Iteris, Inc. (NASDAQ:ITI) Q4 2024 Earnings Call Transcript - InvestingChannel

Iteris, Inc. (NASDAQ:ITI) Q4 2024 Earnings Call Transcript

Iteris, Inc. (NASDAQ:ITI) Q4 2024 Earnings Call Transcript June 13, 2024

Iteris, Inc. beats earnings expectations. Reported EPS is $0.00226, expectations were $.

Operator: Good day and welcome to the Iteris Fiscal 2024 Fourth Quarter and Full Year Financial Results Conference Call. At this time, all participants have been placed on a listen-only mode and we will open the floor for your questions and comments after the presentation. Please note that this event is being recorded. I would now like to turn the conference over to Todd Kehrli of MKR Investor relations. Please go ahead.

Todd Kehrli: 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 fourth quarter and full year ended March 31, 2024. Joining us today are Iteris’ President and CEO, Mr. Joe Bergera, and the company’s CFO, Mr. Kerry Shiba. Following their remarks, we’ll open the call for questions from the companies covering sell-side analysts. Then we will answer investor questions that were submitted to the company in advance of the call for the instructions in our press release dated May 30, 2024. Before we continue, I’d like to remind all participants that during this call, we may make forward-looking statements regarding future events or the future performance of the company, which statements are based on current information, are subject to change, and are not guarantees of future performance.

Iteris is not undertaking an obligation to provide updates to these forward-looking statements in the future. Actual results may differ materially from what is discussed today, and no one should assume 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 can 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 investors section of the company’s website at www.iteris.com. Now, I’d like to turn the call over to Iteris’ president and CEO, Mr. Joe Bergera.

Joe, please proceed.

Joe Bergera: Great. Thank you, Todd. And a good afternoon to everyone. I appreciate all of you joining us today. Iteris reported fiscal 2024 fourth quarter total revenue of $42.8 million and fiscal 2024 full year total revenue of $172 million, representing growth rates of 1% and 10% year-over-year, respectively. As a reminder, the fiscal 2023 fourth quarter comparison was unusual, with us shipping a very large level of backlog that accumulated over several preceding quarters in the wake of global supply chain constraints. Therefore, our full-year double-digit growth rate provides a more normalized view of the business. In addition to reporting double-digit organic growth, our fiscal 2024 fourth quarter and full year gross margins improved 558 and 1,063 basis points year-over-year respectively.

In turn, this gross margin expansion and our continued operating expense discipline drove substantial improvement in adjusted EBITDA and adjusted EBITDA margin, increasing year-over-year by $1.4 million or 33 basis points respectively in our fiscal 2024 fourth quarter and $19.5 million or 1,174 basis points respectively in our fiscal 2024 full year. Of course, Kerry’s going to address our profitability dynamics in more detail in his comments. Despite some expected bookings lumpiness in our fiscal 2024 third quarter, customer adoption of the ClearMobility platform remained very strong through fiscal 2024, with Iteris achieving what we believe is a best-in-class revenue-based win rate in competitive procurements of 69%. This win rate translated into record fiscal 2024 fourth quarter total net bookings of $53.3 million, increasing 20% year-over-year and record fiscal 2024 full-year total net bookings of $181.6 million, increasing 7% year-over-year.

We estimate $59 million, or 32%, of our full-year total net bookings will be recognized as annual recurring revenue. This represents a 32% increase year-over-year in total net bookings will be recognized as annual recurring revenue. We attribute these positive leading indicators to our strong product roadmap and commercial execution as well as the distinct advantage of our unique flywheel. In other words, we believe Iteris has and will continue to capture a disproportionate share of the opportunity in our end market because on one hand, our consultants are positioned as trusted technology advisors, and on the other hand, our software and sensors, all of which are recognized as best to breed in their own right, are even more valuable when deployed in combination.

These synergies are powerful differentiators for Iteris, especially since we have aligned our capabilities to our ClearMobility platform, making it simple for our customers to benefit from the full breadth of our portfolio. Due to our strong net bookings, we ended the March 31, 2024 period with a total ending backlog of $123.8 million, representing an 8% increase year-over-year. Our ending backlog and net bookings figures reflect firm customer orders rather than total contract value. The total value of customer contracts, which of course varies from quarter to quarter, averages on an historical basis about 200% of our total ending backlog. Also our backlog excludes a sizable portion, which of course varies from period to period, of sensor bookings that convert to shipments within a single quarter.

At this point I’d like to share some details about the performance of our product portfolio. We reported fiscal 2024 fourth quarter product revenue of $21.6 million and fiscal 2024 full-year product revenue of $91.8 million, representing a 14% decrease and an 8% increase year-over-year respectively. As a reminder, the fiscal 2024 fourth quarter comparison was significantly affected by an unusually high prior year result due to shipping a very large level of backlog that accumulated over several prior quarters. Over the course of fiscal 2024, we believe Iteris won virtually every large competitively sourced detection, fixed travel time, and cellular vehicle to everything, or what we’ll sometimes call CV2X sensor initiative across the country.

Additionally, we continue to improve the attached rate of SaaS and other annual recurring revenue to our various smart sensors at the point of sale. Some notable deals include a new master purchase agreement with Maricopa County in Arizona, which as you may know is the fourth most populous county in the nation, to use our Vantage Next detection system and BlueTOAD travel time sensors, as well as our Vantage Live ClearGuide signals and VantageARGUS CV software for a multi-year comprehensive arterial modernization initiative. A new purchase agreement with the City of Cedar Park, Texas to deploy our Vantage Apex detection system, connected vehicle sensors, and Vantage Live and ClearGuide signal software for a comprehensive citywide intersection modernization initiative, and a purchase order for our Vantage Apex detection system and Vantage Live software from the Coachella Valley Association of Governments in California for the second phase of a region-wide intersection modernization initiative.

Collectively, this handful of new customer agreements represent more than $10 million in future sensor sales. In addition to solid commercial execution, throughout fiscal 2024, we continued to extend the feature and performance advantages of our sensor portfolio. For example, we released a comprehensive managed service branded as VantageCare that leverages edge and cloud services to help agencies better maximize their traffic detection investments, an integrated intersection detection and connected vehicle system, which is branded as Vantage CV, that combines traffic detection, cellular vehicle to everything communication, and connected vehicle safety applications into a single system, a new central control unit for Vantage Next that doubles the number of sensors supported by each in-cabinet processor, API enhancements that enable our connected vehicle sensors to process and publish connected vehicle data packets at massive scale to the ClearMobility platform as well as directly to other ecosystem participants, and new sensor fusion features in both our Vantage Apex and Vantage Next product lines.

Furthermore, we entered into an exclusive technical and commercial partnership with Sumitomo Electric Industries to integrate its advanced pedestrian detection sensor into our ClearMobility platform. We believe this integrated state-of-the-art solution will transform pedestrian detection in the United States and double Iteris’ total addressable market for detection solutions from about $500 million today to about $1 billion going forward and further enhancing our uniquely curated mobility data set. With that, I’d like to review the performance of our sensors portfolio. We reported fiscal 2024 fourth quarter service revenue of $21.2 million and fiscal 2024 full year service revenue of $80.2 million, representing a 22% and 13% increase year-over-year respectively.

The increase in fourth quarter and full year service revenue demonstrates the talent acquisition program which we initiated in our fiscal 2024 first quarter is starting to benefit our labor capacity and services backlog conversion. In fiscal 2024, about 40% of our services revenue was comprised of project-based, in other words, consulting revenue and 53% was comprised of annual recurring revenue from our software as a service, data as a service, platform as a service, and managed services offers. If you look at it on an enterprise basis, ARR represented 25% of our total revenue in fiscal 2025. In addition to the solid improvement in our services revenue, we posted fourth quarter net services bookings of $34.6 million and full-year net services bookings of $103.5 million, increasing 27% and 12% year-over-year, respectively.

As demonstrated by the recent Orange County Transportation Authority order that we announced on March 27, 2024, we continued throughout fiscal 2024 to increase the attach rate of annual recurring revenue to our consulting projects. This capability, which again is unique to the Iteris flywheel, will continue to contribute to further improvements in the growth rate of our annual recurring revenue going forward. In fiscal 2024, we continued to introduce significant enhancements to our software as a service, data as a service, platform as a service, and managed services portfolio that we believe will also drive future annual recurring revenue growth. For example, in the fiscal 2024 second half alone, we released VantageARGUS CV, which is a next generation travel time and connected vehicle data collection and presentation system, ClearGuide Signal Trends, which uses anonymized trajectory data to optimize signal timing without any dependence on temporary traffic count data or communications infrastructure and OpenLR map support for our ClearData contextual mobility data feed, which we recently announced Telenav will use for its Scout Maps application.

So in summary, we’re pleased with our fiscal 2024 double-digit organic revenue growth and significant gross margin and adjusted EBITDA improvement, as well as our strong commercial execution, whether you measure that by bookings, backlog, or our competitive win rate. With the impact of COVID-19 and the associated supply chain disruptions, in our rearview mirror, we believe the company’s fiscal 2024 results validate our business strategy and represent an important inflection point for Iteris. So on that note, I want to turn the call over to Kerry to provide some more color on our fourth quarter and also our full-year financial results, after which I’ll come back and discuss our fiscal 2025 expectations.

Kerry Shiba: Thanks, Joe, and good afternoon or evening, everyone. As you review our fourth quarter results, I encourage you to consider Joe’s comments regarding our full year revenue results when assessing the overall momentum of the business. You may recall that both Joe and I have noted in our last call for the last — in our call for the last two quarters that the combination of seasonality and unusual shipping dynamics stemming from prior year global supply constraints affected comparisons of our fiscal 2024 third and fourth quarter products revenue relative to the prior year. 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 our double-digit revenue growth for the full year, a significant sales pipeline, and record bookings levels, both for the fourth quarter and the full year.

A close-up of a transportation performance measurement system, highlighting the effectiveness of the company's software.

Because Joe already addressed revenue results, I will move down the income statement to the gross profit line. As Joe noted, our gross margin results were markedly improved in fiscal 2024, increasing 558 and 1,063 basis points for the fourth quarter and full year respectively when compared to the prior year. Let me provide some details, first for the fourth quarter comparison, followed by the full year. On a consolidated basis, the fiscal 2024 fourth quarter consolidated gross profit reached $16 million, an improvement of $2.5 million or 18% over last year. The increase was driven by a $3 million improvement in services, which partially was offset by a $500,000 decline in products. The services gross profit improvement reflects the 22% year-over-year revenue increase Joe mentioned, as well as the benefit of a stronger labor mix resulting from increased internal labor capacity.

The fourth quarter decline in products gross profit primarily reflects the 14% year-over-year revenue decline, which as Joe noted, reflects the comparison to an unusually strong prior year. The impact of the product’s revenue decline more than offset a benefit from lower negative purchase price variances hitting the P&L this year. In the fourth quarter of fiscal 2023, we expensed about $2.2 million of negative purchase price variance and expediting fees, which compares to only $100,000 in the current year’s fourth quarter. As you may recall, last year’s negative purchase price variance resulted from aftermarket purchases of semiconductors and other electronics components. Looking at gross margins, the fourth quarter of this year reached 37.4% in the aggregate, an improvement of 558 basis points compared to the same period last year.

Margins were up for both services and products. For services, the increase was 1,024 basis points, while for products, the improvement was 391 basis points. Services gross margin was 31.9% of revenue for the current year and reflects the improvement in labor mix supported by the success of our talent acquisition program, which Joe mentioned earlier. Products gross margins was 42.7% for the current year’s fourth quarter, as 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 and some inventory adjustments. For the full year, fiscal 2024 consolidated gross profit was $64.6 million, almost $23 million or 54% higher than in the prior year. Products drove about 85% of the total gross profit improvement, with just over $15 million resulting from having the supply chain issues behind us, and approximately $5 million reflecting a combination of stronger product mix, higher pricing, and increased volume.

For services, gross profit grew 17% in 2024, as the benefit of higher revenues and improved labor mix were partially offset by higher costs as we had to adjust for the one-time loss of two data providers during the year. Although costs increased due to this adjustment, the structure of our realigned data supply contracts are expected to provide positive cost leverage as our software revenues grow in the future. For gross margins, we reached 37.6% in the aggregate for the full fiscal year 2024, an improvement of 1,063 basis points when compared to the prior year. Margins were up both for products and services, with the overall increase driven primarily by a 1,897 basis points improvement for products. The margin growth for services was 102 basis points.

Products gross margin was 44.9% for fiscal ‘24 and similar to the fourth quarter, primarily reflects the benefit of having last year’s negative cost impact from supply chain issues behind this with smaller improvement resulting from stronger product mix and higher prices. Services gross margin was 29% for fiscal 2024 and primarily reflects the same factors affecting the gross profit comparison. Operating expenses in aggregate for the fourth quarter of fiscal 2024 were 14.5% higher when compared to the same period last year and 449 basis points higher when measured as a percentage of revenue. The increase was largest in the G&A category with just over two-thirds of the increase resulting from the cost of litigated dispute related to a contract signed back in 2015.

These litigation costs are excluded from adjusted EBITDA. We also continued to invest in R&D as well as in sales and marketing to support the product’s revenue increase. For the full year, fiscal 2024 operating expenses were 9.3% higher than in the prior year, but declined 32 basis points when measured as a percentage of revenue. About 54% of the entire increase in total operating expenses and more than the full increase in G&A cost reflects the litigation expenses I just noted. The operating expense increase in fiscal 2024 categorically was most pronounced in sales and marketing expenses, primarily to support the revenue increase. The research and development category reflects increased activity focused on improving our software products. The factors just discussed related to revenue, gross profit, and operating expense fundamentally explain the major comparisons in operating income and net income.

For adjusted EBITDA, these same factors also apply with the exception of the impact of the litigation costs, which as I mentioned previously, are excluded from adjusted EBITDA. As Joe noted, adjusted EBITDA was $2.8 million for the fourth quarter of fiscal 2024, which was approximately double the result for the prior year. For the full year, adjusted EBITDA was $12.9 million for fiscal 2024, an improvement of $19.5 million over last year. Total cash and cash equivalents at the end of fiscal 2024 were $25.9 million, representing an increase of $9.3 million, or 56% over the balance at the same time last year, and $4.7 million higher than the balance at the end of the preceding quarter. Full year 2024 cash flow from continuing operations increased by $15.9 million compared to the prior year.

Investing activities for fiscal year 2024 were $3 million in total, primarily reflecting capitalized software development. I now will turn the call back over to Joe, who will discuss our fiscal 2025 guidance and provide closing comments.

Joe Bergera: Great, Thank you, Kerry. The smart mobility infrastructure management market continues to represent significant long-term opportunities due to historic federal funding that’s been committed by Congress through 2026 and is expected to have a further 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 automated vehicles will continue to drive significant smart mobility investments by state and local agencies as well as by various private sector entities. Given the breadth of our platform capabilities, significant brand equity, and extensive customer reach, we are very optimistic about Iteris’ ability to capture a disproportionate share of this revenue stream.

To that end, Iteris will continue to deliver against an aggressive solutions roadmap with the following major releases planned for fiscal 2025. A new form factor for our latest AI-based detection system that will significantly expand the serviceable available market for Vantage Apex, our most advanced intersection detection system. A new mobility data set that will address various new use cases and will expand the universe of prospective buyers for mobility data. A cloud-connected Edge solution provided on a subscription basis for remote monitoring and management of critical third-party assets deployed across both local and statewide transportation networks. A combination of new cloud and edge applications will expand our connected vehicle solutions portfolio and will drive both product and annual recurring revenue.

And a highly advanced radar-based pedestrian detection system developed in partnership with Sumitomo that will be fully integrated with our ClearMobility platform and is expected to transform pedestrian detection and pedestrian safety in North America. We believe our fiscal 2025 release plan will increase our total addressable market, accelerate the adoption of our ClearMobility platform, and improve the monetization of our expanding mobility data sets in fiscal 2025 and beyond. For example, as noted earlier, the release of our new pedestrian detection system will more than double Iteris’ total addressable market for detection solutions from approximately $0.5 billion to $1 billion. And also, I want you to know that we’ll begin shipping this new system in our fiscal 2025 third quarter.

To capitalize on our release plan, we will continue to improve the productivity of our various sales channels. For example, we’ll further optimize the distribution network for our sensor portfolio, expand our dedicated enterprise sales team that focuses on private sector segments, and enhance our customer success model to both maintain a greater than 95% retention rate, and increase our software net dollar retention rate from a current 105% to 110%. In addition to sales channel improvements in fiscal 2025, we’ll continue to implement various talent acquisition and talent development initiatives to further improve the labor capacity of our consulting teams. This activity will focus primarily on civil and traffic engineering talent, given the supply of such talent remains very tight, even while we have seen some improvement in the supply of software engineering and data science talent.

These talent initiatives will continue to require some short-term investment, but should further accelerate the pace of conversion of our historic consulting backlog and create operational efficiencies as well as enable us to pursue more sales opportunities going forward. Given these dynamics, we expect fiscal 2025 total revenue to be in the range of $188 million to $194 million, representing organic growth of 11% year-over-year at the midpoint. As a result of the increase in total revenue and our continued cost discipline, we also expect an improvement in our adjusted EBITDA margin to be in the range of 8% to 10% of revenue. This represents 150 basis points improvement in adjusted EBITDA margin at the midpoint of the guidance range, even after we continued to invest in talent acquisition and talent development initiatives.

While we’re not providing net bookings guidance, I do want to reiterate that we expect some continued bookings lumpiness over the next several quarters due to the timing of several large pending orders. And I also want to note that our particularly high fiscal 2024 first and fourth quarter bookings result will create some difficult comparisons in fiscal 2025. With respect to our fiscal 2025 first quarter guidance, we expect total revenue to be in the range of $43.5 million to $45.5 million, representing organic growth of 2% year-over-year at the midpoint of the guidance range. This revenue growth rate reflects a very difficult prior year comparison as well as the timing of various new product releases scheduled for the end of our fiscal 2025 second quarter and the start of our fiscal 2025 third quarter.

Due to costs for the associated final development and pre-launch activities related to the release of those products, we expect our fiscal 2025 first quarter adjusted EBITDA margin to be in the range of 5.5% and 6.5% of revenue, representing a 324 basis points decline year-over-year at the midpoint. While we’re not providing fiscal 2025 second quarter guidance at this time, we certainly anticipate sequential improvements in adjusted EBITDA margin as our Fiscal 2025 full-year guidance implies. Due to the forecasted increase of our fiscal 2025 total revenue and adjusted EBITDA margin, we anticipate continued improvement in our liquidity that should provide adequate cash to fund tuck-in acquisitions similar to our purchases of Albeck Gerken and TrafficCast International prior to COVID-19.

At the same time, we believe the public market currently undervalues Iteris relative to some precedent private market transactions where intelligent transportation systems businesses have been acquired at more than 20 times trailing 12-month adjusted EBITDA. Therefore, while our liquidity outlook and capital allocation decisions can be affected by a number of variables, we are evaluating various options to enhance shareholder value, including share repurchases to return excess liquidity to Iteris shareholders. Looking beyond fiscal 2025, we believe Iteris 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 will continue to estimate or we continued 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?

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