Iteris - Q4 2022

Transcript

Operator (participant)

Good day, and welcome to the Iteris, Inc. fiscal fourth quarter and full year 2022 financial results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Todd Kehrli of the MKR Group. Please go ahead.

Todd Kehrli (Co-Founder and Lead Investor Relations Professional)

Thank you, operator. Good afternoon, everyone, and thank you for participating in today's conference call to discuss Iteris' financial results for its 2022 fiscal fourth quarter and full year ended March 31st, 2022. Joining us today are Iteris' President and CEO, Mr. Joe Bergera, and the company's CFO, Mr. Doug Groves. Following their prepared remarks, we'll open the call for questions from the sell-side analysts covering the company. Before we continue, we'd 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, which statements are based on current information, are subject to change, and are not guarantees of future performance. Iteris is not undertaking an obligation to provide updates to these forward-looking statements in the future.

Actual results may differ substantially from what is discussed today, and no one should assume that at a later date, the company's comments from today will still be valid. Iteris refers you to the documents the company files from time to time with the Securities and Exchange Commission, specifically the company's most recent Forms 10-K, 10-Q, and 8-K, which contain and identify important risk factors that could cause actual results to differ materially from those that are contained in any of the forward-looking statements. As always, you'll find a webcast replay of today's call on the 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. Please proceed.

Joe Bergera (President and CEO)

All right. Thank you, Todd, and a good afternoon to everyone. I appreciate all of you joining us today. I wanna remind everyone that we completed the sale of our agriculture and weather analytics segment to DTN, LLC on May 5, 2020. As such, we're reporting the results of that segment as discontinued operations for all periods presented in today's earnings announcement. I'll be discussing only our continuing operations for the remainder of this call. The company reported record fiscal 2022 fourth quarter total revenue of $34.2 million and record fiscal 2022 full year total revenue of $133.6 million, representing a respective 8% and 14% year-over-year increase. As you'll note, this revenue result is slightly below our full year revenue guidance of $134 million-$136 million.

The revenue variance is fully attributable to supply chain challenges that prevented us from fulfilling and recognizing $2.2 million in fourth quarter revenue on Vantage sensor backlog. These are not lost orders. In fact, we've begun fulfilling this $2.2 million Vantage backlog in the first quarter of fiscal 2023. I will discuss our supply chain exposure and supply chain mitigation plan in more detail in a few minutes. Notwithstanding our supply chain challenges, customer response to our ClearMobility platform is very positive, and we continue to strengthen our position of leadership in the smart mobility infrastructure management market. In the fourth quarter, we reported record total net bookings of $41.9 million, representing a 27% increase compared to the same prior year period.

This brings our full year total net bookings to a record $155.4 million, representing a 28% increase year-over-year. Given our sustained record net bookings, we ended the March 31 period with record total ending backlog of $99.9 million, representing a 28% increase year-over-year and an 8% increase on a sequential basis. As always, our reported net bookings and ending backlog figures reflect firm customer orders. Of our $34.2 million in fourth quarter total revenue, 49.9% was recorded as product revenue and 50.1% was recorded as service revenue. As a point of comparison, 51.5% of our $133.6 million in year-to-date revenue was reported as product revenue and 48.5% was reported as service revenue.

The mix shift reflects fourth quarter supply chain constraints. Our fiscal 2022 fourth quarter product revenue was $17.1 million versus $15.9 million in the same prior year period, representing an 8% increase year-over-year. While this is respectable organic growth, the result was below our expectations due to supply chain constraints that prevented us from shipping $2.2 million in fourth quarter Vantage sensor backlog. If not for the fiscal fourth quarter supply chain constraints, our fourth quarter product revenue would have been $19.3 million or 21% higher in the same prior year period, and our full year product revenue would've been $70.9 million or 13% higher than the same prior year period.

Additionally, please note that our fourth quarter product revenue growth is due to an increase in unit sales in the period since the 10% price increase we implemented for our Vantage sensors on January 1, 2022 has not started to bleed into our revenue results. As we talked about on the prior call, we provide price quotes at least one quarter prior to the receipt of the corresponding sales orders. Based on our fourth quarter product results, we believe Iteris continued to navigate the supply chain environment better than our competitors and continue to take market share in the detection market. For comparison, Autoscope Technologies, our only publicly traded competitor to disclose detection product revenue, reported a 20% year-over-year decrease in revenue for their first quarter ended March 31, 2022.

A major factor in our market share gains is the superior performance of our sensors, which continue to set the performance standard for the industry. To that end, in the fourth quarter, we announced that Iteris, in partnership with Ford, Toyota, Qualcomm, and Continental AG, was awarded a $20 million three-year pilot project to demonstrate the safety potential of connected and automated vehicles operating in cooperation with Iteris' Vantage Fusion sensor. We received statewide approval, additionally we received statewide approval, in other words, a hunting license, from the New York State Department of Transportation to sell and deploy our VantageRadius sensor. We won a competitive procurement by the Florida Department of Transportation, valued at $1 million, to deploy our connected vehicle sensor, which we brand as Spectra CV. That deployment will occur across a corridor in District 7.

Furthermore, our Vantage Next sensor was selected as the detection standard for many of the nation's largest signal modernization initiatives, resulting in the following notable fourth quarter purchase orders. A $9.4 million purchase order from Miami-Dade, Florida, for the first phase of a multi-phase project to modernize the county's signalized intersections. A $3 million order from Baton Rouge, Louisiana, to deploy our Vantage Next sensor across the city's signalized intersections. A $2 million order from Concord, California, to modernize the city's signalized intersections with our Vantage Next sensor with hybrid video and radar detection. A $1.2 million order from Fremont, California, to deploy our Vantage Next sensors. A $500,000 order from the Colorado Department of Transportation to deploy our Vantage Next sensor with hybrid video and radar detection.

Unfortunately, supply chain challenges not only constrained our ability to fulfill our entire fourth quarter backlog, but these challenges also resulted in significant additional cost to source and to expedite components from alternative suppliers. Doug will characterize the current and near-term impact of supply chain constraints on our gross and EBITDA margins. However, in the meantime, I wanna assure you that we've developed a comprehensive supply chain mitigation plan, which we are currently implementing and is intended to progressively improve our supply chain position. Key elements of the plan include, one, redesign of certain Vantage sensor circuit boards to reduce our dependency on specific chipsets. Two, expansion of our supplier base by negotiating volume and price commitments for alternative chipsets. Three, expansion of our secondary market or our broker network. Four, enhancements of certain supply chain and manufacturing business practices with the help of outside advisors and strategic hires.

Fifth, increase in our buffer inventory to cover a target 12-18 months of key components. Sixth, implementation of certain additional price increases to further offset materials costs going forward. Our plan should meaningfully improve our supply chain position as we progress through fiscal 2023, even if the global supply chain environment remains largely the same as current conditions. In other words, the benefits should begin to bleed through our Vantage sensor revenue and gross margin lines in our fiscal 2023 second quarter. In a few minutes, Doug will discuss the financial implications of this mitigation plan in more detail. In the meantime, I wanna review the performance of our service lines of business. As you'll recall, we recognize two forms of service revenue. One, project-based revenue that is associated with our consulting activities.

Two, annual recurring revenue from our software as a service, data as a service, platform as a service, and managed service offerings. Our fiscal 2022 fourth quarter service revenue was $17.1 million versus $15.8 million in the same prior year period. This represents an 8% year-over-year increase. On a full year basis, fiscal 2022 service revenue was $64.8 million versus $54.2 million in the same prior year period, representing a 20% year-over-year increase.

Our fourth quarter annual recurring revenue was $8.7 million or 51% of fourth quarter total service revenue, and full year annual recurring revenue was $33.5 million or 52% of full year total service revenue. In the fourth quarter, we recorded $20.3 million in net service bookings, as well as executed several large contracts, with the following agreements being some of the more notable. A three-year contract with the Virginia Department of Transportation with an unlimited budget ceiling for intelligent transportation operations, planning, and support. A multi-year contract to provide our data as a service offer to iHeartMedia's Total Traffic & Weather Network for an undisclosed value. A $5 million multi-year contract with the Florida Department of Transportation for smart mobility, safety, and sustainability initiatives.

A $3.8 million task order with Orange County Transportation Authority to conduct a traffic signal synchronization program. A $1.6 million task order with L.A. Metro to operate and maintain a next-generation signal priority system, which leverages Iteris' asset management, cloud-enabled managed service solution and infrastructure-to-vehicle integration expertise. More than $1 million in task orders from the Virginia Department of Transportation to support a smart mobility, safety, and sustainability priorities. In summary, customer response to our ClearMobility roadmap continues to be very strong, resulting in record total fourth quarter and full-year net bookings, as well as record total ending backlog. Although supply chain constraints prevented us from fulfilling $2.2 million for our fourth quarter Vantage sensor backlog, we did report solid organic revenue growth, and we made good initial progress implementing our supply chain mitigation plan.

Before I discuss our fiscal 2023 expectations, I'd like to turn the call over to Doug to provide some more color on our fourth quarter and our full year 2022 financials.

Doug Groves (CFO)

Thanks, Joe. Good afternoon, everyone. As a reminder, please see the company's 10-K filing and press release, which is posted on our IR website for a further description of matters under discussion during the call today. As Joe mentioned, we faced several supply chain challenges again this quarter that impacted both the top and bottom line results. While we had anticipated some of these challenges, certain components that were available last quarter were suddenly unavailable in the current quarter, so this continues to be a very challenging environment. From a revenue standpoint, there were approximately four core components within our Vantage sensor product family that we could not source in the quantities we needed from any suppliers. This prevented us from manufacturing all the circuit card assemblies necessary to fulfill a substantial percent of Q4 sensor backlog.

This drove approximately $2.2 million in product sales to slip out of the quarter. On the cost of goods sold side, we continued to have multiple components that were not available from our normal suppliers. We had to access the secondary markets, i.e., brokers, where we saw prices on these components increase anywhere from two to 100x their normal costs. These component cost increases, coupled with higher freight costs to expedite component shipments, impacted the product gross margins by about $2.1 million or 1,240 basis points. As Joe mentioned, we've got many ongoing initiatives to improve the situation. However, we do expect there to be continued supply chain pressure for the next few quarters before we realize the full benefits of these initiatives.

On the bright side, demand for our products and services continues to be strong, as evidenced by our record bookings and backlog in the quarter. Now I will move on to the details of the fourth quarter results. Total revenue for the fiscal 2022 fourth quarter increased 8% to $34.2 million, compared to $31.7 million in the same quarter a year ago. Our gross margins in the fourth quarter decreased 850 points to 32.4% compared to 40.9% from the same quarter last year. As previously mentioned, this was all due to higher component and freight costs. Turning to our revenue mix, the product revenues increased 8% to $17.1 million compared to $15.9 million in the same quarter last year.

Taking into account the $2.2 million of revenue that was not recognized because of component shortages, the revenue growth would have been 21% quarter-over-quarter. Product gross margins declined 1,040 basis points and were 32.3% compared to 42.7% from the same quarter last year due to the supply chain COGS issues mentioned previously. On a normalized basis, excluding the supply chain issues, the gross margins would have been about 45%, which is much closer to their historical average. Our service gross revenues grew 8% to $17.1 million compared to $15.8 million in the prior year quarter. As Joe mentioned, in the fourth quarter, 25% of the total revenue was annual recurring revenue, which was consistent with prior quarters.

Service gross margins decreased 680 basis points to 32.4% compared to 39.2% from the same quarter last year. This was due to higher subcontractor costs on several projects in our consulting business in the current quarter when compared to the prior year quarter. As a reminder, gross margins on most of our subcontractor costs in the consulting business are limited to a 10% or less markup due to the procurement policies of most public agencies. Additionally, there was a slight increase in the licensing costs for some of the data we use in our ClearMobility Cloud. Operating expenses in the fourth quarter were $14.1 million compared to $13.4 million in the same prior year quarter.

This increase is a result of higher R&D spending of $262,000 as we continue to build out the ClearMobility platform and higher sales and marketing expenses of $453,000 related to higher bid and proposal costs and sales commissions on higher revenue. General and administrative expenses were flat year-over-year, and we continue to be focused on keeping our G&A expenses flat to get more leverage in the P&L. We reported a GAAP operating loss in the fourth quarter of $3 million compared with a GAAP operating loss of $382,000 in the same quarter a year ago.

The GAAP net loss from continuing operations in the fourth quarter was $3 million or a loss of $0.07 per share, which compares with a net loss from continuing operations of $385,000, or a loss of $0.01 per share in the same quarter a year ago. Adjusted EBITDA for the fourth quarter was a loss of $1.1 million or a -3.1% of revenue, which compares to $1.8 million or 5.5% of revenue in the third quarter of last year. The GAAP operating loss, GAAP net loss, and adjusted EBITDA loss were driven by the supply chain issues, as previously noted. Due to the supply chain mitigation plans outlined by Joe, we anticipate a progressive improvement in our supply chain position beginning in the second quarter.

This should yield a full year EBITDA margin in the mid-single digits%. With the anticipated improvement in the products' gross margins, we are expecting gross margins to return to about 45% as we execute for fiscal year 2023, which again, is close to their historical average. Turning to liquidity and capital resources. Total cash and cash equivalents were $23.7 million at the end of the year. The $3.8 million decrease in cash and cash equivalents quarter-over-quarter was a result of changes in our working capital. Specifically, we're buying more raw materials as buffer stock to hedge against the ongoing supply chain shortages, and accounts receivable increased in the quarter due to the timing of our invoicing being later in the quarter for our Vantage sensor products due to the component shortages.

We spent $130,000 in purchases of property and equipment in the fourth quarter and $466,000 for the year, which is 0.35% of total revenue, reflecting our asset-light business model. In summary, we continue to be laser-focused on the supply chain challenges, and we recognize we're not alone in this situation as many Fortune 500 companies have also reported similar experiences given the global shortages on a multitude of products. As Joe mentioned, we'll proactively manage the situation by extending lead times on purchase ordering, buying ahead where we can, redesigning aspects of our products to find replacement components for those that are unavailable, and enhancing our supply chain capabilities. With that, I will turn the call back over to Joe. Joe?

Joe Bergera (President and CEO)

Great. Thanks, Doug. Despite the global pandemic and associated supply chain disruptions, Iteris continues to enhance its position in the large dynamic and highly fragmented smart mobility infrastructure management market. This market represents significant opportunities due to favorable secular trends as well as historic new investment driven by the recently passed Infrastructure Investment and Jobs Act, or IIJA. Iteris' market access, our know-how, and our platform-based strategy provide degrees of freedom and optionality that most companies in our market lack. As a result, we are very optimistic about the opportunity in front of Iteris and believe the current environment actually improves our ClearMobility value proposition and competitive position despite some near-term disruption from supply chain constraints.

To accelerate the capture of these opportunities, we will execute an aggressive FY 2023 solution roadmap to expand the adoption of the ClearMobility platform, enhance the cross-sell of our ClearMobility offerings, and increase the monetization of our ClearMobility data sets. Key releases will be, one, extending the ability of our Vantage sensors to cooperate with connected and automated vehicles. Two, increasing the attach rate of our SaaS solutions to our installed sensors. Three, enhancing the artificial intelligence capability of our Vantage sensors. Four, creating prepackaged mobility data solutions for new public sector and private sector customer segments. Five, introducing new ClearMobility technical features to further enhance and differentiate our economic value proposition for IT buyers who are increasingly important in our end markets.

And six, continuing to expand and enhance our cloud-enabled managed services portfolio, which among other benefits, will accelerate the adoption of our SaaS solutions and allow us to transition certain consulting activities to an annual recurring revenue model. To support our platform-centric business model and our aggressive solutions roadmap, we're consolidating and reorganizing the technical teams that formerly comprised our applications and cloud solutions and Advanced Sensor Technologies business units. The new structure will be comprised of a single product team responsible for a unified everything as a service and sensor roadmap, and a single development team responsible for delivery of the unified roadmap. The product team will be led by Will Cousins, who has been appointed Senior Vice President and Chief Product Officer.

Will has recently joined Iteris from Zonar Systems, a subsidiary of Continental AG, where he served as Senior Vice President of Products, Design, and Automotive OEM Solutions. The development team will be led by Todd Kreter, who has been appointed Senior Vice President and Chief Technology Officer. Previously, Todd served as Senior Vice President and General Manager of our Advanced Sensor Technologies business unit. This new functional structure will drive better alignment across our software and sensor portfolio, enhance resource utilization, accelerate the development of ClearMobility Cloud, and support our continued organic and inorganic growth.

As a result of this reorganization, Iteris will take a pre-tax restructuring charge of $0.7 million in our fiscal 2023 first quarter and generate annualized cost savings of approximately $1.2 million, which in addition to the aforementioned benefits, will help offset materials cost variances until we begin to realize the full benefit of our supply chain mitigation plan. Looking ahead, the company's sales pipeline, which includes both public sector and private sector demand for our ClearMobility platform, continues to reach new historic levels due to the sustained release of best-in-class technology and our solid sales execution. Additionally, we expect the IIJA funding to begin to show up in state and local agency budgets in the second half of our fiscal 2023.

Therefore, we anticipate continued bookings growth in our first quarter and beyond, even though results may fluctuate from quarter to quarter, especially as we continue to pursue more multimillion-dollar contracts, including complex agreements with large private sector entities. Based on our current record backlog and anticipated bookings growth, we forecast fiscal 2023 total revenue of $147 million-$155 million, which would represent organic growth of 13% at the midpoint of the guidance range. Also, as previously noted, our supply chain mitigation plan will begin to produce progressive benefits starting in our second quarter. As a result, we forecast an improvement in full-year adjusted EBITDA that should fall within a range of 5%-6% of full-year revenue.

To be clear, we expect our fiscal 2023 first quarter to look similar to our fiscal 2022 fourth quarter, after which we'll begin to realize the benefits of our supply chain mitigation plan. In summary, fiscal 2022 was extremely challenging due to the impact of global supply chain issues, but we believe Iteris navigated the period better than most of our competitors and continued to make good progress transitioning Iteris to a platform-centric business model. Therefore, notwithstanding the difficulties of fiscal 2022, we believe Iteris remains on track to realize our Vision 2027 operating model, as outlined in our December 2021 technology update.

As a reminder, the target operating model assumes a combination of sustained above-market organic revenue growth and two to three tuck-in acquisitions will more than double our fiscal 2022 total revenue to $275 million at the midpoint of the range and triple our fiscal 2022 annual recurring revenue to $100 million at the midpoint of the range by 2027. Lastly, because your board of directors believes the recent trading range of the company's stock is dissociated from the opportunity in front of Iteris, the board has authorized a new stock repurchase program whereby $10 million in common stock may be repurchased from time to time in the open market. We believe buying back our own stock is a recognition of the long-term prospects of our business and the undervalued price of our stock.

With that, we will conclude the prepared remarks and would be delighted to respond to your questions and comments. Operator, do we have any questions?

Operator (participant)

Thank you. We will now begin the question-and-answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star then two. Our first question comes from Jeff Van Sinderen with B. Riley. Please go ahead.

Jeff Van Sinderen (Senior Analyst)

Okay, great. Realize it's a fluid situation, but based on what you know today, what are you contemplating for the timing of supply chain normalization, let's call it? Sort of as a second part of that, what is the outlook for subcontract work? Just wondering if there was an impact in the quarter. Do you anticipate that to just fluctuate, or do you have any visibility there? Just wondering on gross margin impact going forward there. I guess, when do you anticipate realizing the full impact of the supply chain mitigation plan?

Joe Bergera (President and CEO)

Do you wanna take those questions?

Doug Groves (CFO)

Sure. Let's start with the supply chain mitigation plan. You know, as noted, we've got several things underway. One of the more significant is, of course, the redesign of some of our circuit cards, and we're making good progress on that. You know, that is gonna take some time because we've got to not only redesign the product, but we've also got to field test it. As you know, Joe noted, one of the things that sets us apart from our competitors is the superiority of our product and how it performs in the field.

You know, we're not expecting to see meaningful improvement in the product gross margin until we probably get to the second quarter, and then that gets progressively better quarter-over-quarter, you know, exiting the year back about where the product margins were before this whole supply chain situation got started, you know, which is in the kind of mid-40% range. As far as the subcontractors go, that does vary from quarter to quarter. A lot of the subcontractors that we do work with are, of course, facing the same supply chain constraints that we have. There is variability in how much subcontractor, particularly equipment, you know, gets shipped to the sites where we're acting as the systems integrator. It's hard to pinpoint that because we don't have good visibility into their supply chains.

It's been historically, you know, an area that has been impacted by, you know, not only just COVID, but also the supply chain situation that we have now. You know, we would expect that as though things continue to improve, we should see, you know, better delivery from our subcontractors, which will drive more revenue, but just, you know, highlighting that the revenue and the markup on a lot of that equipment is not very big. It does create a mix problem in, you know, any given quarter.

Joe Bergera (President and CEO)

I think I'll add just a couple of quick points to that. Jeff, on the prior calls, which I think you're referencing, we've talked about subcontractor delays, and those took two forms. One is related to equipment. In some cases, that was unavailable, that impacted our ability to recognize forecasted product revenue and also in some cases delayed project implementation. Additionally, we had some supplier delays which were actually personnel related, because some of our subcontractors had staffing shortages. I do want everyone to be aware that in addition to the supply chain mitigation plan, which we talked about on this call, we've also taken some actions that will allow us to begin to insource some of those activities that we previously outsourced.

That will reduce to some degree our dependency on the staffing availability of some of the third-party contractors that we previously worked with. That's something, an action we took internally, which will help to mitigate some of the dependency that we have. The other thing which you asked about, Jeff, which I'm not sure whether we were clear about, is, you know, what is our overall expectation regarding the broader supply chain issues? You know, we obviously don't have a crystal ball, but our expectation is consistent with, you know, what we think most of the experts are saying is that the overall global supply chain environment is gonna probably remain difficult through at least the end of this calendar year, perhaps longer.

based on the mitigation plan that we put in place, you know, we believe, as we said, you know, we can improve our supply chain position even if the global supply chain situation remains the same as it is today. We're expecting that there'll be a continued problem, but we're taking efforts to mitigate our exposure.

Jeff Van Sinderen (Senior Analyst)

Okay, great.

Joe Bergera (President and CEO)

Did we address everything for you, Jeff?

Jeff Van Sinderen (Senior Analyst)

Yeah, I think you did.

Joe Bergera (President and CEO)

Is there anything else you'd like to ask?

Jeff Van Sinderen (Senior Analyst)

No.

Joe Bergera (President and CEO)

Sorry.

Jeff Van Sinderen (Senior Analyst)

I think you hit on most of the points there. I did want to ask you vis-à-vis the stock repurchase that you announced today. I'm just wondering. How do I ask this? I guess maybe just touch on the timing. I think we're past 18 months now, which was kind of the timeframe you were thinking you'd be making, you know, probably wouldn't stretch a lot beyond that to make another acquisition. Just wondering how you're approaching acquisitions in the near term. Is that deferred for now? In other words, are you buying back stock in lieu of making an acquisition or what's the thought process around all that?

Joe Bergera (President and CEO)

Yeah. Well, obviously, we have a finite amount of capital, but we're continuing to look at potential acquisition targets. You know, we'll continue to develop those, and we'll pursue them. But at this point in time, we actually think that, you know, our investors will realize, like, the highest return on investment by actually, you know, doing an acquisition of sorts, which is acquiring our own stock. But that's not to say that we're doing that in lieu of pursuing additional acquisitions. We're very active in that regard, and we'll continue to develop opportunities. Doug, do you wanna offer any additional perspective on that?

Doug Groves (CFO)

No, I think that's exactly how we're thinking about it. A lot of these opportunities, as you can imagine, you know, take, you know, several quarters to develop. You know, we've got a funnel of things that we're continually looking at. In the absence of that, buying our own stock, you know, makes the most sense if those don't look actionable.

Joe Bergera (President and CEO)

Yeah. I will say just for background, at least in our market, you guys will remember that we talked about the fact on our last call, we were actually seeing more deal flow, which we took as a very positive thing. Right now, there seems to be so much uncertainty in the market, and at least some buyers have seemed to be backing away. On one hand, that's kind of arguably potentially good news for us because there may be less, like, less competition for some of the acquisitions. We've also seen sellers start to back away because of the uncertainty regarding, you know, their valuations. Right now, we see a little bit of a pause, but we remain active, and we're sure that the market will come back.

It's a very fragmented market, and there are lots of targets out there.

Jeff Van Sinderen (Senior Analyst)

Okay, fair enough. Thanks for taking my questions.

Operator (participant)

The next question comes from.

Joe Bergera (President and CEO)

Operator, is there any other questions?

Operator (participant)

Yes. Our next question comes from Ryan Sigdahl with Craig-Hallum Capital Group. Please go ahead.

Ryan Sigdahl (Senior Research Analyst)

Good afternoon, guys. Thanks for taking our questions.

Joe Bergera (President and CEO)

Hey, Ryan.

Doug Groves (CFO)

Hi, Ryan.

Ryan Sigdahl (Senior Research Analyst)

Curious, you mentioned, kind of briefly at the end of your prepared remarks, working on some larger deals with some private entities. Curious how much, or I guess, what part of your mix currently is private versus public? Then if you can elaborate kind of on that pipeline a little bit more.

Joe Bergera (President and CEO)

Yeah. Right now, under 10% of our total revenue would be, you know, private sector. You know, I don't wanna mislead people. For the, you know, next three to five years, I'm sure that the majority of our revenue will continue to be in the public sector. We are seeing a lot of inbound interest from various, commercial or private sector entities who have an interest in certain solutions that we offer through our ClearMobility platform. In some cases, some of these, private sector entities have their own cloud strategies, and they're interested in talking to us about cloud-to-cloud integration to support their broader mobility strategy. I can tell you that the pipeline of opportunities with, private sector entities has grown exponentially.

But you know, one of the kind of dirty little secrets is that when you're selling to really big private entities, sometimes those sales cycles can be at least as long and even longer than we're seeing in the public sector. It will take some time before we see a meaningful change in the mix, but I can tell you already that the contribution of private sector opportunities to our sales pipeline has increased significantly.

Ryan Sigdahl (Senior Research Analyst)

And then, maybe just expand on that. Is that primarily on the product side or the service side or both?

Joe Bergera (President and CEO)

Well, it's both in the sense that when I'm just talking about services in this case, I'm talking about software as a service and data as a service, and in some cases, even cloud-enabled managed services that would be providing to public sector entities. At this point, our private sector sales pipeline does not include any material consulting services for private sector entities. Again, it would be service revenue, but it'd be SaaS or what we also called in the in my remarks, everything as a service sales opportunities. Then there's also a little bit of product revenue related to the use of our detection sensors and also in some cases, our connected vehicle sensors.

Ryan Sigdahl (Senior Research Analyst)

Good. Moving on to kinda guidance. Positive EBITDA for the year, but do you think Iteris will be free cash flow positive this fiscal year?

Doug Groves (CFO)

Absolutely, yes. You know, we're you know, as we said in the remarks, very focused on you know, getting the supply chain situation progressively better. I think that we'll absolutely be cash flow positive.

Ryan Sigdahl (Senior Research Analyst)

Good. One more for me, just on the operational restructuring. Good to see the savings there, and efficiencies. You think there's any more opportunity for further consolidations within other parts of the business, streamlining cost rationalization, or is this kind of the main one to point out at this point?

Joe Bergera (President and CEO)

Yeah. I mean, we make an effort when we take actions like this to try to, you know, gang things together and, you know, get things behind us, because obviously, things like this can be disruptive. That being said, you know, while I wouldn't anticipate any other near-term restructurings, there are a lot of opportunities for process improvement and for automation, and we're always focused on that. Doug's responsible for leading a couple things. One is on the development and the implementation of a lean toolkit, which we're rolling out across the company. Also for you guys who don't know, our internal information technology systems group reports to Doug, and so Doug, maybe you could provide some additional color on some of those, you know, on to Ryan's question.

Doug Groves (CFO)

Sure. Yeah. I would say that we're always looking for, you know, improvements and automation, as Joe referred to. You know, sometimes that does result in redundancy in personnel. To Joe's point, I don't think there's anything on the near term, but certainly as we work through this, you know, maybe there are opportunities to be able to continue to streamline the cost structure, you know, of the company, be it with better processes and/or automation, and it's usually both.

Joe Bergera (President and CEO)

Yeah. Certainly, as we've said before, the intent is to try to keep our G&A, our corporate G&A flat even as the company continues to grow. A lot of that is due to the process automation that we're talking about. Certainly, there are opportunities with respect to marketing. We're using marketing automation more and more, sales automation, customer support automation, which will enable us to start to show more operating leverage as the company continues to grow.

Ryan Sigdahl (Senior Research Analyst)

Thanks, Joe. Doug, good luck, guys.

Joe Bergera (President and CEO)

Yeah. Thank you, Ryan.

Doug Groves (CFO)

Thank you.

Operator (participant)

Our next question comes from Mike Latimore with Northland Capital Markets. Please go ahead.

Mike Latimore (Managing Director and Senior Research Analyst)

Great. Thanks. Yeah. Good to see the strong bookings there. I guess, Joe, among your customers, I assume they're not, you know, sort of talking about some additional hesitancy around because there's inflation or talk of recession. I would imagine your agencies are a little more insulated from that kind of macro theme, given where their sources of revenue come from. But just curious what you're hearing in that regard.

Joe Bergera (President and CEO)

Yeah, that's true. The market, you know, generally, I guess mobility overall, generally from our perspective continues to be very robust. We have much more exposure at this point to the public sector than the private. To your question specifically about public sector is, you know, the discussion about supply chain constraints and inflation, is that impacting the sentiment of public agencies? The answer is no. At least not with respect to the activities that, you know, we support. We were pleasantly surprised that most public agencies came through the pandemic in a better budget position than I think a lot of them had anticipated.

As we have talked about on prior calls, one thing that's been benefiting us is that over the last decade, state and local agencies have been putting in dedicated revenue sources to support their transportation infrastructure initiatives. What we're finding is that a lot of those revenue sources seem to be somewhat insulated from economic cycles, like use taxes, for example, vehicle registration fees. Those kinds of things don't tend to fluctuate that much during economic cycles. The revenue stream remained pretty strong even during the worst of COVID. On top of that, of course, there was a lot of federal stimulus. I think a lot of people have been talking about the most recent stimulus, which was enacted last summer.

Only a portion of that has been spent, and the expectation is that the feds are going to extend the period for state and local agencies to continue to use that funding, so that provides a nice backstop. Additionally, of course, there's the IIJA on top of it, you know, which more than doubles the funding that was previously available under the FAST Act, which is Federal on Surface Transportation funding bill. You know, there's a huge increase in that. The FAST Act requires state and local agencies to match the funding. There's a huge multiplier effect on the FAST Act. Overall, you know, at least at this point in time, you know, the public sector market seems to be extremely robust.

Mike Latimore (Managing Director and Senior Research Analyst)

Yep, great. On your service contract, I know you—well, first, I know you have a price increase on the sensors. On your service contracts, are there any sort of, I don't know, inflation adjustments built into the contracts, or are those kind of, you know, negotiated on renewals?

Joe Bergera (President and CEO)

Yeah. So it depends. So, on the products that we talked about, it's relatively easier for a lot of reasons. Services, again, they're different kinds of services. With respect to software, unless we're under contract, and we've committed to certain pricing for some period of time over the course of that contract and in the event that there is no, you know, escalator in the contract, in that case, we may be prohibited. In terms of increasing our pricing on new opportunities, we do believe that we have flexibility with respect to our software products and also with respect to our cloud-enabled managed services. Now, in terms of the consulting and our business process outsourcing, where our revenue generally is associated with underlying labor rates, and we have to provide a lot of visibility to that, there can be more restrictions.

You know, we are finding that at least currently, agencies are, you know, pushing back on that. Remember, at this point, you know, less than 50% of our services revenue is associated with underlying direct labor. You know, more than 50% of it is, you know, associated with software, data as a service, or.

Mike Latimore (Managing Director and Senior Research Analyst)

Mm-hmm

Joe Bergera (President and CEO)

Service level agreements. In those instances, we have a lot more pricing latitude. Doug, I don't know if you wanna add anything additional to that?

Doug Groves (CFO)

No, I mean, I think that covers it, Joe. I mean, you summarized it pretty well. I mean, we're obviously looking for every opportunity.

Joe Bergera (President and CEO)

Yeah

Doug Groves (CFO)

We can to, you know, increase our rates, increase our revenue, and so we do that on a, you know.

Joe Bergera (President and CEO)

Yeah

Doug Groves (CFO)

Judicious basis, you know, day in and day out as we

Joe Bergera (President and CEO)

Yeah

Doug Groves (CFO)

Not only look at new work, but also work that's renewing.

Joe Bergera (President and CEO)

Yeah. Mike, again, in total what that means or in summary, about 25% of our total revenue, which is tied to direct labor rates, we may have limited latitude, but on 75% of it, we've got some degrees of latitude, and we will take reasonable actions.

Mike Latimore (Managing Director and Senior Research Analyst)

All right, great. On the merging or unifying of the cloud and sensor team, does that change any reporting going forward, or you continue to report the way you are?

Doug Groves (CFO)

Yeah, Doug.

Yeah. There'll be no changes to how we report. This is more of an internal reorganization to a more functional organization.

Mike Latimore (Managing Director and Senior Research Analyst)

Mm-hmm.

Okay, great. Thank you.

Joe Bergera (President and CEO)

Awesome. Thanks, Mike. Operator, are there any other questions?

Operator (participant)

Showing no further questions. I would like to turn the conference back over to Mr. Joe Bergera for any closing remarks.

Joe Bergera (President and CEO)

Super. Great. Thanks a lot, operator. We appreciate your help today. And as always, hey, I really appreciate everybody's support and also the thoughtful analyst questions. On the investor relations front, I want everybody to know that we'll be participating in various investor outreach events this quarter. Those will in general be done in coordination with our various covering sell-side analysts. We'll also be presenting at the Stifel Cross Sector Insight Investor Conference in Boston, Massachusetts on June 7th, just next week. If you're participating in the Stifel conference, please plan to attend our presentation and/or schedule a meeting with us. We'd love to see you. In the meantime, we look forward to updating you again on our continued progress when we report our fiscal 2023 first quarter results. With that, we'll conclude today's call. Thanks, everybody.

Operator (participant)

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.