handset if you're listening on speakerphone to provide optimum sound quality. Once again, if you have any questions or comments, please press star 1 on your phone. Your first question is coming from Jeff Van Cenderen from B. Riley. Your line is live.
spk04: Hi, everyone. Joe, I know you mentioned, and Terry, you mentioned too, kind of a tough compare here for the first quarter on revenues. But I guess, is there any more color, and I know you said some things about Q2, but any more color you could give us on how you're thinking about kind of the revenue growth progression we should look for this year?
spk06: Yeah, well, Jeff, as you know, we've been just providing quarterly guidance one quarter at a time. But obviously, if you look at the full year guidance and our first quarter guidance, it's obvious that we expect that there's going to be a step up in the rate of revenue growth throughout the year. And again, if you look at it relative to the prior year, please keep in mind that our first The first quarter of fiscal 2024 was an unusually strong period due to the fact that we continued to ship a lot of backlog that had previously built up as a result of supply chain constraints that we'd been experiencing. And then also we had a couple milestone achievements which impacted or led to a substantial amount of services revenue recognition in the period. So that creates a difficult comparison. We also have a couple new products, which I discussed, which we're going to be releasing into market. I want to be very clear that we will be selling and marketing those activities in the first quarter and the second quarter of the current fiscal year. However, revenue recognition for the sensors won't occur until we actually ship those products, which will occur late in the second quarter and early into the third quarter. And that's going to result in like a higher revenue rate of sequential growth and also improved year-over-year revenue growth rates as we progress through the year.
spk04: Okay. That's really helpful. And then can you speak – I know you mentioned the new product introductions, but maybe can you speak a little bit more on the R&D and sales team investments that you've made and kind of how you're supporting the new product introductions?
spk06: Sure. Sure. There is some, I'll say broadly, and then Kerry, I'll turn it over to you to talk to some of the specifics, but there is some external development costs that we're incurring in the third quarter. Following the release of these products, we will not continue to incur those costs, so it's episodic. There's also, similarly, some external launch-related investments that are occurring in the first quarter that to create assets that will be leveraged over the course of the launch programs for these various new products. And so, again, those are sort of episodic expenses and won't necessarily continue going forward. Kerry, I don't know if there's anything additional that you want to add in response to Jeff's question.
spk00: Yeah, thanks, Joe. Jeff, a couple things. Sales and marketing does have a pretty good size variable component to it all because of commissions that are involved as we go to market. So as our revenues continue to ramp up as we progress through the year for the reasons Joe offered, from a nominal perspective, sales and marketing expense should reflect a bit of that curve, although I would expect as a percentage of revenue, we should hopefully keep that expense line relatively flat from a percent of revenue perspective. I would tell you that R&D, we've been progressively investing more and more, notwithstanding the episodic expenses that Joe mentioned last year associated with using outside contractors to help us, we are continuing to invest in resources in R&D to support, you know, continue build-out of our software platform. So, you know, you should expect that the R&D line will continue run higher than it has in fiscal year 24.
spk04: Okay, that's helpful. If I could just squeeze in one more since we're talking about kind of all these different line items in the P&L. Just any help you can give us on gross margin progression as the year plays out. Realize some of these things are lumpy, as you said. You've got new product introductions. perhaps there are some early things around those new product introductions that play into gross margin that are not, you know, that don't continue or you get more leverage as you reach scale on new products. Maybe if you can just touch on gross margin progression for the year.
spk00: Yeah, to be quite candid with you, Jeff, I was caught a little bit by surprise with the fourth quarter gross margin result. We took some charges that were Fundamentally, it came out of our year-end physical inventory count. And that count, we incurred some shortages that were higher than normal. And I would only comment there that it points to the fact that it was a very thorough process of physical count, but also points to the need for some process improvement as we go throughout the year. So that was a little bit higher number. than normal and we also took some obsolescence charges that were identified during that physical count and we got hit in the fourth quarter of this year with roughly about a half a million dollars worth of charges that were certainly directionally high for this and as I was talking to you last quarter, they weren't expected to tell you the truth. That number is worth you know, like 220 basis points worth of the products area gross profit, which is where all those inventory items, of course, relate. And on an EBITDA margin perspective, those expenses added up to almost 120 basis points of EBITDA margin. You know, with other noise going back and forth, I wanted to point to that item just to say that that really affected kind of the launch pad, you know, looking at Q4 of this year as a starting point. As far as the progression next year, I think that I would expect to continue to see directional improvement in gross profit as we go quarter by quarter throughout the year. I think it's going to be driven by a couple of areas. I do expect our services area gross profits to continue to progress upwards. the improvement in labor mix is going to clearly help and As we've talked about in the past The rate of growth in the software products area is going to start to contribute some leverage to the overall gross margins in the services area In the products area, I would expect the gross margins to be More stable in relative terms, but directionally a small tick upwards as we progress throughout the year, especially if you're looking first half to second half in contrast to a quarter-by-quarter progression there. I think the introduction of the new products that Joe has mentioned we would expect will help provide the incremental improvement in the gross profit there.
spk04: Okay, great. Thanks for all that. I'll jump back in the queue.
spk01: Thank you. Your next question is coming from Mike Lattimore from Northland Capital Markets. Your line is live.
spk03: All right, thanks. Congrats on the great fiscal 24 here, nice profit improvement. Just on the service gross margin, It ticked up really well sequentially, and I know it's from the talent acquisition. But I guess, Gary, you think that can continue to grow from there?
spk00: Yeah, I think the fourth quarter was very strong. There's no doubts about it. And I think as we move into the first quarter of fiscal 25, I would expect the services gross margins to – be maybe even down a small tick compared to the unusually strong fourth quarter. But from that point forward, I think we should continue to see progression as we march through the rest of the year. So fourth quarter to first quarter, I would be more conservative on that. But then second quarter on out, I think the improvement in labor mix should continue to bear fruit for us progressively.
spk03: All right, great. Makes sense. And then on the last earnings call, when you were talking about bookings for the fourth quarter, you said there might be potentially a $10 million deal. I guess, did that close in the quarter, or is that still in the pipeline?
spk06: Yeah, so I'll answer that, Mike. So, yeah, one of those did close. That was the OCTA deal, which was just under $10 million. I will say that we are tracking a number of other very large orders of similar magnitude to the OCTA contract. They continue to kind of move around, you know, so that the timing is somewhat unpredictable. But, you know, we do expect to close them in the relatively near future. There was the possibility when we provided our comments on our last earnings call that in addition to the OCTA transaction, there may be another, which could have closed in the March 31 period, but, you know, obviously it didn't. Again, we are continuing to track, you know, that opportunity as well as others that, you know, we do expect to close in the relatively near future.
spk00: Yeah, what do you think about that? Yeah. I'm sorry, when you think about momentum on bookings, momentum of the business, last year had a lot of lumpiness in it. If you take our total bookings for the year of $181 or $2 million, that's about an average of about $45 million per quarter. There was only one quarter out of four last year that was close to that average, so it was either higher or lower, but but quite lumpy, so when you look at the first quarter of this year, it's a tough comp against the first quarter of last year, again, because of the high and low amplitude that occurred quarter to quarter. But as we've mentioned more than once, Mike, as we keep looking at some of these larger deals, I wish we had perfect foresight on the timing of some of these, but to have some timing... you know, affect us here is something to be expected.
spk03: Yeah, no, it makes sense, makes sense. And among those larger deals in the pipeline, do they skew more towards product or service?
spk06: It's actually a mix of both, Mike.
spk03: Got it. And then did you say that you expect NDR to be 110% this year? I didn't quite get that.
spk06: Correct, yeah. Our software NDR was 105% in fiscal 24, and we expect that to improve to about 110% in fiscal 25.
spk03: Okay, great. Very good. And then just curious on the TeleNav announcement, can you sort of just highlight, you know, why you won that deal and, you know, what the differentiation was?
spk06: Yeah, sure. It really came down to data quality. And as we've talked about, we think we have a very unique, very valuable, highly curated data set, mobility data set. And whenever we do a transaction with a commercial entity, they do extensive comparisons to other data providers. And you know, almost always, you know, when they put us, you know, us and other vendors through, you know, that detailed data evaluation, we always end up coming out on top. And again, that's because, you know, our mobility data sets, you know, we draw upon a variety of different data sources, unlike a lot of other you know, vendors that really are largely relying on a single source. And then we go through a lot of effort to, you know, validate that data and ground truth test it. And so we're not surprised when, you know, whenever we do like a side-by-side comparison, we come out on top. But anyway, at the end of the day, that's why we won that deal. It was certainly not a price. It was due to data quality.
spk03: Okay, great. Very good. Thanks very much.
spk01: Sure. Thanks, Mike. Thank you. Your next question is coming from Tim Moore from EF Hutton. Your line is live.
spk02: Thanks. It was nice to see the new orders up 20%. That was impressive, Joe and Carrie. I was just wondering maybe, you know, I know Joe's touched on this twice. Can you talk a little bit more about the Tuesday and the Simutoma Electric Industries news announcements to double the pedestrian detection addressable market? And, you know, what kind of enhanced features are maybe coming over from its own Japan safety success.
spk06: Yeah, sure. So in the United States, we're actually not particularly advanced in terms of pedestrian detection. I think a lot of you guys, if you're just in your own personal lives, it's probably not unusual for you when you're standing at an intersection you'll see that there's a push button at that intersection, which you'll press to alert the signal controller of your presence. There are a lot of problems with that very outdated approach. In the Japanese market, where there's just an unbelievably high level of pedestrian traffic, in fact, Japan is known for having more pedestrian traffic than any other country. they have, you know, they recognize that, you know, that push button is just not an adequate device. And so Sumitomo has invested over the course of a number of years in a very, very advanced radar sensor, which can be used for very, very precise pedestrian detection. And I don't want to go into all the details, but it's a very difficult thing because you need to understand, like, intent and, you know, speed and trajectory of pedestrian movement. And you also need to be able to distinguish unique individuals when you've got like a large group of people standing at an intersection. So it's very, very complex. Anyway, Simitomo has developed what we believe to be really the best in class, I mean, on a worldwide basis, pedestrian detection sensor. We've been in discussions with Simitomo for some time about introducing that sensor in the U.S. market. We're integrating that into our clear mobility platform and into our detection systems, which will be deployed at intersections with this additional sensor, which we think will dramatically improve intersection detection, pedestrian detection at signalized intersections. But that same device can also be deployed at non-signalized intersections, including like mid-block crossings, which are more and more important I'm sure a lot of you in your own personal lives will see that they're like lights and other indicators at these various mid-block crossings, which get lit up when pedestrians are present. And again, today, those are only being activated when someone actually pushes the button. And so with this new sensor, we'll be able to do that without requiring people to activate the sensor, which is going to really revolutionize the way pedestrian detection occurs in the United States. Now, with respect to why does that increase, you know, our addressable market, it's, you know, our intersection detection products today are only sold into intersections, you know, that have signals. But, you know, this new device, you know, is applicable at other intersections which may not have traffic lights and also at mid-blocks as well. And so it significantly enhances the total number of intersections where we can deploy our technology today. And that's what results in the significant increase in our addressable market.
spk02: That was a great color, and it was nice to paint that picture. I think I grasped that pretty good. You know, I was just wondering, you know, in the U.S., you know, what states, you know, like Arizona, are you expecting to maybe enter more over the next year? You mentioned that win.
spk06: Yeah, sure. Well, again, it kind of depends on, like, the specific offer. So our detection products have significant market share on the West Coast and throughout the Sun Belt. And so as we've talked about previously, there are lots of opportunities for us to expand our penetration into the Northeast and the central regions. So that's a big focus for us. With respect to our consulting services, there's sort of still yet a different footprint. Our software products, are different, and those are easy to sell on a national basis. They don't require that we actually have consultants like boots on the ground like our consulting services and sometimes our detection products do. So that's more evenly distributed across the country. But anyway, so again, it kind of depends on the specific product. But I'd say in general, geographic areas that we're very focused on trying to continue to develop would still be the Southwest. where there's significant growth and substantial opportunity for us. The Florida market, where we have a substantial presence, but it's a massive market. And then markets where we're underserved or underpenetrated today, I'd say it'd be the central region and the northeast. And we're pursuing a variety of actions to increase our presence in those markets, including continuing to optimize our distribution channels, putting feet on the street, and then also entering into various marketing arrangements or co-marketing arrangements with local firms that have a local presence but lack the breadth of capabilities that we have. And so we see that as an opportunity for us to access those markets through these unique local partnerships that we're developing.
spk02: That's terrific. And my last question is regarding that deployment in the Philippines you announced last month. Are there any more countries or international cities part of that USTDA-funded ITS modernization project that you can jump into DeWayne maybe over the next few questions?
spk06: Yeah. Yeah, great question. And absolutely, yeah. And by the way, what all this stems from, as we've talked about, ITERIS originally developed the nation's ITS architecture, which then became the Connected Vehicle Reference Information Architecture, and is now ARCIT, the Architecture Reference for Cooperative Intelligent Transportation. That standard is not only a national standard, but it's effectively become a global standard. And as a result, ITERIS has really a worldwide or recognition as a leading vendor of ITS planning capabilities. And therefore, we're seeing a lot of inbound interest from various international markets in providing similar consulting services to those foreign countries as we've been delivering here in the U.S. for some time. And as a result of that inbound interest, we've been working with the U.S. Trade Development Agency to create a contract mechanism to make it easy for these foreign countries to procure our services. We would expect to continue to see more interest from various international entities, and we would expect to continue to announce more contracts like that.
spk01: Thanks, and that's it for my questions.
spk06: Great.
spk01: Thank you. Once again, everyone, if you have any questions or comments, please press star, then 1 on your phone. Your next question is coming from Alan Klee from Maxim Group. Your line is live.
spk05: Yes, hello. For your as-a-service offerings, what would you point to as kind of the driver for increased attach rates?
spk06: Yeah, so it depends. But I'd say, first of all, in general, we're just getting better at cross-selling. Our market historically has been super fragmented, and most agencies have just been in this model of buying point solutions. And we're trying to disrupt that model. And I think we've gotten pretty effective at offering... you know, a compelling value proposition and also, frankly, overcoming objections, you know, which has allowed us to increase, you know, increasingly sell these, like, larger integrated solutions where we're bundling various capabilities. You know, we expect to continue to do that. The great thing about our market is our public sector market, as opposed to our private sector market, the public sector market, our agency customers don't compete with one another. And so they're more than happy to share best practices with one another. And so as we're successful in executing on this model and then demonstrating value to those agencies, those agencies become great customer references for us. And so we see other agencies follow suit. So we think we're really at the early stages in terms of the development of this kind of alternative procurement model. But I'd say at the end of the day, Alan, it really comes down to the fact that we've just gotten a lot better at articulating the value proposition to the customers. Our customers are responding to that, and it's beginning to snowball to our benefit.
spk02: Okay.
spk05: Thank you. And then just a small question, but related to two things you said about costs during the quarter. Well, one of the things you said during the past fiscal year that you had a negative impact from adjusting to data contracts, but that will be positive going forward. I was just trying to understand that a little better. If you adjusted them to lower contracts, why was it a negative impact? And then the second thing, litigation costs related to an older lawsuit. How do you think about how long that's going to last for? Thank you.
spk06: Yeah, sure. So the data costs, the background there is that we had an agreement with one company called WeJoe and another one called Autonomo for connected vehicle data. Both of those companies were D-SPACs. They had very interesting business models, and we probably were some of their earliest customers and entered into agreements with them to get access to this connected vehicle data. Ultimately, both of those businesses went bankrupt. Because they were relatively... early-stage businesses, and we were kind of their first marquee customer. We were able generally to negotiate sort of preferential pricing with them, at least for the first 12 to 24 months. Over time, there would have been price escalations in those original contracts. But as it turns out, they both entered bankruptcy, were unable to continue to provide mobility data to us. So we went into the market, and we entered into agreements with alternative providers, including with Arity. But because of the circumstances, we weren't able to negotiate as favorable pricing up front with these other entities. But it was an all-you-can-eat multi-year agreement where we were able to lock in pricing. So there was a negative impact to our cost of goods sold in fiscal 24. But in fiscal 25, we'll benefit from the fact that we've got this all-you-can-eat fixed license agreement with alternative providers. And so that's the dynamic that Carrie was referring to. And that will continue to benefit us going forward, again, because these are multi-year agreements with fixed costs, which was unlike the prior agreements that we had. And then with respect to the litigation cost, Kerry, maybe I'm going to punt that to you and see if you wouldn't mind answering Alan's question.
spk00: So, Alan, I'm sorry if I missed part of the question. The cost we incurred this year was roughly $2.8 million. The cadence going into next year, Based on our current expectation of the trial date, which is going to be sort of going into the fall of next year, we would expect there to be a spike in expenses probably in our Q2 as all the pretrial preparation and filings and everything else occurs. And we certainly would hope that as a result of the trial you know, we can put this thing in the rearview mirror favorably for us.
spk06: And Kerry, I'd just add for the benefit of people who have been like following some of our prior comments regarding this trial, we had previously anticipated that the trial would actually occur in April. And because of the court's calendar being very full, it was pushed to September. Unfortunately, when you push out litigation, it seems to create opportunities for lawyers to find like new motions and other things that they can do, you know, which ends up sort of increasing the cost. So, obviously, our desire is to get to trial as quickly as possible, and as Kerry said, put this behind us. But anyway, just in case anyone remembers any prior comments that we made, the trial date did move from April to the current estimated trial date is now September.
spk05: Great. Thank you very much.
spk01: Thank you. Mr. Bouchera, there are no more questions from covering analysts. Would you like to address any investor questions before providing your closing remarks?
spk06: Yes. Thank you, operator. I would like to, because we actually did receive one investor question. And that question is, how is Iteris positioned to work productively with Google's Green Light initiative? And also, can you comment on any strategic position and collaboration opportunities with Google? Which is a great question. For those of you guys who don't know, there's been some recent media reports and stories regarding Google Greenlight. So anyway, I would just say that we have ongoing collaboration with various stakeholders actually across all of Alphabet, including Google. And I characterize that collaboration as very constructive and very complimentary. Based on our collaboration with Google, but also based on our dialogue with agencies that including some that are referenced in the reporting on Google Greenlight. I just want to say that we understand that Google Greenlight is a lab project within Google. It is not mainstream. Google Greenlight is used occasionally for research purposes associated with signal timing studies by really only a handful of agencies. And most of them, if you look at the reporting or do any actual research on it, you're going to see that most of them are international. To be clear, a signal timing study is a planning activity. It's very, very different from signal operations, and it's especially different from intersection detection and signal control. Google Greenlight is not a production-ready commercial solution. And just so everybody knows, we never encounter the product in any competitive procurements. That said, we do feel that the concept of Google Greenlight does validate the benefits of our ClearGuide signal trends software in particular. But I want to note that signal trends is production ready. It's a commercial solution and it's being deployed at thousands of intersections. Additionally, I want to note that the recent stories about Google Greenlight replacing traffic signals, while they're kind of titillating, Those stories conflate technical and operational concepts, and they represent a basic misunderstanding of actual signal operations. So therefore, the bottom line here is I want to make sure everybody understands that we do not see Google Greenlight as a competitive threat. And again, we're engaged in various collaboration opportunities across Alphabet, including Google, and we believe that the companies are highly complementary, not competitive. So anyway, having addressed that question, I also wanted to just kind of briefly talk about our investor relations program. Just so everybody knows, we'll be participating in the Northland Virtual Investor Conference on June 25, 2024. And so if you guys would like to speak to us, please contact your Northland securities representative. Additionally, we're planning to be engaged in various other investor outreach activities this summer, and there'll be more communication coming about that. And then, of course, we're always happy to speak with investors should any of you have any questions for us. So please don't hesitate to contact us. Anyway, if we don't speak with you beforehand, we look forward to updating all of you again on our progress when we report our fiscal 2025 first quarter results in actually just a few weeks. So anyway, with that, we'll conclude today's call. Thank you, everyone.
spk01: Thank you, everyone. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.
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