Todd Kehrli - IR, MKR Group Joe Bergera - President and CEO Andrew Schmidt - CFO

Jeff Van Sinderen - B. Riley Nick Altmann - Northland Capital Markets Joel Slutzky - TLP Brett Reiss - Janney Montgomery Scott William Meyers - Miller Asset Management Matt Sweeney - Laughing Water Capital

Good day ladies and gentlemen and welcome to Iteris' Fourth Quarter and Full Year Fiscal 2016 Financial Results Conference Call. Please note today's conference is being recorded. At this time, I will turn the conference over to Mr. Todd Kehrli with MKR-Group. Please go ahead sir.

Thank you, operator and good afternoon everyone and thank you for participating in today's conference call to discuss Iteris' financial results for its fiscal fourth quarter and full year ended March 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'll open the call for your questions. Before we continue, we would like to remind all participants that during the course of this call, we may make forward-looking statements regarding future events or the future performance of the Company, 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 that the Company files from time-to-time with the SEC, specifically the Company's most recent Form 10-K, Form 10-Q and 8-K, which can 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 today will be available after 7:30 PM Eastern Standard Time through June 30, 2016 via the Investor Relations section of the Company's website at www.iteris.com. Now, I would like to turn the call over to Iteris' President and CEO, Mr. Joe Bergera. Sir, please proceed.

Great. Thank you, Todd, and good afternoon everyone. Thank you for joining us today. As you saw at the close of the market today, we issued our press release announcing the financial results for our fiscal fourth quarter and full year ended March 31, 2016. In Q4, Iteris recorded $19.8 million in total revenue representing a very strong 10% year-over-year rate of growth. Our Transportation Systems business unit started to realize the impact of its record backlog growth, and our performance analytics be benefited from significant growth of ClearAg. For the full year, Iteris recognized $77.7 million in total revenue. This is an 8% increase against FY 2015 led by particularly strong performance in Roadway Sensors. The strong Q4 and full year 2016 revenue results are records for Iteris and reflects continued acceleration across all our lines of business. In Q4 Roadway Sensors recorded $9 million in sales. The business units’ flat year-over-year performance is due to transient factors such as project-timing and severe weather events which can cause typical fluctuations in the timing of customer needs. As we enter our new fiscal year, we remain very optimistic about this business segment. Our Sensors business has a highly defensible market position based on overall product superiority, a recognized commitment to customer success and excellent sales execution. Furthermore, we expect overall market conditions to remain generally favorable through FY '17 despite some regional variations such as, continued softness in the energy sector which could impact regions such as Texas. Sensor's full year growth was 11%. In Q4 our Transportation Systems BU also recorded $9 million in revenue. This represented 20% year-over-year growth and 16% sequential growth for this BU. For the year, Transportation Systems revenue was up 7%. During the fourth quarter Transportation Systems continued to build its backlog adding approximately $11 million in new orders and exiting the quarter with a record $53 million in backlog. This equates to an approximate 80% backlog increase relative to our prior year Q4 backlog. We continue to see a broad based increase in market demand with notable wins in Georgia, Utah, Virginia, Texas and LA County. Similar to the backlog we added in Q3, the vast majority of the new Q4 backlog is made up of software and/or business process outsourcing also referred to as operations and maintenance. The revenue for these projects is highly predictable. In Q4, the Transportation Systems BU continued to see an increase in average project size. As mentioned last quarter, we believe that a larger average project size will enhance internal efficiencies and improve this BU's margin structure. In addition to the forgoing software and business process outsourcing contract awards, Iteris announced that Federal Highway Administration, FHWA, awarded us a $19 million indefinite delivery indefinite quantity contract. As an IDIQ contract we do not record any backlog value until we receive a statement of work at which time the valued of SOW is added to our backlog. In Q4 our Performance Analytics business unit recognized $1.7 million in revenue representing 19% growth both sequentially and year-over-year. ClearPath Weather service revenue was flat compared to the prior year, while transportation analytics realized modest growth. The PA segment’s primary growth factor was our digital agricultural platform ClearAg. Having just launched it as a subscription service last July, we are delighted that ClearAg is already contributing on a material basis to the business unit’s revenue performance. ClearAg recorded more than $1 million in bookings in FY '16 after only 8 months in the market. In February we announced the Bayer Crop Science and selected ClearAg to provide weather and soil content to Bayer's digital farming platform. We further noted that the roll-out would be completed in phases. The first phase targeted two crop types in a limited number of geographic territories. The first phase of the ClearAg implementation is now in production. Subsequent phases will be added both to new crop types and new geographies. In March another global crop protection company selected ClearAg to deliver targeted purpose mobile application to its growers, [agronomers][ph] and other agro business field staff. Like other ClearAg agreement, this is a software as a service model. The contract represents recurring annual subscription revenue which we expect to achieve 80% gross margins at scale. Under the terms of the agreement, this new customer committed to a minimum number of new users in two geographic regions during Phase 1. Over time we expect the customer to add additional users and regions. Currently we are not able to disclose the identity of this new customer. In addition to the new crop protection deal, we continue to secure OEM agreements with software publishers and other allied providers. For example in Q4, we announced a new global agreement with site specific technology or SST software. SST will integrate ClearAg's weather content, in other words our advisories into its market leading geo location planning and optimization solution for growers and agricultural retailers also known as Ag retailers. SST, a pioneer in precision agriculture has a large customer base in 23 different countries. As mentioned in previous calls, our OEM customers pay us a minimum annual subscription fee to embed ClearAg into their agriculture solutions. We participate in any success above the minimum targets. With the addition of SST, we now have over 180 million wholesale acres under management across 15 different countries including Brazil, France, Mexico, Russia, South Africa and United States. Now I would like to turn the call over to Andy to walk through our financial results. Andy?

Thank you, Joe. Good afternoon, everyone. First of all, before I go through our fiscal fourth quarter and year 2016 financial highlights, I'd like to bring to everyone's attention that we will be talking to both GAAP and non-GAAP results today. Staying consistent with our past calls, I will provide a non-GAAP view of our fiscal fourth quarter 2016 and year results that adjusts and highlights what management feels are atypical expenses to better present the performance of the Company and to provide a more relevant benchmark of operating expenses going forward. Specifically, our non-GAAP results adjusts for past period audit fee overruns and related costs, financial consulting service fees, costs associated with our CEO transition, and the recording of a valuation allowance on the Company's deferred tax assets. In regard to our atypical expenses, we did not experience quarterly review, fee increases or financial consulting support fees in Q4 fiscal 2016, as compared to incurring $65,000 of such fees in Q4 of fiscal 2015. In regard to executive management transition costs, we did not experience any cost this period, however recorded $866,000 associated with executive recruiting fees and CEO severance costs in the same period of fiscal 2015. For the fiscal year ended March 31, 2016 audit fee overruns and financial consulting support fees totaled $238,000 as compared to $1.9 million in fiscal 2015. In regard to executive management transition costs, we’ve recorded $150,000 for fiscal 2016 as compared to approximately $1 million for fiscal 2015. Finally during fiscal 2016, we recorded a non-cash $10.1 million valuation allowance on our deferred tax assets. Our non-GAAP adjusted net loss for fiscal 2016 was approximately $2 million or $0.06 loss per share as compared to net income of $675,000 or $0.02 per share. Today's earnings release and related current report on Form 8-K describes how we calculate these non-GAAP financial measures and provide a detailed explanation of our atypical expenses, as well as reconciliation between our non-GAAP financial measures and our most directly comparable GAAP measures. Moving forward, our Q4 was a great quarter. Total revenues in the fourth quarter of fiscal 2016 increased 10% to $19.8 million compared to $18 million in the same quarter a year ago. Overall the quarter was a nice blend of strong performance by all three business units, as opposed to a single business unit being the primary driver behind our growth. Gross margin in the fourth quarter of fiscal 2016 was 40%, consistent with the same period last year. The strong gross margin performance is a great positive and that regardless of the product mix that drives our growth or able to maintain or improve our margins. Non-GAAP operating expenses in fourth quarter of 2016 increased to $9.3 million compared to $7.4 million in the year ago quarter. The increase was primarily due to our continued and planned investments in headcount, product development, and sales and marketing expenses in our Performance Analytics segment. In addition, we added over 70 heads to our roster to deliver on our Transportation Systems TOC and PMG contracts for the Virginia Department of Transportation during the period. Non-GAAP operating loss in the fourth quarter was $1.3 million compared to an operating loss of $140,000 in the year ago quarter. Non-GAAP net loss in the fourth quarter was $1.3 million or $0.04 loss per share compared to a net loss of $198,000 or $0.01 per share loss in the same quarter a year ago. In regard to our total year 2016, we posted record revenues of $77.7 million and a non-GAAP loss of $0.06 per share. Gross margin for the year was up slightly to 39.4% compared to 39.0% in fiscal 2015. Non-GAAP operating expenses for fiscal year 2016 increased to $33.8 million compared to $27.4 million in the year ago year. The increase was primarily due with the planned investments in headcount, product development, sales and marketing expenses in our Performance Analytics segment, as well as our build-up of our Transportation Systems business to support the new contract wins. Non-GAAP operating loss for the year was $3.1 million compared to operating income of $781,000 in fiscal 2015. Non-GAAP net loss for fiscal 2016 was $2 million or $0.06 per share compared to net income of $675,000 or $0.02 per share for fiscal 2015. Cash and cash equivalents at March 31, 2016 was $16 million as compared to $22 million at March 31, 2015. Cash used by operations was approximately $4.1 million. Capital expenditures were approximately $900,000 and cash used to repurchase shares approximately $1.2 million. Total backlog at the end of fiscal 2016 increased $63.3 million compared to $39.2 million at the end of fiscal 2015. Backlog at March 31, 2016 was comprised of $53.3 million from Transportation Systems, $5.2 million from Roadway Sensors and $4.8 million from Performance Analytics. In terms of housekeeping, we expect to file our 10-K within the next week. This concludes my prepared remarks and the financials. Now I would like to turn the call back over to Joe.

Great. Thank you, Andy. Iteris remains in a great position to capitalize on powerful trends in both Transportation and Agriculture. Our team is laser focused on accelerating the performance of our Transportation segments, while also developing a highly meaningful, high margin subscription model in the agriculture market. We believe the progress we made in FY '16 provide a strong platform for growth in FY '17. With an already strong leadership position in the U.S. market, Sensors will pursue three path to growth through FY '17. First we’ll continue to develop our position internationally focusing on Latin America, as well as developed territories within North America where we are currently underpenetrated. Second, we’ll further enhance our data collection capability, an already strong point of product differentiation. And third, we’ll continue to expand into new market segments that Iteris does not address today. As noted previously, we’ll be introducing a number of new products and features in the coming months. These will include a new detection sensor, new data collection capabilities and innovative improvements to existing products. We believe these new product introductions and other planned product enhancements will not only address near term market demand, but will reinforce our position as an innovator and product leader and expand the market segments that we serve. Through the first half of FY '17, we continue to expect the rate of growth in our Sensors business to move in line with the market rate. Historical average market growth rate is approximately 7%. This return to market growth rate is primarily the result of new product introduction cycles. We are confident about the success of our new product introductions and recognize it will take a couple quarters to develop and attract new customers at a meaningful level. Iteris continues to see a shift in transportation infrastructure spending toward intelligent transportation systems and connected vehicle programs. Currently we are experiencing an increase in demand for programs related to vehicle to infrastructure integration, actionable traveler information, data analytics and enhanced safety and mobility. As was the case in Q3, the vast majority of the 11 million in transportation systems orders booked in Q4 align with these program areas. Iteris is in a strong position to benefit from current spending priority. Given the favorable market dynamics and our continued strong backlog, we are increasingly strategic about the new business we pursue. We are focused on opportunities that one enhance our franchise the provider of information based actionable insights and target geographies and market categories. Two, enable us to leverage existing platforms and other tool sets. And three, represents sizable multi-year programs with a meaningful level of recurring revenue. We plan to increase our average project size, which will create internal efficiencies and EBITDA leverage for this BU. As discussed in prior earnings calls, Iteris believes the global food and agribusiness sector represents a significant strategic opportunity. The sector arguably the world's largest sector generates 5 trillion in annual economic output. Yet the sector has been very slow to adopt information technology. Now the sector faces major structural challenges, global population growth, scares water supplies, limited arable land, change in consumer preferences and increasing regulation. These dynamics are fueling a significant need for information technology in general and for agronomic, Climatalogic and biological data analytics in particular. Within the broader sector, Iteris is focused on the digital agriculture market. Digital agriculture is the intersection of precision agriculture and big data. More specifically, digital agriculture involves the collection, aggregation and analysis of big data for purposes of presenting contextually relevant insights of variety of agribusiness users. Within the digital agriculture market, Iteris is identified at $1.2 billion plus TAM that includes over 8,000 unique customers in three distinct segments or categories to enterprise, OEM and growers. In the Enterprise segment, we continue to target the top 100 crop science companies which we defined to include crop protection, crop nutrition and biologics firms. These entities are large enterprises that average more than $1 billion in annual revenue. For these companies, digital agriculture is becoming a competitive necessity. We expect most of the top 100 to implement digital agriculture strategy in 80% of those to adopt a third-party platforms such as ClearAg. Already five of the top 10 crop protection companies have selected Iteris, such customers deploy ClearAg to improve product performance in the field, improve the return on their sales and marketing activities and enhance customer lifetime value. We have found that ClearAg can produce millions of dollars in revenue contribution, operating efficiencies and risk mitigation, we continue to believe our value proposition in especially powerful within the context of current global economic forces and related structural changes in the agri business sector. We continue to see crop science customers deploy ClearAg in stages typically customers complete an extensive trial, roll out ClearAg in initial product line and geographic region and then continue to expand the deployment across product lines, geographies and users. Well new customer acquisition cycles can be long, the pace of expansion in existing accounts has been predictable and much more favorable. We continue to believe if each crop science account should conservatively average more than $1 million in annual recurring revenue. In the OEM segment, we continue to target five types of Allied Providers, farm management information systems vendors, research service providers, data service providers, supply chain management system vendors and agronomists. Today we have strong customer relationships in each of these categories and a proven repeatable commercial model. As mentioned earlier, OEM customers commit to a minimum platform subscription fee and we participate in upside above the minimum targets. Initially OEM customers have intended to embed our weather content in their solutions. In the first half of FY '17, we will release significant new and enhanced agronomic content based on valuable feedbacks from existing customers. We expect this new contents to produce upsell revenue from existing OEM customers as well as increased demand and reduce time to close new OEM customers. In Q4, we announced availability of our ClearAg Mobile solutions, a grower analytics application to help farmers improve crop management. This quarter will expand the focus of our go to market plan which to date is focused only on crop protection companies in Allied Providers and begin promoting our advisory services direct to farmers. In the first phase of our direct to farmer initiative, we will focus our telesales activities against select North American Beacon Farmers in other words, thought leaders with over 10,000 acres. Simultaneously, our channel sales team will start to develop a network of agronomists and Ag retailers to extend our market reach. We believe our continued success in the crop protection market in particular further validates our digital agriculture strategy and we remain confident about the long-term opportunity for Iteris in the agriculture market. Therefore, we plan to continue to invest in our ClearAg business, we believe our ClearAg engineering capacity has reached a sufficient run rate level to sustain current requirements, so we will continue to shift the investment mix towards sales and marketing activities. We do expect some modest operating leverage in FY '17 which will measure as a ratio of between bookings growth calculated as first year subscription value to investment. We would expect the incremental contribution margin dollars from our transportation segment to offset in part the step up in agriculture investments, therefore we anticipate our net investment level to remain consistent for the next four quarters as our digital agriculture business grows to its full potential. On a consolidated basis, we expect operating results to vary somewhat from quarter-to-quarter due to typical seasonality. However directionally we expect operating losses to trend lower through FY '17. To conclude in Q4 and full year 2016, Iteris realized significant positive momentum across all lines of business. Our Sensors BU ended the year with 11% revenue growth. Given our highly defensible position in the Sensors market and our new product pipeline, we are confident that BU will maintain its current market share lead. In Q4, our Systems BU began to recognize revenue on the $35 million in orders booked in H2 FY '16. As we convert this backlog in FY '17, we expect to continue to realize meaningful revenue growth. Likewise we started to realize revenue contributions from our investment in ClearAg and we are very excited about this new growth opportunity. Now I'd be delighted to respond to your questions and comments. Operator?

[Operator Instructions] And our first question today will come from Jeff Van Sinderen with B. Riley.

Good afternoon. Let me say congratulations on the strong results in Q4 and for the year. I know you suggested that Sensors would grow at a market rate, just wondering if there's any color maybe you can provide on how we should think about the growth in the other segments in Q1 and for the remainder of the year. I know you don't really give guidance to speak up but wondering if systems, do you still expect that to be lumpy maybe what level of growth we should look for there, this year, and then maybe you can also touch on ClearAg and kind of the ramp we should be expecting there. And then I think you said that you would expect losses to be reduced throughout this year, just wondering when you think earnings might start to turn positive, is that roughly a year out you think?

All right Jeff, this is Joe, thanks for the multi-part question there. I’ll take part of it, and hand some of that over to Andy. So in terms of Sensors, what we're saying is that we've been growing last year, we were at 11%. Historically the market is growing at about 7%, so we've been growing clearly above market rates. As we enter FY '17 we're reaffirming that we expect to maintain our current market share position. We're going to do our very best to try to continue to take market share. We are acknowledging that we are in the middle of a new product cycle with the introduction of new products that are coming after the most part in the first half. And therefore I'd like to think we're being somewhat cautious in projecting growth rates consistent with the overall market average. But that is in fact what we're anticipating. Again my objective would be to beat that but that's what we're currently modeling. With respect to the systems business, we saw just under 20% growth this quarter. We said previously that we would expect to see that business because of the significant increase in the backlog grow somewhere in the mid-teens to slightly higher than that. And so we are reaffirming that we'd expect to see sort of similar rates of growth for the next couple of quarters in the systems business. And with respect to ClearAg, we're not yet in a position to talk about what the recognized revenue is on that business and partly it's because some of these major new contracts that they're large in and of themselves and because it's a relatively new business, a new contract can result in fluctuations from quarter-to-quarter. And so it's difficult to help you guys see what the overall revenue trend line looks like. We think it could be misleading if we were to just kind of talk about from quarter-to-quarter. So we're just trying to - at this point we're beginning to provide some visibility into bookings, and then later we'll be able to talk about recognized revenue. I will say that - we did contribute materially to Performance Analytics business unit and we do expect it to continue to have a material contribution to that BU.

And Jeff this is Andy, you had a question about whether or not the quarterly revenue would be lumpy or what have you – there's something that Joe brought forward in his remarks on the systems business, just significant part of the increase this year comes from [TOC and RPMG] [ph] contracts. That's actually very predictable and that's basically 80 plus employees [building] [ph] at a regular weekly rate. So that helps us in terms of moderating the quarterly income or quarterly revenue. So if anything we should be much smoother in that business and -

That said I would just note that we do tend to have seasonality in the business and we would expect to continue to see some degree of seasonality. I thought maybe Andy you could talk to the last part of that question, I think it was around losses in the Ag business.

Well sure. Just like Joe said again in his remarks, we’re going to be investing this year and he said we’re going to be seeing this losses trail off by the end of the year and that's just going to be unanticipated recognition of revenue but also winning new deals and implementation of these new deals often times may come with [NRE] [ph] type revenue that we will take a look at how the contracts are put together and how we recognize revenue but all-in-all as that business grows, losses are going to trail and were offset by growing transportation businesses. So, once again investing this year but by the end of the year, see that trend reverse and start seeing less usage of cash if you will and less use of more the revenue generated by transportation.

Okay. That's great to hear and very helpful. And then I know you mentioned in your comments that you're running a higher average project size in systems and just wondering maybe if you can talk a little bit about or little bit more about what's driving that and then if you expect that to continue in systems?

Yes, well I think part of it is strategy and part of it’s market dynamics. We are seeing an increase in the size of procurements in the market, so that is sort of an overall market phenomenon and that certainly lifting the business. But we've also focused from a business development perspective on trying to increase project size. And the reason for that is we just think it creates internal efficiencies for us. It's very difficult to maximize resource utilization across a large number of relatively small projects. And so that desire is trying to increase project size and it just - it makes it easier to maximize utilization. That being said, the downside of having too many large projects is you can create customer risks. So we’re trying to find the right balance there but I think for the last several quarters, we’ve been probably too biased on the side of having a lot of small projects and it's proven to be difficult to manage from a resource utilization from an internal efficiency perspective.

Okay, that’s helpful. And then if I could squeeze in one more if we could just shift back to ClearAg for a minute. Obviously you're continuing to make pretty considerable progress there. Are there other partnerships we should look for over the next few quarters there, I guess how should we think about kind of the near term and the longer term drivers of that business segment and maybe you can also update us on - I know you mentioned that TAM you thought was about $1.2 billion but how much of that do you think is actually available for Iteris to go after. And then maybe just touch on any milestones, I guess we should look for in terms of you getting - moving towards capturing your share of that?

Sure. So the Digital Ag market is - there are all kinds of different estimates regarding the size and I’ve seen reports that say it is little as $3 billion and as big as $20 billion. As I mentioned in my remarks, we estimate our TAM to be $1.2 billion. And so to answer your question, all of the $1.2 billion TAM is addressable by Iteris and when we have more time, we can go through how we constructed it, our estimate in some detail but I will say that is all derived from actual pipeline data and then third-party market research that we've commissioned. So, that is not on analyst report that we've said hey, we can go after that market. That is our view of what the market opportunity is for ClearAg. It’s made up of six different segments of which seed and crop protection which we’ve talked about a lot on this call is a third of the total market or $400 million of the $1.2 billion. In terms of other milestones and partnerships, there are absolutely are other things that you should be looking at. I don't want to get ahead of myself, but I hope we'll have some interesting things to comment on in the not too distant future. But there are other things like some of the significant crop protection deals that we think can really move the needle and we're working hard on this.

Okay great. Thanks very much for taking my questions and continued success.

Thank you. And next we’ll hear from Nick Altmann with Northland Capital Markets.

Thanks guys. So you guys have mentioned in the past how ClearAg has helped you guys expand geographically. Can you just give us an update on how you're doing internationally and if you vented any new countries, I think you guys said 14 last quarter, and you mentioned Latin America on the call, but any additional color would be much appreciated.

Yes, hi Nick this is Joe. I talked about two different international markets for us, one is the Sensors market, as I said previously we've seen some - we think meaningful opportunities in the Latin American market, and we restructured our distributor network a couple of quarters ago and we're starting to see some significant benefit. We're going to continue to make modest that we think but potentially meaningful investments in the Latin American market to further develop our overall Sensors business. With respect to ClearAg, this is another set of international markets you're exactly right. We said 14 last quarter and in my remarks today I mentioned 15. We added one new country and that's South Africa. And we've been able to cost effectively enter that market through our relationship with SST. Most of our international distribution is coming through proper taxing companies where they are embedding us in their platform which they been generally make available to their customers who are - who then are consuming ClearAg and it's also coming through our relationships with our OEM Partners that are - for the most part there are other software companies that embed ClearAg into their solutions and a lot of them operate internationally and that gives us international distribution. We will look to selectively enter some international markets when we launch our director grower Campaigns. As I mentioned initially we're going to be focused on North America in large, North American growers that we do anticipate that eventually we will at a minimum opportunistically probably strategically focus on a couple international markets on a direct marketing and direct telesales basis.

Great, thanks. And then just one more, if you give me a ballpark percentage, what percentage of revenue is coming from your top three customers?

I'll let Andy answer that.

Sure, so again if you consider that Transportation is obviously our biggest revenue source right now. We have several very, very large customers, the Virginia Department of Transportation is very important to us and that's where we announced the TOC and PMG deals, very large contracts. And again it's going to face year-in year-out depending on what need in the projects were involved in, they are very large. We've got MTC up in Northern California a very large customer. Those again like you say depending on the contract and the year and the need of the project which could be multiple millions of dollars of projects that's going to shift somewhat. But right now, again our large customers, our large agencies such as the two that I mentioned are driving revenue.

And I guess I would just add to that, I think the question is kind of about customer concentration and revenue risk and we do have a couple very large contracts with the Virginia Department of Transportation but that being said, I would add that even though we have a couple large public agency customers, in general we have many contracts with them that add up to a large aggregate amount. And so, even though Virginia, the Bay Area Metropolitan Transportation Commission, the LA Metro for example another large customer of ours again we have multiple contracts with them. For the most part, we don’t have any particularly large single contracts with any single customer. I will note that the two recent awards with the Virginia Department of Transportation, each of them are very large contracts.

Great, thanks.

Thank you. And our next question will come from Joel Slutzky with TLP.

Yes, we will begin Jeff’s question, I’ve got two questions and they’re both competitive, you mentioned when you talked about the TAM that is $1.2 billion and that various estimates of the total market in this space is $3 million to $20 million, here the $1.2 million is for digital agriculture if I understood. So I’m curious as to other than Digital Ag, what is the competing technology or methodology that can result in increasing crop yield, it seems like the world needs something to sort of harnessing another planet. So what is this competing technology that we should be looking at or should be knowing about?

Sure, Joe that's interesting question. So I haven’t gone through that detailed reports, so I’m not, I can’t speak for the authors of those reports but I will say that there is some analysts have consolidated some of the addressable market estimates or what – I think would classically be described as precision agriculture with digital agriculture. And precision agriculture is mostly about machine learning and related technologies. We can certainly be an input to that process but we are focused on digital agriculture which is more about data collection and analysis, in our case happening in the cloud, it’s not – it’s distinct although it’s related to precision agriculture. And so we’re drawing that distinction and again the $1.2 billion TAM that we’ve identified is in our opinion is a fully addressable market. That is a market that ClearAg can fully address. So you’re seeing our estimate of the market size being smaller but still a very large number but it is smaller than some of the other estimates that you’re seeing. So I would say that precision agriculture technology, those are other things that are going on that are going to contribute to agricultural improvements and then there are other investments that are going on particularly in the biologics area that will also improve crop yields and create economic value in the larger agri business space. And again we can provide - we can support biologics firms that were not including any of that activity in our estimate of the TAM.

Thank you. The second question, I know there is a lot of money being thrown at this space, it’s hard area. What percent you mentioned that in the last call that more large users and you brought it up again in this call not sure if it’s 10 or 20 or whatever the number is, what percent are you capturing and we talked about what we have, what might be better way to say this, what percent are we losing?

Yes that’s a great question and it’s easier to answer it, I mean it’s more meaningful to answer in terms of what we’re losing and right now we think we’re losing about 15% of the trials that we do and what that means is someone will do a trial and say we appreciate it, we don’t see a business opportunity here and so we’re hitting the pause button and maybe we will get back to you later. But we feel like that opportunity is probably lost, the other 85% can go in a number of different directions and a lot of them, lot of our customers will say hey we are really, really interested but now we’ve got to find a project sponsor and a project budget and we’ve got to figure out what our timeline is and so let’s stay in touch. And those - we continue to track those opportunities, but they don't necessarily have a dollar value and we don't have like a clear line of sight as to when a decision is going to get made. The rest of those deals convert into sales and right now we're converting more deals than we're losing, but that being said it early stage market and I think a lot of these buyers are still trying to figure out their strategy. So we have a lot of opportunities that are in sort of that intermediate zone. They represent substantial future sales for us, but as I noted the initial sales in some of these large enterprises are taking a long time to close, we're looking at 12 to 18 months sales cycles. Not all the time, but you know we certainly see sale cycles of that length. I also noted that I just want to reiterate that once we've gotten into an account we've seen that subsequent buying stages move a lot faster. Now we've already, we validated that technology to provide really the customer has a clear idea of what their strategic intent is, and you know for the most part we've seen all the subsequent sales have been happening pretty much as we expect they're on schedule.

Thank you.

Thank you. Our next question will come from [indiscernible] with Investment Partners.

Congratulations on the progress, just a handful of those unrelated questions. In ClearAg, can you just review the number of customers I know you had mentioned initial deal sizes of the million, was that million over the course of the year, just three year it over two years, and also on ClearAg, it's Monsanto large is so some of these megamergers happen to set so that hurt you because the less customers swing that you with that way?

Okay. A lot of great questions, the first one is the number of customers, and so we haven't disclosed the number of paying customers and we're not intending to do that right now. And I'll tell you why. As I mentioned we addressed three different segments. We want to have good more critical math in each of those segments so that we can provide customer numbers that are going to be meaningful and provide you guys visibility in terms of the trends that are occurring in each of those segments. Right now to be honest you know we're kind of new at this and we haven't been really, really thoughtful about segmenting as we look at our customer account we're not being as thoughtful as we need to be about the various segments. I think would be misleading to give you numbers because you wouldn't necessarily know which, segment to count the number you supply the numbers again, so that's just so anyway that's the first thing. The other thing that you asked about was the number you said something about 10 you know that number of customers, that's the number of trials that we're doing at any given point in time. We try to target to have ten ongoing enterprise class customer trials per quarter, which some of those trials are going to result in customer losses, and I told you it's about 15% percent the other 85% end up in sort of this middle zone where we know they have an interest, but they haven't figured out a timeline or a specific budget to purchase ClearAg and then the other percent convert to sales. So 85% percent of them convert to sales or we maintain that as an opportunity in our pipeline, but we don't have a dollar value at the time to close against that opportunity. In terms of the million dollar size, what I was saying is that as we look at the various deals we have with these major crop protection companies, we anticipate that on average each of those relationships will have more than an $1 million annual recurring revenue value to Iteris. So I'm not saying that all of the deals that we're pursuing right now are worth a million, some of them are worth a lot more, some of them are smaller, but I'm saying that when we look at each of these cuts to these major enterprise class crop science customers of which there are 100 we expect them to average over a $1 million a year in annual recurring revenue. And then with respect to the megamergers, it's interesting, we'll have to see how that plays out for us. We believe at this point in time that if the Bayer and the Monsanto merger were to happen we think down would likely be net beneficial to us, but we don't know, we'll have to see how things like that play out. Overall we think that their digital agriculture is it absolute competitive necessity for these large crop protection companies the way we price there would be some, I guess some potential revenue reduction if there was like tremendous consolidation. But since most of the pricing is done on a crop type or geographic basis or user basis we'd expect that those dimensions remain relatively the same regardless of the degree of consolidation in the industry. And so we don't see it having an enormous effect, but at the margins there could be some lot to see out plays out.

Okay. And just anything you can say about the different businesses as to what the margins are today versus a longer term goal?

Yes Andy, can you comment on that.

Sure. So in transportation businesses, once again fairly consistent, we've been in the business for quite some time and when we consider our Roadway Sensors business that’s primarily a hardware business. We're running about 46% gross margin and again pretty darn consistent when we're working in our Transportation Systems business this last year we were about 33% margins and that's up from about high 31 last year. So that's improving and Joe has made a lot of comments in terms of our go-to-market in terms of larger deal size and we're really looking at some of this TOC projects and so on looking at efficiencies that one we're looking to improve. On the Performance Analytics side, is a overall business again - that overall business has three different key categories to it, but it's about a $5 million per year business right now. And that one's running at about just because of size and scale about 25 point margins. But the ClearAg side of it we believe is going to model up in the 70s to near 80% gross margins so that's going to come up and just case in point our fourth quarter with basically ClearAg starting to jump in there those margins went from the year average 25% to 36% so that's going to work its way up very quickly as we add revenue to that line. So that gives you an idea of overall business at about 39 point margin as we speak.

Okay great.

Does that answer your question?

Yes, thank you.

Thank you. Our next question will come from Brett Reiss with Janney Montgomery Scott.

Hi gentleman. At the end of last year, John Deere purchased a company Precision Planting which was a subsidiary of Monsanto, and I suppose is a value added service trade them and selling their tractors because they aided farmers with their crop and weather management. Does Precision Planting do something similar to what ClearAg does?

No, it doesn't. Monsanto acquired a couple different companies one of them Precision Planting, they divided Precision Planting into two different pieces and divested one to John Deere. Arguably it's related, but I would put it more in that precision agriculture market that I talked about as opposed to the digital agriculture market it has more to do with machine learning technologies. Not to say that we don't integrate, no we definitely have a potential IoT opportunity, we're very interested in machine learning, but we're much more of the big data cloud analytics type business model as opposed to more hardcore machine to machine type model. So I would say the Precision Planting is - it's roughly related, but it is not in any way a competitor.

Is what you are doing something that John Deere could be interested in to put on their tractors to help the farmers or -

Yes, for sure. So there's definitely - and we have from time to time had discussions with John Deere and other equipment manufacturers about collecting machine data and analyzing that in our cloud. We'll continue to look at opportunities in that certainly could represent market opportunity for ClearAg. It would not be competitive with what John Deere is doing with Precision Planning.

Great, thanks a lot.

[Operator Instructions] Our next question comes from William Meyers with Miller Asset Management.

Hi, thanks for all the details on ClearAg, but I would like to go back to the Transportation Systems. I think you said that the new backlog of significant proportion of it was software and I was wondering if in Transportation Systems, you’re using a software-as-a-service model with recurring revenue or is - would these be one-time software purchases, how would that work?

Yes, sure. So we didn’t break-out the backlog by software and business process outsourcing. What I was distinguishing between is software and business process outsourcing/operation maintenance versus IDIQ contracts. And so we’re trying to be more and more focused on contracts our quasi recurring or at least revenue is more predictable from month-to-month than IDIQ contract which by the way, IDIQ contracts definitely have a place in our portfolio but we’re trying to emphasize that there is an increasing degree of revenue predictability with some of the new contract vehicles that we won. But anyway to answer your question, while I don’t know the breakdown between software and BPO and backlog, I will say is that the software contracts that we have are both SaaS like in nature - so there we do have some subscription model, we also have more of a typical enterprise license with the maintenance and support kind of element to it and then there are also instances where it's more of a job shop model where we will develop a software application and then maintain that for a customer. In that case, we don't get the same degree of internal leverage. One of our strategies is to try to move away from the job shop model and move more into either classical commercial software model or SaaS with SaaS being preferred. But anyway to answer the question within Transportation Systems, we do have some subscription models already today.

Okay, thanks. That's all.

Thank you. And next we will hear from Matt Sweeney with Laughing Water Capital.

Real quickly on the transportation business and I guess Sensors and Transportation together. You had previously commented that some of the sell side events that those businesses in hypothetical independent situation will be kicking off around $8 million in free cash flow. Just curious if you had any update on that number or that type of guidance given your projections for growth, as well as margin improvement going forward. And then also curious about $8 million number if that's tax affected number or if that’s a non-tax number assuming that you wouldn’t be paying tax since in reality that cash flow is not flowing through due to the investments in the other businesses?

Sure this is Andy. Sure that number is a good estimate but tax affected or not it’s just pure cash. Again you could look at our - what helps our segment reporting that certainly out in our press release, in the 8-K and what not, you can take a look at the two transportation businesses and there are almost $13 million in operating income and that's before certain corporate expense. So that's another metric that you can always look at in terms of how we report our numbers. It gives you an idea again, nice and healthy businesses and it creates significant cash.

So in summary there are 8 - is still the number going forward, there is no upside to that given projected growth and margin expansion?

It could well be but we are not providing the refresh number on that.

All right. Thank you very much.

And we do have a follow-up this time from Joel Slutzky with TLP.

Yes, just real quick one. The private equity investments in this space which I commented on, I've been reading lot about them and where are we relative to those competitors. Are we ahead or any of these directly competitive to what you’re doing?

So that's great question and there are a lot of - there are a lot of venture capital backed companies and there are also lot of growth equity backed companies that are targeting the larger AgTech market. And there are - I don't think there's anyone with our business model. We are unique in that we are a platform that crop protection companies that allied providers can embed into their business processes or their applications. And that we also support farmers themselves growers, there's no other companies like that sort of all three of those segments. That being said, we obviously do have competitors in some of those segments. For the most part it's limited to the direct to grower market. And again none of them are like exactly like-for-like competitors, but we certainly do run into people. I think there are lot of people who see a big opportunity in AgTech and that's exactly why you're seeing a lot of smart investors who have been - have very successful track record in venture capital and in growth equity they're focused on the segment. And we think it's a great segment to be and it's got a lot of really positive fundamentals.

Thanks.

Ladies and gentlemen, this does conclude our question-and-answer session for today. At this time, I will turn the conference over to management for any additional or closing remarks.

Great, thank you operator. We appreciate everyone's support and lots of great thoughtful questions today. Again thank you and we look forward to updating you at our - on our continued progress very soon on our first quarter conference call. Thanks again everybody.

Thank you. And again ladies and gentlemen that does conclude our conference for today. We thank you for your participation.