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

Jeff Van Sinderen - B.Riley Joseph Osha - JMP Securities David Burdick - Dougherty & Company

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

Thank you, operator. Good afternoon, everyone and thank you for participating in today’s conference call to discuss Iteris’ financial results for its 2019 fiscal second quarter ended September 30, 2018. Joining us 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. In the investor relations section, you will also find a document with many of the financial metrics that were 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 said, I’ll now like to turn the call over to Iteris’ President and CEO, Mr. Joe Bergera.

Great. Thank you, Todd and good afternoon everybody. Thanks for joining us today. As you saw at the close of market, we issued a press release announcing the financial results for our fiscal second quarter ended September 30 2013. In Q2, Iteris recorded $24.4 million in total revenue, which represents a 3.3% decline year-over-year. The result is due to the timing of two events. First, the change in our contract to manage the Virginia Department of Transportation's transportation operations centers, which had its first full year – I’m sorry, its first full quarter revenue effects show up in this period's results. And second, the continued underperformance in the Texas market for intersection detection. Beside from the temporary impact of these events, we continue to experience consistent growth across all other areas of the business. In Q2, our Transportation Systems segment recognized $12.4 million in revenue, versus $13.1 million in the prior year quarter, which included about $1.5 million of quarterly revenue that we lost when VDOT restructured our transportation operations center contract. While the segments Q2 revenue declined 5.6% year-over-year due to the contract change, we continue to experience solid growth excluding the TOC effect. Therefore, we believe the Transportation Systems segment could fully replace the foregone TOC revenue by year end, depending on how quickly the segment is able to accelerate the rate of conversion of our expanding backlog. Indeed the Transportation System segment experienced another significant increase in new orders securing $20 million in added backlog. The segment ended the second quarter with $48.4 million in backlog with an 18.9% sequential increase against the segment's first quarter ending backlog of $40.7 million. The Transportation System segment recorded wins across all of its lines of business; consulting, software and managed services, which includes business process outsourcing. Some of the recent notable wins include a new program management and training services task order from the Federal Highway Administration worth $4.8 million, several new professional and managed services orders with VDOT for a total of $4.7 million, a new integration services contracts with OC-405 Partners related to I-405 expansion projects in Orange County worth $1.3 million, a bus signal priority system for Culver City, California for $1.2 million and several new orders for our iPeMS and CD software as a service solution, representing $1.7 million in annual revenue. In Q2, the Roadway Sensors segment recorded $11 million in revenue versus $11.3 million in the same prior year quarter, which represents a 2.5% year-over-year decline. The decline was attributable to continued underperformance in Texas, especially associated with our third party distribution business in the state. Outside the Lone Star State, the segments revenue continued to meet our expectations, with particularly strong performance in Southern California, the Midwest, and new business in Latin America. As mentioned in our last call, we recently launched an innovative, new intersection-as-a-service offer which bundles Iteris SPM or our SaaS based signal performance measures visualization solution with business process outsourcing and managed services. Intersection-as-a-service is priced on a per intersection per month basis. In Q2, our first intersection-of-the-service customer, George Sam [ph] Texas went live with Iteris now managing all signalized intersections across the city. In addition to the recurring revenue component, the deal also included the deployment of advanced intersection management devices by Roadway Sensors segment at every intersection. I'll talk more about intersection-of-the-service later in the call as we see increasing demand for this offer, and we believe will be a growth engine for us in the future. In Q2, our Agriculture and Weather Analytics segment recognized $1.1 million in revenue versus $900,000 in the same prior year quarter. This represents a 21.1% 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, including global agribusinesses and allied data providers that embed ClearAg API and our visualization components into their solutions. Yesterday for example, we announced the deal with staff at Agro Science, a leading European based contract research organization to provide ClearAg’s environmental and atmospheric content to its crop scientists working in 19 countries. Other noteworthy new customers include, one of the world's largest agriscience and environmental testing companies, a European provider of software and advisory services to grow and agribusinesses worldwide, and a leading North American farm management information systems vendor. In addition to new customer acquisition, we realized a 98% second quarter revenue renewal rate from our current customer base, which includes several global agribusinesses that continue to represent potential large scale enterprise agreements. So with that, I'd like to turn the call over to Andy to walk through our financial results.

Thank you, Joe, and good afternoon everyone. Joe's covered many financial highlights as well as key financial performance drivers. I’ll focus on the status of our three business models and balance sheet highlights. First, our press release issued today include financial tables which include current quarter and year-to-date financial information, including our pro forma reconciliation and segment information. We also published a key financial metrics document, which is posted on our website under our Investor Relations link under financial reports, which provides a trend view of key financial metrics. Okay, considering our three businesses; starting with systems, as Joe noted, we're showing revenue down year-over-year due to the view that VDOT TOC contract renewal. That said, our gross margin of 33.3% for the quarter is up from 32.7% last year Q2, and year-to-date gross margin of 32% is up from 31.1% when compared to our previous year period. We expect to continue to see improved gross margins for this business as the loss VDOT TOC business is relatively lower gross margin business as compared to our other opportunities. Additionally, our gross margin improvement is actually muted due to the larger than typical subcontract element of our revenue for the first six months of the year. All said, we do have the opportunity to see continued expansion of our gross margins as we expect to represent a balance between Iteris labor and subcontract revenue going forward. In terms of contribution margin, operating costs of $2.4 million in Q2 are slightly higher than prior year $2.3 million and when combined with lower year-over-year revenue, that translates into a declining contribution margin of 14.3% in Q2, 2019 as compared to 14.8% in Q2 of fiscal 2018. Year-to-date contribution margin is negatively affected by higher than typical selling expenses in Q1, which is explainable as Q1 was a period of high deal flow, and of course is affected by a lower than previous year revenue. Looking at the balance of the year, contribution margin can improve if we see a more representative product mix combined with expected disciplined cost management. Switching to our Sensors business unit, gross margins are primarily driven by product mix. Our current period gross margin of 45.5% compares to 47.8% for the previous year period. That said, fiscal year 2019 year-to-date gross margin of 47.1% compares favorably to 46.2% for the previous year. Overall, we do not see price compression in our markets and expect solid gross margin performance going forward. Looking to the balance of the year, we do expect market in Texas to stabilize, which should release pent up demand including our orders for a third party distribution business. If the balance of orders during the given quarter slants towards a catch up in our distribution business, we may see slightly lower gross margins but improved contribution margin. Q2 operating costs of $2.5 million is slightly better than last year's $2.6 million, but the unfavorable gross margin performance previously noted left us at 22.6% contribution margin for the current period versus 24.8% for the prior year Q2. As the Texas market rebounds, we expect contribution margins to improve. Finally, in terms of our Ag and weather analytics business, we continue to see significant year-over-year improvement in our business model. This is a business that really leverages and every million dollars of revenue or show a significant improvement in gross margins and contribution margins. While Q2 revenue were up 21.1% year-over-year Q2,19 gross margins of 50.7% far distances gross margins of 34.1% for the prior year period. Year-to-date gross margins at 55.3% likewise our businesses FY 2018 gross margin of 39.4%. We've stated that we expect this to be a 70% plus gross margin business at scale and we are trending in that direction. The business unit’s contribution margin loss of $1.6 million for Q2 is a significant improvement over last year's loss of $2.2 million. Our year-to-date loss of $2.7 million is likewise a big improvement over last year’s year-to-date loss of $4.1 million. This business is at an inflection point and we look forward to continued improved financial performance as new revenue winds accumulate. In terms of corporate expenses, which include on allocated public company expense, accounting finance, I.T. marketing, HR, facilities expense and so on are essentially stabilized given many growth related transitions. While our quarter and year-to-date expense is up from last year, specifically, our year-to-date expense of $7.6 million is up from $7.1 million last year. Much of that variance is due to accounting rules requiring us to capitalize certain efforts related to our new ERP development that occurred during fiscal 2018. As I've noted previously, we expect our overall corporate spend to be approximately $15 million for the fiscal year, and we're at that pace mid-year. Looking beyond fiscal 2019, we do not see a need to build our corporate infrastructure in order to support our expected growth in our businesses. Finally, let me address some unique elements on the balance sheet. In particular, cash is an important topic to discuss. All cash and short term investments at approximately $10 million is down from the start of the year at $15.5 million, this variance does not represent the cash burn of the enterprise. Specifically, we understood that when we transitioned ERP systems at the beginning of our fiscal year, April 1st, that we would be setting up brand new billing or invoicing systems from scratch. That effort took much of Q1, which resulted in delayed billing cycles for our Q1 and an extra effort to catch up in Q2. You'll notice, our accounts receivable has increased from $12.9 million at March 31 to $15.4 million at September 30th as a result of the catch up of our business cycles. As we are completing our ERP evolution, we expect to build cash from this point forward and expect a normalized run rate billings in accounts receivable processed by fiscal year end. At this point, I'll turn the call back to Joe.

Great. Thanks, Andy. Iteris continued to deliver business and technology innovations to capitalize on powerful trends in both smart transportation and digital agriculture. Therefore we believe that Iteris remains well-positioned for a sustained organic growth as we move beyond the VDOT TOC revenue gap and Texas headwinds in the second half of FY 2019. As demonstrated by the significant backlog growth in the first half of our fiscal year, the Transportation Systems segment continues to experience an increase in demand for programs related to smart cities, data analytics, enhanced safety and mobility. While future backlog growth can fluctuate some due to the timing of large procurements, our pipeline remains at historic levels and we anticipate a continued increase in backlog through FY '20 with the highest rate of opportunity conversion to come from three categories; new geographic expansion, software-as-a-service and managed services or business process outsourcing. As mentioned earlier, we believe our intersections-of-service offer represents a long term growth opportunity for Iteris, to offer bundles both software-as-a-service and managed services from our Transportation Systems business unit, which we can also combine with the smart devices from our Roadway Sensors segment as an option as we did in Georgetown, Texas. The staff and managed services components are priced on a per intersection per month basis. We already have a sales pipeline of intersection-of-service opportunities that total seven figures in annual recurring revenue. With the segments Q2 revenue run rate now reflecting the full step down from VDOT TOC, we have a revenue baseline from which we expect Transportation System segment revenue to improve sequentially before the impact of holidays and other seasonal factors. Turning to a Roadway Sensors segment, we continue to anticipate growth outside the Texas market to exceed the 6% to 8% overall historical market growth rate, as we did in H1 FY 2019 outside the Texas market. And we continue to believe the Texas market will begin to normalize in our fiscal second half. Our expectation for this is due to the significant increase in requests for quotes that we have received since the Texas Department of Transportation's new fiscal year began on September 1, as well as recent notices of pending orders from Texas with a combined value in the seven figures. That said, we do anticipate some near-term supply chain issues that could throttle the return to normal business in Texas, meaning that we expect to experience a gradual resumption of growth in Texas over the course of two to four quarters. Therefore, absent any additional market challenges, we believe the Roadway Sensors segment second half FY 2019 total revenue growth should be within the historical market average growth rate with most of the growth occurring in Q4. Now let's discuss our agriculture and weather analytics business. Last year, we appointed Jim Chambers, with a strong record of success in agriculture to lead this segment. Under Jim's leadership, we evolved Greg's market position from an environmental content and scientific modeling platform provider to an environmental and agronomic solution provider. This refined positioning has enabled us to; first, sell to line of business owners and functional leaders, while minimizing our dependence on our customers internal I.T. Second, to increase our sales and marketing effectiveness due to more repeatability in our sales cycle, and three, to rationalize the ClearAg product roadmap and increase our product development velocity. In turn this enabled us to reduce the segments cost structure while simultaneously enhancing our sales and product teams which Andy referenced in his comments. With this transition behind us, we now have the strongest pipeline in ClearAg’s history and we're beginning to experience an acceleration and opportunity conversion. Therefore we expect sustained solid full year growth for FY 2019 with an acceleration in the rate of growth in FY 2020. As we look ahead, we continue to see a path for this segment to achieve a $50 million annual recurring revenue run rate by FY 2024. In summary, in Q2 all three segments continue to make progress against our business strategy despite the temporary underperformance of the Texas market intersection detection and the timing impact from the change in our VDOT TOC contract. As a result in H2 FY 2019, we expect total revenue to grow year-over-year as the Transportation Systems segment more fully replaces the reduction relative to prior year and VDOT TOC revenue and the roadway sensor segment begins to realize a gradual improvement in the Texas market. And lastly bag culture and weather analytics segments should continue to contribute to overall organic revenue growth in our second half as it did in our first. So with that, we’ll be delighted to respond to your questions and comments. Operator?

Thank you. [Operator Instructions] We’ll take our first question from Jeff Van Sinderen with B.Riley.

Hi, good afternoon. I know you went through a bunch of this in your prepared comments, but maybe if you could drill down a little bit more. With the backlogs up substantially, in systems and Ag, can you talk a little bit more about the components of the drivers there in Ag and then also in sensors. I know it's been choppy in Texas. What do you think things are at this point, maybe just some ideas about how the hurricane recovery stands at this point? And I know you said you're looking for kind of gradual recovery there? And then thoughts on when the backlog for sensors you think will be up again?

Yes, a lot of good questions there, Jeff. I’ll do my best to try to unpack that. So first of all, the backlog in Texas, it isn't really -- but my sense is that isn't something that we really focus on that much. As I think, we've talked about in the past, we typically receive orders – our Roadway sensors are really sensors that simply receives orders within a quarter and we typically ship within that quarter. So we don't tend to build a lot of backlog in that business unit. And while backlog was down, the percent difference is largely attributable to the fact it's always a fairly low backlog figure. So really only moved a couple of hundred thousand dollars even though the percent variance it looks more sizable. But with respect to the Texas market, that as we've talked about last year, Hurricane Harvey happened in the beginning of the TxDOT fiscal year. And as a result, our experience has been that they ended up re prioritizing a lot of their spending. They also reallocated a lot of staff for the balance of the year. And so a lot of initiatives that really represented the modernization programs and which we were expecting to be a part of were postponed to some degree, somewhat indefinitely. At this point we expect those to come back. I'd mentioned that we've been receiving requests for quotes in some cases, we've had to provide new quotes for work that was previously bid, because a year has transpired and prices have changed including the prices for some of the third party equipment some of which has been the pricing has been impacted to some degree by the steel and aluminum tariffs. So we've had to rebid some of that work, and so that -- that's some of the quoting that I referred to. In addition, we started to now see notice of pending orders and that would be again for business that would previously bid on, in most cases and receiving that notice is because we bid more recently and therefore there hadn't been any significant pricing changes. It could also be due to the fact that there wasn't -- there aren't as many third party components. Our prices didn't change, and so therefore we may ever see notice that we should shortly receive an order for some of those prior bids that were submitted in the previous TxDOT fiscal year. So that's what we see happening right now. It is a very very complicated picture. I don't want to claim to understand all of the intricacies of what's going on across the state and within TxDOT, but to the best of my knowledge, that's a pretty comprehensive view of the current situation. So I think the last question you asked with regards to your first question was, the third one I’m going to talk to you is, can you kind of comment on the backlog growth in systems in agriculture. And I would say that, really in both cases the growth in backlog is really across the board. As I mentioned, we're seeing, well let me step back. As I've talked to a lot of you about, I feel like within our Transportation Systems business unit, we really have three lines of business; consulting, software and managed services or business process outsourcing. As I mentioned in my prepared remarks, we saw substantial orders, both in terms of volume and dollar value in all three of those categories. And also as I mentioned, we'd expect to continue to see that going forward, although we would expect to see more growth in managed services and software probably than consulting over the next two to four quarters. But I would expect growth in all of those categories. With respect to agriculture or Ag and Weather Analytics again, we saw significant backlog growth for both our ClearPath Weather product as well as for ClearAg. And looking forward in the second half, I would expect continued backlog growth for this segment. In the second half, I would probably expect to see more of the backlog growth coming from ClearAg than from ClearPath, although in the first half I would say that the growth was relatively balanced between those two product lines. So anyway, Jeff, I hope, I answered all of your questions if not, any clarification, I'm happy to follow up.

Okay. Now that was -- there were a lot of questions in there. Just in terms of the backlog trending up in Ag, are elements of that or are there other things that you're seeing at this point in Ag that your confidence of getting closer to an enterprise win. And also, are there other milestones that we should look for in Ag prior to you getting an enterprise one?

Yes, so good question. As I've been trying to impress upon folks that we're looking at improving the pipeline by increasing the number of opportunities of qualified opportunities that we're pursuing, we want to get more that fast. And we expect to hit a lot of singles and those can add up. But that being said, we still expect to get some home runs. And so we remain focused on trying to convert some of our largest agribusinesses customers, primarily, large crop science companies into enterprise agreements. And we still are working towards that. I would say that Syngenta in particular is one crop science company, which we remain very very engaged with, and every quarter we continue to expand our level of engagement with the company, and then we'll continue to do that. But there are other large agribusinesses that also represent potential enterprise agreements. But, coming back to the first part of your question, what makes me most confident about the future opportunity for the business is actually, it's the number of well qualified new sales opportunities that I see in the pipeline and some of the things I particularly like about the opportunities that I'm looking at, is that I see a high degree of repeatability across different customers. I see a good distribution of opportunities as well across the board, different solution areas that we've talked about previously, that, that's our smart content, plus from our product validation or irrigation solution and our harvest solution. And I also see them progressing these options progressing in a really logical way through the well-defined stages that we have in our sales process. So again, it's that it's the number, it's the nature and at the pace that I see the opportunities moving through the pipeline that give me a lot of confidence.

Okay, great to hear. Thanks for taking my questions. I can pick the rest off line.

Thank you. We’ll take our next question from Mike Latimore of Northland Securities.

Hey guys, this is Matt [Indiscernible] on for Mike Latimore. My first question is, what is the average size of transportation deal now versus a year ago?

Wow. That is obvious. This is just a difficult question for me to answer. See if Andy has a better answer. So what I would say is that we have kind of a bimodal distribution curve at this point. We've intentionally been focused on trying to increase the size of at least a reasonable number of our deals. And the reason for that by-the-way has been a couple of years ago when I first start here, we had a very in my opinion very small average deal size and so that now we have literally 100s of small active projects at any given point in time. And it's very difficult to get to our target utilization target when you're trying to manage resource allocation across such a huge number relatively small project. So, we've intentionally been pursuing larger projects. Now that being said, there remain a fairly good number of small projects. And there probably will, that'll always be the case. In some cases you need a small project to get a foot in the door in order to get to the larger projects. So, we always have some smaller. At this point I'd say we have kind of a bi-modal distribution curve. And I would guess that, I don’t have the specific data but just to give you like kind of a frame of reference. In the larger projects that I would consider sort of strategic, we the kind of the minimum thresholds about 500,000 and a lot of the strategic opportunities that we're pursuing have an average value of at least a $1 million. And on the lower end of the spectrum, I would say that they probably tend to be around a $100,000. But again, those aren’t specific data points, I'm not looking at a report, I'm just giving you kind of some directional guidance. And Andy, I don’t know if you want to add anything to that?

No, I think that's dead on. When we look at the year-over-year period, Joe commented that we created quite a bit of that in back log in the systems business. We did that on probably 60% of the volume in terms of deals. And again it's very much more efficient. Q1, we saw some selling expense related for that effort but our Q2 we're back normalized and essentially flat year-over-year operating cost. So, the efficiency we see almost immediately. We've seen a big pickup in backlog but we see flat expense. If we look forward, we expect that to continue.

Okay, yes. That makes a lot of sense. And then, what would be the catalyst for Texas to start moving forward in a more comprehensive deployments in pairs. And how does that kind of effect the supply chain which your roadway sensors?

Yes. So, part of that is just taking time that work through the cycle. So, unfortunately the last four quarter which responds to touch that prior fiscal year, that's it we start on September 1. Unfortunately I looked at that as kind of a last year. We had a number of strategic initiatives that we were presumably expected to convert in that period. And unfortunately those projects got pushed out. And because Texas started me to reallocate budget and also personnel to deal with the aftermath apparently. So, at this point where I think it's really about is TxDOT getting back to normal course of business and I would expect to benefit from that as we have in the past. I will say that there were some orders that we got in the prior periods to replace damaged equipment and what not, so looks like we didn’t have any sales but all of the strategic forward-looking business we'd anticipated in the prior period, it did not occur and now we're in discussions with TxDOT about moving forward with that work in TxDOT current fiscal year which again just started on September 1. So, that's kind of the basic environment. Now, with respect to the supply chain issue, that's not certainly not directly directed to Hurricane Harvey in any way but unfortunately there we on project that are essentially like new building project where there is an existing infrastructure. A lot of time there is a dependency for the deployment of our products on third-party equipment and that includes signal controller cabinets which are steel structures. It includes the necessity that there are poles at intersection and then there is also another product which is kind of luminaire that you just to the pole and our sensors are placed on that equipment. Again the luminaire and the poles tend to be steel or aluminum fabrication and partly related to the recent steel tariffs, we've seen some supply chain issues as U.S. base manufactures of those products are shifting the sourcing for their raw material and that in turn has led to an extended period for fulfillment on some of those critical infrastructure pieces that we're depending upon. And the reason that bring that up with respect to Texas is because the nature of the work that we're doing in Texas, the modernization issue that its new construction, unlike other regions where they would potentially already be existing full luminaires or signal our controller cabinets. We don’t have those in Texas, so there is a dependency on that in that market. Did that answer your question, Mike?

Yes, that answered my question. And then, last question. Any other color that you could add to kind of the seasonality that we can expect in 3Q and 4Q?

Andy?

It's a good question. Typically we see most of the seasonality in our sensors business. Again it's this quite related. As Joe said, all the different geographies if you go all of different markets in that business are doing very well. They're up year-over-year. When you see again that strong profile, the state of Texas obviously is not necessarily is effected by weather dynamics. So, if everything we've talked about in this call, all those different dynamics that are affecting the state of Texas, if we start seeing basically a trickle through release of this kind of demand, we won't necessarily see a traditional seasonality. Perhaps next year we would get back to that, Texas has completely normalized. But some important notes to consider is as we've talked quite a bit about Texas, this is not a never-ending discussion, this is definitely a situation where we consider to be quarter-to-quarter. So, we look at this situation clearing up very quickly here and it's going to be this quarter next quarter; it's going to be fairly fast, it's not going to be an ongoing dynamic.

Okay, great. Thanks guys, congrats on the quarter.

Thank you. We'll take our next question from Joseph Osha of JMP Securities.

How well there gentlemen?

Hi, Joseph.

Alright. So, if I may I wanted to just start with the Ag and weather end of things. As you point out the business was up year-on-year. You are entering a period in the back half of the year where those comparisons get considerably tougher. Do you think that Ag and weather in Q3 and Q4 will be able to show year-on-year growth or will that overall year-on-year growth that you refer to more likely come from sensors or transportation?

On that, we would expect Ag and weather to continue to grow at least the same rate that has in the first half.

Okay. So, that would imply then based on the math that I'm going to see a number in the December quarter on the order of sort of 1.5 million 1.6 million; quite a substantial sequential entries. Is that a correct conclusion?

Yes, that's a reasonable conclusion, yes.

Okay, alright, that's great. And as I look at the overall observation about second-half year-on-year growth, without sort of holding your feet to the fire too much, should I think about that as a kind of a mid-single digits number or a high-single digits number. Would you care to maybe put some bounce around that sort of half against last year half growth outlook?

That's going to depend on the whole of sensors discussion that we've put a lot of time into hear. So, the answer is "Yes, on both numbers," so that.

Yes.

In the Texas rebalance then we're going to be on the part of your range and it continues to kind of trickle through slowly than it'll be more in the lower end of your range.

Okay, alright, thanks.

And what were kind of dancing around here is that we're getting we're starting to see orders, we're getting notices that orders are coming, we're getting special quotes. Now, what we're trying to figure out is how fast we can fulfill those orders when we receive. Again, when it's just our product, we feel like we're pretty good line of sight but when we need to bundle our products with third party products to provide a complete solution. And then the intersection, that’s when we become dependent on these other components where we're seeing some supply chain issues and just extending lead times. So, the challenge is like how fast we're going to be able to convert those orders into revenue.

And we're just not sure we never been here before. But as Andy said, this isn’t going to drag on for multiple quarters but I do think the next two quarters are going to be kind of complicated. And it's somewhat uncharted territory.

And just last piece to add to that. Just a dimension of this, Joe was talking to this. The Iteris product we have good I said on terms or what it takes to fulfill. But when it comes to what we call a third party distribution, that business and what we consider to be historic run rate load, it's typically 15% to 20% of that business and can even do better if we actually have some different new sales channels too, state of Texas. It's been running under 10. And so, that's what we're referring to as the pend up demand. It's been running 5% 6% of revenue for that segment. And once we bounce back into that 15% 20% which is normal run rate and the catchup that can happen pretty quick. And then it's going to be less about the orders it's going to be about how fast can we fulfill.

And also just one other nuance. It's important for to be understand is that even though the third party equipment may represent only 20%, let's say the revenue. Our customers don’t want to take possession of any the order and tell it's complete. So, for not able to fulfill some of the third party equipment, that means our own products wont ship and so the third equipment is ready to go. So, there is a critical dependency that I want to make sure everybody understand.

So that, that will imply that maybe this could be a little back end loaded?

It could be, I think that's what Andy's saying.

Sure, right.

We're just not show how fast you can get it in the pipe.

Yes. No matter what we think it's going to build. Last year we had a little bit of choppiness where the release of in some cases certain types of orders and then back into whole node. It just loosens up, it'll be a consistent building. So, definitely Q4 should be better than Q3 in the sensors business.

Okay, done. And then last one before I turn it back over there. Can you help me understand how that corporate expense line is going to work going forward? How should I think about that?

Sure. That's pretty much steady state. We said early on we expect to be a rate on $15 million and year-to-date we're about 75, 76. So, again that's going to be basically consistent even play all the way as we go forward. And as I said in my remarks, our plan is to keep that steady as we look even into the next fiscal year.

Okay, alright, thanks very much.

Thank you. [Operator Instructions] We'll take our next question from David Burdick with Dougherty & Company.

Hey guys, thanks for taking my question. So, just quickly, you spoke about the VDOT contract being lower gross margin. I'm just curious on how much lower that is versus what you're seeing elsewhere and then how should we be thinking about kind of margins in that segment moving forward?

Sure. So again, just by contract, we run low-20s just as example I can move around in terms of business process outsourcing type where we can run as high as 40s and other types of work. Software products were enclosed, we will get 50. So, we have quite a bit of a good variation in that business. But as I said in my remarks, we're already up a good point in terms of gross margin. But when we look forward, depending on mix, we continue upwards 34% and what have you. This is a business that's going to keep building in terms of gross margin dynamic. And a lot of it has to do with different initiatives that Joe spoke to which are more technology based. And this technology based initiatives are again much different than the consulting base that the business was built upon. So, we expect to see a standing gross margins in that business not just inherent as we go forward next sequential quarters. But when we look at future years, we think that business will continue to evolve into a different looking technology business.

Okay, that's helpful. Thank you. And then on the sensor segment, outside of Texas seems to be performing pretty strong. What do the margins look like outside of Texas? And then, how should we be thinking about kind of margins in that segment, as the Texas market kind of picks back up later this year?

Sure. So when it comes to Iteris product, we're consistent in all our markets, and that business runs 50%, a little bit better than 50% gross margin. As we would look at our different distribution opportunities, we have several different channels of third party distribution, and that can run depending on what or what's being pushed through the channels. That can run anywhere from 10% to 25% gross margins. Obviously, if it's more technology type product, it's going to be a little bit higher, if it's luminaries like Joe speaks to, it might be 10%. So it moves around within a relevant range of 10% to 25%.

Okay, okay. All right. That's all I got. Appreciate taking the question. Thanks.

Thank you. That concludes our questions for the day. I'll turn it back to management for closing remarks.

All right, great. Well thank you. Thanks operator, we appreciate everyone's support and your questions on the investor relations front. Wanted to let everyone know that we'll be at a couple upcoming conferences. Please look for us at the Craig Hallam Capital Group Ninth Annual Alpha Select Conference in York City on November 15th and the 21st Annual Needham Growth Conference in New York City on January 15 and 16. Obviously if you're attending these conferences we'd love to see you. Please come see the presentation or sign up for a one-on-one meetings. In the meantime, we look forward to updating you again on our continued progress when we report the results for our third quarter of FY 2019. And so that concludes todays call and thank you again for joining us.

Thank you. Ladies and gentlemen this concludes today's conference. You may now disconnect.