2022 | 2023 | ||||||
Price: | 3.00 | EPS | 0 | 0 | |||
Shares Out. (in M): | 42 | P/E | 0 | 0 | |||
Market Cap (in $M): | 127 | P/FCF | 0 | 0 | |||
Net Debt (in $M): | -24 | EBIT | 0 | 0 | |||
TEV (in $M): | 103 | TEV/EBIT | 0 | 0 |
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Iteris is an extremely cheap but profitable leader in the mobility data market. It has a $125 million market cap with $24 million in net cash and just announced a $10 million share buyback plan. It trades at an EV/Revenue multiple of 0.6x on 2023E numbers and has a P/E ratio of 12.7x when you strip out the net cash. EBITDA margins are currently sub-optimal to the supply chain issues which have hindered the company’s production over the past six months. EBITDA margins are forecast to be 5-6% this year rising to 16-19% in the company’s 5 year plan. At an 17% EBITDA margin on 2025 estimated revenue of $225 million, EBITDA would be $38 million or basically 1/3 of today’s enterprise value. At that point the P/E multiple would be 4x. Obviously given today’s current stock price few people are envisioning this future scenario but it is in the realm of possibility assuming mid-teens revenue growth and reasonable margin expansion.
So what does Iteris actually do? Mobility data basically means vehicle traffic data and coordination. Iteris sells sensors to monitor intersections accounting for cars, bicyclists, and pedestrians which allow its customers to optimize traffic flow while increasing safety for all participants. The company also has a service division which sells its traffic expertise and data to municipalities and private customers. This can be either done on a consulting basis or as a managed service. Data is sold on a software-as-a-service (SaaS) basis to customers both in the public and private spheres. At the present revenue is basically split 50/50 between product and service.
The market Iteris competes in is both large and fragmented. It estimates it TAM to be $8.3 billion by 2026 in North America alone. It also estimates that 35%+ of that TAM is convertible to SaaS or other recurring revenue. No competitors span the breadth of the company’s products and services. There are lots of local competitors but few have the depth of knowledge and product performance that Iteris brings to the table. Some statistics that the company shares in its investor presentation give proof points to its dominance in this market. The company has 10,000+ public agency and commercial customers, 200,000+ sensors installed, 2 billion+ detections per day, 1.5 petabytes of data processed annually, 32 patents, and 440 industry, technical, and domain experts. Annual recurring revenue (ARR) is currently 25% of total revenue and rising. The company’s sensors and human capital contribute to its ClearMobility Cloud, where it can sell enriched traffic data as SaaS, Platform as a Service, Data as a Service, or as a Cloud-Enabled Managed Service. End-user solutions include ClearGuide, ClearAsset, CrearFleet, ClearRoute, ClearData, Congestion Management, Asset Management, and Maintenance Management.
Beyond the public markets, there are also very interesting private applications for Iteris’ traffic data. iHeart radio is a significant customer as it buys SaaS traffic data to syndicate to its many radio stations. Sirius XM is a recent customer for the same application. These media deals can be worth $2.5 – 5 million per year each on a recurring basis. Insurance is another sector that is very promising for Iteris. Its traffic data can provide context for risk scoring of individual drivers. The insurance industry has made a push to provide individualized policies for customers based on their measured driving proficiency. Use of Iteris data has been found to make these assessments much more accurate and profitable for the insurance companies. While at early stages, so far one major insurance company has implemented this solution at one of its divisions. These insurance deals could be sized at $5 million+ each per year for SaaS data. The fleet and logistics sector could also be interesting for Iteris to augment customers’ existing highway data with Iteris’ enriched data. This sector is in early discussions currently. Finally, the big home runs out there are Apple and Google which have good highway data but not nearly as much local data as Iteris. These deals could be huge and are not discounted in any current models (including mine) of the company.
A revenue driver that has not yet hit the industry but will later this year is the funds from the recent infrastructure bill in Washington. This will give municipalities lots of extra money to fund their traffic initiatives. Another revenue driver at early stages is the automated smart vehicle trend. As cars become autonomous it is extremely important they have current and accurate local traffic conditions which only Iteris can provide on a broad scale. The company has been testing its data service with autonomous vehicles over the past couple of years and this will become a more important catalyst going forward.
So with all of these promising aspects of Iteris’ business, why is its stock trading at such low levels? The answer is that it has run into supply issues over the past few quarters which have hit both its top line and its gross margins. Revenue has stagnated this fiscal year with quarterly revenue growth dropping from 22% in Q1 (June 2021) to 8% in Q4 (March 2022). In addition, product gross margins have been squeezed from 47% in Q1 to 32% in Q4 as costs to get essential parts have risen dramatically. Thus, I would posit that investors now are only looking at the current situation and not at the future.
The company has implemented a supply chain mitigation plan to overcome some of its supply challenges. The parts that have been hardest to come by have been processors made by Intel and Qualcomm. The company now is trialing a solution made with prior generation Xilinx parts which are much more available. The solution has comparable performance but fewer supply issues. Field testing will take 3-4 weeks and these products are expected to go into production by the company’s second fiscal quarter. In addition, the company is beefing up inventory for critical parts for the future. Finally, Iteris is using consultants that have feet on the street in China where they can augment the company’s sources for various parts.
Demand has not been an issue for Iteris. Full year bookings for the 2022 fiscal year were $155 million, up 28% year-over-year representing a book / bill of 1.16. Ending backlog was also at record levels, up 28% year-on-year to $100 million. The company gave guidance for $147 – 155 million for fiscal 2023, up 13% year-over-year at the midpoint even with continuing supply issues. EBITDA guidance is for 5-6% hampered by lower product gross margins until the supply mitigation effects totally take effect.
Iteris is a growth company with multiple catalysts that is being held back temporarily by supply issues. These issues will eventually abate on their own but the company is not waiting for that and is actively managing a mitigation program. Management is top notch and the valuation is incredibly cheap for the asset you are purchasing. What can Iteris be worth by 2025? If I am right and the company does $38 million in EBITDA and is growing 15%, you could put a 15x EBITDA multiple on it to arrive at an enterprise value of $570 million. Adding back today’s $24 million in net cash gets you to a $594 million equity value or about a $14 share price, up 367% from today’s levels.
Multiple catalysts here. Mitigation of supply issues, new insurance customers, funds from infrastructure bill hitting customers, potential Apple or Google deal.
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9 | |
Iteris announced a $1.2 million consulting deal with Illinois this morning. The other day Texas announced a 10-year $10 billion transportation plan. The money is out there and Iteris is well-positioned to benefit. | |
8 | |
Iteris reported a solid quarter last night, beating revenue by 8% and having in-line EBITDA even with the supply constraints the company continues to face. EBITDA margins next quarter are forecast to return to the 8.5-10% levels. Management has redesigned a number of circuit boards with more available components and this is resulting in better product gross margins. Bookings still exceed revenue and backlog grew 22% year-over-year in the quarter. Trading at only 1x sales with the opportunity to do 16-18% EBITDA margins down the road for very differentiated products and expertise seems like a bargain here. | |
7 | |
exceptionally helpful - thanks for sharing. | |
6 | |
i was involved, but have not been for awhile, and i am not current on it. i would say however that when i was last involved, the SAAS story was out there, but it was a tough sell. Customers are basically government traffic bureaus, which like most small gov't agencies are not known for their willingness to embrace change or ability to make decisions quickly. additionally, part of the iteris solution is effectively an outsourced service, so for gov't traffic agencies to embrace that, they have to fire Bill who has been manning the local traffic desk for 20 years, and who is on the tuesday night bowling team. unless the outsourced guy can roll 300 and fly in on tuesday nights, thats a tough transition. full disclosure i have some strong biases here and should probably take a fresh look, but when i was involved i spent alot of time trying to help the board and management, and came away frustrated and thinking they were being willfully ignorant and intentionally fighting change b/c they all just needed the board salaries. | |
5 | |
Thanks MJS - exceptionally helpful. It seems you are/were involved. What do you think of their ability to get the SAAS transition going and get the margins up? thanks! | |
4 | |
Thanks for the context - interesting stuff - maybe needs an activist to change out the board... | |
3 | |
management isn't bad, but the board is terrible. Chairman has been there for something like 30 years at this point, and literally does not understand even the basics of capital allocation or per share value. take a look at the share count over time. then consider that last year during their "strategic alts" process the company came away thinking they were a buyer, not a target. stock has been at a severe discount to comp transactions for years, and they filed a shelf in anticipation of making an acquisition that thankfully fell threw. if you want to raise equity at ~4x sales where comp transactions have gone off, thats fine. if you want to raise equity at 1x sales to buy something at a higher multiple, no thank you. but they literally don't seem to understand that. part of the problem is that when the new CFO andy schmidt came in circa 2015/2016 (since replaced) his big idea was to put in a new ERP system that would give them the capacity to handle $200M in revenue. as they are still well below that level, this has been an albatross around their necks that they cannot get operating leverage on. the proposed solution seems to be growth at any price, which is about what you expect when no one on the board owns any stock, except for the CEO. As for the CEO, when he came on board they gave him something like 3% of the equity. this was a first time CEO who i think is pretty good for a company this size, but he basically got bumped out of ROP, so in my view giving 3% of the equity to an unproven CEO shows you how they think about dilution of their stock. maybe they have finally pulled their head out of the sand and will execute on this buyback, but i would not be surprised at all if this is a red herring. they also face some structural headwinds. Gridsmart is the main competitor on traffic cameras. their product has a fisheye lens which has limitations in multilane intersections, but historically they have been very tough to compete with on price, which matters to municipalities. alot of this is just geography. Gridsmart is in Knoxville, TN while Iteris is in California. Engineers just cost alot less in Knoxville than they do in California. Historically Gridsmart was managed much better as well. The founder hired and fired 3 different sales teams in 4 years until he got the right people and the right strategy, which explains how they went from upstart to share taker. Iteris on the other hand seems to be culturally resistant to change. i agree this is cheap, but if execution is part of the thesis, i would be cautious. if there is a way to screw it up, i think they will find it.
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2 | |
1. We have only been shareholders recently so you may have more context than us on this. In my speaking with the CEO he doesn't seem lazy. They keep signing meaningful deals. The only mistake I might point to is that they didn't get going earlier on product redesigns to offset the supply chain issues. We own another company, Silicom (SILC) that began redesigns mid-last year. 2. Not sure on this one. In general SaaS is growing but do not know if it is through the channel or direct. 3. Management discussed all of the types of deals I mentioned. iHeart and Sirius are live now and are listed as customers in a slide in their investor deck. I think the insurer that is using them so far is State Farm as they are also listed on that slide. Good luck! | |
1 | |
Hi Cobia - nice writeup and I largely agree. A couple of questions - 1) would you agree that management is extremely, er, lazy and that there have been a couple of big mistakes? is it possible to have any confidence that they can take the margins up? what's the problem, why are margins so low (in general, not just because of the current supply chain issues)? 2) the company touts their SAAS revenue, but my understanding is that this has been hard to sell into the channel. and that the ITI solutions are still pretty fragmented. I've had a hard time figuring out if this is something that municipalities really want. Any additional color here? 3) where did you get your info on the radio and insurance deals? are any of these live, or just prospective? thanks! |
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