Iteris, Inc. (ITI) Q4 2018 Earnings Call Transcript
Published at 2018-06-08 00:39:08
Todd Kehrli - Investor Relations Joe Bergera - President and Chief Executive Officer Andy Schmidt - Chief Financial Officer
Jeff Van Sinderen - B. Riley FBR Ryan Sigdahl - Craig-Hallum Capital Group Jon Fisher - Dougherty & Company Mike Latimore - Northland Capital Markets Joseph Osha - JMP Securities
Good day, everyone and welcome to the Iteris Fiscal Fourth Quarter and Full Year 2018 Financial Results Conference Call. Today’s call is being recorded. At this time, I would like to turn the call over to Mr. Todd Kehrli, MKR Group. Please go ahead.
Thank you, operator. Good afternoon and thank you for participating in today’s conference call to discuss Iteris’ financial results for its 2018 fiscal fourth quarter and full year ended March 31, 2018. Joining us today are Iteris’ President and CEO, Mr. Joe Bergera; and the company’s CFO, Mr. Andy Schmidt. Following the prepared remarks, we will 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 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 website at www.iteris.com. Now, I would like to turn the call over to Iteris’ President and CEO, Mr. Joe Bergera.
Thank you, Todd, and good afternoon everyone. I appreciate everyone joining us today. As you saw at the close of the market, we issued a press release announcing the financial results for our fiscal fourth quarter and full year ended March 31, 2018. In Q4, Iteris recorded $25.3 million in total revenue, which was flat to the prior year fourth quarter. This result which was below management expectation was due primarily to continued choppiness in Texas following Hurricane Harvey that hit Houston, Corpus Christi and other Gulf Coast cities in late August and early September. Despite the disruption from an unprecedented natural disaster in one of our most strategic markets, Iteris recorded full year total revenue of $103.7 million, representing 8% growth over our prior fiscal year. Our annual revenue represents a full year record for the company. In Q4, our transportation systems segment recognized $13.1 million in revenue, representing 4% year-over-year growth versus our $12.6 million in the same prior year fourth quarter. The quarterly rate of growth for transportation systems decelerated somewhat due to: one, a general reduction in subcontracting content in the quarter, in other words, our subcontractors performed less activity in Q4 than in typical quarters and two, Virginia DOT’s anticipation of our TOC contract moving under a new contract vehicle beginning in April ended up deferring some expected activities with that agency. For the full year, the segment’s revenue was $54.5 million versus $49.3 million in the prior year, representing a solid 11% annual rate of growth for the segment. During Q4, the transportation systems segment ended the year with $37.7 million in backlog. The backlog figure excludes the new VDOT TOC renewal with Iteris as a subcontractor to AECOM, which received the first week of April. Of note, the expected reduction in fiscal 2019 annual revenue under the new TOC contract and the corresponding shift in the annual contract period will continue to impact our year-over-year backlog comparisons as seen in this quarter’s backlog number through FY ‘19. Notable fourth quarter wins include a new $2.4 million contract with OC 405 Partners for integration and maintenance of the technology infrastructure to support the $1.9 billion I-405 modernization project in Orange County. In addition to the I-405 project, we received sizable new orders from the Federal Highway Administration, the state of South Carolina for our 511 software platform and the Virginia Department of Transportation for technical validation and design activity. Last week, we also announced that Texas DOT awarded us a $3 million ID/IQ contract. Our Q4 backlog figure does not include any orders related to this new $3 million contract. In Q4, the segment’s operating income was $2.2 million or 16.6% of revenue versus $1.7 million or 13.2% of revenue in the same quarter last year. The 340 basis point improvement in segment level operating income is attributable to improved gross margins primarily due to product mix and related decline in the percent of revenue derived from subcontractor content. For the year, the segment’s operating income was $8.6 million or 15.9% of revenue versus $8.5 million or 17.2% of revenue for the full year of FY ‘17. The 130 basis point decline in the segment’s full year operating income margin was due to the higher-than-expected subcontractor content, particularly in the first half of FY ‘18 which was offset partially by the favorable margin improvement as we transitioned customers to a software-as-a-service model. In Q4, the Roadway Sensors segment recorded $10.8 million in revenue versus $11.3 million in the same prior year fourth quarter, which represents a 4% year-over-year decrease. As a point of reference, the prior fourth quarter is an unusual comparison due to recognition of revenue in the period from certain shipments that have been delayed during Q2 and Q3 of FY ‘17. Compounding the already difficult comparison, the segment continued to encounter choppiness in the Texas market in Q4 FY ‘18 related to post-hurricane reconstruction. While we did experience a notable increase in requests for quotes from the Lone Star State in Q4, the receipt of actual orders was below our expectations as Texas DOT is still digesting equipment purchases from various sources, including Iteris that were made during our third quarter. In a moment, I will provide some additional background on the Texas market and discuss our forward assumptions for the region. Outside of Texas, the Roadway Sensors segment realized overall solid performance throughout FY ‘18 and for the full year, the Roadway Sensors segment’s revenue was $44.4 million versus $42.2 million in the prior year. This represents a 5% annual rate of growth for this segment. As a reminder, the Roadway Sensors segment had several important product releases over the past 12 months. These include: first, a new award-winning SmartCycle bike indicator; second, a new traffic velocity or travel time module for VantageLive! and third, a new signal performance measurement, or SPM software product that provides advanced data visualizations critical to the operation of traffic management centers. Iteris SPM is available on a standalone basis as well as a complementary basis to VantageLive! Additionally, this Tuesday, we announced the demonstration of a vehicle infrastructure application at the Intelligent Transportation Society of America Annual Meeting in Detroit. The demonstration with Siemens and with SiriusXM provides data from PedTrax, our patented pedestrian detection technology, to a Siemens roadside unit and then to the onboard unit of equipped passenger vehicles using SiriusXM satellite radio. The application which we are demonstrating is another first of its kind innovation by Iteris. We believe this innovation offers the potential to improve safety of connected vehicles today as well as autonomous vehicles in the future. In the meantime, our current revenue from autonomous vehicle testbeds is de minimis, meaning that Iteris has no negative exposure to the recent autonomous vehicle incidents affecting Uber or Tesla. The Roadway Sensors segment’s operating income dollars declined by $1.5 million or 50% compared to Q4 a year ago. The reduction is largely due to the period’s unexpected revenue variance, one-time events and timing that Andy will discuss in more detail. For the year, segment level operating income declined $1 million or 10% due to product mix, particularly in Texas and a one-time processor swap for our next product line associated with the platform change we made last year. In Q4, our agriculture and weather analytics segment recognized $1.4 million in revenue, representing a modest 1% increase year-over-year. For the full year, the segment’s revenue was $4.9 million versus $4.5 million in the prior year representing an 8% annual rate of growth. The growth was due to consolidated solid performance – I am sorry continued solid performance of ClearAg, which grew at an annual rate of 34%. So let me repeat that. The growth was due to continued solid performance of ClearAg, which grew at an annual rate of 34%. Unfortunately, this growth rate was offset partially by a decline in ClearPath Weather gross revenue following the elimination of a third-party royalty beginning in Q3. Although the change in royalty treatment negatively impacted ClearPath Weather’s top line, we saw an improvement in the products gross margins. In turn, this led to a noticeable improvement in the segment’s gross margins versus Q4 FY ‘17. We would expect ClearPath weather to realize a meaningful gross margin benefit going forward. During the quarter, we closed several new ClearAg ideals. For example, NAU Insurance, which is one of the nation’s largest crop insurers, expanded its use of ClearAg. Under the terms of the new agreement, NAU customers will be able to use ClearAg data to determine the best environmental window to apply spray applications. We also entered into an OEM agreement with AgroVIR, which is one of the leading farm management information systems vendors in Central and Eastern Europe. AgroVIR’s users which operate 360,000 hectares of European farmland will be able to use ClearAg’s smart content to support critical decisions such as harvest timing. In addition to new customer acquisitions, we continued to delight the existing ClearAg customers and we also continue to enhance our set of reference accounts. For the year, ClearAg realized a very solid 97% revenue renewal rate. We also continue to see solid pipeline growth and expect opportunity conversion to accelerate with the addition of key hires, such as P.A. Rebeyrat and Joel Lipsitch. So, with that, I’d like to turn the call over to Andy to walk through our financial results.
Thank you, Joe. Good afternoon, everyone. Following up on Joe’s introduction, let me go through additional financial detail. First, let me take care of some required communications. Today’s earnings release and related current report and Form 8-K include non-GAAP financial measures. We intend to provide our investors a year-over-year cash based view of our operating results taken into account stock-based compensation which has been increasing significantly due to increased share price, depreciation and amortization. We are also taking into account benefits related to changes in tax law as well as restructuring charges which affected our current fiscal year and are not typical expenses for the company. In our press release tables as well as 8-K, we describe how we calculate these non-GAAP financial measures and provide a detailed explanation of our non-GAAP adjustments as well as reconciliation between our non-GAAP financial measures and their most directly comparable GAAP measures. Our press release tables also provide an adjusted 3-year view of our results taken into account the non-GAAP measures to provide a historical context. As Joe has covered our enterprise level results and other detail he has provided discussion regarding our revenue results, I will dive into other detailed segment performance items for Q4 and fiscal 2018. So again, reviewing our systems segment, as Joe commented, revenues of $13.1 million compared to $12.6 million for the previous year period. As we communicated in the past, our systems segment will experience a reconstitution of the VDOT TOC contract resulting in lower annual contract revenues. The transition has taken place in Q1 of fiscal 2019. Hence, our current reporting period benefited from a full 3 months of the legacy VDOT contract and compares directly with the prior year period. Gross margins of 34.7% are within our normal expected range and compares favorably to 31% in our year ago period. Gross margins are primarily driven by product mix and mix of Iteris labor versus sub-content labor and materials. Operating expenses of $2.4 million compares $2.3 million last year are essentially flat. Q4 2018 segment contribution margin benefited from comparably higher revenues in gross margins and totaled $2.2 million or 16.6% this year compared to $1.7 million or 13.2% for Q4 of 2017. Considering the total year, systems segment revenues of $54.5 million compared to $49.3 million, gross margins of 32.5% are within our normal expected range and compares favorably to 31.5% for fiscal ‘17, operating expenses of $9.1 million compares to $7.1 million. Increased expenses was due to increased selling and G&A expenses due to several large contract pursuits as well as overall increased RFP activity and increased R&D expense was due to refactoring our iPeMS software product offering. Fiscal 2018 segment contribution margin of $8.6 million or 15.9% compares to $8.5 million or 17.2% for fiscal 2017. The overall percentage reduction is attributed to the aforementioned increase in operating expenses. Considering our sensors segment, Q4 fiscal 2018 revenues of $10.8 million compares to $11.3 million for the previous year period. As Joe commented, our sensors business continues to experience the effects of the September hurricanes, which has led to a departure from our normal fiscal year revenue seasonality. The year-over-year quarterly decline in revenue was primarily attributed to our Texas region, which was affected by the severe weather events. Gross margins of 43.9% are within our normal expected range and compares to 47.4% in the year ago. Gross margins typically vary based on the level of Iteris product sales versus distribution sales of third-party products. Our current period gross margins were also affected by year-end inventory adjustments as well as variability in the cost of key components. Operating expenses of $3.3 million compares to $2.4 million. The year-over-year variance in operating expense is primarily attributed to the fiscal year 2017 favorable impact of capitalizing engineering effort related to the development of VantageLive! All current year adverse factors combined led to Q4 2018 segment contribution margin of $1.4 million or 13.4% compared to $2.9 million or 25.7% for Q4 of 2017. Considering the total year, sensor segment revenues of $44.4 million compares to $42.2 million for the previous year period, gross margins of $44.8 million within our normal expected range and compares to 47.1% in our year ago period. Difference is attributed primarily to product mix. Operating expenses of $11 million compares to $10.1 million, increased expenses were due to a modest increase in selling and R&D expenses to support our new VantageLive! offering. Fiscal 2018 segment contribution margin of $8.8 million or 19.9% compares $9.8 million or 23.2% for fiscal 2017. Their overall percentage reduction is attributed to aforementioned increase in the operating expenses as well as the reduction in gross margin performance. Finally, let’s review our ag and weather analytics segment. Q4 fiscal 2018 revenues of $1.4 million compares to $1.4 million for the previous year period. While flat, as Joe mention, our ag product line saw growth year-over-year of approximately 6%, which was limited somewhat by the timing of certain renewal. Our weather analytics product line saw slight decrease in revenues year-over-year driven by a reduction in the third-party royalty revenue pass-through that was discontinued this year. The revenue reduction related to the royalty elimination was approximately $200,000 in the quarter. Offset while the effect of the royalty elimination reduced current period revenue, there is a corresponding dollar-for-dollar reduction in cost of goods sold resulting in improved gross margin performance. As such, gross margins of 52.3% compares favorably to 47.2% for our year ago period. Operating expenses of $2.9 million compares to $2.5 million excluding goodwill impairment in Q4 of fiscal year ‘17. The year-over-year increase in the operating expense is primarily attributed to a one-time restructuring charge realized during the period. Essentially, the restructuring was the result of a refocused go-to-market effort and head our sales and marketing line. Q4 of 2018 segment contribution margin of negative $2.2 million compares to $1.8 million for Q4 2017 excluding goodwill impairment. Again, the variance is a result of the aforementioned restructuring charge. Considering total year, our ag and weather analytics segment revenues of $4.9 million compares to $4.5 million for the previous year period. While While our weather analytics product line was flat year-over-year due to the royalty elimination item previously discussed, our ag product line saw a 35% increase in revenue. Gross margins of 46% compares favorably to 43.9% a year ago. Operating expenses of $10.3 million compares to $9.4 million excluding goodwill impairment. As previously noted, the increased expense was due primarily to restructuring charges. Fiscal 2018 segment contribution margin of negative $8.1 million compares to negative $7.4 million in fiscal 2017 excluding goodwill impairment. Lastly, let’s discuss corporate expenses. For Iteris, corporate expenses include corporate marketing, information systems, human resources, facilities, accounting, finance executive and public company costs. When we consider corporate spend for both our current period as well as our fiscal year, we had several unique events that drove expense. Our key projects for the year include implementing a new ERP system the first in 10 years for the company adopting ASC 606 revenue accounting the minor restructuring related to our ag business as well as adopting a new benefits program. In total, the corporate spend for Q4 of fiscal 2018 was $4.3 million as compared to $4.1 million last year. Of the unique expenses this period, our Q4 included a one-time charge of $300,000 related to a new benefits plan. Approximately $150,000 related to the adoption of ASC 606 as well as an increase in stock-based compensation expense. The variances were partially offset by capitalization of labor related to the implementation of the new ERP system. Corporate spend for fiscal 2018 was $14.9 million as compared to $13.7 million for fiscal 2017. In all, corporate expense averaged approximately $3.7 million per quarter for fiscal 2018, inclusive of aforementioned unique projects which was within our expectations. Capping our enterprise level results, Q4 fiscal 2018 revenue of $25.3 million was essentially flat with our prior year period. GAAP loss for the period was $2.4 million or negative $0.07 per share as compared to $3.4 million or negative $0.10 per share for the prior year period. Non-GAAP loss for the period was $1.4 million or negative $0.04 per share as compared to negative $674,000 or negative $0.02 per share last year. In terms of fiscal year 2018 revenues of $103.7 million compared to $96 million. The GAAP loss for the year was $3.5 million or negative $0.11 per share as compared to a loss of $4.8 million or negative $0.15 per share for fiscal 2017. Non-GAAP loss for fiscal year 2018 was $1.4 million or negative $0.04 per share as compared to a loss of $376,000 or negative $0.01 per share last year. From a cash flow perspective for fiscal 2018 we are essentially cash flow neutral from an operating perspective. We invested approximately $2.9 million in IT technology, including our new ERP system, which was the primary driver of our $2.7 million overall use of cash. From a balance sheet perspective, we ended the year with $15.4 million in cash and short-term investments and we continue to have no debt. Finally, our deferred revenue balance grew from $4 million at the start of the year to $4.9 million at the close of the year. At this time, this concludes my remarks. And I will turn the call back to Joe.
Great. Thank you, Andy. So Iteris continues to deliver exciting business and technology innovations to capitalize on the powerful trends in transportation market, while also developing a highly meaningful high-margin subscription model and agriculture. With continued strong execution, we expect to realize continued organic growth in FY ‘19 despite our expected first half revenue decline from the previously noted approximate $6 million annual reduction in VDOT TOC revenue. Our transportation systems business continues to experience an increase in demand for programs related to smart cities, data analytics, enhanced safety and mobility. And despite the immediate headwinds from the VDOT TOC transition, we believe this segment will benefit from a favorable shift in transportation infrastructure spending over the medium to long-term. In fact at this time, we have a strong sales pipeline with an historic level of aggregate contract value in advanced pipeline stages. In FY ‘19, we expect the highest rate of pipeline conversion to come from three categories of opportunities: first, software-as-a-service; second, business process outsourcing; and three, new geographic expansion in markets such as Florida. While some of the deals are large and the timing of the new contract awards can be unpredictable, we expect to see a general improvement in sequential revenue accounting for holidays and other seasonal factors as we progress through the year. As such, we would expect the transportation systems segment to fully replace the lost TOC revenue and resumed growth in the second half of FY ‘19. The segment’s FY ‘19 full year operating income margins should remain similar to prior year despite the revenue compression in the first half of fiscal 2019. With respect to our Roadway Sensors segment, we anticipate three factors to increase our rate of revenue growth in FY ‘19. The factors are: one, the Vantage Sensor product family innovations that we have introduced over the last several quarters; two, a virtuous cycle that we are creating with the introduction of our cloud-based intersection analytics platform, VantageLive! Although revenue recognition is minimal to-date, we have a steady stream the new VantageLive! orders and we continue to grow our VantageLive! pipeline. Virtually, every customer who has seen VantageLive! believes the cloud service will improve their operation and increase the value of their sensors. Thus VantageLive! represents a new recurring revenue stream for Iteris, another point of differentiation for our sensor products and an incentive for customers to upgrade to our newest sensors, which collect more data elements for VantageLive! to analyze. And third, a continuous effort to maximize productivity of our direct and indirect sales channels. In FY ‘19 we will increase our focus on sales enablement and will also re-optimize the split between direct and indirect sales in select geographies to drive additional productivity improvements. Because the Texas market could have some further short-term impact, I want to provide additional background on this market. The region is the segment’s largest geographic market accounting for more than 25% of the segment’s revenue in an average quarter. Unique to Texas, our Roadway Sensors segment sells our own products and also related third-party products direct to customers in Texas. This makes the Texas region more susceptible to fluctuations in mix than we experienced in our other regions. Texas DOT manages arterial roads as well as highways for every city in the state with a population of 50,000 or less, which includes unincorporated areas around major metro centers like the Houston suburbs. Additionally, many large jurisdictions tend to buyout the Texas DOT procurement schedule. Therefore the segment’s performance in Texas has a high dependency on the velvety of Texas DOT personnel and budget. At this time, we expect the Texas market will return to normal course of business at the start of Texas DOT’s new fiscal year which begins September 1. Further, we continue to believe that over the long-term, Iteris will be a net beneficiary of last year’s unfortunate natural disaster. Given the timeline for continued choppiness in Texas, we expect the Roadway Sensors segment’s first half revenue growth rate to be similar to the segment’s average FY ‘18 growth rate, followed by double-digit growth in the second half of FY ‘19. As a result, we anticipate FY ‘19 revenue results to diverge from our typical seasonal pattern. The segment’s operating income margin should expand modestly for the year moving within our expected band as in the past. Now, let’s discuss our agriculture and weather analytics business. We believe that fundamental secular trends present a substantial long-term market opportunity for ClearAg, which as you know we launched in July 2015. In that time, we have acquired an impressive list of customers and perhaps more importantly we have acquired sufficient market insights, productize our phase content to address specific business-critical problems across the agriculture value chain. We believe our refined product and commercial approach will create several strategic advantages. First, it enables us to target sales activities to line of business owners and functional leaders across the larger universe of perspective accounts because we minimize or even eliminate the need for the involvement of an internal IT organization to deploy ClearAg in the company’s application environment. Second, it reduces our dependency on the timing of an enterprise agreement with a crop science account to realize a further acceleration in ClearAg’s revenue growth. And third, it simplifies our technology roadmap and it also enables us to better focus our sales and marketing activities. We began transitioning to this enhanced go-to-market approach in October. And as Andy noted, we then restructured our commercial activities in Q4 to align with this model. Based on customer response to-date, we expect ClearAg’s rate of bookings growth top increase in fiscal 2019 even if we do not secure an enterprise agreement with one of our crop science accounts, which we continue to focus on delivering as well. In turn, ClearAg’s growth will drive an overall increase in the rate of growth for the ag and weather analytics segment. At the same time, we have reduced the segment’s annualized cost base by almost $1 million. In FY ‘19 we expect the combination of ClearAg’s revenue growth and the lower cost base to support a meaningful reduction in the enterprise’s overall net investment and cash consumption. So in summary in FY ‘18 Iteris made progress across all our segments despite some pretty significant anticipated and even unanticipated timing related challenges. I believe our ability to navigate these timing challenges demonstrates underlying strength of the business model and the team’s ability to execute. Looking ahead, we anticipate consolidated year-over-year revenue to decline in the first half of FY ‘19 given that our transportation system segment’s exposure to the TSE revenue reduction is concentrated in that half. And further, we expect the continued choppiness in Texas to limit the ability of our Roadway Sensors segment to compensate for that H1 exposure in transportation systems. In the second half, we estimate at this time anyway that the enterprise will return to year-over-year growth reaching levels in line with recent performance. In the meantime, we expect to realize efficiencies from recent from the recent restructuring we took in our ag and weather analytics segment and also from the completion of our corporate systems modernization initiative that Andy discussed. So, therefore even with our first half revenue headwinds we anticipate our FY ‘19 consolidated full year non-GAAP or adjusted operating income to be approximately breakeven. And of course during FY ‘19 we will continue to deliver business and technology innovations to capitalize on the compelling trends in our end-markets and that also position Iteris for sustainable long-term profitable growth. So with that, we would be delighted to respond to questions and comments. So operator?
Thank you. [Operator Instructions] We will take our first question from Jeff Van Sinderen with B. Riley FBR.
Hi, everyone. Just a follow-up first, Joe, did you just say operating income breakeven for the fiscal year, did I catch that right or did I mishear that?
Yes, I was saying non-GAAP or adjusted operating income approximately breakeven for FY ‘19 and that’s the function of both the revenue growth and then that restructuring benefit from the actions that we took in Q4 of this past year.
Okay, got it. Thank you. And then I mean, I think you went over the choppiness in Texas pretty well and kind of what we should expect here in the early part of the fiscal year? And you did touch on and I guess I wanted to delve a little bit more into this if we could, but you recently did add some new contracts in the areas of smart cities and connected vehicles and just wondering maybe you can give us your latest sense on the outlook for this business segments?
Yes. So the outlook is very positive. As I mentioned, when we look at our pipeline and in particular we have focused on the later stages of our pipeline, personally, I am particularly interested in two stages of the pending contracts and what we call outstanding proposal. In those categories, we have been notified that we want them or we are just working towards finalizing a contract or are we our best and final and we are beginning to work through pricing and we expect to move into the contract discussions. And at this time that value of that, opportunities in those late stages of our pipeline is at historic highs. As I said in the script, a lot of the work is related to smart cities. Generally there is a lot of business related to data analytics. A large portion of that is software subscription-related revenue. And then lastly, we are doing more and more work related to mobility and safety. And that takes a lot of different forms. Another thing of note is that despite the challenges in Texas that our Roadway Sensors business is dealing with today. Interestingly, our transportation systems business has continued to grow. As I mentioned, we just closed the $3 million ID/IQ contract in Texas. We expect systems business in Texas to grow considerably in FY ‘19. And then we also are starting to see a lot of growth in Florida. Both Texas and Florida represent two of the largest and most innovative intelligent transportation systems markets in the country. So there is strategic focus for us and we believe our ability to succeed in those markets will help us, not only in those markets, but on a nationwide basis.
Okay. And as far as the smart city and connected vehicle businesses go, I mean those are really independent of what’s happening with kind of the broader eventual rollout of autonomous vehicles and such, correct?
Yes, it’s a great question. So we are doing as I mentioned some work, but it’s on a limited basis with different state agencies and in some cases it’s involving automobile manufacturers to stand up testbeds in different localities, but the near-term – the current revenue for that activity is de minimis and it has no real impact on our current financial results whatsoever. To the extent that we were able to commercialize, for example, that the application that we are demonstrating right now at ITSA with Siemens and SiriusXM that would represent optionality on top of the revenue projections that Andy and I are discussing. That’s not factored in any way into our FY ‘19 plan.
Okay, fair enough. And then maybe if we can turn to ag for a moment, there has been a fair amount of consolidation going on in the ag space lately, just wondering how you are thinking about that as it relates to your gaining further traction in ag. And I guess how is the consolidation evolving the landscape for you?
Yes. So, it’s a great question. So, we are definitely feeling like we are getting to the other side, but there is still work ahead of us. So, for example as we have discussed on prior calls, Bayer Crop Science is one of our biggest customers. I think a lot of people are aware Bayer is, will acquire Monsanto, they have received approval from both the EU and the U.S. As a result of that acquisition, Bayer Crop Science is going to divest one of their lines of business it’s their digital farming business to BASF. BASF, we have been working with that digital farming division, which is branded as RVO. Our contract will move to BASF and actually the team of 600 people that we have been working with also move to BASF. So, all of our contacts remain the same, but there will be the post-acquisition integration activities still in front of us that could limit our ability to otherwise grow our business with xarvio. Now on the other hand, we have other contacts in the Bayer organization beyond the digital farming team. And so we will continue to pursue opportunities with Bayer even following that directly with Bayer even following the Monsanto acquisition. So we are definitely getting to the other side, but there is still lot of moving parts. And I think it will take another couple of quarters at least to work through it. That being said, a lot of people have said if you guys think that you could still close an enterprise agreement in what’s now our fiscal ‘19. And the answer is, it is possible – it’s going to be hard, because there are still a lot of moving parts, but it’s possible. But I would say, even if we were to do that, I would not expect any revenue from that order in FY ‘19 and there isn’t any such revenue reflected in the revenue projections that I shared with you.
Okay, that’s really helpful. I will take the rest offline. Thanks for taking my questions.
We will go next to Steve Dyer with Craig-Hallum Group.
Hey, guys. Ryan Sigdahl on for Steve. So want to dig into you said the second half of the year revenue growth will return back to historical levels. I mean, can you clarify that a little bit, I mean I see high single-digit growth last year, it was low 20% the year before that. I mean, what are we – any help there I guess on a little more clarity? Thanks.
Yes. So, we have avoided providing explicit guidance. And I think we are still probably too immature to do that I would hit to provide information that’s actually – could end up proving to be more confusing than it is helpful, because we are still fairly immature. And then in this particular period we have got a lot of moving parts. But that being said, we have been like over a 3-year basis, our revenue CAGR has kind of moved somewhere between 11% and 13%ish. And so we are kind of thinking that somewhere in sort of the low double-digits would be kind of consistent with what we have been performing at over more extended kind of 3-year timeframe.
That’s helpful. And then switching gears to transportation systems backlog, so I think I got it that as $38 million for the quarter, which implies down about $8 million quarter-over-quarter sequentially from December. That’s more than I guess what I would expect VDOT to add when that’s layered in. You mentioned a big pipeline, lots of RFP activity, but is that primarily just timing of some of those new awards that are in the late stages?
Yes. So it’s a great question. Yes, it’s a great question, so there is a lot of ground. So, first of all, the thing to think about is that we like typical because of the way that it’s not just the value of the TOC contract, but it’s also that the different timing periods for the contract. So typically we would be carrying the full – almost the full year value of the TOC contract in our backlog, the old TOC contract in our backlog when we ended Q1. In this case, we don’t have that, because that the old contract is expired and so we are not carrying any of that and nor do we have the value of the new contract in the backlog, because we didn’t receive the order until April. So it’s not just a function of that difference in the value, but it’s also the periods of the contract. And I think it’s going to take unfortunately probably about four quarters, a full year to sort of work through that we are going to get back to normal comparisons.
Yes, this is Andy. Let me add to the backlog discussion. As we often said, backlog is just one of the indicators. It is an accounting – it’s an accounting number. So one of the other elements that’s typically not included in the backlog is certainly pipeline, we feel very good about that, but also we have a number of very good contracts that we are bullish about that are ID/IQ type that we don’t recognize any backlog until there is a specific task order issued against it. So, those types of contracts really aren’t represented in the backlog figure. And once again we feel very strong about some of these contracts that we do have booked, but you won’t see them in the backlog figure. So keep in mind, it’s just a one of the measurements that we use, but it’s not the all critical measurement that we run the business by.
Yes. And actually that, Ryan, this is Joe, just to give you a little bit more color on what Andy is saying. So like I talked about these ID/IQ contracts with Texas, where we now hold three of them, one of them we just recently announced and they all have value in the range of $2 million to $3 million each. You will notice if you look at the press releases whilst an ID/IQ contract, it says it has a committed value. And that’s because in the state of Texas when they are award an ID/IQ, they actually do commit to spend the value of that contract with the vendor who wins that contract over the duration of the contract period, but it’s still is an ID/IQ and so there isn’t an task order associated with initial award. So, as Andy said that is not in our backlog nor are the other ones that we have recently won over the last couple of quarters, but we have a very high confidence that award will convert into actual recognized revenue within a finite period of time due to the way that contracts are structured.
Great. Thanks and good luck.
We will go next to Jon Fisher with Dougherty & Company.
Yes, good afternoon. Thank you. Just wanted to explore SG&A and R&D spending, just curious how you think about that going forward and just kind of the impacts from any residual ERP spending in fiscal ‘19 and it doesn’t sound like the new benefits plan we will have any lingering carryover in fiscal ‘19. It sounds like that was a Q4 impact, but just kind of wanted to flush out how you are thinking about both of those line items in fiscal ‘19?
Sure. This is Andy. And even taking a little bit broader as Joe had mentioned, we are targeting to be roughly breakeven at non-GAAP level. Really how we get there despite the fact that we do a lot of talking about the first half of the year, we have unique challenges that are just frankly timing challenges are not structural. But when we look at the overall year, how do we get there we are still going to see growth this year of course? We expect product mix to actually we can see a favorable uptick in product mix, which gives us a slight, but helpful gross margin expansion. So you got growth and you have got expansion in gross margin. We have taken $1 million out of the ag spend annualized basis, so you got $1 million coming out of operating expense. Corporate expense specifically to your point, it’s going to be flat year-over-year. So, we are not getting despite all unique events that are important infrastructure builders, Joe and I have been working on infrastructure over 3 years, some are quietly on it, but we are essentially complete. And so we don’t see any expansion in corporate spend. And when we start looking in terms of some of the areas, especially like our sensors business, where we continue to expand VantageLive! and whatnot, we essentially have the teams in place and that expense related to those teams you saw in Q4. So we don’t really see increased spend from that perspective. So, we are pretty well settled in terms of expense structure and we are just essentially set the leverage from this point forward.
Okay. So when you describe corporate expense here, including SG&A and R&D, so you expect that to be flat year-over-year?
When we get to the corporate expenses I described which include the IT HR facilities etcetera, etcetera, yes, we ran right around $15 million this last year, that’s all-in GAAP expense. It should be right around that level this year.
Yes, so we are looking very stable.
Okay. And as far as continued investment spending in transportation is on RFP activity, that’s something obviously that’s been going on for a few quarters now. I was just kind of wondering where you are at from a continued investment in pursuing RFP activity and kind of spending at high level to continue to capture our opportunities that are out there, because obviously the opportunities continue to grow?
Yes, this is Andy I will start with the mechanical part and then hand to Joe here. Again, that’s a unique business again as we describe it. Essentially everyone in that business is billable and so they charge their time across the P&L. When we look at next year as they typically respond the business works within an expected range of gross margin or contribution margin. That takes into account RFP activity. So when we look at next year, again we run that business around 32.5% gross margin I think it was plus or minus 1% or 2% within a current any quarter. But over a year, it’s fairly predictable. Likewise, the contribution margin at 16% to 17% over a year basis is we feel comfortable about it. That incorporates the expectation that RFP pursuits are going to ebb and flow quarter-to-quarter, but we do see the most important part is we see a lot of good activity, we see a lot of opportunity and we certainly are in pursuit of it, but I don’t – again everything is going to work within the parameters I just discussed, which is again going to be a good financial performance for the segment.
Yes. Jon do you want any additional color or?
No, that was good. I can follow-up later with other questions. Thanks.
We will go next to Mike Latimore with Northland Capital Markets.
Yes, thanks a lot. I guess just on the transportation systems area again, Joe, I think you said that you were in a historic level high, is it something, was it pipeline or what did you specifically refer to that?
Yes. I was saying that the total aggregate value of the late stages of our pipeline and specifically I am thinking about the two latest stages, which we refer to as pending contracts and outstanding proposals and they are kind of specific definitions for the those like pending contracts, for example, means that we have received notice that we won the technical award. We may have even won like the – well, so they can take different forms and you can be negotiating price and the technical aspect of the project together, sometimes you win the technical award and then you move on to pricing, but in any event, it means that the agencies signal to us, they intend to give us the contracts and we either just need to finalize the actual contract terms or we need to finalize pricing about, but we have more or less been notified, we have been selected. Outstanding proposal is another very late stage in our pipeline. In that case, it’s not always as clear-cut, how we define that, but for the most part we wouldn’t refer to anything as an outstanding proposal unless we were at best and final meaning we have been asked to provide our best and final pricing and we maybe in like advanced discussions regarding the technical approach, but at that point we expect that we are the – we will be emerging as a finalist even if we haven’t been technically notified of that. And so when you look at the value of those two stages, we are at historic highs.
Okay, got it. Does that include or exclude these ID/IQs in Texas?
That’s interesting question. It probably would include those – it would include those ID/IQs, but offline we factor some stuff. It’s like there are different kinds of ID/IQs unlike Texas where as I said there is basically a commitment, although it’s not a strict legal commitment, but there is a commercial understanding that Texas DOT plans to spend the value of that contract with us. In other cases, if an agency – if that is not their practice, then we would factor the value of that ID/IQ and coming up with the number that I just referred to. That is the judgment call on our part, however, how we do the factoring.
Alright. And then on the Virginia DOT revenue, I thought you mentioned something about a deferral or something, but I guess can you clarify did you get like a full quarter of revenue under the old contract in the March quarter or is there something that was deferred?
Yes. So, Mike, you are really smart to pickup on that, because Andy and I were saying the same thing, but we are talking about sort of slightly different aspects. So as Andy said, we did have the contract in full force. It ran through that end of our Q4. That being – so technically what Andy said is exactly right, but that being said, what we have found in the past is that VDOT would – there was some ability to flex under that contract and sometimes they would run additional activities through that contract that were complementary to what we are doing in sort of the basic kind of 24/7/365 operation. We saw that drawdown and essentially come to a close. So, we didn’t have any of that benefit of that activity in Q4. So there was expected work that we would have anticipated coming through that vehicle which didn’t materialize, but we did continue to do the basic operations of the center through the end of Q4.
So I mean, just to put it in real simple terms, what will be the change in revenue in the June quarter relative to the Virginia department trends, is it down $1 million or so on a quarterly basis from that point?
Yes, I mean, so all that Andy calculate that, but before I do that, I want to make a point it’s related to the item we were just discussing. If you go back and you look at our Q1 performance last year, you will see that it was huge and you all took that and you see that a fair amount of activity was subcontractor content related. There was probably over $1 million in VDOT TOC subcontractor activity, which is exactly the stuff we are talking about, which materialized in Q1 of last year. So we can kind of look at it on kind of like a typical basis, but it did flux from quarter-to-quarter and so you need to keep that in mind, but anyway Andy, why don’t you talk to the math?
Sure. As you have heard us say before, we are going real around numbers here. We are going to move from roughly a $12 million contract and then again this is all inclusive of the different things Joe discusses to somewhere around that $5 million to 4.5, 5. So again you can kind of divide that by 4, but that doesn’t include what Joe just referred to, which is the kind for lack of a better way of putting it on-the-fly requests that of course that we track to. So the best way to work with it is work with the very broad context that we have been talking to as we have been talking to you all over the last 6 months about this transition.
Okay, got it. And then just last on the pipeline for the ag group, ag division, can you talk a little bit to that as sort of independent of the big potential enterprise deal, what are you seeing in terms of the ag pipeline ideas, 6-figure deals and what kind of verticals there are, any color on ClearAg pipeline will be good?
Yes, that’s a great – another good question, Mike. So, yes, the deals I was talking about with this new go-to-market. So first of all, I just want to be really clear, we are continuing to pursue enterprise deals. ClearAg is an extremely extensible platform and we think it will be adopted on enterprise-wide basis by a number of the very biggest crop science companies. We will continue to pursue that business. But our kind of enhanced go-to-market approach is also focused against these more kind of discrete business critical problems. So, we are offering solutions where you can kind of think of them as analytical applications. And yes, those applications are going to be targeted at line of business owners or functional leaders and like let’s say in the crop science market anything from a Tier 1 crop science account to even like a Tier 3. There could be some variability as to the size of those deal spending on like a number of users, which is kind of a function of that size of the enterprise of course, but I would say on average, they are going to look like kind of small 6-figure deals. There is of course the opportunity to spring a number of those together and we would still expect realized sizable revenue in any given account by selling a number of those deals. But in each on its own merit would be probably in the low 6-figures I am sorry.
[Operator Instructions] We will go next to Joseph Osha with JMP Securities.
I am still working to suppress your comments together in terms of understanding what the year-on-year full fiscal year operating expense number is going to look like? I heard that corporate expenses are going to be flat, then I heard that on a non-GAAP basis, you are going to be breakeven, but I guess I am wondering if I can get you to characterize you on a GAAP basis or a non-GAAP basis for the upcoming fiscal year versus the fiscal year you just finished, am I going to see operating expenses flat or up or down, that’s what I am trying to understand?
Okay. So, again consider the following, the corporate expenses as I described, again that’s an aggregate number, which was approximately $15 million from a GAAP perspective in our current year. Again, we consider that to be flat year-over-year. When we get into operating expenses in each BU, the best way to think about that modeling wise just for simplicity is just what I have gone through in terms of the contribution margin expectations. And as we have said before – as I kind of commented before, our normal expectations in our sensors business given expectations in revenue is that it runs at between 20% and 22% contribution margin systems runs between 16% and 17%. And when you consider last year’s ag operating expense, again, you can see this in their segmentation information on their press release. We are going to be about $1 million better. Those are the key variables that will kind of help you drive the model.
And then Joe, if you want to talk about that more offline, we are happy to take any additional questions and work through that with you of course.
Okay, thanks. And then following on your previous line of questioning, excuse me one of my colleagues previous lines of question on ag should I think about those 6-figure bookings as they come in and that’s obviously an annualized number, should I think about those being additive to the existing run-rate for that business?
Yes, absolutely. I mean, we, as I said, ClearAg grew at 34%, 35% in FY ‘18 and we expect to see an acceleration in that rate of growth in FY ‘19 even without an enterprise deal. And it’s a function of transitioning to this new go-to-market approach, which of course again, it’s lower. Yes, so we are not starting from standing still. Sorry, I don’t mean to talk over you.
That’s okay. So with that old manifest in a year-on-year comp for that weather and ag business for the full year that would be positive I should think it would...
Okay. Alright, thanks very much.
There are no further questions in the queue. I would like to turn the call back over to Joe Bergera for any additional or closing remarks.
Okay, great. Well, thank you very much operator. I appreciate it and I appreciate everyone’s attention and support in the thoughtful questions. As always, we look forward to updating you again on our continued progress when we report our results for the first quarter of FY ‘19 just probably a few weeks from now. So anyway with that, this concludes today’s call. Thanks everybody.
And again, this does conclude today’s conference. We thank you for your participation. You may now disconnect.