Iteris' (ITI) CEO Joseph Bergera on Q3 2017 Results - Earnings Call Transcript

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Iteris, Inc. (NYSEMKT:ITI) Q3 2017 Earnings Conference Call February 9, 2017 4:30 PM ET


Todd Kehrli - MKR Group

Joseph Bergera - President & CEO

Andrew Schmidt - CFO


Steven Dyer - Craig Hallum Capital Group

Michael Morosi - Avondale Partners


Good day, and welcome to the Iteris’ Fiscal Third Quarter 2017 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Todd Kehrli with MKR Group. Please go ahead, Sir.

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 2017 fiscal third quarter ended December 31, 2016. Joining us today are Iteris', President and CEO, Mr. Joe Bergera; and the Company's CFO, Mr. Andy Schmidt. Following their remarks, we will open the call for your questions.

Before we continue, I 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

Now I would like to turn the call over to Iteris' President and CEO, Mr. Joe Bergera. Joe, please proceed.

Joseph Bergera

Great. Thank you, Todd, and good afternoon, everyone. Thank you for joining us today. As you saw at the close of market, we issued our press release announcing the financial results for our fiscal third quarter ended December 31, 2016.

In Q3, Iteris recorded $22.7 million in total revenue, this constitutes 19% year-over-year growth and represents a new third quarter record for the company. During the quarter we experienced continued strong performance in both our Transportation Systems and our Agricultural and Weather Analytics segments. We also made solid companywide progress against critical initiatives to enhance our corporate brands, strengthen our go to market approach and up level our sales readiness. Recently we announced deployment of a new Chief Marketing Officer who will help us accelerate activities already in motion.

Our Transportation System segment recognized $11.9 million in revenue versus $8.3 million in the prior year quarter representing 44% year-over-year growth. In addition the segment continued to win new business securing approximately $11.8 million in new orders and ending the quarter with another year-over-year increase in our 12 month backlog. The segment’s focus on project mix over the past five quarters continued to produce segment level operating income margin expansion. The higher portion of software related consulting services and business process outsourcing backlog as well as the larger average projects size continues to improve revenue predictability and other internal efficiencies.

In Q3 the segment's operating income was approximately $1.9 million or 16.1% of revenue versus $1 million or 12.4% of revenue a year ago. The 370 basis point improvement in the segment's operating income margin demonstrates our approach is continuing to create operating leverage.

In Q3 the Roadway Sensors segment reported $9.4 million in sales. This represents a 4% year-over-year decline in revenue. This is the second quarter of declining revenue. The disappointing result is largely attributable to an unexpected supply chain issue. One of our key suppliers was unable to provide a critical component which prevented us from fulfilling customer demand in our third party distribution business. The supplier has since resumed shipment of the component and we expect distribution revenue returns to normal levels in Q4.

Although distribution revenue was significantly below prior year, I do want to note that we saw respectable growth in our core product business. During the period the segment realized another increase in ending backlog with particularly strong performance in California, Arizona, Nevada and the Mid-West. Despite the negative revenue variance we benefited from a favorable product mix and as a result segment operating income dollars increased 5% as segment income operating margin expanded 160 basis points.

In Q3 our Agriculture and Weather Analytics segment recognized $1.4 million in revenue. This represents a 44% year-over-year increase in revenue and it's 65% sequential increase. The growth was due to strong performance of both ClearPath and ClearAg® our digital agricultural platform. Several noteworthy deals drove ClearAg® continued revenue growth. For example as announced Geoagro an ergonomic geographic information systems vendor selected ClearAg® for deployment in Argentina, Brazil and South Africa. And additionally QBENAU the third largest crop insurance provider in the US elected ClearAg® to provide critical field level insights with their agents and farmer customers to proactively mitigate risk and prevent crop loss.

In addition to these previously announced wins, we continue to expand our relationships with existing crop science customers such as Bayer, Ants and Genta while continuing to broaden our ecosystem of Allied providers. This ecosystem provides cost effective global reach for ClearAg®.

Through our partners ClearAg® has access to more than 400 million managed acres across 18 different countries. As a reminder Allied providers embed ClearAg® into their solutions. We offer Allied providers an OEM pricing model under which they commit to a minimum annual subscription fee based on API costs.

We remain very enthusiastic about the opportunity in front of our Agriculture and Weather Analytics segment. We continue to see strong pipeline growth and improved opportunity conversion for both ClearAg® and ClearPath weather. Due to continued booking growth this segment annualized revenue run rate has increased 44% from the beginning of our fiscal year and our run rate is now $5.2 million.

Now I would like to turn the call over to Andy to walk you through our financial results. Andy?

Andrew Schmidt

Thank you and good afternoon everyone. As Joe's introduction showcases we had another strong quarter. The benchmark quarters, our third quarter ending December 31 is our one seasonal quarter. Our seasonality is driven by our transportation businesses. In the case of our system business the quarter is a period of vacations which leads to lower utilization of billable consultants.

In the case of our sensor business, weather in many states restricts progression of road construction work which limits sales of our sensor products. And all that's key to consider results from a year-over-year perspective. Quickly recapping our year-over-year revenue growth for Q3 Iteris reports revenue at $22.7 million for the quarter, 19% year-over-year increase.

Transportation system accounted for $11.9 million in the quarter a 44% increase year-over-year, roadway sensors $9.4 million, a 4% year-over-year reduction and Ag and weather $1.4 million, a 44% year-over-year increase.

Before getting into growth margins and expenses I need to cover off required communications related to our past pro forma reporting to financial results. Similar to our last quarter we have no pro forma adjustments to communicate in terms of our current period results. However, in regard to our comparative quarter Q3 official 2016 we had one adjustment and that was adjusting for $10.1 million charge taken to full reserve our tax assets.

As such our GAAP and non-GAAP adjusted net loss for Q3 fiscal 2017 was approximately $1.4 million or $0.04 per share. As compared to a GAAP net loss of $10.4 million or $0.33 per share and a non-GAAP net loss of $378,000 or $0.01 per share for the previous year period. From a year-to-date perspective we had no non-GAAP adjustments related to atypical expenses to report for fiscal 2017 as compared to following nine months total for the period ending December 31, fiscal 2016.

$150,000 related to audit fee overruns, $88,000 for financial consulting services, and $150,000 for executive management severance costs. Accordingly our GAAP and non-GAAP adjusted net loss for our nine month ended December 31 fiscal 2017 was approximately $1.5 million or $0.04 per share as compared to a GAAP net loss of $11 million or $0.34 per share and a non-GAAP net loss of $724,000 or $0.02 per share for the same period last year.

Today's earnings release and related current report on Form 8-K describe how we calculate these non-GAAP financial measures and provide a detailed explanation for our atypical expenses as well as of reconciliation between our non-GAAP financial measures and are most directly comparable GAAP measures.

Okay, looking more closely at our Q3 results. Joe has provided some great color commentary regarding our record Q3 revenue performance. Looking at gross margins total company saw gross margins of 38% that compares to 37.9% for the prior year period. Considering gross margins by segment, sensors posted 47.4% which increased considerably from 44.6% in the prior year period. The increase was due to favorable mix of Iteris product revenue versus third party distribution revenue.

As Joe mentioned overall sensor’s revenue was down year-over-year due to a supplier challenge in our distribution business. But what's important is gross margin dollars. Due to strong product sales gross margin dollars increased year-over-year approximately $100,000 or 2% despite the decline in revenue that's a great outcome.

In regard to systems current period gross margin of 30.5% compares to 31.5% in the previous year period. The unfavorable variance is related to job mix. Looking at ag and Weather Analytics we pushed the gross margins of 38.5% as compared to 48.6% last year. The real key behind this gross margin number at this point are accounting rules rather than product or product mix.

As we have now matured the delivering and operational SaaS service, we are required to capitalize certain software development deemed to be new functionality or enhancements to our SaaS software engine. By capitalizing certain development cost we are essentially moving labor costs from R&D expense to the balance sheet as an intangible asset and advertising those intangibles over several years into the cost sales line.

In all, we do expect that at scale the segment should resemble a typical SaaS software company with 70% plus gross margins. Our solid gross margins led the way to following operating margin results. For our transportation businesses, $1.9 million for sensors and $1.9 million for systems. Our ag and weather businesses reported an operating loss of approximate $1.9 million which is a sequential quarter improvement of $185,000 or 9%. So in that regard we are moving in the right direction.

In terms of our corporate expenses which include corporate IT, human resources, accounting, executive and public company related expenses we saw expenses of $3.36 million for Q3 2017 which is up approximately $150,000 sequentially from our second quarter is due largely to public company expenses which include legal fees associated with our proxy contest process, class action lawsuits and Sarbanes-Oxley preparation fees associated with becoming an SEC accelerated filer this year.

Year-over-year operating expenses have increased $1.7 million this is primarily headcount and outside services to support three growing businesses and increasing SEC compliance in public company costs. Year-to-date performance shows Iteris record revenues of $70.7 million as compared to $58 million in the same period last year. Gross margins of 38.9% as compared to 39.2%, total operating expenses of $29.2 million as compared to $24.9 million in the prior year period.

In regard to the balance sheet, we saw a very strong cash performance this period. We reported cash at December 31, 2016 at $17.9 million which is $1.9 million improvement from the start of the year.

Much of this improvement is due to the nature of the Ag and weather analytics segment SaaS engine reaching a certain scale. We've had tremendous yearly contract renewal and up-soar performance in this segment. Our SaaS model is cash upfront payment for annual or multi-year service agreements. While this business is still early stage, we are starting to see the balance sheet positives of being in the SaaS business.

Other highlights. Cash produced by operations for a nine months ending December 31 was approximately $2.4 million. This is an exciting number. This compares to cash use by operations of $2.3 million in the previous year nine-month period, at the swing of $4.7 million in the right direction. Capital expenditures and capitalization of software development used approximately $1.1 million offset by approximately $400,000 provided by royalty payments from our discontinued operations.

Cash proceeds or uses from stock options and RSUs provided approximately a $183,000. Total company backlog at the end of fiscal Q3 2017 was $64.9 million compared to $63.3 million at the end of fiscal 2016. Backlog at December 31, 2016, was comprised of $54.1 million from transportation systems, $5.7 million from roadway sensors and $5.1 million from Ag and weather analytics.

In terms of housekeeping, we expect to file our 10Q within the next few days. And this concludes my prepared remarks on the financials. Now, I'll turn the call back over to Joe.

Joseph Bergera

Great. Thank you, Andy. So, Iteris continues to benefit from solid execution and favorable trends in both transportation and agriculture. Indeed, the team is considering to roll out several innovation initiatives for our transportation segments while also developing a highly meaningful high margin subscription model in that agricultural market. We expect a strong execution over the past several quarters to sustain solid organic growth for fiscal year-end.

Our transportation systems business continues to experience an increase in demand for programs related smart cities, data analytics and enhanced safety and mobility. In other words, we continue to see an increase in the number of RSUs in each of these areas, an increased amount of background activity, for example, conferences, client questions and press coverage in these areas and an increase in the amount of funding against these areas from federal and local sources.

We expect this segment to benefit from the shift in transportation infrastructure spending to the end of FY'17 and into at least the first half of FY'18. Based upon the continued strength of our backlog in the favorable impact of project mix on the segment's operating margins, we remain highly strategic about the new business we pursue.

More specifically, we continue to focus on opportunities that one enhanced our franchise as a leading provider of applied informatics for the transportation infrastructure market to enable us to leverage our existing platforms and other tool set and three represent sizeable multi-year program with a meaningful level of recurring revenue.

Given the scale and the length for German cycles for some of the strategic project we are now tracking, we expect the segments revenue lines move in step functions for the next several quarters. In other words, in at least the first half of that slide 18, we'd anticipate the segments growth rate to be more in line with markets historic growth rate followed by periods of step function growth as we converged them with a large procurement schedules occurred later in the year.

Despite some unanticipated challenges that coincided with this year's new product introduction cycle, the roadway sensors segment continued to execute against our growth strategy. In other words, the segment continues to release major product enhancement and new products to expand our addressable market while also enabling business model innovation.

Last week, we realized we released our new Vantage Radius product which provides forward firing radar sensing capability with streaming video. This is a first of its kind innovation. And within the next 12 weeks, we plan to release a SaaS data analytics service that has the potential to unlock the value of the data collected by the 130,000 sensors we have installed at intersections across the country.

While we recognize it will pay several quarters to develop and convert our new product sales pipeline. We remain confident about the increased growth opportunities with these new products. With the availability of these new products, we continue to expect new products adoption to drive this segments rate of revenue growth for the second half of fiscal 2017 above the historical average market growth rate a 7%.

Now, let's discuss our agriculture and weather analytics business. The global Agri business sector is facing major structural challenges; commodity price fluctuations; scarce water supply; limited arable land; industry consolidation; and increasing regulation. We expect these dynamics to drive significant long-term demand for information technology and data science, despite the sustained weakness in commodity prices.

ClearAg addresses three agricultural end-market. 1) Crop science companies, 2) Allied providers and Ag integrators and 3) growers and agronomists. Crop science companies include crop protection, crop nutrition, and genetics and biologics companies. Literally, crop science companies are the least impacted of our end-market by the softness in commodity prices since our products are essential inputs for agricultural production.

Further, digital agriculture is a competitive necessity for crop protection company and we expect to become a necessity for other crop science companies. It drives supply chain optimization; accelerate new product development; and product registration cycle; and enhances sales and marketing effectiveness.

We continue to believe at least 80% of the largest crop protection companies will pursue a digital agriculture strategy and at least 80% will outsource their technology platform. Those companies that have already launched explicit digital agriculture strategy continued to very quickly to implement regional and even enterprise initiatives.

For example, in July, we announced Syngenta selected ClearAg for a single deployment. And today, we're already involved in four different deployments across the company. We've been highly agile since launching ClearAg in July 2015 and will continue to adopt the marketplace dynamics.

As we enter FY'18, our primary commercial focus will be to maximize account penetration in our five largest crop protection customers. Our secondary focus will be again acquisition of new crop science customers and for the time being we'll pursue other end markets opportunistically.

We remain very confident about the long-term opportunity for Iteris in agriculture market. We anticipate continued bookings growth through the second half of FY'17 and expect continued acceleration next fiscal year. Our scientific and engineering capacity remains sufficient to sustain current requirements. We expect to realign sales and marketing activities in FY'18 to focus on account management and account penetration in our largest crop science accounts but we believe our current total resource level is sufficient to drive our plant revenue growth. Therefore we expect this segment cost base remain relatively flat for the next several quarters.

To conclude, in Q3, Iteris realized excellent positive momentum in our transportation systems and agriculture and weather analytics segments. Our systems segments successfully converted a sizeable prior period backlog growth into 44% revenue growth in Q3, while continuing the secured new business and again increase its backlog.

We continue to believe this segments half-over-half growth rate will be similar in the second half of FY'17 to what we realized in the first half. Having released our new dual core processor in Q3 and our new Vantage Radius product last week, we believe that we passed the period of our most significant product risk. At the same time, we also put a strong technical foundation in place to develop a meaningful revenue stream in new adjacent product category such as the data analytic service referenced earlier.

Based on early product demand signals, we remain very confident about this segments growth opportunity and as mentioned previously, we expect a rate of growth for the second half of FY'17 to exceed our historical market growth rate at 7% despite the negative rate of growth in Q3.

Lastly, we continue to be very excited about the growth opportunity in digital agriculture. We expect to realize continued acceleration in ClearAg revenue, which should drive further growth in our agriculture and weather analytics segment. In a short term, our revenue growth will come mostly from accounts penetration and crop protection market.

Given our expectation of continued strong performance across all segments, we expect to continue to realize sufficient net margin dollar growth to more fully offset our annualized agriculture investment. And as a result, we continue to anticipate our full year operating loss to decline meaningfully relative to FY'16 even as we continue to develop our digital agriculture business to its full potential.

So, now would be delighted to respond to your questions and comments. Operator?

Question-and-Answer Session


Absolutely. [Operator Instructions] And we'll first go to Jeff Van Sinderen from B. Riley & Company.

Unidentified Analyst

Hello. This is Richard Magnusson in from Jeff Van Sinderen. Thank you for taking my call. My first question is regarding the supply chain issue in the quarter, can we expect all those sales from the critical component that was postponed to be again back in Q4?

Joseph Bergera

Richard, we definitely expect to have a strong 3rd party distribution result in Q4. I don’t know that I could say that we'll see all of those opportunities move into Q4. It is complicated getting these jobs dead up, and there is the possibility that you can miss the window and it may require -- it may take another quarter or two before the job is able to get scheduled again. So, I can't guarantee that it's all going to move into Q4, but I don’t think that it's lost revenue.

Unidentified Analyst

Alright, thank you. And I think, do you expect any headwinds or even or tailwinds from the current political environment both domestic and abroad from recent developments?

Joseph Bergera

Yes. It's a great question. I think like everyone, we're trying to understand all the puts and the takes and sort of what the net landscape looks like. I would say that in the transportation infrastructure area and based on information we have today, we would expect the environment to be sort of net favorable to us. In terms of the agriculture environment, we're actually trying to evaluate what's going on.

I do have some concern that some of the tear-ups that have been discussed and what's the potential reactions might be from other countries could potentially complicate commodity trading and impact agriculture. But we don’t really understand that at this point in time. I would say that our primary customer and focus which are the proceeding crop protection companies, they deal on a global basis and I therefore I wouldn’t expect that any kind of trading between, it's like bilateral trading of that, I wouldn’t anticipate that to impact their business and their further investment.

Unidentified Analyst

Okay. And then finally, can you provide any additional guidance for SG&A expectations for each segment in terms of both dollars and percent of sales?

Andrew Schmidt

Sure. This is Andy. Let's just kind of start with our current period. As we've mentioned or I mentioned in my remarks, we had a several unique events that were on top of us. One is the high class problems we call it in terms of becoming an accelerated filer. Our measurement date is September 30th, that's our second quarter. So, from that perspective, we qualified to be an accelerated filer, but the challenge is you have six months to get you a tremendous amount of work while basically running three businesses that are growing.

That being the case, when we look at current period results, our Q3, we ran about $600,000 in G&A, that's above our expectations in terms of how we planned the year at the beginning of the year and I would say was above a certain analysts expectations too in that. This came about us relatively recently. Of that 600, about half of it related to our SaaS preparation, then of course here this period we expect that type of low to continue in our Q4 as we have to continue this work to support the March 31 audit.

Let's say the other half of that $600,000 variance which by the way that's $0.02 per share that other half came from supporting proxy contest that we went through and also a class section lawsuit that we put behind us but there were significant legal fees associated with that and there will be some continuing fees in the Q4. So as we look at those two primary events 600 grand affected this period. We will see another 600 probably around that neighborhood hit Q4 and then in essence those two events are behind us.

Unidentified Analyst

Alright. Thank you very much.


[Operator Instruction] We will now go to Steven Dyer from Craig-Hallum Capital Group.

Steven Dyer

Thank you. Good afternoon guys.

Joseph Bergera

Good afternoon.

Steven Dyer

I guess drilling down a little bit further into the March quarter, I mean seasonally that's typically up a touch quarter-over-quarter from Q3, what sort of all the moving pieces is that I mean would you expect that there still will be up modestly I guess quarter-over-quarter again in this year's attachment?

Andrew Schmidt

Yes. Actually it resembles our Q1 and Q2. So the Q1, Q2 and Q4 pretty similar. So the year-over-year performance again we are looking at strong performance. So I was just discussing expense wise, margins we look at we have been very solid on our margins, very predictable on our gross margins and we push down on the expense line. There is nothing unusual no unusual and that adds side of that $600,000 that hit us in the current period we expect that again to continue in the Q4. So it should be reasonably predictable quarter from that perspective.

Steven Dyer

Great. And then, as I look forward at the Weather Analytics segment next year I mean it sounds like the spend there is going to be pretty flat against what should be some pretty good margin ramping revenue, I mean would you expect that segment to breakeven by the end of fiscal year?

Andrew Schmidt

So this is Andy again, so let's just kind of start the basis of that group and more or less how we have evolved. As we have communicated consistently this year we feel very good about product being a complete product and that basically talks for the engineering expense and what not and we have held that relatively flat year-over-year and that again looks to be very solid. We feel very good about our engineering base and how we put together. This year's net increase was auto-sales and marketing. We just got started this year if you will building that team.

When we look forward, again we are going to be opportunistic. We are always tuning that model Joe Bergera brought forward that we now have Joe [Boise] on board that really helped us take all the three businesses forward in terms of marketing expertise so that's an area where we kind of hold the cards and say well let’s see what unfolds as far as opportunities and going after those opportunities because certainly we got a lot more growing to do. So that's one area that's kind of open question for Joseph Bergera and the rest of the team.

So at that point we will answer that as we go through the year. In terms of breakeven it's going to come down to timing of these big deals. This is the part that little bit hard for us to lock down as far as when do these big deals land. Our near term opportunity is going to be more the expense side of our landing expand opportunity where we expect to further penetrate these key accounts. That's probably going to be the most opportunistic and the bigger deals in terms of landing brand new accounts it's hard for us to predict on that land. So that's going to be the key driver whether or not we had breakeven by end of the year. But we are definitely got our eyes on that ball and that's very important to us.

Steven Dyer

Great that's very helpful. And then Andy just some housekeeping I don't know or maybe I missed it backlog by segment in the quarter.

Andrew Schmidt

Sure. So backlog by segment 64.9 total for the business which again I just have to iterate as Joe said we have been not only maintaining but incrementally building that backlog where we burn significant backlog to support that system's revenue which is really, really a positive, real big positive as far as that support level we add in that business. And so when we consider that backlog it's 54.1 in the systems business, 5.7 million in sensors, which is not really a backlog eccentric business but we report it and 5.1 in ag and Weather Analytics likewise not necessarily backlog eccentric but that's how it fits.

Steven Dyer

Got it. Okay thank very much.


[Operator Instruction] We will now go to Mike Latimore from Northland Capital.

Unidentified Analyst

Hi guys this is Rishi for Mike.

Joseph Bergera

Hi, there.

Unidentified Analyst

Hi, I got a couple of questions and playback actually. How many playback customers have renewed contracts in this quarter like on what was the average up so?

Joseph Bergera

Yes we haven't disclosed the number of customers but our renewal rate has been 100% and we have upgraded virtually every customer. We have up-sold. So either they have added a new geography, we have been able to take some kind of price increase or they have expanded the number of users.

Unidentified Analyst

Well. Okay. And the second thing is have you won any other ClearAg bills with new customers like you’ve not able to announce it as per the customer request in the quarter?

Joseph Bergera

Yes. Yes we have won more deals and we have been able to announce.

Unidentified Analyst

Okay. Alright. One additional thing, final thing what key additional features can we expect from ClearAg for this year FY 2017?

Joseph Bergera

What additional features?

Unidentified Analyst


Joseph Bergera

Is that the question? We will continue to add to our ergonomic models. Also now that we are in market we are getting a lot of feedback regarding workflow that a lot of our users are interested in us being able to facilitate and so there will be some work there that means developing some application logic on our end also means focusing on our integration with other commonly used applications in our customer base. And we continue to international that, with the products being international as we continue to localize it for different markets. Those will be at least three areas where we continue to extend the feature set functionality of the application.

Unidentified Analyst

Okay. Thanks guys. That's all.

Joseph Bergera



[Operator Instruction] We will now go to Michael Morosi from Avondale Partners.

Michael Morosi

Hi guys. Thanks for taking the questions. First on the transportation systems business I wonder if you could just generally speak about the primary drivers that have led to the staff function increase in backlog in that business?

Joseph Bergera

Yes. So this is Joe, and as I said in my remarks that I think we are seeing a focus on transportation infrastructure in general and so there is probably more funding overall going towards that kind of activity but more importantly we are seeing a shift in spending and I think that's a function of number of things. One is that public agencies are recognizing that they are able to deliver a higher return on investment for the dollars they are putting against certain kinds of technology as oppose to laying new pavement and that's definitely paves our strength. Beyond that, something I think is happening which is really important, there are a lot of new business models that are being enabled by technology innovation that's happening really across the board. We are seeing a lot of that in the automobile sector. And that's also driving public agencies to update and modernize their infrastructure in order to be able to manage and accommodate those new business models and again that really paves our strength. So the primary driver for our growth is that there is a shift in spending and its enormous amount of spending in the transportation and infrastructure market already and we are seeing more and more of that being spent against kind of activities that we are – we have a really, really strong confidence. Our impression is that we tend to win maybe more than our fair share of procurements in those particular areas and we would expect that to continue.

Michael Morosi

Very good. Switching gears to the sensor business. What's the mix of the third party in terms of the overall revenue line?

Andrew Schmidt

Sure. It fluctuates period to period but it typically is between 10% and 15% and that dynamic is such to that again it's when you consider our core product, or core product can be 45 to 50 point gross margin where distribution is more in the 10% to 20% again depending and again one of the key aspects is by working with these key distribution partner it enables our product sales and it's actually it's a great vehicle, a great partnership if you will as far as taking the product out to market.

Michael Morosi

That's great. And then on the ag business, have you seen any change in the competitive environment with all of the capital that's coming in the sector and the different companies attacking ag tech more broadly when you are having conversations with these seed and crop protection companies are they looking at a lot of other solutions, just how do those discussions go?

Joseph Bergera

Yes I think in the seed and crop protection space we are still highly differentiated and really regarded as being sort of a go to vendor. We have the most complete platform. We have also always positioned ourselves as being open and independent and enabler for these very complex enterprise strategies and I don't think there is really anyone that is able to match up against us in that regard. In the grower space there definitely is a lot of competitive activity. I think most of the venture investments other capital investments has gone into a solution targeting the growers themselves and while we definitely are interested in that market, we have always looked as being somewhat opportunistic and so we have been able to sort of stay above a lot of that fray there. I would say that IBM is out falling the acquisition of the weather company if they tend to be present in more deals than they used to be and we actually think that's a good thing that there is a very large technology company out there that's helping us to build this category. We are still relatively small company and it's a pretty big task to build that market. So we actually we welcome that. We hope that it continues to draw attention to this market and we actually help to mature the market even more rapidly.

Michael Morosi

That's great and just quickly on the end user mix. You mentioned 400 million acres across 18 countries, is revenue primarily coming from North America at this point or is revenue global and then also if you could just talk a little bit about the end user engagement to the extent that the growers are accessing the platform through an OEM or white labeled version of ClearAg what can you talk about the end, the uptake of ClearAg and engagement of ClearAg at the field level?

Joseph Bergera

Sure. So first of all the reason that we are sharing that global acreage is to give folks a sense of the geographic reach. Also lots of people have asked how our reach compares to Climate Corporation. And so we have tried to continue to provide that metric. But again to be really clear we are not pricing based on acreage. It's that when I use that metric I am really referring to that reach that we are getting through our relationships with Allied providers who embed ClearAg into their solutions. So it's an OEM model.

Our pricing to the Allied providers is done on API basis, it’s not on a per acre basis. Now the next part of the question, so what's the utilization, how active our customers on ClearAg that maybe accessing it through one of these Allied providers and for purpose of full transparency we don't know what the utilization is. There is an assumption when we are negotiating contracts with Allied provider that they are going to get a certain amount of attach and their interest is in trying to enrich their customer experience, their customer, their user experience and bring more functionality to their existing application. So presumably they are getting decent utilization where they wouldn't continue the relationship with ClearAg, but we don't know precisely how many of their users are using the application and how frequently. As far as international versus domestic revenue you want to talk to that Andy?

Andrew Schmidt

Sure. One of the neat things about this offering is we are extremely international if you consider customers that are very, very large multinationals including Bayer and Genta and so on I think it's been the big power to platform is not only do we have that reach but we have demonstrated that we have the performance in this particular product actually make that market. So in terms of levels of complexity it's a fantastic benchmark for us where it makes a lot easier mind thought in terms of how do you drive more into specific markets, if you can start out global fantastic. Financially, these are very large strong companies with very large budgets. They are all U.S. dollar denominated accounts. So even though we are international we don't see currency risk at all.

Michael Morosi

Thanks a lot.


[Operator Instruction] And it appears there are no further questions. I will turn the conference back over to management for any additional or closing remarks.

Joseph Bergera

Great. So thank you operator. Thank you everyone. We appreciate your support and the thoughtful questions. On the investor relations front that I just wanted to note that we will be presenting it at 29th Annual ROTH Investor Conference in Dana Point on Mach 12 through 15. At the 18th Annual B. Riley Investor Conference in Santa Monica on May 24 through 25 and at the Craig Hallum Capital Group 14th Annual Institutional Investor Conference in Minneapolis on May 31. So if you are attending any of these conferences I would love to see you. We encourage you to come see our presentation.

And we look forward to updating you again on our continued progress when we report our results for the fourth quarter and 2017 year end. So with that we are done. It concludes today's call. Thank you.


This concludes today's presentation. Thank you for your participation.

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