Iteris Inc (ITI) 2019 Q2 法說會逐字稿

Good day, and welcome to the Iteris Fiscal Second 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 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 their 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 does not undertake an obligation to update -- 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 document 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 forward-looking statement.

I would like to remind everyone that a webcast replay of today's call will be available via the Investor Relations section on 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 we've 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 these metrics in our prepared remarks.

With that said, I'll now 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, 2018. 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 2 events: first, the change in our contract to manage the Virginia Department of Transportation's transportation operation centers, which had its first full year -- I'm sorry, its first full quarter revenue effect show up in this period's results; and second, the continued underperformance in the Texas market for intersection detection.

Aside 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 segment's Q2 revenue declined 5.6% year-over-year due to the contract change, we continue to experience solid growth, excluding the TSE effect. Therefore, we believe the Transportation Systems segment could fully replace the forgone TSE 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 Systems 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, which is an 18.9% sequential increase against the segment's first quarter ending backlog of $40.7 million. The Transportation Systems 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 contract with OC405 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 CVIEW 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 segment's 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 digitalization 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-as-a-service customer, Georgetown, Texas, went live with Iteris now managing all signalized intersections across the city. In addition to their 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-as-a-service later in the call as we see increasing demand for this offer, and we believe it'll 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, which represents a 21.1% year-over-year increase. Both ClearPath Weather and ClearAg, our digital agricultural platform, contributed to the quarter's growth.

During the quarter, we continued to add net new ClearAg customers, including global agribusinesses and allied data providers that embed ClearAg's APIs and our digitalization component into their solutions. Yesterday, for example, we announced a deal with staff at AgroSciences, a leading European-based contract research organization to provide ClearAg's environmental and atmospheric content, with crop scientists working in 19 countries.

Other noteworthy new customers include one of the world's largest agro science and environmental testing companies; a European provider of software and advisory services to grow our own 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. As Joe has covered many financial highlights as well as key financial performance drivers, I'll focus on the status of our 3 business models and balance sheet highlights.

First, 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. 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 3 businesses. Starting with Systems, as Joe noted, we are showing revenue down year-over-year due to the 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 lost 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 6 months of the year. All said, we do have the opportunity to see continued expansion of our gross margins as we expect to represent the 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 when combined with lower year-over-year revenue that translates into a declining contribution margin of 14.3% in Q2 '19 as compared to 14.8% in Q2 of fiscal '18.

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 to 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 '19 year-to-date gross margin of 47.1% compares favorably to 46.2% for the previous year.

Overall, we did not see price compression in our markets and expect solid gross margin performance growing 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 our 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 22.2 -- 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 will 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 out-distances gross margins of 34.1% for the prior year period.

Year-to-date, gross margins at 55.3%, likewise out distances FY '18's 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 continue to improve financial performance as new revenue winds accumulate. In terms of corporate expenses, which include unallocated public company expense, accounting, finance, IT, marketing, HR facilities expense, and so on, we're essentially stabilized given many growth-related transitions. While our quarter 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 midyear.

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. While cash and short-term investments at approximately $10 million is down from the start of the year of $15.5 million, this variance does not represent the cash burn of the enterprise. Specifically, we understood that when we transitioned to ERP systems at the beginning of our fiscal year, April 1, 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. If you'll notice, our accounts receivable has increased from $12.9 million at March 31, to $15.4 million at September 30, 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, billing and accounts receivable process by fiscal year-end. At this point, I'll turn the call back to Joe.

Great. Thanks, Andy. Iteris continues 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 sustained organic growth as we move beyond the VDOT TOC revenue GAAP and Texas headwinds in the second half of FY '19. 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 and 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 3 categories: new geographic expansion, software-as-a-service and managed services or business process outsourcing. As mentioned earlier, we believe our intersection-as-a-service offer represents a long-term growth opportunity for Iteris. The 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 Roadways Sensor segment as an option as we did in Georgetown, Texas. The SaaS and Managed Services components are priced on a per-intersection, per-month basis. We already have a sales pipeline of intersection-as-a-service opportunities that total 7 figures in annual recurring revenue. With the segment's Q2 revenue run rate now reflecting the full step-down from VDOT TOC, we have a revenue baseline from which we expect Transportation Systems segment revenue to improve sequentially before the impact of holidays and other seasonal factors.

Turning to our 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 '19 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 we've 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 7 figures. That said, we do anticipate some near-term supply chain issues that could throttle the return to normal business in Texas. Mainly, we expect to experience a gradual resumption of growth in Texas over the course of 2 to 4 quarters.

Therefore, absent any additional market challenges, we believe the Roadway Sensors segment second half FY '19 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 the segment. Under Jim's leadership, we evolved ClearAg'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 a line of business owners and functional leaders, while minimizing our dependence on our customer's internal IT; 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 segment's cost structure, while simultaneously enhancing our sales and product teams, which Andy referenced in his comments.

With this transition behind us, we now have of the strongest pipeline in ClearAg's history, and we're beginning to experience an acceleration in opportunity conversion. Therefore, we expect sustained, solid, full year growth for FY '19 with an acceleration in the rate of growth in FY '20. As we look ahead, we continue to see a path through the segment to achieve a $50 million annual recurring revenue run rate by FY '24.

In summary, in Q2, all 3 segments continued 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 '19, we expect total revenue to grow year-over-year as the Transportation Systems segment more fully replaces the reduction relative to prior year in VDOT TOC revenue and the Roadway Sensors segment begins to realize a gradual improvement in the Texas market. And lastly, the Agriculture and Weather Analytics segment should continue to contribute to overall organic revenue growth in our second half as it did in our first. So with that, we'd be delighted to respond your questions and comments.

Operator?

(Operator Instructions) We'll take our first question from Jeff Van Sinderen with B. Riley.

I know you went through a bunch of this in your prepared comments, but maybe if we could drill down 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 also in Sensors, I know it's been choppy in Texas. Where 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...

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...Sensors, that isn't something that we really focus on that much. As we -- I think we've talked about in the past, we typically receive orders -- our Roadway Sensors business typically 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 that it's always a fairly low backlog figure, so it really only moved a couple of hundred thousand dollars even though in the percent variance, it looks more sizable. But with respect to the Texas market, as we've talked about last year, Hurricane Harvey happened in the beginning of the TxDOT's fiscal year. And as a result, our experience has been that they ended up reprioritizing 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 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 if a year has transpired and prices have changed, including the prices for some of those 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's some of the quoting that I referred to. In addition, we've started to now see notice of pending orders. And that would be, again, for business that we previously bid on, in most cases in receiving that notice is because we've bid more recently and therefore, there haven'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 have received 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, actually the first question was -- the third one, I'm going to talk to is can you kind of comment on the backlog growth in systems and agriculture. And I would say that really, in both cases, the growth in backlog is really across the board. As I've 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 3 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 3 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 2 to 4 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 the 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 2 product lines. So anyway, Jeff, I hope I answered all of your questions. If not -- if you need any clarification, I'm happy to follow up.

Okay, no. That was -- there were a lot of questions in there. Just in terms of the backlog trending up in Ag, are there elements of that or are there other things that you're seeing at this point in Ag that add to your confidence of getting closer to an enterprise win? And then also, are there other milestones that we should look for in Ag prior to you getting an enterprise win?

Yes, so good question. As I've been trying to impress upon folks is that we're looking at improving the pipeline by increasing the number of opportunities -- of qualified opportunities that we're pursuing. Want to get more at that. 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 Agribusiness 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 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 that 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 4 different solution areas that we've talked about previously. That's our smart content plus our product validation, our irrigation solution and our harvest solution. And I also see them progressing -- these opportunities progressing in a really logical way through the well-defined stages that we have in our sales process. So again, it's the number, it's the nature, and it's the pace that sees a...

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...opportunities moving through the pipeline that give me a lot of confidence.

We'll take our next question from Mike Latimore of Northland Securities.

This is Matt Shea on for Mike Latimore. My first question is what is the average size of the transportation deal now versus a year ago?

Wow, that is -- I'll be honest. This is Joe. It's a difficult question to -- for me to answer. I'll see if Andy has even better input. But 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, is that a couple of years ago when I first got here, we had a very, in my opinion, very small average deal size and so that meant we had literally hundreds of small active projects at any given point in time, and it's very difficult to get to our target utilization targets when you're trying to manage resource allocation across such a huge number of relatively small projects. 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 will always be the case. In some cases you need to -- you need a small project to get a foot-in-the-door in order to get to the larger projects. And so we'll always have some smaller -- but at this point, I'd say we have kind of a bimodal 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 -- kind of the minimal threshold's about $500,000 and a lot of those strategic opportunities that we're pursuing have an average value of at least $1 million. And on the lower end of the spectrum, I would say that they probably tend to be around $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, as Joe commented, we created quite a bit of added backlog 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. Our Q1, we saw some selling expense related to that effort but our Q2 were back-normalized and, essentially, flat year-over-year operating costs. So the efficiency we see almost immediately, we've seen a big pickup in the backlog, but we see flat expense. So as 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 more comprehensive deployments in repairs? And how does that kind of affect the supply chain with your Roadway Sensors?

Yes, so part of it is just taking time to work through the cycle. So unfortunately, the last 4 quarters, which responds to TxDOT's prior fiscal year that typically starts on September 1, unfortunately, I look at that as kind of a lost year. We had a number of strategic initiatives that we were pursuing we expected to convert in that period and unfortunately, those projects got pushed out. And it's because TxDOT needed to reallocate budget and also personnel to deal with the aftermath of Harvey. So at this point, what I think it's really about is TxDOT getting back to the 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 period to replace damaged equipment and whatnot. It wasn't like we didn't have any sales, but all of the strategic forward-looking business that 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's 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 issues, that's certainly not directly related to Hurricane Harvey in any way but unfortunately, on projects that are essentially like new building projects where there isn't an existing infrastructure, a lot of times, there is a dependency for the deployment of our product on third-party equipment, and that includes signal controller cabinets which are steel structures. It includes the necessity that there are poles at the intersection and then there's also another product, which I'm going to just call the luminaire that you affix 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 materials. And that, in turn, has led to an extended period for fulfillment on some of those critical infrastructure pieces that we're dependent upon. And the reason that I bring that up with respect to Texas is because it's the nature of the work that we're doing in Texas. It's their modernization initiative. It's new construction. Unlike other regions were there would potentially already be existing poles, luminaires or signal controller cabinets. We don't have those in Texas, so there's a dependency on that in that market. Does that answer your question, Mike?

Yes, that answers 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?

That's a good question. Typically, we see most of the seasonality in our Sensors business. Again, it's just weather-related. As Joe said, all the different geographies -- if you -- all our different markets in that business, are doing very well. They're up year-over-year. We see again that strong profile. The state of Texas, obviously, is not necessarily as affected by weather dynamics. So if that weather -- if everything we've talked about on this call -- all those different dynamics that are affecting the state of Texas, if you start seeing basically a trickle-through of -- release of this pent-up demand, we won't necessarily see a traditional seasonality. Perhaps next year, we would get back to it once Texas has completely normalized. But something important to also consider is we've talked quite a bit about Texas. This is not a never-ending discussion. This is definitely a situation where we consider it to be a 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.

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

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 referred to more likely come from Sensors or through Transportation?

Oh, no. We really expect Ag and Weather to continue to grow at, at least the same rate it has in the first half.

Okay. So that would imply then, based on the map, 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 increase. Is that a correct conclusion?

Yes, that's a reasonable conclusion. Yes.

Okay. All right. 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 kind of a mid-single digits number or a high single-digits number? Would you care to maybe put some bounds around that sort of half against last year and half growth outlook?

That's going to depend on the whole Sensors discussion that we put a lot of time into here. So the answer is yes, on both numbers. How does that sound? In a Texas rebound, we're going to be on the higher part of your range and if it continues to kind of trickle through slowly, then it'll be more in the lower end of your range.

Okay.

And Joe, the -- plus we're 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 requests for quotes. Now what we're trying to figure out is how fast we can fulfill those orders when we receive them. Again, when it's just our product, we feel like we have pretty good line of sight. But when we need to bundle our products with third-party products to provide a complete solution in 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've never been here before. But as Andy said, this isn't going to drag on for multiple quarters. But I do think the next 2 quarters are going to be kind of complicated, and it's somewhat uncharted territory.

And just, last piece to add to that, just the dimension that, as Joe was talking to this, the Iteris product, we have good eyesight on in terms of what it takes to fulfill. And when it times to what we call our third-party distribution, that business and what we consider to be historic run rate mode is typically 15% to 20% of that business, and it can even do better as we actually have some different new sales channels through -- State of Texas. It's been running under 10%. And so that's what we're referring to as the pent-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 in the catch-up, 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 1 other nuance that's important for everyone to understand is that even though the third-party equipment may represent only 20%, let's say of the revenue, our customers don't want to take possession of any of the order until it's complete. So if we're not able to fulfill some of the third-party equipment, that means our own product won't ship until the third-party equipment's ready to go, right? There's a critical dependency there that I want to make sure everybody understands.

That would imply that maybe this could be little back-end loaded?

It could be. I think that's what Andy's saying. We're just not sure how fast we can get it through the pipe.

Yes. No matter what, we think it's going to build. Over the last year, we had a little bit of choppiness where the release of -- in some cases certain types orders and then back into hold mode. As this loosens up, it'll be a consistent building. So definitely, Q4 should be better than Q3 in the Sensors business.

Okay. And then the last one before I turn it back over here, can you help me understand how that corporate expense line is going to look going forward? How should I think about that?

Sure, that's pretty much steady-state. We said early on, we expect to be right around $15 million and year-to-date, we're about $7.5 million, $7.6 million. So again, that's going to be basically, a 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.

(Operator Instructions) We'll take our next question from David Burdick with Dougherty & Company.

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 type, we run low 20s. Just as an example, it can move around in terms of business process outsourcing type work. We can run as high as 40s in other types of work. Software products run closer to mid-50s. So we have quite a bit of 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 can 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 those technology-based initiatives are again, much different than the consulting base that the business was built upon. So we expect to see expanding gross margins in that business, not just concurrent as we go forward in the next sequential quarters. But when we look at future years, we think that business will continue to evolve in -- to a different-looking technology business.

Okay, that's helpful. And then on the Sensors segment, outside of Texas seems to be performing pretty strong. What's the margin 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 products, we're consistent in all our markets, and that business runs 50%, a little bit better than 50% gross margin. As we look at our different distribution opportunities, we have several different channels of third-party distribution. And that can run, depending on what's being pushed through the channel, 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 luminaires, like Joe speaks to, it might be 10%. So it moves around within the relevant range of 10% to 25%.

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, I wanted to let everyone know that we'll be at a couple of upcoming conferences. Please look for us at the Craig-Hallum Capital Group Ninth Annual Alpha Select Conference in New York City on November 15 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 1-on-1 meetings. In the meantime, we look forward to updating you again on our continued progress and report the results for our third quarter of FY '19. And so that concludes today's call. And thank you again for joining us.

Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect.