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Iteris: A niche within a niche

Iteris is a transportation company that is a vertically integrated provider of hardware, software, and consulting services to the signalized intersection industry. They have their hardware in nearly thirty percent of the signalized intersections in the USA and process petabytes of traffic data per day. ITI is leveraging its hardware footprint and long-term adviser relationships with thousands of municipal agencies to upsell its innovative SAAS offerings. ITI has recently positioned itself as a pure-play transportation company and is well poised to ride the USA’s needed infrastructure upgrade and the coming of smart cities.


Background:

There are about 1.2mm intersections in the US. Roughly 400k of these are signalized and about 150k of them have smart detection- non smart detection means there is an inductance meter buried in the cement that can sense cars, it is a binary output and does not have recording capability. ITI has a 30% market share across both segments (signalized and smart intersection). ITI integrates third-party equipment and sells this as their hardware offering. These products range from radar sensors to traffic cabinets to Bluetooth detection and are low-margin items. ITI’s value does not come from their hardware but from their algorithms that control traffic signals.


ITI’s trusted reputation with thousands of municipal agencies built over many years due to their consulting services and hardware capability puts them in a unique position to upsell. Rekor, an AI firm trying to enter into the transportation business, recently called out these relationships as to why Iteris would be a great complement to them.


“…but the power of our (Rekor) solutions just isn’t being recognized by governmental agencies”.


We imagine that selling to government agencies is a bureaucratic pain and being the first mover is quite an advantage due to inertia. Other cities will naturally copy what the neighboring cities are using which gives an element of path dependency to the first mover. Software may compound this advantage as intersections will be able to communicate with one another across districts. This will enable global traffic optimization rather than localized intersection optimization which increases traffic throughput significantly. It is important to add that Rekor also mentioned leveraging ITI’s data and hardware presence for vehicle identification which highlights the different ways ITI’s infrastructure can be leveraged aside from intersection management.


Iteris is composed of two segments after having recently sold their Agriculture business in May 2020. They are now positioned as a pureplay transportation company with a hardware(roadway sensors) and software/consulting (transportation) segment.


Roadway Sensors

ITIs hardware segment is primarily their Roadway Sensors. Their roadway sensors product line uses image and signal processing to capture and analyze sensor data. These algorithms can also detect vehicles, bicycles and pedestrians, and control signals. ITI is a leader in this space due to their equipment and algorithms being best in class along with the breadth of their relationships. ITI competes with about three competitors in this space. These are Cubic Transportation, Econolite, and Flir. Here is what CEO Bergera said in the 2021 Needham conference:


“Our win rate is excellent in all the categories in which we compete and generally, we expect that we have a better than 50% chance of winning every competitive pursuit that we focus on”.


Having a 50% win rate against steep competition is a testament to ITI’s competitive offerings. To have robust intersection detection capability, there needs to be an array of sensors, there is no magic bullet. These sensors range from video to radar to thermal to Bluetooth detection. This mitigates the risk of superior technology coming out which renders ITI’s offerings obsolete. ITI has been steadily growing this segment at about a 10% CAGR for the last ten years.


Transportation Systems

ITIs transportation systems segment provides consulting services- regulatory compliance, infrastructure layout - and as of 2019, intersection SAAS solutions. Traditionally this segment was primarily consulting based focused on the planning, design, and implementation of traffic systems for counties/cities. However, this segment is becoming increasingly software-focused, with approximately 25% of 2020 revenue being SAAS based. An example of ITI’s solutions at work is at the City of Lakeland. It is estimated that ITI’s solutions prevent around 20 close calls/day. ITI prevents these events by holding yellow lights longer if an oncoming car will not be able to stop, thus preventing a collision.


Initially their consulting services were point offerings designed to fix key problems for municipalities. However, ITI is now positioning itself to become a one-stop-shop with its ClearMobility platform seen below. ITI released this application about 20 months ago and although COVID has put a dent in its growth, is seeing significant growth. Transportation segment revenues were growing around 20% prior to COVID.



ITI is offering its entire vertical stack to government agencies beginning with hardware and culminating with SAAS outsourcing applications such as Intersection-as-a-service. To bridge hardware with software, ITI also has taken care of multiple other pain points for municipalities. These pain points include communication (enabling devices to talk to the cloud), cybersecurity, plug n play cloud solutions, support for standards such as 5G, DSRC, and V2X. Iteris is able to offer some of these services through partnerships with companies such as Cisco. Cisco equipment bridges the communication gap between cities outdated architecture and ITI’s SAAS offerings. Most municipal agencies lack the capability to do this and currently select point offerings from vendors. We believe that ITI’ bundled offerings will be more attractive to cities than point solutions as it is more convenient and effective. Their expanded offerings are shown below with ITI still innovating. They recently released the ClearMobility cloud in January of 2021 which is a plug n play cloud-based portal to access ITI’s apps and its third-party ecosystem in a convenient manner.




ITI recently commented on why their offering is best in class at their Q3 2021 conf call:


“ our platform represents the most future ready product and services solution portfolio in the market. Why am I able to make that claim? Because we've actually developed and managed the connected vehicle reference architecture for the US Department of Transportation for the last decade. That is a global standard for connected and automated vehicle communication. We are the only vendor that has that same depth of knowledge and understanding of those future requirements, and for the last decade, we've been incorporating those requirements into our products' roadmaps”


ITI was picked to spearhead the development of Architecture Reference for Cooperative and Intelligent Transportation (ARC-IT) under the U.S. Department of Transportation back in 2012. This is the standard architecture that intelligent transportation will be built upon. So why was a microcap-sized company able to win this contract along with others? The below contract clause reveals why.

ITI is the only company that was able to do it. ITI has a dominant position in the intelligent transportation industry, and this will likely persist given its entrenchment with municipalities. We suspect there is a large first-mover advantage with municipal agencies and the more these agencies outsource to Iteris, the more interconnected intersections become, and the greater the moat around ITI’s business. This can be seen with a majority of ITI’s customers upgrading to their newest offering. ITI has also added cities in California, Texas, and Florida to its roster. California, Florida, and Texas make up the majority of ITI’s revenue being larger states along with having higher infrastructure expenditures. We believe these states are a good proxy for ITI’s competitive standing.


ITI is intent on acquiring bolt-on companies to bolster their offering and give them footholds in more states. They also have recently acquired Traffic Cast (all software generates about 15mm in revenue(1x revenue multiple). TrafficCast's commercial line of business develops software that collects, filters, and models real-time traveler information and traffic incident data for global media companies and other commercial customers. Its public sector line of business provides sensors and related software that helps state and local agencies measure, visualize, and manage traffic flow. ITI will continue acquiring bolt-on companies that enhance their offering.


ITI is trying to be the end-to-end intersection provider to municipal agencies. Tack onto this other end uses of intersection data such as more granular risk assessment for insurance companies and the TAM could get multiples larger. Iteris was already in talks with a multi-line insurance company to provide them with their transportation data back in Q3 2020. The potential TAM of this industry is forecasted to be around 6.5B which Iteris believes roughly 1/3 of it will be SAAS. ITI also plans on having their “Clear Mobility Cloud” open to third-party developers so they can build apps and programs on their datasets. ITI believes this open-source environment will be accretive to their value chain and accelerate their ability to be the one-stop-shop for municipal agencies.

Some recent contract wins:

-Florida DOT selects Iteris ClearGuide Solution (Feb 2021-2100 intersections) 25% of signalized intersection in state, one of the largest signal management contracts in the country( roughly 1mm a year))

-San Bernardino selects Iteris ClearGuide Solution (Feb 2021- 1,250 intersection)

-Hillsborough County upgrades to ClearGuide Nov 2020 (4 year consulting + SAAS contract)

-Orange County selects Iteris Intersection as a Service Sep 2020

-Orange County 405 July 2020 Upgrades to ClearGuide Solution


Autonomous Cars & Smart Cities

Intersections are the areas in which the highest rates of incidents occur and are also a major hurdle for automated cars. It is estimated that traffic and car crashes cost the USA about 1T/year or about 5% of GDP (this base rate is constant across countries). Given these incredibly high costs and being a potential hurdle for automation, it is inevitable that autonomous cars and smart cities are the future and important trends to watch for the next couple of decades.


Smart intersections are perhaps even more needed with the adoption of automated cars. Automated cars will increase vehicle throughput dramatically which will make streets even more of a limiting factor. Smart intersections will be one of the few high-impact levers to increase throughput as physical infrastructure is already built out. Automated cars will need to communicate with both intersection (V2X) and other cars in the future.

Here is a tweet from Elon Musk tweeting about the challenge for automated cars and getting through intersections. Smart intersections would alleviate this problem.




Smart intersections may also improve carbon emissions by ten to forty percent! Cars braking to a stop then starting again is a large contribution to emissions. Smart intersections will mitigate this substantially. With smart intersections, higher throughput will mean less fuel consumption which means fewer emissions. The future will probably look slot based with the intersection lights changing rapidly in constant rapid communication with autonomous cars. All of this is to say that the electrification of cars and smart cities are enormous trends that will shape our future.


Risks

1. The greatest risk is adoption of smart cities continues at a slow/slower pace. Although ITI will still benefit, it will take longer for the market to take notice and ITI could remain around these same price levels for a while.


2. COVID could continue to disrupt ITI’s revenue for the foreseeable future. COVID related delays impacted their subcontractor revenue in 2020 and impacted the timing of several large orders.


Catalysts & Tailwinds

1. The transportation industry has seen a lot of consolidation and there is a good chance ITI will get acquired. The acquisition spree has involved Cubic being acquired for 2.8B and Flir being acquired for 8B. With the massive infrastructure bill in the works, it could prompt even more consolidation. An offer has already been tendered valuing ITI at almost $8/share, however, this was summarily dismissed due to the terms. We would not be surprised if there are more offers to come. As Laughing Water Capital said in his 2016 ITI write up:


“What are the chances that a $200 million micro-cap company that is developing the architecture that will shape the future of autonomous vehicles will not be purchased by a larger consulting / technology / autonomous vehicle player?”


2. The gargantuan 2T Infrastructure bill will be a tide that lifts all boats. ITI will be one of those boats. Regulatory shifts are usually major catalysts for change. CEO Bergera said the following about their business at the 2020 investor conference.

“it's (ITI) been subject to dysfunction of budget processes, particularly at the federal level that has historically impacted the transportation infrastructure market, really a constraint to growth.”

The infrastructure bill would serve to get rid of this roadblock for ITI and be a step change to their business.


3. 5G and the electrification of cars will be another tailwind. With private enterprise becoming more involved, cities are now more incented to have smart cities to attract businesses and future generations ( thee municipal imperative).


Valuation:

Currently, ITI makes about 120 mm per year in revenue and its recurring SAAS-based revenue makes up about twenty percent of this. ITI cash flows about 12mm/year. We believe given ITI’s positioning, it will be able to grow these cash flows 30% for the medium term (5-7 years) and will be able to grow revenues at around a ten percent CAGR. ITI was achieving these numbers prior to COVID. The above assumptions would put ITI at around 6x 2025 FCF. Given ITI’s position - with both its data and SAAS offerings- the powerful long-term trends of smart cities and automation, and a massive pending infrastructure bill, we believe this is far too cheap.


Here is a possible look of where ITI could be in ten years. The TAM of smart intersections is projected to be around 6.5B with about 2B of this coming from SAAS based products. If ITI is able to capture a proportional part of this (in range with its current market share), ITI would be worth about 4-6 billion dollars. This is about a 20x multiple of where it is currently trading at. Granted a nationwide presence of smart intersections is at least ten years away. Even so, a long-term investor would still be looking at least a 25% compounded annual return. There is also a significant runway with the other 800k non signalized intersection in the USA as well as private enterprise involvement.


Conclusion

There are many ways to win with Iteris. Its footprint and the value of its data make it a juicy acquisition target. Even without being acquired, its growing SAAS segment will make it considerably cheap on a FCF basis. Multiple trends along with a possible infrastructure bill will continue to provide a long runway for ITI’s business. Run by a capable CEO whose domain expertise is up ITIs alley, who is also shareholder aligned( owns about 2mm shares) , we see limited downside and significant upside to ITI.

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