Updated: Jun 23, 2021
This newsletter is for Fiducia's research on Iteris, Inc and the potential theme for smart road infrastructure as government spending may turn up a notch, as well as the rollout over a longer period of time of autonomous vehicles.
Breaking down the Investor Presentation on Iteris, Inc. I think there is a small opportunity for them in a rather niche market. First, what is the IoT (Internet of Things)? It is basically what it sounds like, it is a network of things that are embedded together with software, sensors, or other deep tech in order to connect with other devices and exchange data. A link to further your knowledge on this topic can be found here.
Iteris has some very nice goals set out over the next three and five year periods, and a neatly laid out target operating model that stands for building at least 30% of the total revenue into a recurring SaaS model. Currently, the TTM (trailing twelve month), annual recurring revenue accounts for 20.7% of that revenue.
People may be thinking, Fiducia why this company? Obviously this is not a super concentrated high conviction holding of mine thus far. I am thinking over time maybe build to a 6-8% position in my actively managed account, which I will start posting quarterly here as well in my reports. We have to think deeper, this company is operating in a niche industry where they will be a beneficiary of potential infrastructure spend, smart roads, autonomous vehicles, and the safety of the roads we drive on everyday (and walk).
I want to point out that Iteris had actually declined an acquisition offer from Rekor, which is an AI Driven Decision business that is focused on AI-enabled smart roadways, serving multiple missions from one single source. I can see how this would be a great fit, but it seems Iteris is dominating the market and this tells me they feel they are a better standalone company, for now. I cannot wait to monitor the business and spend some more time on them. Feeling I have a pretty good grasp on Cloudflare, I can relax a bit more with them and let management deliver results over the next three, five years. I will most likely update them quarterly with my thoughts and overview.
Iteris wants to:
Improve road congestion, safety, and carbon emissions
Reduce cost to operate roadwork
Enable vehicle to infrastructure (V2X) integration
Instrument road network with advanced technology
Sounds boring, but really I think this is a theme for us to dig deeper in on smart roads and how they will connect to autonomous vehicles as they roll out. Here is a Tweet from Elon Musk talking about the difficult nature of software challenges for autonomous vehicles: link
How do we dissect the Smart Mobile Infrastructure Management? The investor presentation does a pretty nice job of dumbing it down for someone like me, who wants to get straight to the point and understand it.
It has been a while since I studied a business that wants to take a disciplined approach to capital allocation, focusing on ROIC. This tells me they may be a standalone business longer than expected, but eventually I wont be surprised if they sell themselves down the road as they get larger and capture more market share.
Iteris had sold its money losing business, the Agricultural and Weather Analytics to DTN, LLC for $12m. This is the right move to make to focus on their core product strategy, now generating positive operating cash flow from the sale. $10.5m was paid in cash at the closing date, and the $1.5m extra will be payable at one year and 18 month anniversaries of the closing date as long as certain milestones were achieved. This sale is also aiding in cost restructuring, and heavier investments revolving around their Roadway Sensors and Transportation systems segments.
You can see that top line had actually be growing double digits, which is nice, but got hit harder as COVID hurt the subcontracting as noted in the first write up:
Revenues in the following quarters are going to be more volatile, as management had noted in the Q3 earnings call. However, they did call for the rate of revenue in the Fourth Quarter to increase compared to the rate of growth in the Third Quarter. Management remains bullish on their long-term prospects in the smart mobility infrastructure management and note that vehicle-to-infrastructure integration and connected and automated vehicles represents a favorable secular trend. (This is very cool).
Lets talk about the TrafficCast acquisition because that will be important moving forward. TrafficCast has two lines of business, the commercial line of the business has software that collects, filters, and models real-time traveler information as well as traffic incident data for large media companies. The public sector line of business provides sensors and software that aid state and local agencies measure, visualize and manage traffic flow. Approximately 60% of their sales is related to its software products and reports as ARR (annual recurring revenue). So now we can see Iteris's push towards ARR.
I am long the business, and will continue to monitor. On the chart, you can see we are breaking out. We will see if this breakout holds!