I make jokes about this company going down 3% every day, but it is literally true. No, I do not know why it is 35%+ off its highs. I can theorize and come up with reasons but at the end of the day that does not mean anything to me, or anyone else. All we can look at is the future of the business, which looks very very bright through my monocle.
Normally I care about formatting and making things look pretty, but dont really care right now. At a glance you might think, wow that report was not very good! Well, that is because we have to look further in. Sales this quarter would have been in line, management noted that supply chain issues caused a roughly $1.2m ding to the top-line. Here is an example of supply chains hurting a Co, and we will look into this further with Iteris further down.
The company is exhibiting fair growth for their business, Q2 revenue was $33.2m up 14% on a YoY basis and Annual Recurring Revenue for them this quarter was at $8.5m, which is 26% of their Q2 revenue. Iteris had record bookings of $36.7m and a total backlog of $83.4m. All those deals we see them continuously inking, only more juice for the company. Wait until they expand more (talk about this more later). The company took a big one time $2.8m charge relating to the Iowa contract, it seems there might have been some sort of contractual issues here. Management expects the changes to the contract going forward to be successful in that endeavor and they have NO other contracts like this. This caused margins to be down YoY, and EBIT to completely miss, obviously.
Holding guidance steady with the wide range on top-line of $134m to 142m. This takes in account supply chain issues.
From reading the earnings call twice, it sounds like business is as usual. No further comments on the strategic alternatives they were pursuing, and they have an Investor Day coming up in December and I am hoping we get some more information on what they are really looking forward to doing with this. The company has been consistently executing on new deals and focusing on their core areas of competence which are the West Coast, Texas region, and the Florida market. These are the areas that are spending money on smart mobility infrastructure right now. There are so many expansion opportunities for this company in many other states.. currently the company is working in New Jersey on some new projects and they see opportunity in the Northeast region. Over the years, we will start to see these deals inked and contribute to the top line. Management notes this will be a major focus for them for organic growth. We have to monitor this closely and make sure management is executing, I dont care about the short-term pricing right even though it is pissing us all off. People are addicted to high growth, no cash flow companies right now. I think we find the sweet spot and look where others are not!
Margins got beat down this quarter because of the Iowa write off. We can take this with a grain of salt for now, as they said no other contract they have has deal terms like this one so it is a one time write off. Total gross margins took a 530bps hit to 33.5% from 38.8% last year same quarter. But, after adjusting for the $2.8m charge, gross margins were actually up 310bps YoY to 41.9%. So, all in all, I think moving forward we can incorporate 40%+ margins as a steady state. The company is experiencing higher direct sales than OEM distributor sales, which is giving them solid leadership in their sensors (noting it is driving above-market growth rates, have to find these out). Services gross margins took a brutal hit down to 15.3% compared to 34.1% last year, this was due to the $2.8m charge and without that, was at 33.4% so still slightly down from the 34.1%.
In this quarter supply chain constraints actually hurt the top line by an estimate of $1.2m, so would have been more in-line with estimates. Management notes that it was raw materials and professional services ran into supply chain issues and could not deliver equipment they needed to the project.
Iteris has two operating segments, Product and Service. The service segment includes the SaaS revenue, so that is a main area of focus for anyone who wants to invest in this business. "Service revenues primarily consist of traffic study, design, engineering, and management services, but also includes service revenues generated from advanced sensor technologies product installation services and cloud-based application installation and support services." TrafficCast is the company they acquired, and is already becoming accretive to growth with $2m of SaaS revenue from them in the quarter, and $3.9m in the last 6 months. Majority of the increase in Revenue for Services IS the TrafficCast acquisition.
As we discussed above, the company took a huge hit with the Iowa contract. I view this as a buying opportunity under $5. I will acquire shares here.
Strong position with $28.2m in cash, no revolving credit facility, and the company is taking strides to preserve cash and manage cash flow due to COVID-19 pandemic.
The government has passed the infrastructure bill, and of course Iteris stock price does not care. Truly amazing how much of an inefficiency I think there is in this business, or I am flat out wrong. I dont think I am. Time will tell, unless there is information I am not aware of and I need to be.
I wont bore you with the whole part of the congestion part of the bill, but here is a snippet. This bodes well for Iteris and I am interested in reaching out to management to see how they will take advantage of this.
I remain bullish, despite the weak price action as the stock is getting cheaper (and can continue to as well).