Todd Kehrli - MKR Group Joseph Bergera - President and CEO Andrew Schmidt - CFO

Jeff Van Sinderen - B. Riley & Company Steve Dyer - Craig-Hallum Jon Fisher - Dougherty & Company Joseph Osha - JMP Securities

Good day, and welcome to the Iteris Fiscal First Quarter 2018 Financial Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Todd Kehrli. Please go ahead.

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 2018 first quarter ended June 30, 217. 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'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 that the company files from time to time with the SEC, specifically the company's most recent Forms 10-K, 10-Q and 8-K, which contain and identify important risk factors that could cause actual results to differ materially from those that are contained in any of the forward-looking statements. I'd like to remind everyone that a webcast replay of today's call will be available via the Investors section of the company's Web site at www.iteris.com. Now I'd like to turn the call over to Iteris' President and CEO, Mr. Joe Bergera. Please proceed.

Great. Thank you, Todd, and good afternoon everyone. Thanks for joining us today. As you saw at the close of the market, we issued a press release announcing the financial results for our fiscal first quarter ended June 30, 2017. In Q1, Iteris recorded $27.2 million in total revenue, representing 14% year-over-year growth. The result was due to continued strong execution across all three of our reporting segments; Transportation Systems, Roadway Sensors, and Agriculture and Weather Analytics. The result represents record revenue for each reporting segment and for the company as a whole. That said, we did experience some margin compression, notably in our Transportation segment. The compression was largely attributable to revenue mix, which we will discuss more on today's call. In Q1, our Transportation Systems segment recognized $14.7 million in revenue versus $12.4 million in the same prior year quarter, and $12.6 million in the previous quarter. This represents 19% year-over-year growth and 17% sequential growth for this segment. During Q1, the Transportation Systems segment continued to win new business, securing approximately $13.2 million in new orders. This is a 2.3% sequential increase against the $12.9 million in added backlog in the preceding Q4 and a 24% year-over-year increase against the $10.7 million in added backlog in Q1 of last fiscal year. This segment ended the quarter with $52.8 million in backlog. Recent notable wins include additional design activity for Phase 1 of the Orange County Transportation Authority I-405 project. As communicated on our last earnings call, we're a subcontractor to a joint venture, OC 405 Partners, which was recently selected to complete the I-405 project. This is one of the largest transportation infrastructure projects in the nation, with a total estimated value of over $1.1 billion. We anticipate a number of task orders over the course of this multi-year project. In addition to the increased I-405 activity, we received large business process outsourcing contracts from the Virginia Department of Transportation and the State of Montana as well as sizable software-related deals with Caltrans, and the San Francisco Bay Area Metropolitan Transportation Commission. Over the course of FY'18, we expect our focus on project mix to continue to benefit the financial performance of the Transportation Systems segment. More specifically, we believe the higher portion of software-related consulting services and business process outsourcing backlog, as well as larger average project size will continue to improve revenue predictability and drive other internal efficiencies. That said, we may encounter project timing issues related to the precise dates of new contract awards and contract renewals, which are (1) difficult to forecast, (2) beyond our control, and (3) could impact results within a specific quarter. In Q1, the segment's operating income was $2.3 million or flat to prior year on a dollar basis. The segment's operating income margin rate compression was due to a relatively high level of revenue generated by sub-consultant and third-party equipment, both which yield lower gross margins than our consulting services. Alternative we are working hard to manage revenue mix we could again experience unexpectedly high gross margin variability. In Q1, the Roadway Sensors segment recorded $11.3 million in revenue versus $10.6 million in the same prior year quarter, which represents 6% year-over-year growth. This growth is almost entirely attributable to continued strong demand for our core product lines, as we are only just beginning to realize the effect of the recent introduction of new products. For example, we already received several orders for VantageLive! Which just launched in May of this year, we won't begin to recognize any SaaS revenue for this new cloud analytic solution until the second half of this year. During Q1, the Roadway Sensors segment realized especially strong performance in Texas and the Southeast region. Because our gross margins tend to be lower in Texas, the high degree of revenue contribution from the state created some gross margin compression. Nonetheless, the impact of geographic mix, -- apologies, notwithstanding the impact of geographic mix, the segment's operating income dollars increased by 200,000 or 10% on a year-over-year basis, and the segment's operating income margins expanded 80 basis points. In Q1, our Agriculture and Weather Analytics segment recognized approximately $1.2 million in revenue versus 900,000 in the same prior year quarter. This represents a 28% year-over-year increase. The growth was due to strong performance of ClearPath and ClearAg, our digital agriculture platform. Despite the solid year-over-year performance, some of you may know that Q1 revenue result reflects 16% sequential decrease. This effect is due to ClearPath's historical seasonality and is consistent with our expectations for this segment. During the quarter, we closed several net new ClearAg deals with a variety of customers, including Allied Providers, Ag Integrators, and Agronomist. Allied Providers and Ag Integrators represent OEM sales for Iteris as these customers tend to embed ClearAg in their software and other service solutions, whereas Agronomist tend to be actual end-users of ClearAg. While we continue to add new customers, I am especially pleased that we saw additional ClearAg penetration at the operating company level of our largest crop science accounts. We believe the single biggest near-term lever for exponential growth will come from converting these accounts to enterprise agreements. To that end, today we announced that Jim Chambers will be joining Iteris as Senior Vice President and General Manager of our Agriculture and Weather Analytics segment. Jim is an Ag tech veteran with over 20 years in leadership roles with large agro businesses, including Bayer CropSciences, Valent BioSciences, Monsanto, and John Deere. Among other responsibilities, Jim will be focused on helping us maximize and accelerate our penetration at crop science market. Looking ahead, we remain very enthusiastic about the opportunity for Agriculture and Weather Analytics segment. We continue to see solid pipeline growth and opportunity conversion for both ClearAg and ClearPath Weather. As a function of sustained solid bookings, the segment's annualized revenue run rate has increased 47% for the same -- from the same prior year period. Our seasonally adjusted run rate is now $6.2 million for the Ag and Weather Analytics business unit. Now, I'd like to turn the call over to Andy to walk through our financial results.

Thank you, and good afternoon, everyone. Well, as Joe's introduction showcases, we continue to demonstrate strong revenue growth across all our business lines. As we've we touched upon in past reports, we are growing and evolving business continuing to improve infrastructure to enable continued business expansion. Before addressing detailed financial metrics, let me update everyone regarding our evolving financial statement presentation. As previously noted, Iteris is now an accelerated filer with the SEC. Our 10-K report for our fiscal year ended March 31, 2017 was our first accelerated SEC filing, however the rules permitted certain scale disclosures as a small reporting company during that transition period in our 10-K. Beginning this fiscal year, we are required to meet full regulation S-X disclosure rules with the SEC and our Forms 10-K and 10-Q. Of note, our current 10-Q which will be filed tomorrow August 8 will included certain new disclosures, most ideas is our presentation of revenues under face of our P&L. From this point forward, we will present Iteris revenues as product revenues and service revenues. That said, both Joe and I described business from a business unit perspective and we will continue to do so, we will continue with our segment reporting details in our press release as well as our 10-Qs and 10-K and as you're aware, we did refine our segment reporting last year to create what we feel is the clearest picture of how our three businesses perform. Finally, as you'll see in our segment reporting, we do break out products and service revenue at the segment level so you can see the components of what constitutes overall Iteris product and service revenue. As an introduction to our quarterly performance metrics, let me note that there are no pro forma adjustments applicable to our current period or our comparative period. As such, all amounts are referred to, are GAAP results. Okay, reviewing our Q1 detail, as Joe previously noted, Iteris reports revenues of $27.2 million for the quarter, a 14% year-over-year increase. Transportation Systems accounted for $14.7 million in the quarter, a 19% increase year-over-year, Roadway Sensors a $11.3 million a 6% year-over-year increase and Ag and Weather $1.2 million, a 28% year-over-year increase. Looking at gross margins, total company saw gross margins of 36.4% that compares to 39.3% for the prior year period. Considering gross margins by segments, sensors posted 44.7% which is down from 46.7% in the prior year period. The current period performance is on the lower side of our expected margin performance is due to core product mix as well as rebalancing warranty and reserves given their significant product transitions over the last couple quarters. In regard to Transportation Systems, current period gross margin of 29.6% compares to 32.4% at the previous year period. The unfavorable variance is primarily related to job mix and particular higher than usual subcontract and third-party equipment components at our current period revenue numbers which carry very low margins. Looking at Ag and weather analytics, we pushed gross margins up 43.3% as compared to 47.5% last year, the current period gross margin figure is consistent with previous quarters which also fell under SaaS accounting treatment which requires to the first certain revenues related to upfront SaaS deployments over future periods as well as capitalized certain software development costs for new functionality or enhancements to our SaaS software engine. Joe touched on our segment operating margin results, which was $2.5 million for sensors, which is up from $2.3 million last year, $2.3 million for systems which is flat with our last year performance and our AG and Weather business reported an operating loss of $1.8 million which is flat with our last sequential quarter but is unfavorable compared to $1.6 million loss in their last year comparative period. In terms of our corporate expenses which include corporate IT, HR, accounting, legal, administration executive and public company costs we saw expenses of $3.56 million for the current quarter which is down from $4 million at Q4 fiscal 2017. Our prior year first quarter corporate expenses were $3.05 million, the year-over-year increase was due to planned headcount additions and subcontract expense associated with overall strengthening of our infrastructure which includes Sarbanes-Oxley compliance and accelerated filer costs. As we've discussed every period, our G&A expenses have and will continue to be a key management focus and we are on plan in terms of normalization of these costs as demonstrated by the $400,000 sequential quarter cost improvement. Looking forward, we feel that $3.5 million to $3.7 million quarterly corporate expense range may be appropriate given the seasonal nature of audits, proxy filings, new accounting rule changes and so forth. At the current level of corporate spent, we feel that we can attend to what will be yet another year of building and improving our business models. As noted earlier, we are now filing our 10-Qs and 10-K under full Reg S-X Accelerated Filer Status we continue to improve upon our internal management reporting capabilities to support what Joe notes our newly introduced business models. Unlike the rest of the industry, we'll be migrating our revenue recognition models and processes to take into account the new rules under ASC 66 which becomes effective for Iteris at the beginning of our next fiscal year April 1, 2018 and we will continue to look at other housekeeping items that are due for refresh such as proxy filing process S-3 registrations, internal processes and so on and so forth. Regarding earnings, our first quarter fiscal 2018 loss was $0.01 per as compared to $0.00 share or breakeven last year. From a balance sheet perspective, we ended the quarter with cash at $17.6 million a slight use of cash which approximates our operating loss. Finally, deferred revenue increased slightly to $4.3 million at June 30, 2017 versus $4 million at the beginning of the year. In all, this is a start to a new year of continued growth and development aimed at creating increasing leverage in our business model. This concludes my prepared remarks, and again reminder that we will be filing or 10-Q tomorrow. At this point I'll turn the call back to Joe.

Great. Thanks, Andy. So Iteris continues to benefit from improved execution and also from favorable trends in both transportation, agriculture, and simultaneously our team continue to deliver business and technology innovations in our transportation segments while also developing a highly meaningful high margin subscription model in the agriculture market. With continued strong execution, we'd expect to realize solid organic growth through FY'18 although we continue to anticipate some shifts in the mix and timing of future growth which I'll discuss in more detail momentarily. Our transportation systems business continues to experience an increase in demand for programs related to Smart Cities data analytics and enhanced safety and mobility. We also continue to experience growing demand for connected vehicle advisory services and vehicle the infrastructure planning and design projects. At this time we have six active projects related to connected vehicle advisory services and vehicle infrastructure planning and design. We believe the segment will continue to benefit from a favorable shift in transportation, infrastructure spending through FY'18. As we continue to pursue large strategic projects we anticipate the length and timing of these complex procurement cycles will cause the segments revenue line to move in step functions. In other words we had anticipate the growth rate for the transportation system segment to average in the mid single digits for the fiscal year followed by periods of step function growth as we convert these large procurements. However, the specific timing of contract renewals and contract awards is highly unpredictable. In FY'18 the Roadway Sensors segment will continue to execute against our strategy of providing the industry's most complete portfolio of detection sensors, increasing the number and value of data elements our sensors collect and developing a recurring revenue stream from monetizing that data. As I mentioned a few minutes ago, the segment recently launched its first SaaS solution a data analytics service branded as VantageLive!. It is our intent to evolve VantageLive! into a robust analytical platform with the potential to unlock both the strategic and economic value of the data that can be collected by a 130,000 sensors we've installed intersections across the country, given the level of market interest for VantageLive. We're proceeding with some limited investments in the segment sales and customer success organizations. These investments are to start in Q2 and reach steady state in Q3 will support channel and sales enablement as well as customer onboarding. Based on the introduction of new products in FY'17 and the recent release VantageLive!, we expect the rate of revenue growth for Roadway Sensor segment to increase year-over-year with our annual growth rate anticipated to exceed the market's historical growth rate of about 7%. This higher level of revenue will increase to segments operating income dollars however the anticipated modest investment to capitalize on the high demand for VantageLive! may put some near term pressure on the segment's operating income margin rate. Still we continue to believe the VantageLive! product line will realize substantially higher gross margins than we realized on our sensors as the new SaaS product reaches maturity. Now let's discuss our agriculture and weather analytics business. We remain confident of the structural challenges faced by the agricultural sector present a substantial long term market opportunity for ClearAg indeed the continued growth in adoption of ClearAg particularly the operating company level of some of the world's largest even crop protection companies validates our market assumptions. Nonetheless, as I mentioned last quarter, the combination of historically low prices for agricultural commodities compounded by the industry consolidation among the largest crop science companies is delaying the enterprise wide adoption of digital agriculture and several of our largest accounts. We continue to anticipate enterprise agreement at our largest crop science customers to average $5 million in annual recurring revenue however our near term pipeline tends to be comprised of operating company level opportunities rather than enterprise wide Deals because most of our crop science accounts are distracted with industry consolidation and other short term sectoral challenges. Therefore through FY'18 we'll continue to focus our commercial activities to secure additional orders at the operating company level of existing accounts as well as to penetrate new accounts but again do that at the operating company level. We expect this activity to continue to generate solid segment level revenue growth similar to our FY'17 growth rates. Additionally, we continue to anticipate considerable future revenue acceleration as we transition our crop science customers to enterprise agreements However again we expect to begin to realize that impact in FY'19 rather than FY'18 due to current market conditions. While we will maintain our strategic focus on the crop science market we will of course continue to develop our OEM business with allied providers and AG integrators who in back ClearAg into their solutions and of course will continue to respond opportunistically to demand in other segments. We believe our scientific and engineering capacity remain sufficient to meet current product roadmap performance and likewise we believe our current total sales and marketing resource level is sufficient to support our FY'18 revenue targets, therefore with the exception of the segments new general manager. We expect the AG and weather analytics cost base to remain relatively flat through FY'18. In summary, in Q1, Iteris realized solid sales execution across all of our segments despite the mix challenges in the transportation system segment. We believe the market conditions will remain generally favorable in all of our end markets and therefore we continue to anticipate full year organic revenue growth from each of our reporting segments while at the same time we continue to work to contain expense growth. Further, we'll continue to implement business model innovations such as introduction and development of high gross margin recurring revenue streams which we believe will continue to create long term shareholder value. Now with that, we would be delighted to respond to your questions and comments. Operator?

Thank you. [Operator Instructions] And we'll go to Jeff Van Sinderen, B. Riley.

Good afternoon. Let me say congratulations on the record revenues for the quarter, and great to see Jim Chambers on board for the Ag segment. I know it's early, and you mentioned a couple of things in your prepared comments, but maybe you can give us a little bit more of a sense of what Jim's sort of early primary objectives will be, and anything I guess along the lines of his approach to those objectives?

Yes, sure. Jeff, those are great questions. So, given the market landscape that we see in the Crop Science segment, I think it's really important that we take a very, very focused approach to each of our accounts. One of the things that I see customers asking for is a better understanding of how our solutions can be immediately plugged in to their business operation to create a near-term value. And that's because right now I feel like a lot of these big crop science companies are having a hard time thinking overall extended timeframe, given the degree of industry consolidation, and then some are just the sectotal challenges that they're facing. So, what does Jim give us? He has substantial experience working in a number of the largest crop science companies. He understands their internal operations. He actually was involved in the evaluation of ClearAg at Bayer CropScience. And so, based on that experience I think he is going to be able to help us better articulate our value proposition, our return on investment in these accounts, and make sure that we are introducing those accounts in a way that it's clear how we can provide immediate value to these customers.

Okay, good. And then if we could shift a little bit, maybe you can just tell us a kind of -- I guess, more about what you are factoring into your system segment outlook or guidance, and are there other things we should consider timing-wise and mix-wise as we think about revenues by segment for Q2 and beyond? And I guess also is there anything else we should be aware of around gross margins and operating expenses for Q2?

Hey, this is Andy. Given that very, very broad question, honestly, I'll take the start and then will have Joe finish. First and foremost, with any of our BUs it's really important to consider them from a full year perspective; all three of them are going to be subject to different timing issues from a quarter-to-quarter basis. In context of the systems business, that business from a statutory perspective is going to run between 31% and 32% gross margin. As you've heard from us in the past, from both Joe and I, the leverage in that business tends to come from the operating income side, operating margin side. But in context of gross margins, you know that business traditionally runs about 25% to 30% of subcontract contents, sometimes with a prime contract or sometimes with a sub. We run up to 400 concurrent projects, so there is quite a bit of variation and complexity in our mix. So, at time to time, we are going to have some variations from a quarter-to-quarter perspective. When you consider our last quarter, we did have a fairly high content of subcontract and also equipment, pass-through of revenue and hence costs associated with that. If you take out the part that's considered to be a typical for a given quarter, we still grew that business let's say in the mid to high single percentage points. So if you consider a $2.3 million year-over-year growth, about you know, just [dome in the air] [ph], 1.3 million of it was basically a typical subcontract component cost. Again, that just happen to hit this one quarter, and you are talking about the timing between one or two weeks as that moves. So, all things go well in that business, we are growing again where we expect to grow, and in some cases we did have this up-spread in terms of subcontract content. But on a total year basis, that business is going to perform within our expectations and I think within basis of the way people are modeling that business from a gross margin and OI perspective. Joe, would you like to add a little bit more about forward-looking side of it?

Yes, sure. So, Jeff, just as a context here, there we do have one particularly large project that's coming up for renewal at the end of this calendar year. We are certainly going to compete to -- for the renewal of that contract. And in addition, we are pursuing a number of additional very large new projects, but for purposes of forecasting, we are trying to be as conservative as possible, and the current description that we're providing to you guys under -- reflect the most conservatives in -- we would not win the re-compete for that project. So, depending on the outcome of that procurement process, the timing of that decision and then also when and if we win some of these other large projects that are expected to be announced at the end or the very beginning of our next fiscal year, you could end up with some dramatically different timing scenarios. So again, we're trying to be as conservative as possible and setting expectations with you and others who are following the stock.

Okay, well, that's a good strategy. I could take the rest offline. I appreciate you guys answer my questions.

We'll go next to Mike Latimore, Northland Capital Markets.

Hi this is [Rishi] [ph] on for Mike Latimore. I have a couple of questions. Do you see most of the digital Ag growth coming from current or new customers?

Say again?

Do you see most of the digital Ag growth for the next year coming from the current customers or the new customers?

It's that most of the Ag revenue is that the question?

Yes.

Yes, so good question. Yes, most of the revenue we would expect for the balance of FY '18 to come from additional penetration in our existing Crop Science accounts now that being said we continue to win a number of new accounts as I mentioned in my prepared remarks just a few minutes ago, we secured additional several new allied provider and Ag integrator customers last quarter, quarter one of this fiscal year, we'll continue to do that but just because of the size of the relationship and that overall size of the enterprise of our Crop Science accounts that's where most of the revenue growth will come in FY '18.

Great. And how are the insurance and irrigation categories shaping up as prospects for Digital Ag?

For Clear Ag?

Yes, yes.

So you're probably thinking about QBE NAU deal that we announced a couple of quarters ago as a matter of fact we have continued to expand our relationship with that account. We've had some follow-on orders, I would expect that there will continue to be additional orders and also as I mentioned at the time that we announced that we'd won that deal we were starting to see inbound interest from other crop insurance companies and we continue to do that we do have some dialog going on with other perspective crop insurers. Now that being said, we try to be clear that we at this time anyway, we don't view the crop insurance market as the strategic market, so we're not proactively marketing to that segment but we have qualified inbound interest we're certainly responding and we also of course are going to continue to develop our relationship with QBE NAU.

Okay. And what about the irrigation category?

Yes, so that's interesting. So you're probably thinking about the announcement that we recently put out regarding our irrigation advisory, we do you continue to see irrigation as being an interesting opportunity for us we would expect to partner with irrigation providers although we do think we can provide valuable irrigation advisories direct to growers. So we'll I guess what I would say is, I think, it's an interesting area for us and I'd recommend that you guys stay tuned.

That's all from me. Thank you.

We'll next go to Steve Dyer, Craig-Hallum.

Thanks, good afternoon. I appreciate the conservatism just around the remainder of the year but just as it relates to Q2 and I know there are some variability that typically run somewhat close to Q1 is that a conservative way to think about it or is that kind of going out of limit at this point?

We don't want you to draw on line.

Q2 is good quarter for us, Q3 is typically our seasonal quarter, the typical variations again can be across all sector is very strong and our systems business in particular, we do get some August vacations which does put a little bit more cost down in the G&A side and OI but in terms of just the variations in gross margins again more likely to bounce back to the norm than be where they are, again as there will be a little bit of extra cost on G&A due to vacation since utilization. The sensors business has a very predictable in terms of their business a strong quarter and they're doing quite well in terms of gross margin they're a little bit lighter than they typically are seasonally but not certainly within the point of expectation and that can probably improve a little bit. And I think what's probably at least for me one of the more interesting aspects of Ag and Weather is as we're getting into our second and third years of really going out the market with this and now it's having Jim Chambers on board partnering with Tom Blair we're just entering all the big planning periods for the big agri businesses in terms of planning for the next cropping season. So a lot of interesting activity going on a lot of very important strategic discussions, so at that point hopefully we'll have more to report on that as we look at the next two quarters.

Thank you. And then finally for me wondering your thoughts on acquisitions I know it's been sort of out there but you had sort of enough things internally there to keep you busy and probably still do but is that something that's kind of out there new on that development?

That's exactly right, we have a lot to keep us busy internally as I've had some people actually about that from time to time and just to be totally transparent, the first few quarters that I was here anyway I just thought like we had a lot of internal work that's needed to get done to really capitalize on the intellectual property that we already had as a company and so that's what we've really been focused on, I do think over the course of the last couple of quarters, we've managed and demonstrate our ability to scale the operation. As Andy has said in his remarks today and previously we've made some investments in our infrastructure and I do think we're getting to a place where we could successfully plug another like a tuck-in into our operation, if the right opportunity came along we would certainly look at it, assuming it would create shareholder value but now that being said I think we have a lot of opportunity in front of us, it's not saying, there's no requirement for us to do an acquisition but I do think it's something that we're in a position we could at least consider now.

Got it, thank you.

[Operator Instructions] We'll next go to Jon Fisher, Dougherty & Company.

Thank you, good afternoon. First wanted to start with Roadway Sensors, given kind of the early stages in the new products cycle you're in that was a pretty significant deceleration in growth from Q4, I guess I was surprised at that people were drop off, so I was just wondering kind of what your outlook would be for a new product cycle this year for growth for that segment?

Well, I'm thinking that the reason you felt that there was a deceleration is because we had such strong growth in Q4 of last year and just as a reminder for everybody, we did have some pick up in Q4 which I think we talked about last quarter and that was due to the fact that we had some supply chain issues and inventory issues that prevented us from fulfilling product for which we received orders in previous periods and so there was that catch up effect in Q4. Now that being said, the 6% growth rate I will say is below the seven plus percent growth rate which we're expecting to average over the course of the year but that being said we do see a fair amount of variability from quarter-to- quarter, it's not I certainly don't think it represents an overall trend although it is a little bit on the low side of the range, I think for the year. We continue to see strong demand in all regions, we have a tremendous amount of opportunity flow as Q2 and as I look ahead to the - through the end of Q2 and beyond, I feel very confident that we'll manage to come in above the 7% historical average growth rate.

Okay, thanks. And then just taking a couple of bigger picture questions for the year good start to the year from a backlog standpoint, would you expect this year based on what your pipeline looks like to grow backlog versus what you ended fiscal year out last year at $54.5 million.

Yes, it is Andy. I'll take a start on this. I think what's a really positive story and backlog and just kind of backing up first I should it's kind of remind everyone backlog is just one measurement that we look at as far as forward looking indicators and to put it a funny way. If the backlog keeps growing and growing, that means we're not executing against it so, there's a there's a specific size we think is relevant and certainly we're operating at that level but as Jim said earlier on we do take a conservative approach in terms of how we look forward as far as some of these very large jobs that we're re-competing for or are bidding for in the normal roll off of contracts scored quarter-to-quarter and year-to-year when you look at the book backlog assuming win or a possible when we basically wind that backlog down in terms that what's left in the contract. So despite the kind of our cautious conservative nature that backlog is still maintaining at a very strong level so, again very healthy business but I think both of us will always caution that it's just one particular number and in any period it can, it can move with say $5 million to $10 million up or down that's not necessarily indicative of a big change in the business it's just basically timing of some very large contracts.

Okay, thanks. And then a final question just on the margin outlook for the year both, both gross margins and operating margins is it your expectations to increase gross margins year-over-year and from an operating margin standpoint is a year expectation for OpEx spending to be at a slower rate of growth than revenue growth will be this year.

Sure. Again, this is Andy. I'll start on the gross margin and then you know kind of handed Joe little bit on the margin because up margin does actually bring into very strategic investing concepts but the again if you look at the different businesses systems as I said earlier 31% to 32% somewhat statutory driven in that a fair amount of that business still is hourly driven and hourly driven in terms of the statutory overhead rate So that, that becomes so much programmed that business leverage is down and the OI level and again that's going to be subject to where we choose to do some investing so for instance in the software or software type applications that we're pursuing and feel actually can provide a much better leverage opportunity in the future, you'll see basically R&D spend or might be some sales and marketing related to actually selling a different type of product down there. So that's something that we choose to manage specifically on the sensor side that business runs actually very strong for being at agency based business that 47% to 50% for core business there's about 10% of that business again as a reminder that is distribution of third party product that runs 10 to 15 point margin so you end up at a blended 45% that's very strong and we think that's sustainable and well but it will move within let's say depending on that mix between distribution and product it's going to move between the 44% and 48% quarter-to-quarter but very strong and likewise leverage is down pretty consistently what you see right now in terms of our operating expenses, our G&A type expenses, R&D expenses. We're building ever so slightly there for the new products but it's fairly representative of what they expect in the future so this is gross you continue to see more margin and Joe did comment that in Ag and weather. We basically stabilized the spin in that business so incremental revenue is going to drive in current incremental OI but let me just pause a second the let Joe talk a little bit about some of the key investments that we're looking at and actually both sides but probably more so in transportation this far as enabling some of these new product opportunities.

Yes, so thanks a lot, Andy. So, yes and I appreciate that yes we are making some investments and we tried to talk to those on our last call. In the systems business there they're modest but some of you may remember that last year we talked about factor, we are refactoring our various applications to deliver them on a SaaS basis. We started to increase our R&D headcount in that segment throughout FY'17 so, while we're not adding a lot of additional R&D resources in FY'18 there is headcount annualization that is showing up in our FY'18 figures also we have made a decision to hire a couple sales resources that have experience sale selling SaaS solutions in particular and software in general which is a different model from what we've done in the past because typically we've had our consultants sell our software which is one of the reasons I think we ended up delivering it on more of a job shop kind of basis or a managed services basis. But as we start to focus more on delivering our software solutions on a SaaS basis, we think we need to have a couple dedicated sales people with experience in selling enterprise software and SaaS solutions. In the segment in a sensor segment also as I mentioned we are making some modest investments to channel and sales enablement as well to customer onboarding again it's kind of in a similar vein we we've had tremendous success in generating demand and closing a surprisingly good number VantageLive! deals with our existing sales staff. But we think having people with a software experience selling VantageLive! will be beneficial can help us get even additional acceleration so again there are some very modest increases in spending there with respect to Ag and weather analytics. There is no additional expense other than we've added the general manager as I'd just Mentioned So what does that look like our OpEx as a percent of sale I think would stay with you know in the generally the same range that it was. And I'd expect our second level Oh I remain you know generally in the same range so these are big investments but you know there are there are some investments this year which we think will create leverage going forward.

Okay, thank you.

And we'll go to Joseph Osha, JMP Securities.

Hello there. A couple of questions; first, acknowledging that you said that the sort of expense run rate or Ag and whether it's his stabilized. At the point at which one of these really big subscription deals potentially shows up you know a couple million dollars run rate. Would that potential still be coverable with the existing organizational run rate that you've got war or would there be additional expense associated with that and I do have one other question.

Sure yes, this is Andy and yes we think we have a very robust infrastructure built out of this point and you bring up a good kind of good factor which is the strategy has been to go after these very large scene crop protection folks the large enterprises because this is where we can get our leverage. It's highly leveraged the sales. Sales play and it's also highly leverage in terms of when you look at deployment these aren't super custom the appointments. These are basically an extension of the service that we have in place. Again incrementally it would take quite a few very large customers to actually drive our cost of sales from that perspective. We feel again that we have a very big strong engine built and this is what we're looking forward to in the future is actually taking on this larger customers and executing.

So we see it that at that point to some of these materialize the fall through from that revenue should be pretty high right.

But absolutely and this is what we've talked to in the past in terms of basically how this is this business drive it's way up to 70 plus gross margin and it's exactly this way you start you get this business up from like Joe said the $6 million run rate get it to 10 it's going to look different and you get a 15 to 20 and it's profitable and it's running 70 point gross margin so each essentially each 500,000 revenue basically incrementally improves all our metrics.

Okay, thank you and second question and our full forewarning here Joe I'm headed off the range. I've had a number of companies I've met here recently doing drones is as a service. I have one here in here the other day that was doing it for sort of mining facilities I'm wondering whether as part of your business maybe in the context of the acquisition question earlier, have you thought about trying to integrate some drone services for some of these Ag information product you are offering?

Yes. So we've had some drone companies approach us. To some -- I don't mean to cash dispersions at drone -- I think it's a really exciting…

Oh, go ahead, go ahead please.

But in my experience, I think sometimes it's a solution looking for problem, right, and so we've had interest by some drone companies in working with us because using the drone to collect information that then provides the insights and helps to kind of close the value loop there, if you will, so anyway we are certainly open to it, but right now we've just got so many other opportunities in front of us, we are kind of staying focused on those. But I'm not ruling that, I think it's an interesting idea.

Okay. Thank you very much.

Sure.

And that concludes today's question-and-answer session. I will now turn the conference back over to management for any closing remarks.

All right, great. Well, thank you, Operator. So, we appreciate everybody's support and all the thoughtful questions even though some of them were a little bit tough today, but that's okay, we are up to it. On the Investor Relations front, I just wanted to let everybody know that we'll be presenting at several upcoming conferences. We hope you look for us at the Canaccord Genuity 37th Annual Growth Conference. That takes place in Boston this week, August 9 through 10. And then we will at the Dougherty & Company Institutional Investor Conference in Minneapolis on September 18 through 20. And we will also be at The Benchmark Micro Cap Discovery Conference in Chicago on December 14. So, if you are attending any of these conferences, we would love to see you, we encourage you to come see our presentation. In the meantime, we look forward to updating you again on our continued progress when we report our results for the second quarter of FY'18. So, thanks again, and this concludes today's call.

And that does conclude today's conference. We thank you all for joining us.