Iteris, Inc.

Iteris, Inc.

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Iteris, Inc. (ITI) Q3 2019 Earnings Call Transcript

Published at 2019-02-06 23:28:04
Operator
Good day, and welcome to the Iteris Fiscal Third Quarter 2019 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Todd Kehrli with the MKR Group. Please go ahead, sir.
Todd Kehrli
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 third quarter ended December 31, 2018. Joining us today are Iteris' President and CEO, Mr. Joe Bergera; and the company's CFO, Mr. Andy Schmidt. Following the remarks, we'll open the call for your questions. Before we continue, we'd like to remind all participants that during the course of this call, we may make forward-looking statements regarding future events or the future performance of the company, which statements are based on current information, are subject to change and are not guarantees of future performance. Iteris is not undertaking an obligation to provide updates to these forward-looking statements in the future. Actual results may differ substantially from what is discussed today, and no one should assume that at a later date, the company's comments from today will still be valid. Iteris refers you to the documents that the company files from time to time with the SEC, specifically the company's most recent forms 10-K, 10-Q and 8-K, which contain and identify important risk factors that could cause actual results to differ materially from those that are contained in any of our 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. In the Investor Relations section of the Iteris website, you'll find a document with many of the financial metrics that we have previously provided in our prepared remarks. We think it is more efficient to provide investors these metrics in a single, easy-to-read document rather than for us to read them in our prepared remarks. Now I'd like to turn the call over to Iteris' President and CEO, Mr. Joe Bergera.
Joseph Bergera
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 of our fiscal third quarter ended December 31, 2018. In Q3, Iteris recorded $23.1 million in total revenue versus $26 million in the prior year and $24.4 million in the prior quarter. This represents an 11% year-over-year decline and a 5% sequential decline. Typically, we experienced an 8% to 10% sequential decline in our third quarter due to seasonal factors that affect both the Transportation Systems and Roadway Sensors segments. However, the third quarter of our prior fiscal year benefited from disaster recovery spending in the immediate aftermath of Hurricane Harvey, which affected our year-over-year comparisons. Additionally, the year-over-year decline in revenue is a result of the transition of a large contract with the Virginia Department of Transportation, or VDOT, which took effect in the first half of our current fiscal year. Lastly, our third quarter results reflect the timing of 2 transitory events. The first was the continued delay by the state of Texas in renewing its SmartBuy contract, which continues to impact the ability of all vendors, including our Roadway Sensors segment, to sell products in Texas, which is our largest market for Roadway Sensor products. And second, an investment by our Transportation Systems segment to expand our presence and develop our position in the Midwest. In a few minutes, I'll discuss both of these items in more detail, but first, I'll discuss the third quarter performance of each segment. In Q3 of fiscal 2019, our Transportation Systems segment recognized revenue of $11.3 million versus $12.4 million in the preceding quarter. This represents an 8% sequential decrease. The decrease was largely due to typical seasonality, in other words, the effective reduction in the number of billing days due to the holiday season and also the timing of an opportunistic investment we made to expand in the Midwest. Despite our disappointment in the segment's third quarter performance, we believe this segment did demonstrate overall progress in reducing the GAAP created by the change in our largest VDOT contract. For example, this segment recorded third quarter net bookings -- or added backlog of $8.2 million, contributing to a total year-to-date net added backlog of $44.3 million, which represents a 34% year-to-date increase over the same prior year period. Software and managed services orders represented a substantial portion of the segment's third quarter net added backlog. Some notable wins in the third quarter include several orders for our software solutions CVIEW, iPeMS and ATIS, representing a combined value of $1 million; a new managed services agreement with the Virginia Department of Transportation for signal and freeway operations with a value of $1.5 million, an add-on order from OC 405 Partners valued at 650,000 provide additional support for the multiyear I-405 expansion project in Southern California; and several net new orders in the Midwest with a combined value of over $1 million. With respect to the Midwest, we issued a press release on January 29 noting that we increased our presence in the Midwest and established a small office in the Chicago area. As background, we've identified a significant increase in demand across the region over the last four quarters. And a few months ago, we were approached by a small team of highly respected transportation engineers located in Chicago who wanted to move their team to Iteris. Ultimately, we believe this arrangement represented the best option for us to capitalize on growing demand in the region. Although the startup activity in the Midwest depressed the segment's total labor utilization in the quarter, which, in turn, affected both our top and bottom line, we anticipate realizing a strong payback on this investment. As noted, we have already booked over $1 million in new orders in the Midwest, and we are in negotiations for additional contracts with a combined total of -- value of more than $2.5 million. In Q3, the Roadway Sensors segment recorded revenue of $10.2 million, representing a 7% sequential decline. As referenced earlier, the ongoing delay by the State of Texas in renewing its SmartBuy contract affected our results. I will further discuss the status of this contract in a few minutes. Related to our Roadway Sensors segment, we recently announced a strategic partnership with Cisco Systems. The partnership includes joint sales and marketing initiatives to address smart city solutions throughout the United States and also integrates Cisco edge hardware and software into the Iteris intersection-as-a-service offering. We believe the partnership will enable Iteris to support advanced capabilities for edge processing as well as larger data sets and connected vehicle applications. At this time, we've initiated a small connected vehicle project with Cisco in Lee County, Florida. And we continue to jointly pursue several large strategic sales opportunities across the Sun Belt. In addition to the near-term revenue potential, we expect to productize some of the derivative IP, which could, in turn, enable Cisco's sales channel to distribute select Iteris products as part of the Cisco Kinetic for Cities solutions portfolio. In Q3, our Agriculture and Weather Analytics segment recognized $1.6 million in revenue versus $1.1 million in the preceding quarter. This represents a 46% sequential increase. Both ClearPath Weather and ClearAg, our digital agriculture platform, contributed to the quarter's growth. During the quarter, we continued to add several net new ClearAg customers as well as deepen our relationships with existing customers. As a result, the segment's year-to-date total bookings totaled $6.1 million, representing a 34% year-over-year increase against the same prior year period. Some noteworthy ClearAg customer wins include, first, a company called Staphyt, a leading European agroscience contract research organization that selected ClearAg for use in 19 countries; Hummingbird Technologies, a leading U.K. drone and satellite-enabled data imagery vendor, which executed an OEM agreement to embed ClearAg's weather and climatological modeling capability into Hummingbird's product offering in six countries, CropMetrics, a leading precision irrigation company that entered into an OEM agreement to integrate ClearAg environmental content in the CropMetrics irrigation platform, another irrigation solution company, this one being confidential, which committed to use ClearAg environmental content in Asia and all of our major agribusiness customers who continue to deepen their commitment to ClearAg, including one of the world's largest crop science companies, which executed a global agreement for the use of ClearAg. We believe this new global agreement is a critical milestone toward securing a seven-figure enterprise agreement. Now I'd like to turn the call over to Andy to walk through our financial results.
Andrew Schmidt
Thank you, Joe, and good afternoon, everyone. Following up on Joe's introduction to our financial highlights, I'll focus on providing an update of our 3 business models and our balance sheet highlights. As a reminder, our press release issued today includes financial tables, which include current quarter and year-to-date financial information, including our pro forma reconciliation and segment information. As previously noted, 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, let's start with our Ag and Weather Analytics business. We have seen the third consecutive quarter of vastly improved year-over-year results. We continue with our plan of realizing leverage of the business model. This year, we have benefited from increased revenues, coupled with lower operating expenses. While Q3 revenues were up 11% year-over-year, Q3 '19 gross margins of 57.4% far outdistances gross margins of 49.6% for the prior year period. The gross margin dollar increase of 28.6% for the quarter and 51.1% year-to-date showcases the overall improvement in our model and takes into account year-over-year revenue timing and favorable royalty expense changes. We show consistent progress to be in the 70% plus gross margin business at scale. The business unit's contribution margin loss of $1.1 million for Q3 is a significant improvement over last year's loss of $1.8 million. Our year-to-date loss of $3.9 million is likewise a big improvement over last year's year-to-date loss of $5.9 million. That's a $2 million improvement in 3 quarters. As we've said, this business is at an inflection point, and we look forward to continued improved financial performance as new revenue wins accumulate. Continuing with Transportation. As has been previously discussed in detail, transportation has faced headwinds this year. Starting with our Systems segment, revenues have a very difficult year-over-year comp. As has been noted, we are showing revenue down year-over-year due to a change in the VDOT TOC contract. That said, our gross margin of 34.2% for the quarter is up from 33.4% last year Q3. Year-to-date gross margin of 32.7% is up from 31.8% when compared to our previous year period. In terms of contribution margin, operating costs of $2.7 million in Q3 are up from our prior year $2.3 million. And when considered with lower year-over-year revenue, this translates into a decline in the contribution margin. Q3 contribution margin of 10.1% compares to 16.3% in Q3 of fiscal '18. Year-to-date contribution margin of 11.6% compares unfavorably to 15.6% in fiscal '18. Our current quarter and year-to-date contribution margin is negatively affected by higher-than-typical selling expenses in our Q1 and our Q3. The increased cost is not structural and selling expense in this business unit is variable expense versus being a fixed expense. On a very positive note, year-to-date selling expense has been driven by high deal flow and result in favorable backlog trend. Switching to our Sensors business unit. Gross margins are primarily driven by product mix. Our current period gross margin of 40.2% compares to 42.7% for the previous year period. Our current period gross margins are not typical for the business. Our current period includes charges to inventory and cost of sales for a nonrecurring product rework effort. Fiscal year '19 year-to-date gross margin of 44.9% is representative of the business and compares to 45.1% for the previous year. Q2 operating cost of $3 million is up from last year's $2.7 million, which is likewise attributed to products rework efforts specific to our current quarter. Increase in expense is not structural in nature. When looking at contribution margin for the Sensors segment, Q3 margins of 11.3% compare unfavorably to 18.5% for our previous year period due to the product issues previously highlighted. Year-to-date contribution margin of 17% likewise compares unfavorably to 22% for the prior year period. In terms of corporate expenses, which include unallocated public company expense, accounting, finance, IT, marketing, HR, facilities expense and so on, essentially stabilized and 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 $11.2 million is from $10.7 million last year, much of that variance is due to accounting rules requiring us to capitalize certain efforts related to our fiscal 2018 ERP development. Overall, our corporate expense is stable, and we do not anticipate added expense in this area in the foreseeable future. Finally, let me address some unique elements of our balance sheet. In particular, cash is an important topic to discuss. We started the fiscal year at $15.5 million and saw our cash balance drop to $9.9 million at the close of Q2. As discussed during our last call, we attributed a portion of that decline to our ERP system transition. They're not going to affect billing and invoicing cycles. At this time, we have normalized our billing and invoice cycles and have returned to an expected cash balance given our operating loss. Cash at December 31, 2018, ended at $10.9 million, an increase of $1 million from our Q2. Of course, we will continue to diligently manage our working capital to preserve our cash resource. At this point, I'll turn the call back to Joe.
Joseph Bergera
Great. Thank you, Andy. Iteris continues to deliver business and technology innovations to capitalize on powerful trends in both smart transportation and digital agriculture. Therefore, we believe Iteris remains well positioned for overall long-term organic growth. As we move beyond the VDOT TOC and Texas SmartBuy headwinds, our financial results should reflect the underlying strength of our business model. As demonstrated by the 34% year-to-date increase in added backlog, the Transportation Systems segment continues to experience strong demand for programs related to smart cities, data analytics and enhanced safety and mobility. Although future backlog growth can fluctuate some due to the timing of large procurements, our opportunity pipeline remains at historic levels, and we continue to anticipate a significant increase in net added backlog through FY '20, with the highest rate of opportunity conversion expected to come from three categories: first, geographic expansion; second, Software as a Service; and third, managed services or business process outsourcing. Given the significant demand for our solutions in the Midwest and across the U.S., we continue to believe the Transportation Systems segment is on pace to retire the TOC revenue gap and resume year-over-year growth early in our next fiscal year. Additionally, we've identified significant market interest in our intersection-as-a-service offering, which bundles our SaaS and BPO solutions. We position the bundle as a software-enabled managed service that is priced on a per intersection, per month basis. As an option, customers can combine the managed service with the purchase of smart devices from our Roadway Sensors segment. After only two quarters in market, we have already deployed intersection-as-a-service in five jurisdictions and have developed a sales pipeline that totals seven figures in annual recurring revenue. Intersection-as-a-service represents an entirely new market category and, thus, significantly expands the total addressable market for Iteris. Turning to our Roadway Sensors segment. Based on our continued growth outside the Texas market, we expect to retire the drag in our Q4 from any continuing delay in the SmartBuy contract renewal. Recently, the state has told us the contract should be renewed by the end of March or our fiscal fourth quarter. In the event this does occur, we could experience some upside against our current expectations. However, the upside is likely to be modest in the quarter because it will take time for TxDOT to absorb all of the pending orders, which we believe are valued in millions of dollars. Now let's discuss our Agriculture and Weather Analytics business. We've successfully evolved ClearAg's market positioning from an environmental content and scientific modeling platform provider to an environmental and agronomic solution provider. This refined positioning has enabled us to [indiscernible] business owners and functional leaders while minimizing our dependence on our customers' internal IT, increase our sales and marketing effectiveness due to more repeatability in our sales cycle and rationalize the ClearAg product road map and increase our product development velocity. In turn, this has enabled us to reduce the segment's cost structure while simultaneously enhancing our sales and product teams. At this time, our sales pipeline is the largest in ClearAg's history, and we continue to experience an acceleration and opportunity conversion, as demonstrated by the 34% year-to-date bookings growth. We continue to expect that Agriculture and Weather Analytics segment's Q4 revenue growth to be similar to its average rate of growth in the first half of FY '19. And we continue to anticipate an acceleration in the segment's full year rate of revenue growth in FY '20. As we look ahead, we believe this segment could achieve a $50 million annual recurring revenue run rate by FY '24. In summary, we are disappointed with our third quarter financial results. However, we believe that we have crossed an inflection point, from which recent headwinds will begin to recede and create better visibility to the core strength of the business. Further, we believe the strong demand for our smart transportation and digital agriculture solutions, as demonstrated by our net bookings and added backlog growth, will drive sequential growth in our fourth quarter and return Iteris' sustained year-over-year growth in our new fiscal year. With that, we would be happy to respond to your questions and comments. Operator?
Operator
Thank you. [Operator Instructions] And our first question comes from Jeff Van Sinderen with B. Riley FBR.
Jeff Van Sinderen
Good afternoon. Let me say, great to see the strong backlog trends in the various segments of your business. As we think about the Texas SmartBuy contract, I think you said it could be renewed by the end of March, and you said there could be an impact in the March quarter, I think. How should we think or how should we expect that business that's been delayed due to the lack of that contract to ramp? I'm just trying to get a sense of how -- maybe a sense of how that business will come back?
Joseph Bergera
Yes. So, Jeff, this is Joe. So first of all, we are taking a cautious position relative to SmartBuy contract. As you might recall, we've previously been told by TxDOT to expect the contract to be renewed in December, and obviously, that didn't happen. Therefore - although TxDOT is telling us to expect that the contract will be reinstated this quarter, for planning purposes, we are not anticipating that, that will happen. To be clear, that contract will be renewed. TxDOT purchases all of its new roadside equipment through that contract. There are literally hundreds of vendors that sell to TxDOT through that contract. It represents up to $1 billion in annual purchases by TxDOT. And TxDOT cannot function without that contract, so it will be renewed. But that being said, we are being cautious currently. And our current expectations do not assume that it will necessarily happen this quarter. When it does happen, what will occur is we will receive pending orders that we've been informed are ready to be released. We've been told that those pending orders are valued in millions of dollars. There will be -- when we receive the order, there will be a ship date. In some cases, there will be a to-be-determined ship date, but typically, there will be a ship date on that order. We'll fulfill them according to the ship date and then recognize the revenue based on that ship date. I do want to caution folks that TxDOT will not be able to absorb all that equipment immediately, so we would expect that the ship dates will be staggered probably over a couple of quarters. And I'm not sure exactly what the - actually, the proportion of the shipments will be over those quarters. It's not clear to us at this point in time. But in any event, we would expect to see a bit of a bump. But I do want to caution, don't expect that to all occur in a single quarter. It will definitely be throttled due to the fact that TxDOT can't absorb all that equipment.
Jeff Van Sinderen
Okay. That's helpful. And then if we could turn to the SaaS part of your business, just thinking about smart city and connected vehicle work in the mix of your business. I guess, could you walk us through the SaaS penetration at this point or just remind us of the SaaS penetration at this point and then where you see that going?
Joseph Bergera
Yes, absolutely. So first of all, just to be clear, all of the revenue in our Ag and Weather Analytics segment is SaaS-related. In our other segments, we have some SaaS revenue. So Roadway Sensors has de minimis SaaS revenue right now. What that segment does have is associated with our VantageLive! product. That is - over time, will become material, but to date, it's still modest. Our Transportation Systems segment has a number of different SaaS product lines. Our Iteris iPeMS product, which is the performance measurement software product, is now only delivered on a SaaS basis. We have a CVIEW product, which is used for commercial vehicle operations by a number of different states. All of our CVIEW customers are now -- have been converted to a SaaS model. We have another product line, which we referred to as ATIS, or Advanced Traveler Information System, which is a software platform that powers 511 systems across the country. We are migrating customers from what was formerly a hosted model into a true SaaS model. They're not all there at this point in time. All of those products, I would say, are in relatively immature markets, which represents significant growth for us. For example, the iPeMS market originally was only a state market. That's generally true. That was specifically true for us, because in our former hosted model, the economics didn't work to sell to municipalities. By reconfiguring that product, moving it to a SaaS architecture, we opened up the municipal market. And then recently, we started to sell iPeMS as well on a commercial basis. You may have noticed a press release that we issued a couple of months ago where we talked about the use of iPeMS by OC 405 Partners to manage traffic rerouting during their construction or the expansion of the I-405. We're seeing demand from other major construction companies, global civil engineering firms, and they're also expressing interest in iPeMS for the same purpose. So as a result of a number of things that we've done, we've expanded the target addressable market - or the total addressable market for our various SaaS products from probably less than $50 million to potentially as much as $500 million. And we'll continue to expand that total available market.
Jeff Van Sinderen
Okay. That's helpful. And then can you just remind us -- because I know you've got a lot of different compares here, you've got the VDOT compare, you sort of have the hurricane compare, which was a little bit of - I mean, you had like a tough compare. Now that compares, I think, will get easier, can you just kind of frame for us or remind us of what the compares are, when the compares get easier in VDOT and the hurricanes and such?
Joseph Bergera
Yes, sure. I'm glad to do that. And I'll be even more glad next year when we won't have any of this noise, because that'll -- it will all go away shortly. But, yes, just for everyone's benefit, that VDOT TOC contract was -- the original contract expired in -- was set to expire in December of last year. There was a delay in finalizing that procurement, and so there was a -- an extension that we were awarded that took us into the April, May time frame. So there was a little bit of TOC revenue even in the first quarter of this fiscal year. But it's important to note both the December and the first quarter dates, because the December date impacts the backlog comparisons, because in the prior years, we would be adding $10 million to $12 million in backlog to our -- ending backlog in Q3 under the original contract. And so from a backlog comparison perspective, keep that in mind. With respect to the revenue run rate, the comparative period to keep in mind is the first quarter. The way that, that contract got restructured, we had 3 of the 5 TOCs move out from under us, and they were -- that occurred in sort of a staggered fashion throughout the first quarter. So as we said previously, the second quarter of this year was the first quarter in which you saw our normal run rate, where you now have the same amount of TOC revenue going forward. We expect to see that over the next 5 years. As you'll remember, that's a 5 year contract. with respect -- so that -- those are the big movements in the Transportation Systems segment. With respect to Roadway Sensors, that -- Hurricane Harvey occurred in late August, early September, 2 years ago. That was the beginning of TxDOT's fiscal year, which starts on September 1. As a result, virtually all of the projects that we had planned to do for TxDOT in that fiscal year were scuttled. TxDOT reallocated budget dollars and staff to deal with the hurricane fallout. In the third quarter, our third quarter of the prior fiscal year, we saw a lot of equipment purchases to replace damaged product. And so -- and a lot of that was third-party equipment. As you may recall, we resell third-party equipment in the state of Texas, and we've talked about the implications for our gross margins as a result of that. And then after that immediate sort of cleanup activity, things went relatively dormant in Texas because planned modernization initiatives were put on hold while TxDOT continued to do further remediation work and basically replanned for the balance of that fiscal year. One of the implications of their staff reorganization that happened after Hurricane Harvey is that the procurement shop saw a lot of staff turnover. And as a result, the SmartBuy contract, which expired last year, in May, was not renewed on a timely basis. So starting in May, we were no longer able to sell any equipment to TxDOT. That's continued to be the case through today. And as I mentioned, we're now expecting the SmartBuy contract to be renewed by the end of March. But from a comparative perspective, let's say the SmartBuy contract isn't renewed even in -- by the end of this quarter or even into Q1, from a comparative perspective, things will normalize in Q1. That noise will be gone. In the event that the SmartBuy contract comes up -- is renewed sooner than as I said in the script, you could expect some modest upside. So hopefully, that helps, Jeff?
Jeff Van Sinderen
No, that helps a lot. And then just 1 follow-up to that because you mentioned gross margin. Just wondering if there's anything we should be considering around gross margin and expenses for Q4.
Joseph Bergera
Andy, do you want to talk to that?
Andrew Schmidt
Sure. So a little bit what I was talking to. I would expect sensors to run back in their typical range, which our year-to-date range is around 45%. That should bounce back from our Q3. Any of the headwinds we saw in the current quarter are behind us. We're done with that. Sensors has been -- excuse me, Systems has been on a nice uptick year-over-year regardless of the revenue run, and part of that is the reduction of TOC revenue. That's a little bit lower gross margin business. So that's -- we're ticking up in the 33% to 34%. So that should be very consistent. And then Ag and Weather, as I noted, has been on this continuous uptick, where they are right now in the 55% to 60% of the current revenue range. And so that should be as expected as well.
Jeff Van Sinderen
Okay. Thanks for taking all my questions…
Joseph Bergera
Yes, Jeff, and I just wanted to quickly add just to try to net it out for everybody, that if nothing happens with respect to the SmartBuy contract, all of our comparisons will normalize in Q1 and Q2. So again, like TOC will be largely normalized in Q1, fully normalized in Q2. SmartBuy contract will naturally be normalized in Q1. We do expect the contract to be renewed, and then that would represent upside. But even in the event that, that were to be delayed further, all of our comparisons will be normalized for Roadway Sensors in Q1.
Jeff Van Sinderen
I mean, isn't it hard for Texas to not have this contract in place? I would think they would want to get it in place as soon as possible.
Joseph Bergera
Oh! yes, it is incredibly painful for TxDOT. They are basically -- and this is a bit of an exaggeration, but to some degree, they're almost unable to operate because they cannot purchase any equipment. Now if there are -- if there's existing equipment, it's under a maintenance agreement. There is a contract vehicle for them to replace damaged equipment, but they cannot purchase any new equipment. There is no contract vehicle for them to do that. So that's obviously really painful for people that want to perform their mission. But from a political perspective, this is a big deal. There are a lot of local Texas-based companies that are actually going -- provided products to TxDOT that have gone out of business. And so this is becoming very visible. It's a political hot button. Additionally, as everybody knows, like government budgets tend to be based on prior year spending. So in this case, you're going to have -- like potentially -- assuming that the contract isn't renewed quickly, you could have as much as $1 billion gap that will impact TxDOT's budget going forward because they weren't able to make those purchases this year. So this is a really, really big issue in Texas, and it will obviously get resolved. It's just a matter of how quickly.
Jeff Van Sinderen
Okay. Thanks for taking my questions and best of luck in Q4.
Joseph Bergera
Thanks.
Operator
And our next question comes from Mike Latimore with Northland Capital Markets.
Mike Latimore
Thanks. Just sticking with the Roadway Sensor business there for a second. I think, Joe, you said the drag will sort of diminish or be behind you in the fourth quarter. Does that mean you're expecting the Roadway Sensor business to maybe grow a little in the fourth quarter? Is that what you mean?
Joseph Bergera
So -- yes. So we're trying to be cautious, but what I want to be -- I want to make sure that everybody understands is that despite the challenges that we've had in Texas, outside of the Texas market, we continue to grow. Also, I think it's probably -- it's important to remind everybody that Texas traditionally represents 25% of Roadway Sensors' total revenue, and TxDOT is by far our largest customer in Texas. So you can imagine what kind of challenge that's created for our Roadway Sensors business. But that being said, outside of Texas, we continue to grow. And so what I'm saying is that, yes, the growth outside of Texas should be sufficient by Q4 to allow Roadway Sensors to get back to some modest growth. But I do expect it to be modest, because, again, it represents -- the state represents 25% of the segment's total revenue. And at this point, we're not assuming that SmartBuy comes back in Q4. It could and then there could be a little bit of upside. But even without that, we would expect some modest growth in Roadway Sensors in Q4 due to that continued growth outside of that state.
Mike Latimore
And then on the backlog growth, and Transportation's great, and you highlight a little bit of a -- some of the SaaS backlog there. I guess, should we think about, over the long term, gross margin continuing to increase in Transportation Systems because of the, I guess, mix shift, to some extent?
Joseph Bergera
Yes, you should. I'll let Andy talk about that. One thing that everybody needs to keep in mind is we'll continue to grow our product-based revenue, like our non-SaaS revenue as well. And so that's going to have an impact or it's going to put some limitations on how much gross margin expansion we can get overall from the SaaS revenue. But, Andy, do you want to talk to that?
Andrew Schmidt
Sure. So as we've been clear about, [indiscernible] product mix, we've seen a nice uptick this year, where we're, like I said, 34.2% in the current period. We think that's sustainable. Again, overall, fiscal year '18 was 32.5%, so we've already got 1.5% up. So I think that's sustainable. And depending on the mix into FY '20, again, it should be right in that 34-point range and can tick up again. But it's been very solid and very predictable.
Joseph Bergera
And the SaaS product lines in the Transportation Systems segment should be able to perform roughly equivalent to what you'd see in any SaaS business with 70% plus gross margins. But you need to -- to Andy's point, it really depends on mix as to what the total consolidated gross margin is for the segment.
Mike Latimore
And then just on the Ag business also. Obviously, the backlog growing nicely there. Joe, can you just talk a little bit about the global agreement you highlighted? How do you characterize that versus sort of an enterprise license agreement? And then what moves you to that sort of next step to get you to the bigger contract, let's say?
Joseph Bergera
Yes. So we intentionally are describing this as our global agreement versus an enterprise agreement, because we previously said that we would anticipate that an enterprise agreement could represent as much as $5 million in the [ARR] with any of these major crop science companies. But I think we've also said that the way that we're going to get there is by deploying ClearAg in a number of different lines of businesses or for a number of different product lines within a crop science company. And then from there, we would get a company-wide agreement. And so what we're trying to say here is that we now have that. We have like the global leadership team of a major crop science company who said, "ClearAg is a strategic platform for this company. We want to enter into a global agreement." But what we haven't yet got into is a commitment on what would hopefully represent 7 figures in annual recurring revenue. So that's the next step. I'm not certain as to what the timing of that would be. I think what we've said all along is that we thought it would be possible to get an agreement in place by the end of this year, but we weren't certainly would get any of the revenue. And so where we are now is we feel like, hey, we got that contract in place, but we still don't have commitment on the larger level of revenue that -- what we previously described as enterprise agreement. So you can bet we're in discussions with people now about what that would look like. That would be the next step.
Mike Latimore
Thanks a lot.
Operator
And our next question comes from Steve Dyer with Craig-Hallum Capital Group.
Unidentified Analyst
Hey, guys. Ryan on for Steve. So 1 quick follow-up on that global agreement with a major crop science company. Is that an expansion with an existing customer, I assume? It's not a new customer, right?
Joseph Bergera
Correct. It is an expansion with an existing customer.
Unidentified Analyst
Okay. And then, Andy, you mentioned nearing an inflection point soon, and I was hoping to get a little more clarity specifically when you could see that inflection back to positive cash flow. Are we one to two quarters away from that? Or are we farther out than that?
Andrew Schmidt
Sure. At the enterprise level, we expect to be back to cash flow -- the right performance by the second half of fiscal year. Again, it depends on a lot of the time that Joe has talked to on the revenue pieces. We've got expenses clearly in hand, and we have a really good understanding of those. And we don't see any material need to push expenses in any of our business units or corporate significantly beyond what we're doing today. It's always going to be opportunistic sales and marketing. So with that in mind, once the revenues come back untapped, as Joe described quite a bit about the Transportation businesses, he also described quite a bit about the Ag opportunities, the bookings and so on and so forth, we really start leveraging next year and, again, just kind of hedging. By the second half of the year, all this should be cleared up, and we should be well underway in terms of generating cash.
Unidentified Analyst
Great. Thanks so much, guys.
Operator
And our next question comes from Joseph Osha with JMP Securities.
Joseph Osha
Hello, there. Returning to the Ag business and your $50 million run rate observation and tying that back into some of the commentary we've heard about global agreement and enterprise agreement. Should we think about the scaling of that business as being relatively linear towards that $50 million run rate? Or should we think about one or two enterprise level of agreements sort of coming in and giving you a significant step function? I'm just trying to digest that all in terms of how my model looks over the next couple of years.
Joseph Bergera
Yes, this is a good question. Being a SaaS business, I -- there could be some steps, but I think it's going to be overall more kind of curvilinear. And I think part of your question is maybe like what should we be kind of thinking about next year. But to be clear, when we provide the backlog for -- or, in this case, we recently have been talking about our added backlog for our Ag and Weather Analytics business, that's a 12-month view of backlog. So we've been growing at about 28-ish percent year-to-date. Our added backlog is up 34%. So obviously, we would be expecting that in FY '20, you'll certainly see an increase in revenue that would be at least equal to the added backlog growth rate. And then as we are successful in converting some of -- like, for example, this large global accounting to a true enterprise agreement, obviously, that would drive an acceleration in the added backlog growth. But I would expect that being a SaaS model and also assuming that the way that the enterprise consumes ClearAg could impact our revenue recognition, that it won't -- I don't think you would see an absolute spike in sort of step functions. It will be a little bit smoother than that. Ultimately, I think it will look curvilinear.
Joseph Osha
Okay. And then just to be clear, you said that added backlog number was up 34% year-on-year, and it's 12-month backlog. So that would imply a minimum of sort of above 30% year-over-year full year comp based on what you're saying.
Joseph Bergera
Correct.
Joseph Osha
Okay. And then just back to some of the earlier SaaS comments, understanding, of course, that you are continuing to add project revenue as well. I guess I'm still not -- quite not clear on how layering in 70% margin SaaS business wouldn't drag that overall average up. It just seems -- I can't get that math to work.
Joseph Bergera
I think it will. I think what Andy is saying is that because the SaaS revenue -- it's like our -- right now, our SaaS revenue for Transportation Systems is -- so let's see if there's a way to think about that. So we'd probably have about $15 million that is software-related and about $10 million that is truly SaaS. And so I think what Andy is saying is that we'll -- it really depends on the rate of growth of the SaaS revenue relative to the rate of growth of the non-SaaS revenue. It's going to throttle the rate of the gross margin expansion. I think you're just trying to take a conservative view. But do you want to -- I'll let you talk for yourself, Andy?
Andrew Schmidt
Yes. Well, here's another element to add into it, which these are all positives. As Joe described our view of SaaS and Systems, which is iPeMS, the CVIEW and the ATIS, they are actually 3 different platforms, 3 different product lines. They are different sizes. And so they are right now similar to Ag, to where they're showing much better gross margin performance than a typical project -- government project in the Systems group. But they're still, in their own way, not at full scale. So right now, they may be running at 50%, 60%, and they will get to 70% as they get to scale and we see a clear path through them getting to scale. So that's one -- another part of the equation of why we're not right at 70% right now. But they are clearly much higher gross margin than a typical business -- project business in that segment. And they are under path, where in the next year to 2 years, they will be running at 70%.
Joseph Osha
Okay. And then just lastly, the return to some of the comments right at the end there about not needing to add any layer on any expenses. Can we really start to model below-the-line expenses for this company flat over the next 4 to 6 quarters?
Andrew Schmidt
Take into account your typical inflation. So again, if you've got a 3.5% or 4% on expensive labor, that's kind of a -- let's just call that basic flat. So flat means that we're going to still see your typical labor cost [getting] competitive markets, let's say, an average of 4%. But other than that, it's going to be, like I said, opportunistic sales and marketing, though, and to the extent that we see unique opportunities. And as Joe pointed out, the backlog performance has been tremendous this year. But we did -- we clearly did a little bit investing in Q1 and Q3 in the Systems segment to actually get us there. So it will be opportunistic, but we don't have a structural need to add real incremental expense factors to the business.
Operator
[Operator Instructions] And our next question is from David Burdick with Dougherty Financial Group.
David Burdick
Just one quick question I got. On the Sensors gross margin, you mentioned some product issues in the segment. Could you guys shed a little color on what's going on there?
Joseph Bergera
Andy?
Andrew Schmidt
Sure. So consider it this way. In that particular product or different products that represent the Sensors segment, 2 ways of thinking about it. One is, we deploy across a vast array of geographies. So our product basically stretches a lot of different enviromental conditions. So in some cases, in this particular case that we ran into in our current quarter, had a very complex implementation, roughly Midwest area, that required -- basically had some activity that looked a little buggy. And so it basically took a little bit more work in the implementation than we typically look at. We are considered to be the class leader in this area. So performance is our differentiator. So we had basically what I would call a onetime dynamic, where we're out in the field doing a lot of tuning of our product, which usually isn't required. So we experienced right around -- across all the different expense categories, about $400,000 worth of cost that we typically would not. We're done with that activity. When we look forward, we don't expect it to go forward. And it's like anything else. And as you continue to deploy in different geographies, it's good learnings and learnings that we don't expect to have the same type of bugs, if you will, in future implementations.
Joseph Bergera
Yes. And to be clear, we have -- as we've talked about in the past, we modernized all of our Sensor family, moving to what we've, on this call, referred to as a new platform. That included use -- migrating to a new multi-core processor and then rewriting some the firmware associated with that new processor. One of our most advanced sensors was the last product to make this transition, and we partnered with a large city in the Midwest to deploy that for the first time. And under some very unusual environmental conditions, we found that the performance was suboptimal. We could have elected to continue to lead that product in the field and continue to work with the customer to optimize it, but in the interest of maintaining our overall position in the market, which is being the performance leader, we decided it was in everyone's best interest to, in some cases, switch out some of that product in order to get that customer back to the expected service level immediately. And then we did the reoptimization on that product here as opposed to doing that in the field, and that resulted in us taking an expense. But it will normalize, and we'll be able to redeploy that product after reoptimizing it here. We'll redeploy it to other customers.
Operator
That concludes today's Q&A session. I would like to now turn the call back over to the management team.
Joseph Bergera
All right. Super. Thank you very much, operator, and thank you, everyone, for your support and for the thoughtful questions. On the Investor Relations front, I want to let everyone know that we'll be presenting at a couple of upcoming conferences. You'll see us at the JMP Securities Technology Conference in San Francisco on February 25 and 26 as well as the B. Riley FBR 20th Annual Institutional Investor Conference in Beverly Hills on May 22 and 23. If you're attending either of these conferences, we would love to see you, please come to our presentation. And in the meantime, we look forward to updating you again on our continued progress when we report our FY '19 fiscal fourth quarter and also our full year results. So with that, we'll conclude today's call. Thank you.
Operator
Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.