Iteris Inc (ITI) 2017 Q3 法說會逐字稿

Good day, and welcome to the Iteris Fiscal Third Quarter 2017 Financial Results Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Todd Kehrli with 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 2017 fiscal third quarter ended December 31, 2016. Joining us today are Iteris' President and CEO, Mr. Joe Bergera; and the company's CFO, Mr. Andy Schmidt. Following their remarks, we'll open the call for your questions.

Before we continue, I'd to remind all participants that during the course of this call, we may make forward-looking statements regarding future events or the future performance of the company, which statements are based on current information are subject to change and are not guarantees of future performance. Iteris is not undertaking an obligation to provide updates to these forward-looking statements in the future. Actual results may differ substantially from what is discussed today, and no one should assume that at a later date, the company's comments from today will still be valid.

Iteris refers you to the documents that the company files from time to time with the SEC, specifically the company's most recent forms 10-K, 10-Q and 8-K, which contain and identify important risk factors that could cause actual results to differ materially from those that are contained in any of the forward-looking statements.

I'd like to remind everyone that a webcast replay of today's call will be available via the Investors section of the company's website at www.iteris.com.

Now I would like to turn the call over to Iteris' President and CEO, Mr. Joe Bergera. Joe, please proceed.

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 third quarter ended December 31, 2016.

In Q3, Iteris recorded $22.7 million in total revenue. This constitutes 19% year-over-year growth and represents a new third quarter record for the company. During the quarter, we experienced continued strong performance in both our Transportation Systems and our Agriculture and Weather Analytics segments. We also made solid company-wide progress against critical initiatives to enhance our corporate brand, strengthen our go-to-market approach and up-level our sales readiness. Recently, we announced the appointment of a new chief marketing officer who will help us accelerate activities already in motion.

Our Transportation Systems segment recognized $11.9 million in revenue versus $8.3 million in the prior year quarter, representing 44% year-over-year growth. In addition, the segment continued to win new business, securing approximately $11.8 million in new orders and ending the quarter with another year-over-year increase in our 12-month backlog.

The segment's focus on project mix over the past five quarters continues to produce segment-level operating income margin expansion. The higher portion of software-related consulting services and business process outsourcing backlog as well as the larger average project size continues to improve revenue predictability and other internal efficiencies.

In Q3, the segment's operating income was approximately $1.9 million or 16.1% of revenue versus $1 million or 12.4% of revenue a year ago. The 370 basis points improvement in the segment's operating income margin demonstrates our approach is continuing to create operating leverage.

In Q3, the Roadway Sensors segment recorded $9.4 million in sales. This represents a 4% year-over-year decline in revenue. This is the second quarter of declining revenue. The disappointing result is largely attributable to an unexpected supply chain issue. One of our key suppliers was unable to provide a critical component, which prevented us from fulfilling customer demand in our third-party distribution business. The supplier has since resumed shipment of the component, and we expect distribution revenue to return to normal levels in Q4. Although distribution revenue was significantly below prior year, I do want to note that we saw respectable growth in our core product business.

During the period, the segment realized another increase in ending backlog, with particularly strong performance in California, Arizona, Nevada and the Midwest. Despite the negative revenue variance, we benefited from a favorable product mix and as a result, segment operating income dollars increased 5% as segment operating income margins expanded 160 basis points.

In Q3, our Agriculture and Weather Analytics segment recognized $1.4 million in revenue. This represents a 44% year-over-year increase in revenue and a 65% sequential increase. The growth was due to strong performance of both ClearPath and ClearAg, our digital agriculture platform.

Several noteworthy deals drove ClearAg's continued revenue growth. For example, as announced, GeoAgro, an agronomic geographic information systems vendor, selected ClearAg for deployment in Argentina, Brazil and South Africa. And additionally, QBE NAU, the third largest crop insurance provider in the U.S. selected ClearAg to provide critical field level insights that their agents and farmer customers can use to proactively mitigate risk and prevent crop loss.

In addition to these previously announced wins, we continue to expand our relationships with existing crop science customers such as Bayer and Syngenta, while continuing to broaden our ecosystem of allied providers. This ecosystem provides cost-effective global reach for ClearAg. Through our partners, ClearAg has access to more than 400 million managed acres across 18 different countries. As a reminder, allied providers embed ClearAg into their solutions. We offer allied providers an OEM pricing model, under which they commit to a minimum annual subscription fee based on API cost.

We remain very enthusiastic about the opportunity in front of our Agriculture and Weather Analytics segment. We continue to see strong pipeline growth and improved opportunity conversion for both ClearAg and ClearPath Weather. Due to continued bookings growth, the segment annualized revenue run rate has increased 44% from the beginning of our fiscal year and our run rate is now $5.2 million.

Now, I would like to turn the call over to Andy to walk you through our financial results. Andy?

Thank you, and good afternoon, everyone. As Joe's introduction showcases, we had another strong quarter. The benchmark quarters, our third quarter ending December 31, is our one seasonal quarter. Our seasonality is driven by our Transportation businesses. In the case of our Systems business, the quarter is a period of vacations, which leads to lower utilization of billable consultants. In the case of our Sensors business, weather in many states restricts progression of real construction work, which limits sales of the Sensor products. In all, it's key to consider results from a year-over-year perspective.

Quickly recapping our year-over-year revenue growth for Q3, Iteris' reports revenues at $22.7 million for the quarter, 19% year-over-year increase. Transportation Systems accounted for $11.9 million in the quarter, a 44% increase year-over-year; Roadway Sensors, $9.4 million, a 4% year-over-year reduction; and Ag and Weather $1.4 million, a 44% year-over-year increase. Before getting into gross margins and expenses, I need to cover off required communications related to our past pro forma reporting the financial results.

Similar to our last quarter, we have no pro forma adjustments to communicate in terms of our current period results. However, in regard to our comparative quarter, Q3 of fiscal 2016, we had one adjustment and that was adjusting for a $10.1 million charge taken to fully reserve our tax assets.

As such, our GAAP and non-GAAP adjusted net loss for Q3 fiscal 2017 was approximately $1.4 million or $0.04 per share, as compared to a GAAP net loss of $10.4 million or $0.33 per share and a non-GAAP net loss of $378,000 or $0.01 per share for the previous year period. From a year-to-date perspective, we had no non-GAAP adjustments related to atypical expenses to report for fiscal 2017 as compared to the following nine-month totals for the period ending December 31, fiscal 2016. $150,000 related to audit fee overruns, $88,000 for financial consulting services, and $150,000 for executive management severance costs.

Accordingly, our GAAP and non-GAAP adjusted net loss for our nine-month ended December 31, fiscal 2017, was approximately $1.5 million or $0.04 per share as compared to a GAAP net loss of $11 million or $0.34 per share and a non-GAAP net loss of $724,000 or $0.02 per share for the same period last year.

Today's earnings release and related current report on Form 8-K describe how we calculate these non-GAAP financial measures and provide a detailed explanation of our atypical expenses as well as a reconciliation between our non-GAAP financial measures and our most directly comparable GAAP measures.

Okay. Looking more closely at our Q3 results. Joe has provided some great color commentary regarding our record Q3 revenue performance. Looking at gross margins, total company saw gross margins up 38%, that compares to 37.9% for the prior year period. Considering gross margins by segment, Sensors posted 47.4%, which increased considerably from 44.6% in the prior year period. The increase was due to favorable mix of Iteris' product revenue versus third-party distribution revenue.

As Joe mentioned, overall Sensors revenue is down year-over-year due to a supplier challenge in our distribution business. But what's important part is gross margin dollars. Due to strong product sales, gross margin dollars increased year-over-year, approximately $100,000 or 2% despite the decline in revenue. That's a great outcome.

In regard to Systems, current period gross margin of 30.5% compares to 31.5% in the previous year period. The unfavorable variance is related to job mix.

Looking at Ag and Weather Analytics. We posted gross margins of 38.5% as compared to 48.6% last year. The real key behind this gross margin number at this point are accounting rules rather than product or product mix. As we've now matured the delivering and operational SaaS service, we are required to capitalize certain software developments deemed to be new functionality or enhancements to our SaaS software engine. By capitalizing certain development costs, we're essentially moving labor costs from R&D expense to the balance sheet as an intangible asset and then amortizing those intangibles over several years into the cost sales line.

In all, we do expect that at scale, the segment should resemble a typical SaaS software company with 70%-plus gross margins. Our solid gross margins led the way to the following operating margin results. For our Transportation businesses, $1.9 million for Sensors and $1.9 million for Systems. Our Ag and Weather businesses reported an operating loss of approximately $1.9 million, which is a sequential quarter improvement of $185,000 or 9%. So in that regard, we're moving in the right direction.

In terms of our corporate expenses, which include corporate IT, human resources, accounting, executive and public company-related expenses, we saw expenses of $3.36 million for Q3 '17, which is up approximately $150,000 sequentially from our second quarter. It's due largely to public company expenses, which include legal fees associated with our proxy contest process, class-action lawsuit and Sarbanes-Oxley preparation fees associated with becoming an SEC-accelerated filer this year.

Year-over-year, operating expenses have increased $1.7 million. This is primarily headcount and outside services to support three growing businesses and increasing SEC compliance and public company costs. Year-to-date performance shows Iteris' record revenues of $70.7 million as compared to $58 million in the same period last year. Gross margins of 38.9% as compared to 39.2%. Total operating expenses of $29.2 million as compared to $24.9 million in the prior year period.

In regard to the balance sheet. We saw very strong cash performance this period. We reported cash at December 31, 2016, at $17.9 million, which is a $1.9 million improvement from the start of the year. Much of this improvement is due to the nature of the Ag and Weather Analytics segment SaaS engine reaching a certain scale. We have had tremendous yearly contract renewable and upsell performance in this segment. Our SaaS model is cash upfront pavement for annual or multi-year service agreements. While this business is still early stage, we are starting to see the balance sheet positives of being a SaaS business.

Other highlights. Cash produced by operations for our nine months ending December 31 was approximately $2.4 million. This is an exciting number. This compares to cash used by operations of $2.3 million in the previous year nine-month period. That's a swing of $4.7 million in the right direction. Capital expenditures and capitalization of software development used approximately $1.1 million, offset by approximately $400,000 provided by royalty payments from our discontinued operations. Cash proceeds through uses from stock options and RSUs provided approximately $183,000.

Total company backlog at the end of fiscal Q3 2017 was $64.9 million compared to $63.3 million at the end of fiscal 2016. Backlog at December 31, 2016, was comprised of $54.1 million from Transportation Systems, $5.7 million from Roadway Sensors, and $5.1 million from Ag and Weather Analytics.

In terms of housekeeping, we expect to file our 10-Q within the next few days. And this concludes my prepared remarks on the financials. Now I'll turn this call back over to Joe.

Great. Thank you, Andy. So Iteris continues to benefit from solid execution and favorable trends in both Transportation and Agriculture. Indeed the team is continuing to roll out several innovation initiatives for our Transportation segments, while also developing a highly meaningful, high-margin subscription model in the Agriculture market. We expect the strong execution over the past several quarters to sustain solid organic growth through fiscal year-end.

Our Transportation Systems business continues to experience an increase in demand for programs related to smart cities, data analytics and enhanced safety and mobility.

In other words, we continue to see an increase in the number of RFPs in each of these areas, an increased amount of background activity, for example, conferences, client questions and press coverage in these areas, and an increase in the amount of funding against these areas from federal and local sources. We expect the segment to benefit from the shift in Transportation infrastructure spending through the end of FY '17 and into at least the first half of FY '18.

Based upon the continued strength of our backlog and the favorable impact of project mix on the segment's operating margins, we remain highly strategic about the new business we pursue. More specifically, we continue to focus on opportunities that, one, enhance our franchise as the leading provider of applied informatics for the transportation infrastructure market; two, enable us to leverage our existing platforms and other toolsets; and three, represent sizable multi-year programs, with a meaningful level of recurring revenue.

Given the scale and the length of procurement cycles for some of the strategic projects we are now tracking, we expect this segment's revenue line to move in step functions for the next several quarters.

In other words, in at least the first half of FY '18 would anticipate this segment's growth rate to be more in line with the market's historic growth rates, followed by periods of step function growth as we convert some of the large procurement scheduled to occur later in the year.

Despite some unanticipated challenges that coincided with this year's new product introduction cycle, the Roadway Sensors segment continues to execute against our growth strategy. In other words, this segment continues to realize -- I'm sorry, to release major product enhancements and new products that will expand our addressable market, while also enabling business model innovations.

Lastly week, we realized -- we released our new Vantage Radius product, which provides forward-firing radar-sensing capability with streaming video. This is a first of its kind innovation and within the next 12 weeks, we plan to release a SaaS-based data analytics service that has the potential to unlock the value of the data collected by the 130,000 sensors we have installed at intersections across the country.

While we recognize it will take several quarters to develop and convert our new product sales pipeline, we remain confident about the increased growth opportunities with these new products.

With the availability of these new products, we continue to expect new product adoption to drive the segment's rate of revenue growth for the second half of fiscal 2017 above the historical average market growth rate of 7%.

Now let's discuss our Agriculture and Weather Analytics business. The global agribusiness sector is facing major structural challenges, commodity price fluctuations, scarce water supplies, limited arable land, industry consolidation and increasing regulations. We expect these dynamics to drive significant long-term demand for information technology and data science, despite the sustained weakness in commodity prices.

ClearAg addresses three agricultural end markets. One, the crop science companies; two, allied providers and ag integrators; and three, growers and agronomists. Crop science companies include crop protection, crop nutrition and genetics and biologics companies. We believe crop science companies are the least impacted of our end markets by the softness in commodity prices since our products are essential inputs for agricultural production.

Further, digital agriculture is our competitive necessity for crop protection companies, and we expect to become a necessity for other crop science companies. It drives supply chain optimization, accelerates new product development and product restoration cycles and enhances sales and marketing effectiveness.

We continue to believe at least 80% of the largest crop protection companies will pursue a digital agricultural strategy, and at least 80% will outsource their technology platform. Those companies that have already launched an explicit digital agriculture strategy continue to move quickly to implement regional and even enterprise initiatives.

For example, in July, we announced that Syngenta selected ClearAg for a single deployment and today, we're already involved in four different deployments across the company. We've been highly agile since launching ClearAg in July 2015, and we'll continue to adopt the marketplace dynamics.

As we enter FY '18, our primary commercial focus will be to maximize the count penetration in our five largest crop protection customers. Our secondary focus will be, again, acquisition of new crop science customers. And for the time being, we'll pursue other end markets opportunistically.

We remain very confident about the long-term opportunity for Iteris in the agriculture market. We anticipate continued bookings growth through the second half of FY '17 and expect continued acceleration next fiscal year.

Our scientific and engineering capacity remains sufficient to sustain current requirements. We expect to realign sales and marketing activities in FY '18 to focus on account management and account penetration in our largest crop science accounts. But we believe our current total resource level is sufficient to drive our planned revenue growth. Therefore, we expect the segment cost base to remain relatively flat for the next several quarters.

To conclude, in Q3, Iteris realized excellent positive momentum in our Transportation Systems and Agriculture and Weather Analytics segments. Our Systems segment successfully converted a sizable prior period backlog growth into 44% revenue growth in Q3, while continuing to secure new business and again increase its backlog. We continue to believe this segment's half-over-half growth rate will be similar in the second half of FY '17 to what we realized in the first half.

Having realized our new -- having released our new dual core processor in Q3 and our new Vantage Radius product last week, we believe that we passed the period of our most significant product risk. At the same time, we also put a strong technical foundation in place to develop a meaningful revenue stream in new adjacent product categories, such as the data analytics service referenced earlier.

Based on early product demand signals, we remain very confident about the segment's growth opportunity and as mentioned previously, we expect the rate of growth for the second half of FY '17 to exceed our historical market growth rate of 7%, despite the negative rate of growth in Q3.

Lastly, we continue to be very excited about the growth opportunity in digital agriculture. We expect to realize continued acceleration in ClearAg revenue, which should drive further growth in our Agriculture and Weather Analytics segment. In the short term, our revenue growth will come mostly from account penetration in the crop protection market.

Given our expectation of continued strong performance across all segments, we expect to continue to realize sufficient net margin dollar growth to more fully offset our annualized agriculture investment and as a result, we continue to anticipate our full year operating losses to decline meaningfully relative to FY '16 even as we continue to develop our digital agriculture business to its full potential.

So now, we'd be delighted to respond to your questions and comments. Operator?

(Operator Instructions) And we'll first go to Jeff Van Sinderen from B. Riley & Co.

This is Richard Magnusen in for Jeff Van Sinderen. My first question is regarding the supply chain issue in the quarter, can we expect all those sales from the critical component that was postponed to be gained back in Q4?

Richard, we definitely expect to have a strong third-party distribution result in Q4. I don't know that I could say that we'll see all of those opportunities move into Q4. It's complicated getting these jobs set up, and there is a possibility that you can miss a window and it may require -- it may take another quarter or two before the job is able to get scheduled again. So I can't guarantee that it's all going to move into Q4, but I don't think that it's lost revenue.

All right. Thank you. And do you expect any headwinds, or even -- or tailwinds from the current political environment, both domestic and abroad for recent developments?

Yes. It's a great question. I think like everyone, we're trying to understand all the puts and the takes and sort of what the net landscape looks like. I would say that in the Transportation infrastructure area, based on information we have today, we would expect the environment to be sort of net favorable to us. In terms of agriculture environment, we're actually trying to evaluate what's going on.

I do have some concern that some of the tariffs that have been discussed and what the potential reactions might be from other countries could potentially complicate commodity trading and impact agriculture. But we don't really understand that at this point in time.

I would say that our primary customer focus, which were the seed and crop protection companies, they deal on a global basis and therefore, I wouldn't expect there any kind of trading between -- bilateral trading effect. I wouldn't anticipate that to impact their business and therefore, their investment.

Okay. And then finally, can you provide any additional guidance for SG&A expectations for each segment in terms of both dollars and a percent of sales?

Sure. This is Andy. Let's just kind of start with our current period. As we'd mentioned or I mentioned in my remarks, we had several unique events that are on top for us. One is a high class problem as we call it in terms of becoming an accelerated filer. Our measurement date is September 30. That's our second quarter. So from that perspective, we qualify to be an accelerated filer. But the challenges, you have six months to get through a tremendous amount of work, while basically running three businesses that are growing.

That being the case, when we look at current period results, our Q3, we ran about $600,000 in G&A. That's above our expectations in terms of how we planned the year at the beginning of the year, and I would say it was above certain analyst's expectations too, and that -- this came about relatively recently. Of that $600,000, about half of it is related to our SOX preparation. That, of course, in this period, we expect that type of load to continue in our Q4 as we have to continue this work to support the March 31 audit.

The other -- let's say, the other half of that $600,000 variance, which by the way that's $0.02 per share. That other half came from supporting a proxy contest that we went through and also a class-action lawsuit that we put behind us, but there were significant legal fees associated with that and there will be some continuing fees into Q4. So as we look at those two primary events, $600,000 affected this period. We'll see another $600,000, probably in that neighborhood hit Q4, and then in essence, so those two events are behind us.

All right. Well, thank you very much.

We'll now go to Steve Dyer from Craig-Hallum's Capital Group.

I guess drilling down a little bit further into the March quarter, I mean, seasonally that's typically up a touch, quarter-over-quarter from Q3. With sort of all the moving pieces, is that -- I mean, would you expect that to still be up modestly, I guess, quarter-over-quarter, again, this year as it has been?

Yes. And actually it resembles our Q1 and Q2. So the Q1, Q2 and Q4 are pretty similar and so the year-over-year performance, again, we're looking at strong performance. I was just discussing expense-wise. Margins we look at. We've been very solid on our margins, very predictable on our gross margins. And we pushed down on the expense line. There is nothing unusual. No unusual net adds outside of that $600,000 that hit us in our current period. We expect that again to continue into Q4. So it should be a reasonably predictable quarter from that perspective.

Great. And then as I look forward at the Weather and Analytics segment next year, I mean, it sounds like the spend there is going to be pretty flat against what should be some pretty good margin ramping revenue. I mean, would you expect that segment to breakeven by the end of the fiscal year?

Well, so this is Andy again. So let's just kind of start the basics of that group and more or less how we've evolved. As we've communicated consistently this year, we feel very good about the product being a complete product and that basically talks to the engineering expense and whatnot. We've held that relatively flat year-over-year and that, that again looks to be very solid. We feel very good about our engineering base and how we're put together. This year's net increase was out of sales and marketing. We just got started this year, if you will, building that team.

When we look forward, again, we're going to be opportunistic. We're always tuning that model. Joe Bergera brought forward. That we now have Joe Boissy onboard to really help us take all the three businesses forward in terms of marketing expertise. So that's an area where we kind of hold the cards and say well, let's see what unfolds as far as opportunities and going after those opportunities because certainly, we got a lot more growing to do. So that's one area that's kind of a open question for Joe Bergera and the rest of the team. So at that point, we'll answer that as we go through the year.

In terms of breakeven, it's going to come down to timing of these big deals. This is the part that gets a little bit hard for us to lock down as far as when do these big deals land. Our near-term opportunity is going to be more the expand side of our land-and-expand opportunity, where we expect to further penetrate these key accounts. That's probably going to be the most opportunistic, and then the bigger deals in terms of landing brand new accounts. It's hard for us to predict when they land. So that's going to be the key driver whether or not we hit breakeven by end of the year. But we're definitely, got our eyes on that ball and it's very important to us.

Great. That's very helpful. And then, Andy, just some housekeeping. I don't know, maybe I missed it backlog by segment in the quarter.

Sure. So backlog by segments, $64.9 million total for the business, which again I just have to reiterate as Joe said, we've been not only maintaining but incrementally building that backlog, where we burned significant backlog to support that systems revenue, which is really, really a positive. A real big positive as far as the support level we're at in that business. And so when we consider that backlog, it's $54.1 million in the Systems business, $5.7 million in Sensors, which is not really a backlog-centric business but we reported, and $5.1 million in Ag and Weather Analytics. Likewise, not necessarily backlog-centric but that's how it fits.

Got it. Okay, thank very much.

(Operator Instructions) We'll now go to Mike Latimore from Northland Capital.

This is [Rishi] for Mike. I got a couple of questions on the ClearAg actually. How many ClearAg customers have renewed contracts in this quarter like? And what was the average upsold?

Yes, so we haven't disclosed the number of customers, but our renewal rate has been 100%, and we've upgraded virtually every customer. Upgraded -- we've upsold. So either they've added a new geography. We've been able to take some kind of price increase, where they've expanded the number of users.

Okay. And the second thing, have you won any other ClearAg deals with new customers? You have not been able to announce yet, as per the customer request in the quarter.

Yes. Yes. We've won more deals than we've been able to announce.

Okay. All right. One additional thing. A final thing. What key additional features can we expect from ClearAg for this year, FY '17?

What additional features?

Yes.

Is that the question? We'll continue to add to our agronomic models. We -- also, now that we're in market, we're getting a lot of feedback regarding workflow that a lot of our users are interested in us being able to facilitate, and so there will be some work there, that means developing some application logic on our end. Also means focusing on our integration with other commonly used applications in our customer base. And we continue to international -- with the products fully internationalized, we continue to localize it for different markets. Those will be at least three areas, where we'll continue to extend the feature set and functionality of the application.

Okay, yes. Thanks, guys. That's all.

(Operator Instructions) We'll now go to Michael Morosi from Avondale Partners.

First on the Transportation Systems business, I wonder if you could just generally speak about the primary drivers that have led to the step function increase in backlog in that business.

Yes. Sure. This is Joe. And as I said in my remarks that, I think we're seeing a focus on Transportation infrastructure in general. And so there's probably more funding overall, going towards that kind of activity. But more importantly, we're seeing a shift in spending. And I think that's a function of a number of things. One is that public agencies are recognizing that they're able to deliver a higher return on investment for other dollars that they put against certain kinds of technology as opposed to laying new pavement. And that definitely plays to our strength.

Beyond that, something I think is happening, which is really important. There are a lot of new business models that are being enabled by technology innovation that's happening really across the board, but we're seeing a lot of that in the automobile sector. And that's also driving public agencies to update and modernize their infrastructure in order to be able to manage and accommodate those new business models and again, that really plays to our strength.

So the primary driver for our growth is that there's a shift in spending, and it's an enormous amount of spending in the Transportation infrastructure market already. And we're seeing more and more of that being spent against the kind of activities that -- where we have a really, really strong confidence. Our impression is that we tend to win maybe more than our fair share of procurements in those particular areas, and we would expect that to continue.

Very good. Switching gears to the Sensors business, what's the mix of the third party in terms of the overall revenue line?

Sure. It fluctuates period to period, but it typically is between 10% and 15%. And that dynamic is such to that again, when you consider a core product, a core product can be 45- to 50-point gross margin, where distribution is more in the 10% to 20%. Again depending -- and again, one of the key aspects is, by working with these key distribution partner, it enables our product sales and it's actually -- it's a great vehicle. It's a great partnership if you will as far as taking our product out to market.

That's great. And then on the Ag business, have you seen any change in the competitive environment, with all of the capital that's coming into the sector and the different companies attacking Ag tech more broadly? When you're having conversations with these seed and crop protection companies, are they looking at a lot of other solutions? Just how do those discussions go?

Yes. So I think in the seed and crop protection space, we're still highly differentiated and really regarded as being sort of the go-to vendor. We have the most complete platform. We've also, always positioned ourselves as being open and independent and an enabler for these very complex enterprise strategies. And I don't think there's really anyone that is able to match up against us in that regard.

In the grower space, there definitely is a lot of competitive activity. And I think most of the venture investment, other capital investment has gone into solutions targeting the growers themselves. And while we definitely are interested in that market, we've always looked at that as being somewhat opportunistic, and so we've been able to sort of stay above the line of that fray there.

I would say that IBM is -- following the acquisition of the weather company. If they tend to be present in more deals than they used to be, we actually think that, that's a good thing. That there's a very large technology company out there that's helping us to build this category. We're still a relatively small company, and it's a pretty big task to build that market.

So we actually -- we welcome that. We hope that it continues to draw attention to this market, and we actually hope that it will help to mature the market even more rapidly.

That's great. And then just -- just quickly on the end user mix. You mentioned the 400 million acres across 18 countries. Is revenue primarily coming from North America at this point, or is revenue global? And then also, if you could just talk a little about the end-user engagement, to the extent that the growers are accessing the platform through an OEM or white-labeled version of ClearAg? What can you talk about the end, the uptake of ClearAg and the engagement of ClearAg at the field level?

Sure. So first of all, the reason that we're sharing that global acreage is to give folks a sense of the geographic reach. Also, a lot of people have asked how our reach compares to climate corporation, and so we've tried to continue to provide that metric, but again, to be really clear, we're not pricing based on acreage. When I use that metric, I'm really referring to the reach that we're getting through our relationships with allied providers, who embed ClearAg into their solutions. So it's an OEM model.

Our pricing to the allied providers is done on an API basis, not on a per acre basis.

Now the next part of the question is like so what's the utilization, how active our customers are on ClearAg that may be accessing it through one of these allied providers? And for purpose of full transparency, we don't know, what the utilization is. There is an assumption when we are negotiating contracts with the allied provider, that they're going to get a certain amount of attach and their interest is in trying to enrich their customer experience, their customers -- their users experience and bringing more functionality to their existing applications. So presumably, they're getting decent utilization where they wouldn't continue the relationship with ClearAg. But we don't know precisely how many of their users are using the application and how frequently.

As far as international versus domestic revenue, you want to talk to that, Andy?

Sure. One of unique things about this offering is, we are extremely international. If you consider our customers, they're very, very large multinationals, including Bayer, Syngenta and so on. I think it's been the big power of the platform is not only do we have that reach, but we demonstrated that we have the performance in this particular product to actually make that market.

So in terms of the levels of complexity, it's a fantastic benchmark for us, where it makes it a lot easier mind thought in terms of how do you drive lower and to specific markets. If you can start out global, fantastic. Financially, these are very large strong companies with very large budgets. They're all U.S. dollar-denominated accounts, so even though we're international, we don't see currency risk at all.

Thanks a lot.

(Operator Instructions) And it appears there are no further questions. I'll turn the conference back over to management for any additional or closing remarks.

Great. So thank you, operator. Thank you, everyone. We appreciate your support and the thoughtful questions. On the Investor Relations front, I just wanted to note that we'll be presenting at the 29th Annual ROTH Investor Conference in Dana Point on March 12 through 15. At the 18th Annual B. Riley Investor Conference in Santa Monica on May 24 through 25, and at the Craig-Hallum Capital Group 14th Annual Institutional Investor Conference in Minneapolis on May 31. So if you're attending any of these conferences, we'd love to see you. We encourage you to come see our presentation. And we look forward to updating you, again, on our continued progress, when we report our results for the fourth quarter and the 2017 year-end.

So with that, we're done. This concludes today's call. Thank you.

This concludes today's presentation. Thank you for your participation.