Iteris, Inc. (NYSEMKT:ITI) Q1 2017 Earnings Conference Call August 4, 2016 4:30 PM ET
Todd Kehrli - Co-founder &President
Joe Bergera - President& CEO
Andrew Schmidt - CFO
Jeff Van Sinderen - B. Riley & Co
Nick Altmann - Northland Capital Markets
Good day and welcome to the Iteris Fiscal First Quarter 2017 Financial Earnings Conference Call. Today's conference is being recorded.At this time, I'd like to turn the conference over to Mr. Todd Kehrli of the MKR group. Please go ahead, sir.
Thank you, Operator. Good afternoon, everyone. Thank you for participating in today's conference call to discuss Iteris' financial results for its 2017 fiscal first quarter ended June 30, 2016.Joining us today are Iteris', President and CEO, Mr. Joe Bergera; and the Company's CFO, Mr. Andrew Schmidt. Following their remarks, we will open the call for your questions.
Before we continue, we would like to remind all participants that during the course of this call, we may make forward-looking statements regarding future events or the future performance of the Company with 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.
I would like to remind everyone that a webcast replay of today's call will be available via the investor section of the Company's website at www.iteris.com. Now I would like to turn the call over to Iteris' President and CEO, Mr. Joe Bergera. Go ahead.
Great, thank you Todd and good afternoon everyone. Thank you for joining us today. As you saw at the close of market today, we issued a press release announcing the financial results for our fiscal first quarter ended June 30, 2016.
In Q1 Iteris recorded $23.9 million in total revenue, representing a strong 30% year-over-year rated growth. To align with our current operating structure and better - by better visibility the progress of our digital platform, ClearAg, we are now reporting the result of ClearAg and our weather analytics product line as a distinct segment.As such, we've changed the name of our performance analytics segment. We will now refer to the segment as our Agriculture and Weather Analytics segment or Agriculture and Weather Analytics Business Unit. In this regard, we've moved our transportation analytics product lines into our transportation system segment. All segment comparisons have been adjusted to reflect this change.
During the quarter, we saw continued acceleration across the Company. All three of our segments deliver record Q1 revenue resultsIn Q1, roadway sensors reported $10.6 million in sales. This represents a 7% year-over-year and an 18% sequential growth. During the current period, we have received over 550 sales orders, demonstrating continued broad based demand across a large customer set. Southern California, the Midwest, and the Northeast produced particularly strong results in the business unit gross margins were within our normal expected ranges.
As you may remember, due to our new product introduction schedule, we anticipated the roadway sensors rate of growth in the first half of FY 17 would move more in line with the overall market growth rate. Our sensors business continues to have a highly defensible market position based on our overall product superiority; a recognized commitment to customer success, and excellent sales execution. We remain extremely optimistic about this business segment.In Q1, our transportation systems business unit did a fantastic job of converting a sizable backlog growth into recognized revenue.
We recorded $12.4 million in revenue versus $7.8 million in the same prior year quarter. This represented 59% year-over-year growth and 37% sequential growth for the business unit. The Transportation system's BU also continued to win significant new business, securing approximately $11 million in new orders and exiting the quarter with $54 million in total annual backlog.As recently announced, the Orange County Transportation Authority awarded Iteris a $2.1 million traffic signal synchronization project. We also secured large new contracts or task orders with the Texas City College Station, Virginia Department of Transportation, and the Federal Highway administration.
The new backlog continued to represent an overall increase in average project size and a healthy mix of task-base project work, software related services, and business process outsourcing; also referred to as operations and maintenance.We believe our focus on backlog mix over the past three quarters has contributed the business unit's margin expansion. The higher portion of software related consulting services and BPO backlog as well the larger average project size is improving revenue predictability and creating other internal efficiencies.
In Q1, the transportation system segment operating income was approximately $2.3 million versus $900,000 a year ago. In Q1 our Agriculture and Weather Analytics Business Unit recognized over $900,000 in revenue, representing 38% year-over-year growth rate. While we saw improvement in Clear Path Weather revenue, the BU's primary growth engine was our digital agriculture platform, ClearAg, as measured on both the percentage and absolute dollars basis. The business unit's gross margins increased 950 basis points to over 47% compared approximately 38% in the same quarter a year ago.
We continue to expect ClearAg to realize up to an 80% gross margin at scale.In July, we announced Syngenta a ClearAg mobile app to assist its biologics research teams worldwide. Under the terms of the agreement, Iteris will provide weather , soil, crop health and crop growth information directly to Syngenta researchers, whether they're working in a lab are working in a field. This agreement further extends our relationship with Syngenta.
In Q1, we also closed a noteworthy with one of the world's largest professional services companies. Under the terms of this agreement, the professional services firm plans integrate ClearAg's weather contact into the Firm's global business solution. The first deployment is expected to be a nationwide rollout to 140,000 farms across Australia. With the addition of this new agreement, we will have over 270 million wholesale acres under management across 15 different countries, including Australia, Brazil, France, Mexico, South Africa, and the United States.
Now I'd like to turn the call over to Andy to walk through our financial results. Andy?
Thank you, Joe. All right first of all, before I go over our first quarter of fiscal 2017 financial highlights, I'd like to bring to everyone's attention that we will be talking to both GAAP and non-GAAP results today.
Staying consistent with our past calls, I will provide a non-GAAP year of our fiscal first quarter 2017 results that adjusts and highlights management feels are atypical, expenses incurred in Q1 for fiscal 2016 to better present the performance of the Company and to provide a more relevant comparison to current results.Specifically, our non-GAAP results adjust for past period audit fee overruns, financial consulting service fees, and costs associated with our CEO transition.
While Joe was introduced at our great start to fiscal 2017, I'm very happy to report that transitional events that occurred in fiscal 2016, including the CEO and CFO transition among other key events, are behind us. And they are behind us in terms of current period expense. In this regard, our non-GAAP adjustment that relates to atypical expenses applies only to fiscal 2016 for comparative reporting. All said, we did not experience audit fee overruns or financial consulting support fees in Q1 of fiscal 2017 as compared to incurring $311,000 of such fees in Q1 of fiscal 2016.
In regard to executive management transition costs, we did not experience any such costs this period. However, we recorded $86,000 associated with the CEO severance cost in the same period of fiscal 2016.
On a GAAP and non-GAAP adjusted net loss basis, our Q1 fiscal 2017 net loss was approximately $38,000, or $00.00 per share, as compared to a GAAP net loss of $192,000 or $0.01 per share a year ago and a non-GAAP income of $54,000 or $00.00 per share.Today's earnings release and related current report on form 8-K describe how we calculate these non-GAAP financial measures and provides a detailed explanation of our atypical expenses as well as a reconciliation between our non-GAAP financial measures and the most directly comparable GAAP measures.
Moving forward, our Q1 was yet another record period. While we preannounced our revenue range and that we expected to improve our operating income performance, I'm very pleased to note that Q1 of fiscal 17 was the first quarter in two years that we are EBITDA positive; and this is from a GAAP perspective. Specifically, we produced approximately $250,000 EBITDA this period.
Reviewing other detailed results; total revenues in the first quarter of fiscal 2017 increased 30% to $23.9 million as compared to $18.4 million the same quarter a year ago. Overall, the quarter was a really nice blend of strong performance by all business units, weather systems group have seen the potential of the substantial backlog we talked to in past quarters.
Gross margin the first quarter of fiscal 2017 was 39.3%, which is within our range of expected results and influenced by the significant increase in our systems business, a key support of the strong gross margin performance in tandem with our significant increase in revenues. Non-GAAP operating expenses in the first quarter 2017 increased to $9.5 million, compared to $7.7 million in the year ago quarter.
However, this is up only $200,000 from our previous quarter, which is due to the final build-out of our Virginia Department of Transportation or VDOT-TOC personnel plan. The year-over-year increase was primarily due to our continued and planned investment headcount, product development, and sales and marketing expenses in our agriculture and weather analytics segment, as well as our complete deployment of personnel and other resources to support the VDOT-TOC and PMG contracts.
Non-GAAP operating loss in the first quarter was $90,000, as compared to a non-GAAP operating loss of $140,000 in the year ago quarter. Non-GAAP net loss in the first quarter was $38,000 or $00.00 per share, compared to net income of $54,000 or $00.00 per share in the same quarter a year ago. Cash and cash equivalents as of June 30, 2016 was $15.1 million compared to $16 million at March 31, 2016. Cash used by operations was approximately $468,000.Capital expenditures and capitalization used was approximately $548,000 and cash proceeds from stock options provided approximately $14,000.
Total backlog at the end of fiscal Q1 2017 was $62.7 million compared to $63.3 million at the end of fiscal 2016. Backlog at June 30, 2016 was comprised of $53.7 million in transportation systems, $6.2 million from roadway sensors, and $2.8 million from agriculture and weather analytics. In terms of housekeeping, we expect to file our 10-Q within the next week.
This concludes my prepared remarks and the financials. Now I would like to turn the call back over to Joe.
Thank you, Andy. We believe Iteris is poised to capitalize on powerful secular trends in both transportation and agriculture. Our team continues to identify both operating efficiencies and innovation opportunities for our transportation segment, while also developing a highly meaningful, high-margin subscription model and the agriculture market.The progress we made over the past four quarters should provide a strong platform for growth through FY 2017.
For the balance of FY 2017, our roadway sensors business unit plans to continue to execute against three paths to growth. First, we will continue to develop select geographic markets focusing on Latin America and territories within North America where we are currently underpenetrated. For example, we are in the process of realigning our Pacific Northwest and Northeast distribution. Second, we will further enhance our data collection capability an already strong point product differentiation. And third, we will continue to expand into new market segments that Iteris has not addressed today.
We remain on schedule to introduce a number of new products and features beginning this order and continuing through this fiscal year. These product introductions are expected to include a new detection sensor, new data collection capabilities, and other proprietary first of its kind innovations. We believe these new product introductions and other planned product enhancement will reinforce our position as an innovator and product leader, as well as expand our total addressable market.
We continue to expect our first half revenue growth to move in line with the overall market rate of growth. While we recognize it will take a couple orders to develop and convert our new product sales pipeline, we remain confident about the increased growth opportunities that our new product introductions present. It is difficult to precisely model new product adoption curves. However, we do expect to see sufficient adoption to drive a seasonally adjusted increase in the sensor BU's rate of revenue growth from the first half of fiscal 2017 to the second half of 2017.
Moving on our transportation systems business, we continue to experience an increase in demand for programs related to vehicle infrastructure integration, actionable traveller information, data analytics, and enhanced safety and mobility. Indeed, we are seeing an increase the number of RFPs in each of these areas; an increase in the amount of general activity. For example, conferences, client questions and press coverage in these areas and increasing in the amount of funding against these areas from federal and local sources.
We expect the business units to benefit from this shift in transportation infrastructure spending through the end of Fiscal 2017.Given the favorable market dynamics and our continued strong backlog, we remain highly strategic about the new business we pursue. We are focused on opportunities that one enhances our franchise as the provider of information base actionable insights and target geographies in market categories. Two, enable us to leverage existing platforms and other tools sets. And three, represent sizeable multi-year programs at the meaningful level of recurring revenue.
In Q2, we do expect to increase our level of business development investment for this business unit in order to further capitalize on the growth in this market.
Now let's discuss our agriculture and weather analytics business. We continue to believe that the global agri-business sector represents a significant strategic opportunity. This massive sector generates $5 trillion in annual economic output, but the sector is been very slow to adopt information technology. Now the sector faces major structural challenges; commodity price fluctuation, scarce water supplies, limited arable land, changing consumer preferences, and increasing regulations. These dynamics are fuelling a significant need for information technology in general and for agronomic meteorological and biologic data analytics in particular.
Within the broader agribusiness sector, Iteris is focused on the digital agriculture culture market. Digital-Ag is an intersection of precision agriculture and big data. We believe Digital-Ag represents a $1.2 billion-plus for Iteris, with the top 100 science entities alone contributing more than $250 million market opportunity. We define crop science companies to include crop protection, crop nutrition, and biologics firms. The top 100 entities are large multinational enterprises, many of which report more than $1 billion in annual revenue. For these companies, Digital-Ag is a competitive necessity. And today, we believe ClearAg is the leading Digital Ag firm for crop science.
Our established leadership in the crop science market is starting to create a virtuous [ph] for ClearAg. High market visibility and strong customer reference ability is producing an increasing number of inbound leads. The value of our ClearAG pipeline grew approximately 50% last quarter, alone. As we look ahead to the balance of our fiscal year, we expect to be in consideration for every digital agriculture procurement opportunity taking place in the crop protection market, which again is the largest portion of the crop science segment.
In June, we announced the launch of ClearAg insights, which represents a portfolio of digital agriculture applications for crop protection. These applications are delivered on our ClearAg platform, which has already been deployed in several of the largest crop protection companies in the world. We are finding that ClearAg insight improves our ability to sell to a line of business owners, and reduce time to value for our customers. We believe that ClearAg Insights will accelerate both our rate of penetration in existing customer accounts and the rate of adoption in the second tier crop protection companies. We define the second tier as comprised of approximately 20 crop protection accounts.
In addition to our significant progress in the crop science segment we continue to build our OEM customer-base. As mentioned on last quarter's call in our first phase of market development, we lead with our weather content. This week we released our new harvest advisor. This is the first in a series of significant new and enhanced agronomic content that we plan to release this fiscal year.We continue to believe this new content will produce up-sell revenue from existing OEM customers, as well as, increased demand and reduce time to close new OEM customers.
We remain very confident about the long-term opportunity for Iteris in the agriculture market and we plan to continue to invest in our ClearAg business. We believe our ClearAg engineering capacity has reached a sufficient run rate level to sustain current requirements. We anticipate our investment will remain focused against sales and marketing activities.
Given our sustained acceleration in both agriculture and transportation, we expect to realize sufficient incremental contribution margin dollars to begin to more fully offset our agriculture investment going forward. In other words, we now anticipate our full-year net investment level to decline relative to FY 2016. On a consolidated basis, operating results are expected to continue to vary somewhat from quarter to quarter due to continued investment and typical seasonality. However, again, we expect our full-year operating losses to decline even as we continue to develop our digital agriculture business to its full potential.
To conclude in Q1, Iteris realized excellent positive momentum across all lines of business. Our sensors business maintained a significant market leadership with solid 7% revenue growth and the BU remains on track with the planned FY 2017 product releases. We remain confident in the BU's growth opportunity in the video sensor market for intersection detection. We expect over time to developing equally meaningful growth opportunity in new adjacent markets.
Our systems business unit successfully converted its sizable backlog growth into nearly 60% revenue growth in Q1, while continuing to secure new business and replenish its backlog. Although anticipate typical seasonality, we believe that BU's rate of growth remains substantially above its recent historical norm through at least the first half of FY 2017.
And lastly, we are very excited about the growth opportunity in digital agriculture, and we expect realize continued acceleration in ClearAG revenue, which should drive further growth in our agriculture and weather analytics segment.
Now I would be delighted to respond to your questions and comments. Operator?
[Operator Instructions]We'll go ahead and take our first question from Jeff Van Sinderen with B. Riley.
Jeff Van Sinderen
Good afternoon. And let me say, nice work delivering strong growth in the quarter. One thing that I just wanted to touch on quickly - just to get out of the way - maybe you could give us a little bit more background on how the changes to the Board transpired and the thought process there?
As you guys have probably watched, there's been a process going on for several weeks now. We recently filed an 8-K and as communicated there, we have reached a settlement. We are very pleased with the outcome. I'm excited to say that Kyle Cerminara, who is with FGI, will be joining our Board effective immediately. And we are also in the process of identifying a new independent director to join our board.These events do not change Iteris' existing business strategy. They don't affect any of our customer engagement. We try to work very collaboratively with all our investors and were very excited about the outcome and look forward to working with Kyle going forward.
Jeff Van Sinderen
Then maybe if we could delve into the business segments a little bit more. I know you touched on this in your prepared comments, but just to clarify, I think you said your sensor business you were expecting to grow roughly at a market rate? And then maybe you could touch on - you got a nice backlog and systems. Maybe you could just touch on the growth we should expect there in the near term. And then anything else you got on agri.
So as you know, we don't provide specific guidance right now. But directionally, what we're trying to communicate with respect to sensors, as you may recall, we were growing above market - taking significant market share of the last few quarters. Because of our new product introduction cycles, we communicated previously that we expected in the first half of this year the sensors would be growing more in line the overall market rate of growth, which is 7%, which is about - where we came in just barely over that in the first quarter and were expecting for the first half to be within that range. As I said, it's hard to model a new product adoption, but we are very confident about the new product introductions. And we would expect our rate of growth be to be above market again in the second half of this fiscal year.
In terms of systems, based on the strength of the current backlog, we would expect the increase in the recent historical rate of growth. And I'll let Andy kind of comment on what that has been, but I would definitely expect to see the rate of growth increase over that. It might temper a little bit on what you guys saw in Q1, and that's going to be largely due to the seasonality.It's also the timing of some RFPs which we absolutely want to pursue. As I mentioned right now, spending in transportation infrastructure is moving favorably to benefit Iteris, and we want to take advantage of that.
So we would expect to put more effort into business development, which effectively means we have less capacity to bill clients,so that should occur in Q2.And as far as agriculture and weather, we are still early in the market with ClearAg so it's not quite as predictable right now as I'm sure it will be, but generally we've seen a really nice increase in that business and would continue - again, as I mentioned, that segment grew at 38% in Q1 and I think we would expect to see very sizable revenue growth going forward.
I'm just going to add on to what Joe had to say there to support him in the description of the systems business. The best way to look at us is always year-over-year.In systems, in particular others, this period has fewer billable days, and as Joe said, there's always a flurry of activity in terms of RFP support, which typically shows those sizable movements and backlog at the close of the third quarter for us - the 12/31 quarter. So it's going to be very, very strong year-over-year. Again, that consistent strength is what we just saw over the period.
And just to echo what Joe said, in our new segment, agriculture and weather, both weather and Ag are up. And so, what had been a bit of our legacy business in weather that is still going strong. Every single piece of the business improved this period.The other piece I'll bring to your attention I think is important to keep an eye on is in our cash performance. Last year for the three months ended June 30, we used $2 million basically working all the investments to get launched in the whole Ag space. We used $2 million from operations. This period, we used $468,000.
So obviously, a night and day change in terms of the use of cash and I think that's really critical as we start pivoting here and we are going forward. And obviously, Joe mentioned that while we look at how we model this, we are expecting X amount of investments or cash usage in this current fiscal year; we are seeing it much more favorably now. So again, a great turn of events for us, and a great start.
Jeff Van Sinderen
Along those lines, you had to have some SG&A to grow Ag - or you've had some. How do you think about SG&A going forward? I'm just wondering if there was a base level. Was Q1 sort of the base level, or do you think it's going to gyrate; is there anything planned, I guess, that we should be aware of in thinking about SG&A?
I think you nailed it there. I think we hit that approximate level of the maturity. One of the key pieces we had to follow-through and finish has been deployment of these very large projects on the system side.We ended the year right around 400 employees; now we are at about 420. That was the primary increase in the expenses that you're going to see on the SG&A side. And it's basically the start-up expenses that we see through HR, IT, and facilities to get that up and running. But that's now stabilized; so that's great, that's behind us.And then when we look forward, it's going to be more in terms of just small seasonality; whether we are going through a proxy season or we are going through a year-end audit.
One of the best things that has happened to us is stock price, obviously. We are now going to be an accelerated filer. So we are well prepared to be an accelerated filer. We will spend a little money to actually goose up that audit. So there is going to be small pieces, but in general, we are really nice and stable at that $9.5 million mark, so that's kind of nice as well.
Jeff Van Sinderen
Okay, great to hear it. Thanks very much. I'll let someone else jump in.
[Operator Instructions]And we next move to Nick Altmann with Northland Capital Markets.
Hey guys, thanks for taking my questions. So you just kind of touched on this, but OpEx was up a little bit - partially due to increased headcount. Can you talk a little bit about what the sales headcount is at right now, possibly what it could be at a year from now? And then, if you could, what percentage of your sales headcount is a part of ClearAg?
Again, it is very different between our three segments; arguably our GM and systems will say, everyone's a salesman and his group. So once again, the folks that are deploying product in systems also go out and work on RFPs. And so, that whole headcount dynamic is such that they basically are utility players working both sides of the fence.The big increase in selling expense for the Company in general over the last year was definitely in our agriculture and weather analytics group. And in that group, just talking rough numbers, we spent about a $0.5 million in the first quarter of 2016, and we've got that built up to about $950,000 right now in sales. And that varies; again, we are just starting, and so we are working that more in the, let's say, 5 to 10 card-carrying quoted salespeople in that space.
We do look to continue to build in that area. So when you consider the three different BU's the key area of growth in sales will be from that side. We've done a minor bit of investment that we will continue with that Joe leads on our corporate marketing side. Again, a very humble amount but very important because we are a very different business now. And so, we are doing a lot of work that Joe can speak more intelligently about in terms of branding and basically corporate re-launching. So there's a bit of investment that way.
Then obviously transportation was a strong point. Can you talk about some the drivers there and whether those are continuing to next quarter and beyond?
As I mentioned, the shift in spending is significant and I think it's sustained at least through the kind of medium-term and that's benefiting Iteris. Kind of the most simple way of looking at it this, is that agencies have an option to either spend money to build out new and maintain physical infrastructure, or to invest more in technology to get better utilization out of the existing infrastructure. And when they do analysis they get - for every dollar that is invested in the physical infrastructure itself, they get a 1.2X return. Whereas what their finding is for every dollar invested in technology, they get a 7X return on that dollar.
And so as a result, you're seeing a significant shift in spendingIteris historically has been known for having an expertise in applying technology to get better utilization out of existing transportation infrastructure. And so, we are really in the sweet spot in the market right now. As I said, we expect that to continue certainly through the end of this fiscal year and we are trying to capitalize on that opportunity. We will continue to do that.
Great, thank you.
And ladies and gentlemen, that does conclude today's question-and-answer session. I would now like to turn the conference back over to management for closing remarks.
Great thanks, operator; I appreciate it. We appreciate everyone's support and thoughtful questions. On the investor relations front, we will be presenting at the Canaccord Genuity Growth Conference in Boston on August 10. If you're attending this conference, we would like to encourage you to come see our presentation.We also look forward to updating you again on our continued progress when we report our results for the second quarter of fiscal year 2017. So with that, we are finished. This concludes today's call. Thank you.
Ladies and gentlemen, that does conclude today's conference. You may now disconnect.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!