Todd Kehrli - Investor Relations Joe Bergera - President and Chief Executive Officer Andy Schmidt - Chief Financial Officer

Jeff Van Sinderen - B.Riley FBR Joseph Osha - JMP Securities Ryan Sigdahl - Craig-Hallum Capital Group

Good day, everyone and welcome to the Iteris Fiscal First Quarter 2019 Financial Results Conference. Today’s call is being recorded. And now at this time, I would like to turn the conference over to Todd Kehrli, MKR Group. Please go ahead, sir.

Thank you, operator. Good afternoon, everyone and thank you for joining us today to discuss Iteris’ financial results for its 2019 fiscal first quarter ended June 30, 2018. On the call today are Iteris’ President and CEO, Mr. Joe Bergera and the company’s CFO, Mr. Andy Schmidt. Following the 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. These 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 our forward-looking statements. I would like to remind everyone that a webcast replay of today’s call will be available in the Investor Relations section of the company’s website at www.iteris.com. Additionally, we are starting something different this quarter in the Investors section of the iteris.com site under Q1 ‘19 conference call details, you will find a document named Q1 ‘19 key financial metrics, which contains many of the financial metrics that we have previously provided in our prepared remarks. We think it’s more efficient to provide investors these metrics in a single easy-to-read document rather than for us to read through them in our prepared remarks. With that, I would now like to turn the call over to Iteris’ President and CEO, Mr. Joe Bergera. Please go ahead.

Great. Thank you, Todd and good afternoon everyone. Thank you 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, 2018. In Q1, Iteris recorded $25.5 million in total revenue, which represents a 6.3% decline year-over-year. The result is due to two factors. First, the expected reduction in revenue, which began showing up in our Q1 results from our contract to manage the Virginia Department of Transportation operations centers and two, the continued choppiness in the Texas market for intersection detection. Aside from these two challenges, we continue to experience consistent growth across all other areas of business. In Q1, our transportation systems segment recognized $13.2 million in revenue. While the segment’s revenue declined 10.5% against a particularly strong prior year quarter, the result is up 1% compared to the preceding quarter despite the initial step down in TOC revenue. During Q1, the transportation systems segment continued to win new business, securing approximately $16.1 million in net added backlog. This is a 22% year-over-year increase against the $13.2 million in net added backlog in Q1 of last fiscal year. The segment ended the FY ‘19 first quarter with $40.7 million in backlog. The transportation systems segment recorded wins across all of its lines of business: consulting, software and business process outsourcing. Some of the recent notable wins include, the deployment of our commercial vehicle operations, that’s our CVIEW application suite and our iPeMS software for various states, a new 5-year business process outsourcing initiative for the Florida Department of Transportation, District Southern Transportation Management Center, traffic signal synchronization services for the San Bernardino County Transportation Authority and the Orange County Transportation Authority, Bus Signal Priority systems for Pasadena and LA Metro, and also several new task orders for the Virginia Department of Transportation, which are in addition to the VDOT Transportation Operations Center or what I will refer to on the rest of the call as VDOT TOC subcontract that we discussed on our last call. In Q1, the segment’s operating income was compressed due to a high level of effort applied to sales and marketing activities rather than build the customer projects and also due to an increase in the relative contribution of subcontractor content to our total revenue. We believe these conditions are transitory and the segment’s operating income margin should return to its normal range in subsequent quarters. In Q1, the Roadway Sensors segment recorded $10.9 million in revenue versus $11.3 million in the same prior year quarter, which represents a 3.7% year-over-year decline. As I just mentioned, the revenue decline was attributable to continued underperformance in Texas, particularly associated with our third-party distribution business in the state. As Andy will discuss, the proportionally lower contribution of third-party revenue had a positive impact on the segment’s gross margin rate relative to the same prior year period. Outside the Lone Star State, the segment’s revenue continued to exceed our expectations. As stated on our last call, we believe that Texas market will begin to normalize in our fiscal second half after the Texas Department of Transportation’s new fiscal year begins on September 1. Having said that, we have some modest concern about apparent supply chain delays that seem to be associated with steel and aluminum tariffs. These delays could exacerbate lead times for third-party equipment, such as pulls, mounts and cabinets that we depend upon. For various reasons, we believe Texas presents more exposure to these potential delays than other regions. In Q1, our Agriculture and Weather Analytics segment recognized $1.4 million in revenue versus $1.2 million in the same prior year quarter. This represents a 21.7% year-over-year increase. Both ClearPath Weather and ClearAg, our digital agriculture platform, contributed to the quarter’s growth. During the quarter, we continued to add new ClearAg customers and with these additions, ClearAg now has more than 50 unique paying customers. In addition to new customer acquisition in Q1, we continue to deepen our existing relationship with Syngenta, which is one of the world’s largest crop science companies. Last week, we announced a new deal with the UK Agriculture & Horticulture Development Board. The AHDB is a statutory levy board funded by farmers, growers and others in the food supply chain. It’s membership represents over 72% of total agriculture output in the UK. Under the terms of the agreement, Iteris will provide hyper local atmospheric weather data to the board’s membership through the AHDB WeatherHub. We believe our relationship with AHDB will not only enhance ClearAg brand awareness in the UK and also Continental Europe, but we believe it will create opportunities for us to up-sell AHDB members to our higher value analytical solutions over time. With that, I would like to turn the call over to Andy to walk through our financial results. Andy?

Thank you and good afternoon everyone. Following up on Joe’s introduction, let me go through additional financial detail. First, I have to take care of some required communications. Today’s earnings release and related current report on Form 8-K include non-GAAP financial measures. 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. Moving forward, starting with our transportation systems segment, Joe has reviewed our revenue performance, I should say and revenue drivers. So, let me discuss margins and expenses. Gross margins this period at 30.8% compares favorably with 29.6% to previous year, however, is lower than our typical range. Both comparative quarters had a higher than average subcontract component to the revenue mix, which is primarily caused by project timing. In particular, we saw significant subcontract revenue from our I-405 project this period as compared to Iteris internal labor. In terms of total operating expenses, operating expenses of $2.7 million is up from $2 million from the previous year period. As Joe mentioned, much of the increase is due to sales and marketing effort and is not a structural increase and will vary quarter-to-quarter. The sales and marketing efforts were very effective and resulted in a sequential increase in backlog, which will benefit the segment in future periods. In all, Q1 FY ‘19 segment operating income of $1.4 million or 10.6% of revenue compared to $2.3 million or 15.8% of revenue for the previous year period. Switching to Roadway Sensors, Joe has covered revenues, so likewise let’s discuss operating performance. Sensors Q1 ‘19 gross margin of 48.7% compares favorably to 44.7% in the previous year period. Product mix is the key driver to gross margins in this segment. Of keynote, gross margin dollars of $5.3 million compares favorably to $5 million last year, despite a slight decline in revenue. Our overall shift in product mix this period is related to our distribution business, which is highly concentrated in the Texas region. As Joe discussed, the Texas region overall has been impacted this period, hence distribution revenue is down year-over-year resulting in favorable gross margins. Overall, operating expense of $3.5 million is up from $2.5 million for the previous year period. The difference is attributed to both R&D and sales. In respect to R&D, part of the variance is due to previous year capitalization of internal efforts involved in the build out of VantageLive! For the go-forward, our engineering efforts will primarily be sustaining in nature and hence we will see less capitalization of internal labor. In regard to sales and marketing, we have added new sales capabilities in order to expand our regional reach outside of our Texas markets and to accelerate growth of our VantageLive! offering. Segment operating income of $1.8 million or 16.5% of revenue compares to $2.5 million or 22.6% of revenue in the previous year period. Finally, looking at Ag and weather, Joe has introduced the many positive accomplishments for this segment this quarter and I am happy to report that the accomplishments were achieved along with much better financial performance. As previously reported, revenue was up for the period. Gross margins were strong as well. Gross margins of 58.8% compares favorably to 43.4% last year. The increase is tied less to product mix as is the case with our other segments and is a structural step up as this business continues to mature. Operating expense of just under $2 million compares favorably to $2.3 million for the previous year period, which is consistent with our messaging during our FY ‘18 year end call, detailing our restructuring efforts, moving from a heavy business development effort to a go to market effort. While we expect consistent favorable, comparable expense performance throughout the year, the absolute expense will vary quarter-to-quarter due to the timing of specific sales and marketing activity. Overall, the operating loss for the segment has dropped to $1.1 million for the quarter, down significantly from $1.8 million operating loss in the prior year period. Lastly, total corporate expense was $3.6 million for the period, flat with our last year performance. Again, as noted during our last quarter, we expect corporate expenses to be flat year-over-year and about $15 million for the year. Our quarterly expense in this area will vary quarter-to-quarter due to timing of certain expenses. From the balance sheet perspective, we had a couple of unique events affect us this period. At the start of our fiscal year, we launched our new ERP system. Doing so caused a delay in our customer invoicing process, while we completed the setup and conversion of data from our legacy ERP system. In all, the set up effort created a temporary timing event for our cash and accounts receivable accounts. Cash and investments ending at June 30, 2018 of $13.4 million is down from $15.5 million at the start of the fiscal year. That said, accounts receivable was up $3.7 million to $16.5 million. We expect the cash timing issue to resolve itself in the next two quarters. Lastly, we now provide a non-GAAP view of our enterprise operating results and reporting our non-GAAP reconciliation in our press release financial statements. Specifically, our non-GAAP view adjusts for non-cash expenses that include stock based compensation, depreciation and amortization. For our Q1 ‘19 results, our GAAP operating loss was $1.6 million as compared to $0.6 million loss for the previous year period. From a non-GAAP perspective, our operating loss was $540,000 as compared to an operating income of $218,000 for the previous period. At this time, I will turn the call back to Joe.

Great. Thank you, Andy. Iteris continues to deliver exciting business and technology innovations to capitalize on powerful trends in transportation, while also developing a meaningful high margin subscription model in agriculture. With continued strong execution, we continue to expect full year organic growth in FY ‘19, despite the expected first half decline from over $6 million annual reduction in VDOT TOC revenue and the continued choppiness in the Texas market for intersection detection, both of which appeared in our Q1 FY ‘19 results. 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 believe this segment will benefit from this shift in transportation infrastructure spending over the medium-term to long-term. And in FY ‘19, we continue to expect the highest rate of opportunity to conversion to come from three categories; first, Software-as-a-Service, second, business process outsourcing and third, new geographic expansions such as Florida. On a related note, in Q2 we will begin standing up our first intersection as the service customer. Under this innovative new model, we are able to monitor devices across an agency’s transportation infrastructure from our network operation center in Richmond, Virginia, using our SaaS solution, Iteris SPM, which we launched in Q3 of FY ‘18. We can then provide alerts and other analytics to the agency’s traffic management center or we can deploy our own resources to address any optimization or maintenance issues. Our intersection as a service offer which bundles our SaaS software with business process outsourcing activities is priced on a per intersection per month basis. Additionally, we will be introducing an integration between our transportation performance measurement application, iPeMS and our proprietary hyper-local weather and land surface data, that is already available with ClearPath Weather and ClearAg. This integration will enable agencies to better measure and manage the impact of weather and related road conditions on traffic safety, travel time and air quality. Our first customer deployment will be a state wide implementation for the Utah Department of Transportation. Despite an additional step down in VDOT TOC revenue that will appear in our Q2 run rate, we continue to expect the Transportation Systems segment to realize a general improvement in sequential revenue, accounting for holidays and other seasonal factors as we progress through the year. As such, we would expect this segment to resume growth in the second half of FY ‘19. And notwithstanding the Q1 results, we continue to believe this segment’s H2 FY ‘19 operating income margins should remain similar to prior periods. With respect to our Roadway Sensors segment, we continue to expect that Texas market to begin to trend towards normal course of business at the start of TxDOT’s new fiscal year, which begins September 1. And further, we continue to believe that over the long-term, Iteris will be a net beneficiary of last year’s unfortunate natural disasters. With return to equilibrium in Texas, we continue to believe three factors will accelerate the Roadway Sensors segment’s annualized rate of growth in FY ‘19. These factors are; first, the Vantage Sensor product family innovations that we have introduced over the last several quarters to enhance our competitive differentiation and also drive upgrade sales among our installed base, second, a virtuous cycle that we are creating with the introduction of our cloud based intersection analytics platform, VantageLive! and third, a continuous effort to maximize productivity of our direct and indirect sales channels. Absent any additional market challenges, we would expect the Roadway Sensors segment’s first half revenue growth to be roughly similar to the segment’s average FY ‘18 growth rate. In other words, low to mid single-digits, followed by double digit growth in the second half of FY ‘19. Further, we continue to expect the segment’s full year operating income margin rate to expand relative to last year’s annual income margin due to product mix and sales efficiencies. Now let’s discuss our agriculture and weather analytics business. We believe that fundamental secular trends represent a substantial long-term market opportunity for ClearAg, which we have launched in July 2015. Since our launch day, we have acquired an impressive global customer base that includes market leaders in all of our target segments. And as a result, Iteris is already a recognized market leader in digital agriculture despite the still early stage of the ClearAg products line. Today, we possess significant marketing insight and we are positioned to provide a number of highly targeted business critical solutions across the agriculture value chain. These solutions include field-specific environmental content, product and market validation intelligence, irrigation water management intelligence and harvest intelligence. Last quarter, we aligned our product in commercial activities to these solution areas. We continue to believe our refined product and commercial approach will create several strategic benefits. Specifically, the approach will first enable us to target sales activities to line of business owners and functional leaders across a larger universe of prospective accounts, because we have minimized or even eliminated the need for involvement of an internal IT organization. Second, reduce 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, simplify our technology roadmap and enable us to better focus our sales and marketing activities. Based on the positive initial response to our product and commercial strategy, we continue to expect ClearAg’s rate of bookings growth to increase in fiscal 2019 even if we do not secure an enterprise agreement with one of our crop science accounts this fiscal year. As a result, we expect ClearAg’s growth to continue to drive an overall increase in the rate of revenue growth for the ag and weather analytics segment. As background, in Q4 FY ‘18, we introduced an out-of-the-box integration between ClearAg and GDM’s Agricultural Research Management, or ARM application, which is the gold standard in field trial management for research organizations around the world. By co-marketing ClearAg’s integration with GDM, we have managed to accelerate our rate of penetration into R&D functions of Tier 1, Tier 2 and Tier 3 crop science entities, which we are already starting to up-sell to our higher value analytical solutions. In summary, in Q1, all three segments continue to make progress in executing our business strategy despite the financial headwinds from the transition of our VDOT TOC contract and the choppiness in the Texas market for intersection detection. We continue to believe market conditions remain generally favorable in all our end-markets and recent negative factors are temporary. As stated before, we continue to anticipate the consolidated H1 FY ‘19 revenue will decline relative to H1 FY ‘18 due to two factors. The transportation systems segment exposure to the TOC revenue reductions is higher in H1 than H2 and the Texas market for intersection detection is expected to remain choppy through the end of TxDOT’s fiscal year that ends August 31, which limits the ability of our Roadway Sensors segment to mitigate the TOC revenue reduction. However, in H2 FY ‘19, we continue to expect the enterprise to realize high single-digit year-over-year growth, as the transportation systems segment more fully replaces the reduction in VDOT TOC revenue. In the meantime, we expect continued improvements in the performance of our agriculture and weather analytics segment due to first, sustained organic growth of both ClearAg and ClearPath Weather. Second, sustained gross margin improvement associated with the elimination of ClearPath Weather third-party royalty expense that began in Q3 FY ‘18. And third, a reduced cost structure, as Andy referred to, from the organizational realignment that occurred in Q4 FY ‘18. And finally, we expect to realize some efficiencies in our corporate G&A due to the successful completion of our corporate systems modernization initiative, which we refer to internally as Atlas. Therefore, notwithstanding our first half revenue headwinds, we continue to anticipate FY ‘19 consolidated full year adjusted non-GAAP operating income to be near breakeven, while we continue to deliver business and technology innovations to capitalize on the compelling trends in our end-markets and to position Iteris for sustainable long-term profitable growth. So now with that, we would be delighted to respond to your questions and comments. So, I will turn it back to the operator.

Thank you. [Operator Instructions] Jeff Van Sinderen of B.Riley FBR.

Hi, good afternoon everyone. Just a couple of things you guys did a great job kind of going through a lot of the elements in your prepared comments. Just wanted to follow-up on, I guess the second half outlook that you spoke to. It sounds like you would expect your overall P&L to inflect year-over-year in second half. And then I guess any other color you can shed on the outlook for how we should think about gross margin and SG&A, because it seems like there are some moving parts there between segments and so forth?

So Jeff, could you just clarify what you mean by inflect. I mean, definitely, we would expect the rate of growth to accelerate as we get the VDOT TOC headwinds behind us, but I want to make sure I understood your use of the term inflection.

Sure. Yes, with inflect what I meant was year-over-year growth.

Yes and that’s absolutely right. And the reason for that is twofold. On one level, they kind of both relate to Texas, but we are anticipating that Texas DOT new fiscal year will bring us back to normal course of region – normal course of business in that region. So you will start to see a step up in the roadway sensors business rate of revenue growth, which in turn will not only produce higher levels of growth for the segment, but will help to mitigate some of the remaining headwinds that we have from the VDOT TOC contract that flow into Q3 and Q4. Additionally, you will start to see the benefit of the backlog that we secured in Q1 and that we anticipate to secure in Q2, start to convert into net new revenue for the transportation systems business unit, which will further accelerate our rate of growth and therefore lead to the inflection that you are talking about.

Jeff, let me jump in on the margins. So, when we consider our different VUs, you have been watching us for quite some time. If we start with our transportation systems, that business – over a significant period of time will run right around 32.5% gross margin, given an average product mix, call it that. That basically can vary plus or minus 2%, depending on mix. So in a high sub-content or subcontract period, it will drop 2% and then likewise in the high Iteris labor timing element in that quarter, it could go up into the 34s, but we tend to average right around 32.5% over a year basis. On our sensor side, probably your primary driver is the distribution business that we have in Texas. And by distribution, this is basically distributing third-party product, which is different than working through distributor who sell Iteris product. Again, we have a very large business in Texas. That business tends to run in about a 15 point gross margin level. So, in an average quarter, the overall segment runs at 45% gross margin. If it’s low distribution as it was this period, it can run higher closer to 48% or so. And likewise, if it is a very strong period in distribution in the Texas region, it can run as low as 43%. And then finally in our Ag & Weather segment the cost of sales are semi-fixed. So, as that business grows, we will continue to see improving gross margins. Obviously, the gross margins were a big step up this period, that’s because we were at about $1.4 million in revenue versus $1.2 million or $1.1 million or less than that in previous periods. As we go forward, there is some slight seasonality in that business in the ClearPath Weather that fix our Q2, where if we have any dip in sequential revenue, the gross margins will come down accordingly, but overall, we expect gross margins to be 48% plus in that particular segment as we look through the year.

Okay, that’s extremely helpful. And then just as a follow-up, on the Ag and Weather segment I know you have – some of the discussion in your prepared remarks talk to the idea that even if you don’t have or even if you don’t get an enterprise agreement in this fiscal year, various metrics in that business should improve, just I guess wondering if there is any change in how you feel, like you are making progress towards getting an enterprise agreement, maybe just – if you can just touch on that the progress you feel like you are making there?

Yes. We – that’s a great question, Jeff. And I didn’t mean to suggest that we have lost confidence in our ability to convert one of our crop science accounts into an enterprise customer. We are still confident that that’s going to happen. As we have said, the best case scenario would be that, that would happen late in this fiscal year, we wouldn’t see any revenue benefit until next fiscal year. That would still continue to be the best case scenario. We are working towards that. We will continue to work towards that and I feel very confident that eventually we will be successful. But what I wanted to make sure I got across to people is that regardless of the actual timing and when such an agreement does convert into actual recognized revenue, we still have a path – a meaningful path to grow based on the refined strategy that we started to articulate in January of this calendar year. And more specifically, what we are focusing on is providing instead of simply content and then technology components that can be utilized by our enterprise customers but are dependent on involvement from the crop science enterprises internal IT organization. We are now sufficiently sophisticated that we have managed to define what are essentially a set of solutions or applications that prepackage our content and that can be more easily consumed by accounts and can be sold directly to the line of business without any direct involvement from the enterprise’s IT organization. And as a result, we are seeing an increase in our new customer adoption rates and we continue to roll out ClearAg on an operating company and a product line basis within those accounts. As well as we are starting to penetrate integrated food service companies and other related agribusinesses, which reduces our dependency on securing that enterprise agreement.

Okay, great. That’s really helpful to understand. Thanks for taking my questions. I can take the rest offline. Best of luck.

Thank you.

Next we will hear from Joseph Osha of JMP Securities.

Hello gentlemen.

Hi Joe.

Hi, listen I am wondering, I have a good sense now as to what the year-on-year comps look for – look like for the second half of your fiscal year, obviously this has been kind of a disrupted year because of VDOT and so forth, but I am wondering if you would care to talk a little bit about what the organic rate of growth in sensors and transportation systems might look like as we get out into FY ‘20? And then I have a follow-up.

Yes. So Joe we have – over the last few years, we have been realizing revenue CAGR in the low teens, somewhere between 11% and 13%. I don’t see any reason why we couldn’t – over the medium-term continue to grow at that rate. So this year as you said has certainly been disrupted by the change in the contract structure for the VDOT TOC effort that we have been involved and we continue to be involved in. But once we get beyond that hiccup, I think we are back at that same rate of revenue growth, which I see as actually a baseline. And as we have talked about there are transformational opportunities above and beyond that for our transportation segments, but just looking at our core business, I would expect us to be able to grow at that rate over the medium-term.

Okay. And can you continue to support that level of revenue and revenue growth with this roughly $15 million a year in corporate overhead?

I will let Andy talk to that.

Yes. We think so as Joe said, we are looking for efficiencies based on ERP system. When we look at what we built out, certainly from that perspective, we are built for the next 5 years plus, this was the first effort we have gone through in 10 years. So we built it looking forward. The other large infrastructure elements to the business are in our Ag and weather area. Again that – the big engine that runs Ag and weather is industrial grade. It was built out not only to support all the R&D effort that went into it but also to handle quite a customer load. So we feel confident that our expense base in our primary structural areas, everything is built out the way we need it. And we are really focused on go to market. And so we are going to have varying expenses in our go to market efforts. As Joe said, as we not only support our expected mid-term growth, but also transformational opportunities.

Okay. It sounds like no corporate jet then. Last – the last question on Ag and weather, taking into account your comments on bookings and obviously you have got the enterprise thing out there, I mean is there some point at which these bookings begin to flow through to revenue even leaving aside this enterprise conversation, you have been at about $1.4 million now for three quarters and I am just trying to think about whether that maybe begins to grow as these bookings are monetized? Thank you.

Yes. Andy maybe you can chime in, one of the – I think I will just set it up, I will let you talk about it, maybe remind people that going against us has been the impact of the third-party royalty that came out of our gross revenue, which maybe makes it a little bit confusing looking at the numbers. I will pass it to you.

Sure. As Joe said, different pieces, if you look at our comps, actually we have two key elements that had affected the past in terms of comparable results. One is, ClearPath Weather has not necessarily been linear in terms of how the revenue books, again there is some seasonality in our Q2 and I think our last year Q2 was under $1 million for the overall segment because of that. So there is some seasonality piece that, as small as we are right now we do actually see those movements. As Joe said on many for our calls, while we don’t breakout the product lines the ClearPath Weather and ClearAg, ClearAg has been a consistent grower every quarter. We just do see a little seasonality in ClearPath Weather that we do our best to explain. Other element that Joe is talking to is good outcome in the industry that affected the ClearPath Weather product line was an elimination of a third-party royalty, that royalty was actually cost of sales that we are allowed to pass on to our customers, so you basically saw, let’s say a net plus of $200,000 in the quarter to revenue. But there is a net expense – cost of sales expense of $200,000, so it had an adverse margin effect, but it did inflate our revenues. That royalty has been removed. So it’s an overall good piece. And that’s again, why you see some very improved gross margins. But on the other hand, at $200,000, when you are dealing with $1.2 million, $1.4 million revenue base, that’s a pretty big chunk that we are making up for. Now the last part of the equation is our bookings. It’s a SaaS model. Again, it’s nice that every quarter we go into with a bank and we don’t have to start from scratch in terms of building up revenue. But on the other hand, revenue does build relatively slowly. Obviously, any new bookings we get in a period, you are only going to see three-twelfths of that revenue. So once again we are building, we still have a little bit of seasonality in our ClearPath Weather quarter-to-quarter, as Ag continues to grow, it will basically help mute that little bit of seasonality.

Okay. And thank you very much.

And Joe, as a result of all that, you will definitely see an increase in the rate of growth for our Ag and weather analytics business unit as we progress through FY ‘19.

Okay. And just actually since that’s come up, may I also assume that the kind of operating cost run-rate that you have got in that business can be – is sufficient to support your efforts going forward?

So you saw in this particular period here was again very good cost performance, which again structurally, we have reset the bar, but the one caveat is going to be sales and marketing is going to vary quarter-to-quarter. Again, the different periods have marketing different events, if you will. So, that will vary – so what you see on the books today will vary a couple of hundred thousand dollars period-to-period depending on what marketing and sales activities are occurring.

Maybe then can I just get a sense as to what like that annual run-rate for OpEx in that business might look like then?

What we have said last period is we expected that we took $1 million out of total OpEx. So if you look at our FY ‘18 total expense, we took $1 million out of that. Our Q1 actually showed favorable than that. So we will go back to original $1 million out of our FY ‘18 operating expenses in the ag space and we will do our best to beat that.

Okay, sorry to interrupt. Thank you very much.

Good questions.

Next we will hear from Mike Latimore of Northland Capital Markets.

Hi, this is [indiscernible] for Mike Latimore. Thanks for taking my questions. Is the average deal size in transportation systems growing?

So, the answer would be, yes. But right, at this point, I couldn’t really give you – if the question is what is the current deal size relative to what it’s been historically, I can’t really give you that number we need to do more analysis now, that we are in a more robust ERP system, we will be able to do that. But I can’t tell you that as we look at our opportunity pipeline, we have seen a significant increase. Today, we have literally dozens of opportunities that we are pursuing that are in excess of $1 million. 3 years ago, when I first started here, those kinds of deal sizes were extremely few and far between. My guess would be that the average deal size has certainly increased by at least 200% to 300%, but I can’t give you an actual average deal size at this point.

That’s very helpful. So how many 10% customers do you have and who are they?

How many 10% customers we have, is that what you’re asking?

Yes.

So how many customers represent 10% of our total revenue, is that the question?

Yes, yes. That’s the question.

Okay, yes. Andy, I’ll let you answer that one.

Sure. So at this point, our only concentrated segment would be systems and we have one.

That’s all from me. Thank you.

[Operator Instructions] And we will now hear from Steve Dyer of Craig-Hallum Capital Group.

Hey, guys. Ryan Sigdahl on for Steve.

Hi, Ryan.

Within the Ag & Weather Analytics segment, I know you don’t breakout specific revenue by products, but historically, you have given percentage growth for ClearAg. I don’t believe you gave that this quarter maybe I missed it, but what was that in Q1?

I am looking at Andy to give you that information.

It’s in excess of 10%, but I don’t have that one at my fingertips.

Okay. And then you guys gave good color on kind of first half, second half assumptions, if I just do some back of the envelope math from what you reported in Q1 with the one half assumptions, is it reasonable or am I in the right ballpark that Q1 and Q2 will be similar on a revenue basis or any color there would be helpful?

That’s a good starting point. The one key element that was still in play that Joe touched on was in Q1 we finalized the transition in our systems VDOT TOC contract. That said we still had some legacy revenue in our current period that legacy revenue kind of round it’s between $500,000 and $1 million. So that goes away in our Q2, but we look to have good momentum in all our business units frankly to help offset that. So again, roughly, it looks similar with maybe – again maybe a slight pressure downward to make up with that – for that rollover of the legacy TOC contract.

Great. Thanks, guys. That’s it from me.

There are no further questions at this time. I would now like to turn the conference over to management for any additional or closing comments.

Okay, great. Well, thank you operator. As always, we appreciate everyone’s support and also the thoughtful questions. On the Investor Relations front, I want everyone to know that we will be presenting at a couple of upcoming conferences. Please look for us at the Dougherty & Company Institutional Investor Conference in Minneapolis on September 6. And also we will be at the Craig-Hallum Capital Group 9th Annual Alpha Select Conference in New York City on November 15. So if you are attending either of these conferences, we would love to see you. Please come to our presentation. In the meantime, obviously, we look forward to updating you again on our continued progress when we report our results for the second quarter of FY ‘19. So with that, this concludes today’s call. Thank you.

Once again that does conclude today’s conference. Thank you all for your participation. You may now disconnect.